INDIA AND FREE TRADE AGREEMENTS: A PERSPECTIVE

Kashish Komal

Introduction and Background

A Free Trade Agreement is based on the principle of “open, integrated economies,” wherein two or more countries enter into a pact to engage in barrier-free trade, by reducing or eliminating customs, tariffs and non-tariff barriers (Indian Trade Portal, n.d.).

India signed the Comprehensive Economic Partnership Agreement with UAE and Australia-India Economic Cooperation and Trade Agreement in 2022. India’s agreements with the European Free Trade Association (EFTA), UK and Oman have since come into force, in October 2025, July 2026 and June 2026 respectively (ODI, 2026; Press Information Bureau [PIB], 2026b; The Economic Times, 2026).

India also concluded negotiations for an FTA with the European Union in January 2026 and signed an FTA with New Zealand in April 2026, which is set to come into force on 20 October 2026 (DD India, 2026; European Commission, n.d.; The Economic Times, 2026). India is also negotiating FTA deals with countries like Canada, Israel, Australia, Peru and Chile, and has agreed upon a framework for an interim trade agreement with the USA (The Hindu BusinessLine, 2026).

India’s active perusal of FTA’s has garnered significant attention and is the subject of much debate. The new FTA strategy may have been spurred by Western countries’ attempts to initiate an overhaul in their supply chains and reduce their dependence on China (The Economic Times, 2022). Economists cite this as a “window of opportunity” for India to fill the vacuum and increase its trade exports to these countries.

India’s Experience with FTA’s

India has been engaging in FTA’s since the 1990’s post liberalization. As of March 2026, India has signed 16 FTA’s including with Sri Lanka, Bhutan, Thailand, SAFTA, Japan, Malaysia, UAE, Australia, EFTA and UK etc. (Rajya Sabha, 2026). Data from the Economic Survey 2019-20 reveals the following trends in India’s FTA’s (Ministry of Finance, 2020):

Manufactured exports have benefitted from 8 of 14 free trade agreements between 1993 to 2018. However, only 4 of 14 FTA’s positively impacted merchandise exports in this period.
3 of 14 FTA’s exerted positive impact on India’s manufactured imports, and 5 out of 14 FTA’s showed a positive impact for merchandise imports.
In most cases, the percentage increase in exports is higher than the percentage increase in imports (11 out of 14 FTA’s).
Exports to FTA countries has not outperformed overall export growth (Saraswat et al., n.d.).

Arguments in favour of FTA’s

The “gains from trade” theory suggests that free trade allows countries to specialize in those goods and services which it can produce the most efficiently, utilise their trade potential and capitalize on their comparative advantage. The benefits of FTA’s for India are:

Increase in exports– The Economic Survey 2019-20 states that the overall impact on India’s manufactured exports between 1993 to 2018 has been 13.4%, while the impact on merchandise exports has been 10.9% (Ministry of Finance, 2020). Further, India’s merchandise exports to FTA partners has shown an increase of 20.75% in the five years preceding 2022 (Kapoor & Bhambri, 2022). This trend may be observed in the value of India’s exports to ASEAN, SAFTA countries and South Korea. Further, between 2001 and 2016, Indian exports to FTA countries like SAARC, Malaysia, Afghanistan, ASEAN, Bhutan have increased significantly (PHD Chamber of Commerce and Industry, 2018). Therefore, FTA’s are considered significant in increasing exports.

Increase in investment– Studies show a positive relationship exists between FTA’s and inflow of FDI’s. Usually, a positive relationship exists between the size of the market and FDI inflows. Since FTA’s expand market sizes of host countries, a positive relationship between the two emerges (Chadha, 2021). Data from DPIIT suggests that the cumulative investment received from India’s FTA partners in the five years preceding 2022 is valued at $89.46 billion (Kapoor & Bhambri, 2022).

Access to resources– FTA’s can not only facilitate access to new markets, but also access to important resources. For example, India is seeking FTA’s with countries rich in minerals like lithium and cobalt to achieve its electrification targets (Siddiqui, 2022). India is currently heavily dependent on lithium imports and FTA’s with countries like Bolivia, Argentina or Chile would help India gain access to the mineral and achieve its ambitious targets without depleting fiscal resources.

Access to new markets– FTA’s facilitate access to new markets which may not have been accessible otherwise. For example, India’s FTA with Australia provides Indian businesses with the largest market in the Pacific region. Similarly, the FTA with EU, concluded in January 2026, will provide deeper penetration into markets that India currently does not have access to (The Economic Times, 2026).

