FTA utilisation low in India; compliance cost is a hurdle: GTRI

New Delhi: India's utilisation of free trade agreement benefits remains low at just 20-30 percent of eligible exports, compared with 60-70 percent by the FTA partners, due to high compliance costs and already low tariffs in partner countries, think tank GTRI said on Tuesday.

It also said that Free Trade Agreements (FTAs) have made the inverted duty structure issue harder to fix because many finished goods now enter India at low or zero duty from partners such as ASEAN, Japan, South Korea, the UAE and Australia.

Follow The PSUWatch Channel on WhatsApp

As a result, Indian manufacturers often pay high duties on imported inputs, especially those sourced from non-FTA countries, while competing against finished products imported duty-free under FTAs, the Global Trade Research Initiative (GTRI) said.

Citing an example, it said steel and aluminium attract MFN (duty applicable for all countries) duties of 7.5-10 percent, but machinery, industrial equipment and engineering products made from these materials can enter India duty-free under several FTAs.

Indian manufacturers, therefore, face higher input costs when competing with tariff-free imported machinery produced with globally priced inputs, it said.

"Just 20-30 percent of India's eligible exports utilise FTA benefits, compared with 60-70 percent utilisation by exporters shipping to India. High compliance costs and low foreign tariffs discourage Indian exporters from using FTA preferences. Many small firms prefer to avoid the compliance burden for modest tariff savings," it said, adding 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 percent in Japan, Australia, Malaysia and the UAE.

In contrast, India's trade-weighted MFN tariff is about 12.6 percent, with rates ranging from zero to 150 percent.

"As a result, when India cuts tariffs under an FTA, exporters from partner countries gain a significant price advantage in the Indian market. A 50 percent tariff reduction, for example, can translate into a major cost advantage over competing suppliers," GTRI Founder Ajay Srivastava said.

He said that FTAs are no longer limited to reducing tariffs; they increasingly shape how governments regulate businesses, manage data, design industrial policies, support domestic industries and pursue broader development objectives.

"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," he said.

Traditional trade pacts focused mainly on reducing tariffs and expanding trade, while the new-generation deals increasingly regulate how governments design policies in areas such as procurement, healthcare, environment, digital governance, and intellectual property, he added.

He further noted that over the past three years, India's average annual trade deficit with ASEAN, Japan and South Korea has reached about USD 62 billion.

To deal with these issues, Srivastava suggested that tariff schedule revision, addressing inverted duty structure, strengthen domestic manufacturing ecosystems and supply chains, setting up of an FTA Impact Monitoring Authority to track utilisation, and prioritise mutual recognition of standards, testing and conformity assessment to reduce non-tariff barriers faced by Indian exporters.

"Most of India's FTA partners had already rationalized their tariff structures before embarking on the FTA journey, ensuring that trade pacts led tariff cuts did not trigger import surges or worsen inverted duty structures. India continues on these deals without reviewing its regular tariff structure," he said.

INDIA'S FIRST GENERATION FTAs (IMPLEMENTED BEFORE 2012):

Sri Lanka FTA (2000); South Asian Free Trade Area (2006); Nepal Trade Treaty (2009); Bhutan Trade Agreement (1972); Thailand Early Harvest Scheme (2004); Singapore Comprehensive Economic Cooperation Agreement (2005); ASEAN (between 2010 and 2011); South Korea Comprehensive Economic Partnership Agreement (2010); Japan CEPA (2011); and Malaysia CECA (2011).

FTAs IMPLEMENTED AFTER 2020:

After nearly a decade of limited FTA activity, India resumed negotiations with a stronger focus on strategic partners, investment and supply-chain integration.

The new generation agreements include: Mauritius Comprehensive Economic Cooperation and Partnership Agreement (2021); UAE (CEPA - 2022); Australia Economic Cooperation and Trade Agreement (ECTA - 2022); EFTA Trade and Economic Partnership Agreement (TEPA - 2025); and Oman CEPA (2026).

Follow PSU Watch on LinkedIN

FTAs SIGNED BUT NOT IMPLEMENTED

The UK and New Zealand.

FTA TALKS CONCLUDED

European Union

FTA NEGOTIATIONS UNDERWAY:

USA, Israel, Canada , Peru, Chile, Gulf Cooperation Council (Bahrain, Kuwait, Qatar and Saudi Arabia), Eurasian Economic Union (EAEU - Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia).

India now has 15 implemented FTAs covering 27 countries, while another 9 agreements are pending implementation or under negotiation, covering 42 additional countries.

Together, these 69 countries account for more than three-quarters of India's exports, highlighting how central FTAs have become to India's trade strategy.

(PSU Watch is India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy. 👉 Click to join our channel now: PSUWatch WhatsApp Channel. Prefer LinkedIn? Follow PSU Watch on LinkedIN. Click to stay connected on Twitter here and stay updated.)