This article is written by Himanshu Mahamuni, a student of Government Law College, Mumbai. This article analyzes the concept of FTA, current and harmful FTAs signed by India and future desired FTAs of India.
Table of Contents
Every country is dependent on trade to satisfy the demand and introduce newer innovations as no country is self-reliant in every aspect. Trade also becomes a major source of revenue for the countries through taxes and entry barriers. To make the trade routes easier, two or more countries or blocs of countries enter into Free Trade Agreements (FTA) by eliminating custom tariffs and tariff barriers on substantial trade. FTAs encourage the flow of goods and services in trade. There are various other arrangements except FTA undertaken by bodies to liberalize the trade between them, namely Preferential Trade Agreement (PTA), Comprehensive Economic Cooperation Agreement (CECA), Comprehensive Economic Partnership Agreement (CEPA), Customs Union (CU), Custom Market (CM) and Economic Union (EU). Countries are willing to sign an FTA because of the elimination of tariff barriers which are major roadblocks between the parties. India has so far signed 14 FTAs which include relations with 34 countries for preferential access and economic cooperation out of the total 43 FTAs including the FTAs under negotiations.
The article discusses the concept of FTA, its advantages and the process to claim its benefits, further the article mainly focuses on current FTAs of India, the expansion India is aiming towards and the FTAs which are detrimental to India with examples.
Advantages of FTA
Countries enter into an FTA for various reasons, they are
- Elimination of trade barriers and easier market access to FTA partners with non-tariff barriers for facilitation of cross-border movement of goods.
- Exporters of FTA agreements get preferential treatment over non-FTA members. FTA exporters may apply competitive pricing compared to a non-FTA export due to duty preference. This will also protect local exporters from foreign companies. It promotes conditions of fair trade competition and gives equitable benefit for economic development.
- FTA also increases foreign investment outside the FTA. The FTA members create a trading environment and facilitate the demands. Foreign investors may desire to exploit the huge domestic market, hence creating new markets for exporters and importers.
- FTA may act as a stepping stone to establish a further regional cooperation framework to expand and improve the mutual benefits from the agreements. Initiations such as Mutual Recognition Agreement (MRA), help improve progress in multilateral negotiations and reduce complexities.
- The domestic industries become more competitive as a result of FTA. This can decrease the dependence on government support and help the government to lower the spendings on subsidies for local industries.
Claiming FTA benefit in India w.r.t CAROTAR
Rules of Origin
A foundation of an FTA is based on the set of rules called Rules of Origin. These rules lay down the criteria the goods must fulfil to achieve the desired outcome and complete the objective of FTA. The criteria may vary in different FTAs, however, they must satisfy the following conditions-
- Wholly obtained goods – the raw material or input shall be contributed by participating countries and not any third country.
- Substantial transformation of goods – If they are not wholly obtained, they must be substantially transformed during and/or processed by the country responsible for its export. The transformation can be achieved by the following means;
- Changes in Tariff classification by different HS codes as the final product.
- Adding a minimum percentage of the product’s value through regional or domestic content.
- Using a specific chemical process to produce the goods by the originating country.
The origin of the product is established by its Certificate of Origin (COO). The Central Board of Excise and Customs (CBEC) is responsible for the implementation of the FTA at the ground level. The implementation of concessions is done through yearly notifications issued by CBEC. The authority of the exporting country shall take care of designating the COO to the goods under the FTA. The Directorate General of Foreign Trade (DGFT), Indian Chamber of Commerce (ICC) and the Federation of Indian Export Organisation (FIEO) are examples of such authority in India which can designate the COO to the goods. The exporter must submit all required documents to the appointed authority for the COO to claim FTA benefits. The customs officials of the importing country can check with the verifying authorities of the country of origin if there is any doubt regarding the COO or any information it holds.
CAROTAR – Customs (Administration of Rules of Origin Under Trade Agreements) Rules
India has revised its FTA rules of origin recently in 2020, known as Customs (Administration of Rules of Origin Under Trade Agreements) Rules (CAROTAR). The Rules were introduced after the amendment in the Customs Act, 1962 in the same year, which is responsible for the accuracy of the information on FTA COO, compliance with value-added requirements and access to cost data. Following this amendment, the rules introduced the procedural and compliance requirements for importers and processes and timelines for verification by customs authorities. The businesses desiring to claim benefits under FTAs in India shall be required to provide regional value content documentation and other required documents as may be demanded. It also provides severe impact on failure to comply with the requirements which range to supply chain disruption, denial of FTA benefit, penal consequences and many more. The FTA partners are not certainly happy with the stricter rules and have asked for a review of them.
