Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Key Phrases: Early-harvest agreement, Free Trade Agreements (FTAs), Stalled trade negotiations, Economic Cooperation and Partnership Agreements (CEPAs), Comprehensive Economic Cooperation Agreements (CECAs), Preferential right of entry, Preferential Trade Agreement,

Why in News?

• In the past year, New Delhi has inked two free trade deals - the first one was with Mauritius in February 2021 and the second with the United Arab Emirates (UAE) last month.
  • A third, an early-harvest agreement - an interim deal - is almost ready, as trade negotiators from India and Australia are putting the finishing touches to the document, according to India’s commerce ministry officials.
  • Two more bilateral pacts - one with Canada and another with UK - are on GoI’s radar for this calendar year, indicating how New Delhi has shifted gears to open up its market of 1.4 billion consumers to a vast array of foreign goods and services from select nations.
  • Stalled trade negotiations are also getting a new lease of life; for instance, India’s trade talks with Canada, which got derailed in 2017 after completing 10 rounds, were revived in July 2020.

Background:

• At the turn of the millennium, India went on a signing spree, inking one deal after another. Most of them were Free Trade Agreements (FTAs); some of them were called Economic Cooperation and Partnership Agreements (CEPAs) or Comprehensive Economic Cooperation Agreements (CECAs) because of their extended sphere, covering investments and intellectual property rights.

• India signed deals with Thailand (2003), Singapore (2005), ASEAN (2009), South Korea (2009), Japan (2011) and Malaysia (2011). Then, for one long decade, 2011-21, New Delhi refrained from signing even one pact, and pulled itself out during the final round of negotiations for the Regional Comprehensive Economic Partnership (RCEP) in 2019, as China refused to budge on India’s demand for more concessions.

Why India restrained itself from FTA in 2011-21?

India decided to go slow in signing pacts after the office of the chief economic adviser under the Ministry of Finance analysed the outcome of existing FTAs in 2015. The conclusion was not very much in favour of aggressively pursuing free trade even though many in the government continued to be votaries of an FTA-led trade regime.

• The Economic Survey of 2015-16 did touch upon the outcome of the FTA study. It said :
  • Increased trade has been more on the import than export side. According to commerce ministry’s export-import data between 2016-17 and 2020-21, India’s total export with FTA/RTA (regional trade agreement) partner nations rose from $59 bn to $63 bn, registering a growth of only 6.7% whereas imports grew from $65.7 bn to $74.5 bn, a rise of over 13%.
  • Countries such as South Korea and Japan and the ASEAN bloc gained disproportionately from free trade deals with India.
    The situation exacerbated in 2018-19 when India’s total import from such trading partners rose to $93 bn, a growth of 42% in just two years, forcing GoI to strategise on reducing the mammoth import bill.

India liberalising economy in face of growing protectionism:

So why has India suddenly woken up to liberalising its trade regime even as several developed nations, including the US, are moving in the opposite direction, on a path of protectionism?

• A calculated move to balance trade and economy: India’s renewed trade liberalisation is not random. The nation has been treading carefully — be it in choosing the partner or in when and how it goes for tough negotiations.
  • After all, New Delhi has to strike a balance between free trade and aatmanirbharta (selfreliance), with the latter gaining currency after the breakout of the Covid-19 pandemic, which disrupted global supply chains, among others.
• Focusing on least sensitive issues: India has chosen only those partners with whom there are least conflicting issues. For instance, agriculture, which is a sensitive area for India, is of no concern to the UAE. Similarly, India is sensitive to issues such as patent protection. The UAE, on the other hand, is not known to have any aggressive interest on this issue.
  • Result – The UAE is India’s third largest trade partner, after the US and China, with bilateral trade likely to surpass $60 bn in the current financial year, according to a statement by the Ministry of Commerce and Industry
• Creating a robust geopolitical alignment via trade: For example, Australia is an important player in India’s new geopolitical ecosystem. So, New Delhi’s maritime partnership with Australia has recently gained momentum as both nations share a common threat from China, which has been flexing its military muscle from the Himalayas to the Asia-Pacific.
• Focusing on complementary economies: Japan and South Korea with whom India had inked FTAs are highly competitive in the manufacturing sector. What India is now focusing on are nations with complementary economies like Maldives, Canada etc.
• Battling the narrative that India is protectionist: In its latest report on global trade barriers, the US trade department singles out India as having the highest tariffs "of any major world economy" - averaging 13.8%. India is on the path to change these narratives.

Conclusion:

• India made a strategic mistake in the past by liberally opening up its doors to readymade foreign goods. There is no point in following free trade unless our indigenous industries are competitive enough to fight with global giants. So India needs to strike the balance between free trade and aatmanirbharta.
• “Protectionism may work only in the short run. In the end, it will lead to a shrinkage of global GDP (gross domestic product) which, in turn, will damage every economy. Therefore, rule-based trade like WTO (World Trade Organisation) regime is the most ideal way to go ahead.” — Ajay Dua Former Union industry secretary.

Sources: Econimic Times

Mains Question:

Q. What are the rationales behind India’s new vigour to sign free trade deals? Also explain impact of FTA on the Indian economy. [250 words].