Job creation-The removal of barriers on trade and investments provides an opportunity for employment generation. Export promotion would imply increased labour requirements to fulfil export demands. In the case of import of unfinished goods, increased labour will be needed to convert those to final goods (India Brand Equity Foundation [IBEF], n.d.).

Building strategic relations-FTA’s can help expand and strengthen geo-political and strategic relations between countries. FTA’s signify political and institutional cooperation and can be used to promote political diplomacy (Thangavelu, 2011). For example, FTA’s could be used as a starting point to negotiate more lenient immigration regimes, flow of FDI’s and as a strategy to counter aggressive forces like China. India’s current FTA negotiations transcend mere trade considerations, and can be leveraged to achieve common outcomes such as sustainable development and arresting climate change. All current FTA’s are with countries with which India has strong geopolitical ties (Palit, 2021).

Arguments against FTA’s

Trade Deficit-India’s FTA’s with ASEAN, Japan and South Korea have resulted in significant trade deficit for India. The overall trade deficit with ASEAN, Korea and Japan increased from $ 5 billion in 2006, to $ 15 billion in 2011 to $24 billion in 2017 (Kapoor & Bhambri, 2022). Further, between 2001 and 2016, India’s imports exceeded exports with FTA partners such as Nepal, Finland, Malaysia, Chile, ASEAN and MERCOSUR countries (PHD Chamber of Commerce and Industry, 2018).

India’s deficit with South Korea (as a percentage of total bilateral trade) worsened to 52.7% in 2020, from 37.4% in 2009, before the FTA came into effect. Similarly, the trade deficit with Japan changed from 25.8% of bilateral trade to 46.7%. Notably, India had a surplus trade balance with Singapore before the FTA, which has now moved to a deficit (Pattnayak, 2022).

This trend has continued in recent years. Between 2018-19 and 2023-24, India’s imports from FTA partners grew by nearly 38% to $187.92 billion, while exports to them grew by only 14.48% to $122.72 billion (Deccan Herald, 2024). In 2025-26, India’s trade deficit with ASEAN widened further to $51.55 billion (NewsBytes, 2026), up from about $45 billion in 2024-25 (Impact and Policy Research Institute [IMPRI], 2026), while the deficits with South Korea and Japan stood at about $15.3 billion and $15.4 billion respectively (Department of Commerce, n.d.; “List of Largest Trading Partners of India,” 2026).

The following table analyses India’s trade balance with major FTA partners in 2025-26.

Table 1: India’s Trade Balance with FTA partners (2025-26)

FTA Partner	Trade Balance (in $million)
Sri Lanka	≈ 3,900†
Nepal	5,505.25
Bhutan	750.56*
Thailand	-11,370
Japan	-15,400
South Korea	-15,340
Mauritius	465.43*
Malaysia	-7,350
ASEAN	-51,550

Source: Export-Import Data Bank, Department of Commerce, Ministry of commerce and Industry (Department of Commerce, n.d.; Embassy of India, Kathmandu, 2026; Embassy of India, Thimphu, 2026; High Commission of India, Colombo, 2026; High Commission of India, Port Louis, 2026; “List of Largest Trading Partners of India,” 2026; NewsBytes, 2026). * Figure for 2024-25, the latest published by the source. † Approximate; derived from total trade and imports from Sri Lanka in 2025-26 (High Commission of India, Colombo, 2026; Institute of South Asian Studies [ISAS], 2026).

Thus, as is evident, the value of deficits with FTA partners, exceeds the value of surplus.

Unnecessary-Most of India’s biggest trade partners are those with which India does not have FTA’s.

The following figure represents the share of India’s trade with top 5 trading partners (China, USA, UAE, Russia and Saudi Arabia) and its share of trade with major FTA countries.

Colombo, 2026; “List of Largest Trading Partners of India,” 2026). *Bhutan: 2024-25.

As is evident, apart from UAE, none of the countries with which India has an FTA has a share of trade as large as the top 5 trading partners. Therefore, it may be argued that FTA’s are unnecessary as trade may be stimulated without them. However, this argument may weaken going forward, as India’s CEPA with UAE came into force in May 2022, and India has since agreed upon a framework for an interim trade agreement with the USA (Rajya Sabha, 2026; The Hindu BusinessLine, 2026).