FTAs signed by India
India has entered a total of 14 FTA agreements which are signed and in effect with various countries and blocs. FTAs are signed with a provision for review and implementation at specified intervals by institutional mechanism. The Ministry of Commerce and Industry recorded a CAGR in trade over the last 5 financial years of 7.1%. This internal assessment of India’s bilateral FTA was of Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, South Korea and Malaysia.
Following are the various bilateral FTAs entered by India with other countries.
|India – Sri Lanka FTA||2000|
|India – Afghanistan PTA||2003|
|India – Singapore CECA||2005|
|India – Bhutan Trade Agreement||2006|
|India – Chile PTA||2007|
|Treaty of trade between India and Nepal||2009|
|India – South Korea CEPA||2010|
|India – Malaysia CECA||2011|
|India – Japan CEPA||2011|
Following are the regional multilateral FTAs entered by India with various blocs of nations.
|India-Asia Pacific Trade Area (APTA)||Bangladesh, China, India, South Korea and Sri Lanka||2005|
|India-South Asia Free Trade Area (SAFTA)||Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka, Afghanistan||2006|
|India-MERCOSUR PTA||Brazil, Argentina, Uruguay and Paraguay, India||2009|
|India-ASEAN FTA||Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, India, Singapore, Thailand, Vietnam||2010|
Some of the important FTAs for trade to India of significant interest are listed below.
India-Sri Lanka Free Trade Agreement (ISFTA)
The India-Sri Lanka Free Trade Agreement (ISFTA) was signed between the Prime Minister of India and the President of Sri Lanka on December 28, 1999, and implemented from December 15, 2001. The ISFTA has coverage of the limited goods sector and agreements of service and investment are in process of negotiations. The concessions agreed in ISFTA range from zero duty items to not less than 25% in the reduction of tariffs. A negative or exclusion list is maintained by the agreement where no reduction in tariff is offered. It mainly comprises agricultural products, motor vehicles and domestic produced items such as ceramics and footwear.
The goods of the interest of India exported to Sri Lanka are- petroleum (crude & products), transport equipment, cotton, yarn fabrics, sugar, drugs pharmaceuticals & fine chemicals. The goods of the interest of Sri Lanka imported to India are- spices, electrical machinery except for electronic, transport equipment, pulp & waste, natural rubber and paper board.
The ISFTA was the first FTA signed by India with any country. The trade of Sri Lanka with India has drastically increased from the signing of the FTA. Sri Lanka’s export to India increased ten folds in 2005 from the export in 2000 and reached USD 566 million. By 2012, India stood third largest export destination for Sri Lanka behind the European Union (EU) and the United States (US). India’s exports also increased six folds in 2012 compared to 2000 to a total value of USD 3,640 million. The trade between both countries has facilitated exponentially after the FTA, being neighbouring countries.
India-South Asia Free Trade Agreement (SAFTA)
The India-South Asia Free Trade Agreement (SAFTA) is an intra-trade agreement formed by the formal member states of the South Asian Association for Regional Cooperation (SAARC). This bloc consists of Bangladesh, Bhutan, Maldives, Nepal, Pakistan, Sri Lanka, Afghanistan and India. The SAFT agreement was agreed upon by the SAARC countries in its 12th summit in Islamabad on 6 January 2004 and came into force after ratification from 1 January 2006. SAFTA is governed by five principles, namely Governance, Obligation, Reciprocity and mutuality, Removal of trade barriers and Facilitation and harmonisation.
The amount of bilateral trade between India and other SAFTA members has increased from USD 6.8 billion in 2005-06 to USD 28.5 billion in 2018-19. The initial pace was sluggish, it took speed eventually and now India’s trade with SAFTA has grown faster than its total trade with other countries. The share of India’s trade with SAFTA rose from 1.6% in 2005-06 to 2.5% in 2018-19. The export to India has also been increased than India’s import from SAFTA countries. The trade surplus of India with SAFTA countries increased from USD 4 billion to USD 21 billion in the period. The healthiest growth among SAFTA nations with India is seen with Bangladesh. There has been a significant increase in trade between both the countries from USD 1857 million in 2006-07 to USD 5784 million in 2012-13.
India-Singapore CECA (ISCECA)
The India-Singapore CECA (ISCECA) was signed on 29th June 2005 and became operational with effect from 1st August 2005. The CECA has been regularly reviewed by the Ministry of Commerce and Industry, first in 2007 and the second review was conducted in 2010. Singapore accounts for India’s 22.13% of overall trade with ASEAN in 2014-15 and is the second-largest investor in India with a total FDI of 16% received in 2015. The CECA has four key components- FTA in goods, boosting trade in services, promoting investment flow and providing mutual investment protection; and agreement to avoid double taxation.
