India's Trade Agreements and Their Implications

India has concluded significant trade agreements with the EU, the UK, and Australia, marking a shift from a previously inward-focused trade policy. This offers Indian exporters zero-duty access to a $3.5 trillion market, particularly in low-skill manufacturing sectors such as apparel, footwear, and assembled electronics.

Opportunities and Challenges

• The agreements potentially eliminate the disadvantage Indian exporters faced due to tariffs of 10-12% in apparel and up to 17% in footwear, compared to competitors like Bangladesh and Vietnam who had preferential access.
• These trade deals signal policy stability, encouraging long-term investments and making India a viable alternative to China for global firms.

Export Potential and Domestic Readiness

• India underutilizes its export potential, with an 18 percentage point deficit compared to its capability, translating to roughly $160 billion in annual export headroom.
• Effective conversion of these agreements into export gains requires addressing four main challenges outside the FTA text:
  • Standards Compliance: Non-tariff measures now impact 90% of global trade. A single instance of non-compliance can damage an entire industry's reputation, highlighting the need for strong self-regulation and government-supported compliance infrastructure.
  • Regulatory Complexity: India's trade regime complexity, with numerous tariff exceptions and conditional rates, increases compliance costs and hampers credibility. Simplifying tariffs is crucial to enhance competitiveness.
  • Access to Inputs and Machinery: FTAs open markets but don't ensure access to essential inputs and machines. India must address high protection costs to improve competitiveness and export potential.
  • Consistency in Trade Agreements: India has previously undermined trade agreements post-signing through antidumping duties and quality-control orders, raising input costs and weakening exports.

Domestic Reforms and Constraints

• Ongoing domestic reforms include simplifying labor codes, rationalizing GST rates, expanding solar infrastructure, and establishing a deregulation commission.
• High input costs, particularly power and credit, remain a significant constraint on competitiveness.

The ultimate success of India's FTAs will be measured by gains in global market share, necessitating credibility with global firms and trading partners through standard compliance, regulatory simplicity, competitive input access, and sustained commitments post-agreements.