GTRI suggests elimination of inverted duty structures, new FTA impact monitoring authority to maximise FTA gains

Even as Union Commerce Minister Piyush Goyal expresses confidence that India will operationalise nine Free Trade Agreements (FTA) over the next 10 months, the Delhi based think tank Global Trade Research Institute (GTRI) has flagged six challenges negotiators should be aware of, drawing on its analysis of operational FTAs the country has signed in the past.

Looking at the performance of the 15 FTAs that are already in force ,  GTRI in its latest report identifies these challenges as rising trade deficits, low utilization of FTA benefits by Indian exporters, worsening inverted duty structures, relocation of  manufacturing to partner countries, new carbon-related trade barriers, and growing policy obligations under modern FTAs.

“Between 2007–09 (before the FTAs took effect) and 2023–25, India's trade deficit with ASEAN grew by 381%, with Japan by 318%, and with South Korea by 268%. In comparison, India's trade deficit with the rest of the world increased by 142%. Over the past three years, India's average annual trade deficit with ASEAN, Japan and South Korea has reached about $62 billion”, says Ajay Srivastava, founder, GTRI. According to him, India's newer FTAs are also associated with large trade deficits. “In FY2025, India exported $48.6 billion to the UAE, Australia, Mauritius and EFTA countries, but imported nearly $100 billion, resulting in a trade deficit of over $50 billion. As tariff cuts under these agreements deepen, the deficit may increase further”, he says adding that “South Asia remains the major exception, where India's trade surplus expanded from $6.7 billion to $20 billion during the same period”.

GTRI has looked at the total trade India has with its FTA partner countries for this analysis and not trade conducted exclusively under FTA preferences. That is because “in practice, only a small share of this trade utilizes FTA tariff concessions, while the majority continues under the Most-Favoured-Nation (MFN) tariff regime outside FTA provisions”, Srivastava says.

The report points out that most of India's FTA partners are already open economies with low tariffs. ‘Average MFN tariffs are close to zero in Singapore and below 4% in Japan, Australia, Malaysia and the UAE. In contrast, India's trade-weighted MFN tariff is about 12.6%, with rates ranging from zero to 150%. As a result, when India cuts tariffs under an FTA, exporters from partner countries gain a significant price advantage in the Indian market. Indian exporters, however, often gain little additional market access because tariffs in partner countries were already low or zero before the agreement’, the report says.

On the challenges specific to the newer generation of FTAs, it notes that it increasingly seek to influence policy choices behind the border by introducing rules on labour, environment, digital trade, intellectual property rights (IPR), government procurement, competition policy, anti-corruption, gender, MSMEs and data governance. “While presented as modern trade rules, such provisions can reduce India’s policy flexibility, create new compliance burdens for exporters, and constrain future industrial and development strategies”, the report says.

To face the challenges posed by FTAs, GTRI proposes systematic elimination of inverted duty structures by reducing tariffs on industrial inputs used by domestic manufacturers. It calls for strengthening domestic manufacturing ecosystems and supply chains, as competitiveness ultimately determines whether FTAs boost exports or imports. The report also suggests that India creates an FTA Impact Monitoring Authority to track utilization, sectoral gains, import surges and trade deficits. Prioritization of mutual recognition of standards, testing and conformity assessment to reduce non-tariff barriers faced by Indian exporters and creation of mechanisms for judging performance and ensuring accountability of negotiators were the other suggestions given. “The government and industry must work together to address the challenges so that FTAs strengthen India's manufacturing base instead of encouraging higher imports, overseas production, and loss of industrial capacity”, Srivastava said.