India’s Expanding FTA Network Faces Four Key Trade and Manufacturing Challenges

As India’s free trade agreements grow to cover more countries, concerns emerge over trade deficits, utilisation levels, tariff structures and manufacturing shifts.

India’s expanding network of FTAs is influencing trade patterns, industrial competitiveness and economic outcomes in several ways.

The first challenge is the rise in trade deficits. Between 2007-09, before the FTAs took effect, and 2024-25, India’s trade deficit with ASEAN increased by 381 per cent, with Japan by 318 per cent and with South Korea by 268 per cent. During the same period, India’s trade deficit with the rest of the world increased by 142 per cent. Over the past three years, the country’s average annual trade deficit with ASEAN, Japan and South Korea has been about $62 billion.

Newer FTAs have also coincided with significant trade deficits. In FY2025, India exported $48.6 billion to the UAE, Australia, Mauritius and EFTA countries, while imports from these partners were close to $100 billion, resulting in a trade deficit exceeding $50 billion. South Asia remains an exception, where India’s trade surplus increased from $6.7 billion to $20 billion over the same period.

Differences in tariff structures between India and its FTA partners help explain these outcomes. Most FTA partner countries are relatively open economies with low tariffs. Average MFN tariffs are close to zero in Singapore and below 4 per cent in Japan, Australia, Malaysia and the UAE. India’s trade-weighted MFN tariff, by contrast, stands at about 12.6 per cent, with rates ranging from zero to 150 per cent.

As a result, tariff reductions under FTAs often provide exporters from partner countries with a stronger price advantage in the Indian market. A 50 per cent tariff reduction, for example, can create a significant cost advantage over competing suppliers. Indian exporters, meanwhile, may gain limited additional market access because tariffs in partner countries were already low or zero before the agreements came into effect.

Trade flows further highlight this difference. Nearly all imports into Singapore enter duty-free under MFN rules, while more than 80 per cent do so in Japan and Malaysia. In the EU and the UK, more than half of imports face zero customs duty. In India, however, only about 6 per cent of imports enter duty-free under MFN treatment. Consequently, FTAs often provide foreign exporters with a larger advantage in the Indian market than Indian exporters receive abroad.

The second challenge is the low utilisation of FTA benefits by Indian exporters. When MFN tariffs in partner countries are already zero, the incentive to use FTA preferences is limited. Even where tariffs range between 1 and 3 per cent, the savings are often too small to offset compliance costs associated with rules of origin, certification requirements and documentation.

As a result, only an estimated 20-30 per cent of India’s eligible exports make use of FTA preferences. Many smaller firms choose not to undertake the additional compliance burden for relatively modest tariff savings.

The third issue is the worsening inverted duty structure. This occurs when duties on raw materials and industrial inputs are higher than those on finished products. While this issue predates many FTAs, the agreements have made it more difficult to address because finished goods from ASEAN, Japan, South Korea, the UAE and Australia can enter India at low or zero duty.

Manufacturers in India often pay higher duties on imported inputs, particularly those sourced from non-FTA countries, while competing against finished products entering duty-free under FTAs.

Examples can be seen across sectors. Steel and aluminium attract MFN duties of 7.5-10 per cent, yet machinery, industrial equipment and engineering products manufactured from these materials can enter India duty-free under several FTAs. This can increase input costs for Indian manufacturers while imported machinery benefits from globally priced inputs.

Similar patterns exist in chemicals, plastics, rubber and textiles. Duties on inputs such as caustic soda, soda ash, polypropylene, PVC and SBR increase production costs, while finished products in these sectors may enter India at low or zero duty. This creates a tariff structure that favours producers of basic materials while placing downstream manufacturing at a disadvantage.

The fourth challenge relates to the relocation of manufacturing activity. Inverted duty structures and FTA provisions can encourage companies to establish production facilities outside India and export finished products back into the Indian market.

ASEAN countries have increasingly emerged as manufacturing hubs serving India. Chinese companies have invested substantially in countries such as Vietnam, Thailand and Indonesia. Some Indian companies have also established factories and joint ventures in these markets to benefit from lower production costs and duty-free access to India under FTAs.

Comparable trends are visible in electronics, steel, chemicals, plastics, consumer goods and engineering products.

As noted in the article, “When it becomes cheaper to manufacture in an ASEAN country and export duty-free to India than to produce in India, investment and jobs tend to move abroad. As a result, FTAs can encourage firms to ‘Make in ASEAN, Sell in India’ rather than ‘Make in India’.”

The article concludes that better alignment between India’s tariffs on industrial inputs and its FTA commitments may be required to avoid weakening domestic manufacturing and supply chains. It argues that government and industry need to work together to address these four challenges so that FTAs support India’s manufacturing base rather than contributing to higher imports, overseas production and reduced industrial capacity.