Ineffective– FTA’s have not significantly impacted trade flows. While, trade in absolute numbers may have risen, share of trade with FTA countries does not experience significant increase. FTA’s accounted for 17.9% of India’s trade in 2019, which is a marginal increase from 16.3% in 2000 (Forbes, 2022). Moreover, in the case of Japan, trade flows have fallen since 1999-2000.

India’s imports from Japan accounted for 5% of total imports in 1999-2000, but only 2.5% in 2018-19. Similarly, India’s exports to Japan fell from 4.6% (in 1999-2000) to a mere 1.5% (in 2018-19) (Forbes, 2022). In 2025-26, Japan accounted for 2.8% of India’s imports and only 1.4% of its exports (Department of Commerce, n.d.; “List of Largest Trading Partners of India,” 2026).

The following figures represent India’s trade with FTA countries vis-à-vis non FTA countries over the years.

Source: Forbes (2022)

As is evident, the rise in imports and exports with non-FTA countries has exceeded the rise in imports and exports with FTA countries.

Disruption of local supply chains– Influx of imported goods can cause a disruption in local supply chains. This is because removal of tariff barriers would make imports cheaper and therefore increase their demand. Locally made goods may potentially face shortage of demand. The same principle is highlighted in India’s trade policy (2015-20) which emphasises “vocal for local” and promotes domestically produced goods over imported goods (Banerjee & Singh, 2022).

Way Forward

The Economic Survey of 2022 made a strong case for FTA’s. As mentioned above, FTA’s have clear proven benefits. India’s FTA with Sri Lanka has been immensely successful and India has been able to leverage this engagement to its benefit. This proves that FTA’s have the potential to be mutually profitable and advantageous to India.

The major challenges to achieving success in FTA’s is as follows:

Spaghetti Bowl effect- The Spaghetti Bowl Effect is a phenomenon wherein increasing numbers of FTA’s between countries slows down trade relations between them (Sajid, 2015). Sajid (2015) suggests that trade volume between South Asia and East Asia has remained stagnant at around 20% despite a number of trade agreements being signed, due to the Spaghetti Bowl Effect.
Non- tariff barriers- While FTA’s ensure the removal of tariff barriers, several non-tariff barriers continue to exist. For example, 76% products exported to Japan experience non-tariff regulations.
Low utilization of trade pacts- India’s rate of FTA utilization is only 25% as opposed to a 70-80% utilization rate in developed countries (Cogoport, 2021; ThePrint, 2026).
Circumvention of Rules of Origin- Routing imports from non-FTA countries through FTA partners is a common practice that hinders India benefitting from FTA’s.

Thus, the way forward for India is to address these challenges.

Reduce transaction costs– Complementary steps must be taken alongwith signing FTA’s to benefit from tariff concessions. Discretionary power of officials in determining tariff concession claims must also be regulated to reduce transaction costs.

Strengthen RoO mechanisms– India has already taken steps in this direction by notifying the the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR 2020). The principle must be sustained and strict compliance measures enforced.

Review existing FTA’s– India is currently reviewing its FTA with ASEAN to accommodate demands for making the agreement more “user-friendly, simple, and trade facilitative for businesses,” and hosted the 13th AITIGA Joint Committee meeting in New Delhi in July 2026 to advance the review (PIB, 2026a). India has also asked Japan and South Korea to renegotiate their respective agreements to make trade more balanced (Mint, 2024). Such reviews should be extended to more FTA’s to ensure removal of non-tariff barriers and strict adherence to RoO.

Improved trade pact utilisation– Utilisation rates may be improved by reducing the cost of compliance, increasing awareness about FTA’s and RoO and eliminating administrative delays. Packaging and labelling as well as certification issues increase the cost of compliance and reduce utilisation rates (International Food Policy Research Institute [IFPRI], n.d.). This must be addressed.

Avoid dumping– Safety and quality standards should be set to prevent the dumping of lower quality, hazardous goods into the India Market (Kapoor & Bhambri, 2022).

Careful selection of FTA countries– FTA’s should be signed with countries with which india would significantly benefit, after consultations with stakeholders and a careful analysis.

-Submitted by Kashish Komal

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About the Contributor

Kashish is a Young Professional at NITI Aayog, and is passionate about policy interventions for social justice. With a Master’s in Public Policy, she intends to leverage her work for grassroot-level development. In her free time, she enjoys travelling and watching movies.