The new US administration has recently made headlines by signalling a shift in its interest towards a bilateral Free Trade Agreement (FTA) with India. The USA, being India’s largest trading partner, leaving the negotiations table gives India a chance to reconsider its global trade policies thoroughly.
Understanding Free Trade Agreements (FTAs)
FTAs are agreements between two or more countries aimed at reducing impediments to the import and export of goods and services amongst them. The key principle is to enable trade across international borders with minimal or no government interference, be it in the form of tariffs, quotas, subsidies or prohibitions. This idea sits in sharp contrast with trade protectionism or economic isolationism.
India’s Relationship with FTAs
India’s involvement with FTAs has seen its own share of ups and downs. It opted out of the Regional Comprehensive Economic Partnership (RCEP) in November 2019, effectively giving cold shoulder to FTA engagements. However, a revival was seen in May 2021 with the resumption of stalled India-EU talks from 2013 and discussions of FTAs with countries like UAE, Australia, and Britain.
The Abandoned US-India Mini Trade Deal
The mini-trade deal was centered around certain demands from both sides. India sought resumption of export benefits under the Generalised System of Preferences (GSP), and greater market access for products from sectors like agriculture, automobile, auto components, and engineering. Conversely, the US demanded increased market access for its farm and manufacturing products, dairy items, and medical devices. The US Trade Representative (USTR) flagged India’s data restriction policies as a considerable hindrance to digital trade, particularly concerning foreign e-commerce firms.
Issues Beyond the Mini Trade Deal
Several longstanding issues exist between India and the US. The US has often criticized India for its high import duties, leading them to revoke India’s GSP benefits in June 2019. Additionally, disagreements remain over intellectual property protection and the coordination of social security protection for employees working in both countries.
Challenges in India’s Foreign Trade Policy
India’s trade policy faces multiple challenges such as a lacking manufacturing sector which only contributes around 14% to the GDP. This is significantly less compared to other developed and developing nations. Previous FTAs signed with ASEAN, Korea, Japan, and Malaysia have proven more advantageous for these countries than for India. Moreover, the Atmanirbhar Bharat campaign has spurred concerns about increasing protectionism.
Moving Towards a Better Trade Future
With India not being part of any mega-trade deals currently, shifting to multilateralism would positively influence its trade policy agenda. After exiting RCEP, it’s crucial for India to prove to potential FTA partners that it is a formidable alternative to China in the post-pandemic world.
Economic reforms facilitating an open, competitive, and technologically innovative Indian economy need to be integrated into the trade policy framework. A significant uplift in the share of manufacturing in the GDP is required, achievable through efficient implementation of programs such as Make in India initiative. For promoting innovation, an incentivization policy should be introduced, recognizing the importance of intellectual property rights to innovation.