India’s trade with Singapore has seen a positive curve since the signing of the FTA. The tariff reduction/eliminations account for 81% of Singapore’s exports to India making it more competitive and increasing its consumer market. The range of trade has sporadically increased from a range of USD 0-5 before 2005 to a range of USD 5-22 billion post the agreement. India exported a record of USD 14.07 billion in 2016 and imported a value of USD 6.72 billion from Singapore.
The unique tax set up signed through the agreement has enabled Indian companies to manufacture and service operations in Singapore and base Singapore as their regional headquarters for the Asia Pacific regions.
Expansion of FTAs in India
India has closed its major chance of being a part of the governing party with its main trading partners by declining the entry into RCEP. The RCEP is supposed to be the largest trade agreement in the world with 15 economies, out of which India faces a trade deficit with 11 of them. This includes the countries with whom India has already signed an FTA but haven’t shown any sign of progress such as Japan, South Korea and ASEAN and other promising countries with whom an agreement is under negotiations such as Australia and New Zealand. One of the concerns for the last moment back out of India is supposed to be the liberalization of trade between China and India through RCEP. India already faces a trade deficit of USD 54.7 billion in 2018 and a further reduction in tariff would have worsened it.
India must look for reforms to reap full benefits out of the FTAs to reduce the trade deficit on a long-term basis. The Ministry of Commerce is looking forward to fast-track six FTAs and sealing a deal with them. The Ministry desires to participate in the world market by revamping its FTA strategy. The following are some of the crucial FTAs out of a total 29 under negotiations and proposed one that will be beneficial if signed and brought into effect.
Negotiations between Australia and India for a CECA have been launched since 2011. Australia has identified the key sectors for investment in a document “An India Economic Strategy to 2035” released by them. Australia has shown its willingness to make India its third-largest export market by 2035. The huge trade deficit of India’s export of USD 4.2 billion compared to India’s import of USD 14.1 billion from Australia shall be aimed to be reduced by this FTA. The Australian government intends an ambitious investment of over USD 100 billion in India.
This investment in Australia may develop the mining industry of the country as identified in the report. India has huge potential to expand its dairy industry and agriculture sector to improve with Australia. Australia can be developed as a strategic partner from the agreement. Both the countries have shown potential areas of cooperation and implemented a successful FTA.
An ETP between India and the UK is under negotiation and consultation for study since 2017. Brexit has led to the expansion of the foreign trade policy of the UK. The ETP is one of the expedited plans of India because the UK is an important trading partner of India. Indian companies also play a major role in the creation of jobs and taxes in the UK. The UK is also the sixth-largest source of remittance for India and accounts for around 6% of total Foreign Direct Investment (FDI) into India. The trade of service from India to the UK was GBP 5657 million and from the UK to India, it was GBP 3337 million in the year 2020. The ETP thus plays a crucial role to facilitate trade between both countries to improve the economies.
Both countries have signed a Migration and Mobility MOU to implement the India–UK comprehensive Migration and Mobility Partnership (MMP) by April 2022 and MoU for cooperation in the field of telecommunications/ICT, meant to enhance cooperation in telecoms infrastructure, including telecoms diversification and disaster resilience. The ETP shall focus on relaxation on barriers in the sectors of cars, whisky and market access in areas including digital and data, and legal services from India. India might look forward to replacing the presence of China and providing trade in the sector of fashion, homeware and furniture, electrical machinery, and general industrial machinery through the ETP. A mutual FTA is soon expected to be entered by the partners and align their business interests to unlock new opportunities.
An India – EU FTA has been stalled since it was proposed in 2007. The negotiations stood suspended between 2007-2013 on five contentious areas of agriculture, services, digital trade, patent protection, and environment and labour rights. The trade between India and the EU has increased by over 72% since the last decade. The EU Foreign Direct Investment (FDI) in India amounts to USD 92.50 billion in 2019. The EU has exported goods and services amounting to EUR 55 billion to India and imported goods and services amounting to EUR 59 billion from India.
The negotiations have been resumed by formal talks and joint statements in 2021. The talk focused on mainly two aspects of investment protection and geographical indications. The countries should clear the challenges and issues of both sides which mainly consists of barriers to trade in services, lowering the tariff barriers, IPR standards and termination of BITs. If the challenges are overcome, India can expand its manufacturing industry and establish logistic corridors. The EU can support India’s need for technology transfer and become a part of the global value chain.
Detrimental FTAs of India
India’s exports to FTA countries have underperformed the exports to the rest of the world. The trade deficit of India, with exports of USD 30.21 billion and imports standing at USD 45.45 billion, was at USD 15.24 billion in April 2021 which is a 120.34% jump. India has underutilized the FTA less than 25% and according to a Deloitte report, it is even less than 3%. The underutilization can be due to the lack of awareness about FTAs and rules of origin, high compliance cost and absence of trade negotiations.
