Article written by Retd Senior IRS Commissioner Shri Jaiprakash Rau
From Tariff Cuts to Trade Capture: India’s Export Competitiveness Challenge
Introduction
Free Trade Agreements (FTAs) are designed to reduce trade barriers and integrate economies into global value chains. India has recently accelerated its FTA strategy—signing agreements with UAE (CEPA), Australia (ECTA) and concluding negotiations with the UK, EU and EFTA.
However, experience shows that preferential market access does not automatically translate into higher exports. The decisive factor is export competitiveness, which is shaped by domestic structural conditions. Without addressing internal constraints, FTAs risk becoming import-enabling rather than export-expanding.
India’s Recent FTAs: Opportunity Landscape
Key Agreements
India–UAE CEPA (2022) – Gateway to West Asia & Africa
India–Australia ECTA (2022) – Critical minerals, services, education
Ongoing negotiations – UK, EU, EFTA, Canada
Strategic Objectives
Diversify export destinations
Integrate with Global Value Chains (GVCs)
Reduce dependence on China-centric trade
Boost manufacturing & services exports
But outcomes depend on domestic readiness.
Domestic Constraints Limiting Export Gains
1. High Cost of Production (Cost Disability)
Power, logistics, and finance costs remain higher than global competitors.
Logistics cost in India ≈ 13–14% of GDP vs 8–9% in developed economies.
MSMEs struggle with high interest rates and limited access to trade finance.
FTA tariff benefits get neutralised by higher domestic costs.
2. Weak Manufacturing Depth & Scale
India’s exports dominated by low-value or mid-value goods.
Limited presence in:
Electronics components
High-precision engineering
Advanced chemicals
Fragmented production ecosystems restrict economies of scale.
FTAs favour countries with deep industrial bases, not shallow assembly lines.
3. Standards, Quality & Compliance Deficit
Developed FTA partners impose:
Stringent SPS & TBT norms
Sustainability, traceability & carbon standards
Many Indian exporters lack:
Testing labs
Certification support
Awareness of evolving standards
Non-tariff barriers matter more than tariffs in modern trade.
4. Rules of Origin (RoO) Constraints
Complex RoO requirements limit eligibility for preferential tariffs.
High import content in Indian exports (especially electronics & machinery).
Compliance cost is high for MSMEs.
FTA benefits often remain on paper due to RoO non-compliance.
5. Logistics & Trade Facilitation Gaps
Port congestion, delays in customs clearance.
Inconsistent implementation of National Logistics Policy at state level.
Last-mile connectivity issues hurt time-sensitive exports.
Global buyers value reliability as much as price.
6. Limited Integration into Global Value Chains (GVCs)
India’s GVC participation remains backward-linked (raw materials, intermediates).
Limited role in high-value segments like design, R&D, branding.
Frequent policy changes reduce investor confidence.
FTAs reward GVC hubs, not peripheral suppliers.
7. MSME Export Constraints
45% of exports come from MSMEs, but:
Limited scale
Poor technology adoption
Low awareness of FTA provisions
FTAs often benefit large firms disproportionately.
Export competitiveness must be broad-based to be sustainable.
8. Services Exports: Untapped Potential but Policy Frictions
India strong in IT, health, education, professional services.
Yet, issues remain:
Visa & mobility barriers (Mode 4)
Data localisation uncertainties
Mutual Recognition Agreements (MRAs) missing
Services FTAs need domestic regulatory alignment.
Case Insight: Learning from Past FTAs
ASEAN FTA: Imports rose faster than exports.
Revealed India’s:
Weak industrial competitiveness
Lack of export preparedness
Lesson: FTAs without domestic reform can worsen trade balance.
Way Forward: Making FTAs Work for India
Supply-Side Reforms
Scale up PLI schemes with export linkage.
Lower logistics cost via PM Gati Shakti.
Stable, predictable trade policy regime.
Standards & Compliance Support
Common testing labs for MSMEs.
Government-backed certification & traceability platforms.
MSME & Services Focus
FTA awareness cells at district level.
Push MRAs and mobility provisions in future FTAs.
Strategic Trade Policy
Align FTAs with:
Industrial policy
GVC integration
Climate & carbon transition strategies
Conclusion
FTAs create opportunities, but export competitiveness determines outcomes. India’s recent FTAs offer significant strategic openings, yet domestic constraints—ranging from cost structures to compliance capacity—limit their effectiveness.
For FTAs to become export multipliers rather than import gateways, India must complement trade diplomacy with deep domestic reforms. In the absence of competitiveness, market access remains a missed opportunity.
UPSC Prelims Relevance
Possible Prelims MCQs:
Consider the following FTAs:
India–UAE CEPA
India–Australia ECTA
India–EU FTA
Which of the above are already in force?
Rules of Origin in FTAs are primarily related to:
1.Determining product quality
2.Preventing trade deflection
3.Fixing tariff ceilings
UPSC Mains Relevance
GS Paper II
India’s trade diplomacy
Bilateral & regional groupings
GS Paper III
External sector
Manufacturing, MSMEs, logistics
Globalisation & its impact on Indian economy
Essay Paper
“Trade liberalisation without competitiveness is an illusion.”
Likely Mains Questions
- “Free Trade Agreements are necessary but not sufficient for improving export performance.” Discuss in the context of India’s recent FTAs.
- Examine how domestic supply-side constraints limit India’s ability to leverage FTAs for global market share expansion.
- Do India’s FTAs risk becoming import-oriented? Suggest measures to ensure export-led outcomes.