Economy
India's brush with FTAs, in five charts
Summary
- A prime objective of a country signing free trade agreements (FTA) is to boost its exports. As India signs its fifth FTA, with UAE, the largest of the lot shows that such agreements are not an engine for export growth by themselves
Last month, India and the United Arab Emirates (UAE) signed a comprehensive economic partnership agreement, which comprises a free trade agreement (FTA). An FTA is a bilateral agreement that aims to increase trade between the two signatories by relaxing tariff and non-tariff barriers on most goods in that trade basket. UAE is India’s fifth major FTA. The experience with four previous FTAs shows that following a relaxation in tariffs, India’s imports have generally risen at a faster pace than exports to the respective trading partners.
India signed an FTA with its seven South Asian neighbours (Safta) in 2006. In 2011, it signed separate FTAs with South Korea, Japan, and the 10 countries that comprise the Association of Southeast Asian Nations (Asean). The Asean FTA is the most significant, as the bloc accounted for 10% of India’s exports and 11.7% of its imports in 2019-20. By comparison, India’s overall trade with each of the other three regions was less than 4%. It’s also with Asean that the gap between import growth and export growth has been the most pronounced.
In the initial stage of trade liberalization through FTAs, India will be adversely affected due to negative terms of trade and revenues foregone from tariffs, suggests an analysis by academics Chandrima Sikdar and Biswajit Nag in a 2011 paper titled ‘Impact of India-ASEAN Free Trade Agreement’. However, their simulation shows that significant longer-term gains can accrue to India if there is a reallocation of resources to export-intensive sectors. This insight becomes pertinent as the UAE is India’s third-largest trade partner and the second among its top 10 trading partners to come under the FTA ambit.
Advantage Asean
Within Asean, Singapore and Indonesia collectively comprise more than half of the imports to India. On the exports side, Singapore is the largest destination, followed by Malaysia and Vietnam. In 2011-12, the first year of this FTA, India’s exports to the region spiked 43% in 2011-12. Since then, however, they have been range-bound, moving up and down in the annual band of $30-35 billion, peaking at $37.5 billion in 2018-19.
Meanwhile, India’s imports from Asean countries have nearly doubled between 2011-12 and 2018-19. Therefore, India’s ‘terms of trade’ with Asean, calculated as the value of exports relative to imports, have worsened over the past decade, when the FTA has been in place. Amid exports that moved in a narrow band, India’s trade deficit with Asean has widened from $5 billion in 2010-11 to $23.8 billion in 2019-20.
Wider and Deeper
India’s import basket from Asean countries has remained largely the same over the past decade, when the FTA has been in place. As per a four-digit classification standard, India imported about 1,000 items from Asean countries in both 2010-11 and 2019-20. But there are changes within that show how Asean partners have leveraged the trade pact. For example, the number of commodities whose imports to India exceeded $50 million has increased from 69 to 168.
Seven of the top 10 import heads have grown faster than the overall rate. Coal, palm oil, petroleum products and electronic-related items are the leading imports. However, the relative importance of palm oil has reduced, while those of other products has risen. On the exports side, mineral fuels and oils (except crude), which is the largest export over the past decade, has fallen significantly, while exports of frozen meat and unwrought aluminum have risen.
UAE Calling
The UAE FTA will see duties being eliminated on 80% of tariff lines, accounting for 90% of India’s exports to the UAE by value. In 2019-20, UAE accounted for 9.2% of India’s exports, the third largest after the US and China. Jewellery, diamonds, mineral oils and electrical parts for telecom are the leading export heads. India’s hope will be that zero tariffs and greater market access can fire exports in sectors where India is competitive like textiles, leather and pharmaceuticals. However, agricultural items such as dairy, fruits, vegetables and foodgrains, where India can gain significantly, are currently excluded from the FTA.
The UAE FTA also gives India an opportunity to deepen its engagement with other cash-rich countries in the Gulf Cooperation Council. India is also in talks for more trade pacts, including with Australia, Canada, Israel and the European Union. While the increased market access can boost export-oriented sectors, as the Asean experience shows, it’s not a given.
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