The ASEAN, South Korea and Japan agreements have proven detrimental to India. The report from think-tank Third World Network says that the trade deficit of India with the three partners has been increasing and a progressive slowdown in exports.
The India-ASEAN FTA is between ten member states of the Association of Southeast Asian Nations (ASEAN) and India. It was signed on 8 October 2003 in Bali, Indonesia and enforced on 13 August 2009. The FTA has reciprocated India’s Look East policy by many ASEAN countries.
India’s exports increased from USD 23 billion in 2010 to USD 36 billion in 2018. While India’s imports increased from USD 30 billion in 2010 to USD 57 billion in 2018. The trade deficit with ASEAN has increased to USD 24 billion. The worrying issue is that the imports from ASEAN to India have grown faster than the imports from other countries while exports have not seen the rising curve.
There is a huge untapped potential for India in the ASEAN group. The policymakers must negotiate to include more service sectors in the agreement besides the goods. The demand for information services, financial, medical, tourism, insurance, etc can be exported by India to the ASEAN countries if negotiations are made. India must participate in the East Asian production network to achieve a higher growth trajectory.
The India-Japan CEPA was signed and brought into effect in 2011. The agreement had sharp growth in the year of implementation but contracted after the year 2011-12, increasing India’s trade deficit. The trade deficit has not only increased but has also grown faster than the trade deficit with the rest of the world. India’s exports declined to USD 4.5 billion in 2019 from USD 6.4 billion in 2011. While the imports of the country kept on increasing from USD 12.43 billion in 2019 to USD 11.96 in 2011 according to the figures of the Ministry of Commerce. The trade imbalance has widened to USD 7.91 billion with Japan.
India has initiated talks with Japan to review the CEPA and revise the Pact. Japan has also proposed a correction within the existing framework rather than a full-fledged revision to avoid the time consumption for its approval. India demands market access to areas such as textile, leather and footwear from Japan.
India-South Korea CEPA
The India-South Korea CEPA was signed in 2009 and became effective in 2010. The trade between both the countries increased from USD 12 billion in 2009 to USD 21.5 billion in 2018 with a pace of India’s trade with the rest of the world. The export of South Korea amounted to USD 15.1 billion while the import was just USD 5.6 billion from India in 2019. While India’s imports increased at a CAGR of around 8%, Korea’s imports did not cross the CAGR of more than 4%. The trade deficit of India with Korea reached USD 12 billion in 2019 compared to the deficit of USD 5 billion in 2009.
The Commerce Ministry of India had called a meeting of Export Promotion Councils (EPCs) to review the bilateral trade pact between India and South Korea. India has asked to fast track the review to focus on increasing the market access for Indian business. India has been underutilizing the FTA with South Korea and shall overcome this difference through the review. South Korea agreed to reduce the import duty on 17 items and India on 11 items in 2018, however, this did not improve the exports of India significantly. India had been out conducting its trade in both the sectors, goods and services. A mutual recognition agreement is expected to be signed for recognition of local qualified professionals.
India is the largest member who has signed FTA in the South Asia region, including the FTAs under the proposed negotiation stage. The ministries have well-organised frameworks and regulations for the implementation of the FTAs. South Asia Free Trade Agreement (SAFTA), Indo Malaysia CECA (IMCECA), India Singapore CECA (ISCECA) are some of the major agreements which have impacted India’s trade and opened the gates for larger markets. The agreements have seen huge amounts of surplus trade as in India-Sri Lanka and SAFTA FTA. The FTAs are even properly regulated and reviewed from time to time such as in the case of India-Singapore CECA.
Every FTA entered by India has necessarily not benefitted or has given results as expected. In fact, there are very few FTAs that have shown a positive curve, otherwise, other FTAs are either stagnant or have a trade deficit. The reasons for the trade deficit should be examined and the sector-specific measures that need to be taken to gain from future trade deals should be explored. India should review its existing FTAs as done in the FTAs signed with Japan and South Korea. India shall diversify its trades such as into Africa, India-Mauritius CECA being the first of its type. India is suffering from the “spaghetti bowl effect” of multiplication of FTAs with the same countries. India has FTAs with countries like Singapore and Malaysia despite them being part of the ASEAN FTA.
70% of India’s exports comprise only a 30% share of the world’s traded commodities. There is a need to shift the focus from low-value products to the export of raw materials to high-value products. The current FTAs consist of countries with a lower volume of trade which bring minimum benefit. Changing the focus on major trade partners such as the FTAs currently discussed with Australia, UK, EU, UAE, etc will bring out major changes. The issues must be resolved such as with the EU and the deal must be struck with the main trading stakeholders which can bring noticeable changes in India’s trade volumes.
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