Following India’s disappointment with the free trade agreements (FTAs) signed around 2009-2011, there was a significant pause in new FTA negotiations. The agreements made during this period failed to produce the desired outcomes and faced harsh criticism from various sectors, particularly due to the mounting trade deficit with FTA partners. The Indian industry demanded a review of specific FTAs, including those with ASEAN, Korea, and Japan.
After nearly a decade, the Indian government has regained faith and enthusiasm in FTAs. The fear of being priced out due to non-participation in major agreements like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has prompted policymakers to reconsider their stance. Not participating in FTAs could leave India isolated and deprived of the tariff advantages enjoyed by competitor countries. Additionally, FTAs with developed economies could facilitate India’s integration into multinational supply chains.
It is now evident that not joining the FTA game would not only deprive India of clear advantages but also put the country at a significant disadvantage compared to competing nations. Therefore, it is prudent for India to pursue deeper bilateral agreements with major trading partners. The government’s proactive engagement with advanced economies like Australia, the EU, and the UK is a positive move.
However, India should aim to secure concessions in other areas in exchange for the expected tariff cuts, since the most favoured nation (MFN) tariffs in these advanced economies are significantly lower than India’s.
For India’s apparel exports, the relevance of FTAs becomes apparent. The export of ready-made garments has stagnated in recent years, with India’s share in global trade declining. This decline emphasizes the need to consider the impact of MFN duty rates prevailing in trading partner countries, as higher duties in these countries can lead to increased exports after duty elimination through FTAs.
India’s apparel exports face tough competition from countries that have a clear tariff advantage in terms of market access. For instance, Bangladesh, as a least developed country, enjoys duty-free access to the EU through the EU GSP scheme. Vietnam has a free trade pact with the EU, while Turkey being part of the European customs union is exempt from paying customs duty in the EU market. These factors put Indian apparel exports at a distinct disadvantage.
Indian apparel exports to the EU and the UK face an average duty of 9.6 percent. The EU accounts for 28.1 percent of India’s apparel exports, and the UK accounts for 8.8 percent.
Therefore, negotiating tariff elimination through FTAs with these countries could significantly benefit Indian apparel exports. However, it’s essential to note that non-tariff barriers also need to be addressed during FTA negotiations. Merely eliminating duties may not be sufficient, as demonstrated by Japan’s experience. Despite not enjoying duty concessions, China remains the top exporter of textiles and apparel to key markets.
To strengthen India’s apparel exports, there should be a focus on diversifying the product profile according to global demand patterns. The industry should work towards reducing the bias towards cotton-centric apparel and increase the production of manmade fibre-based garments. However, there are several challenges that need to be considered, including the mismatch in product preferences, growing protectionism, non-tariff barriers, sustainability requirements, and labour issues.
The UK-India FTA report highlights that the Indian garment industry is a significant contributor to water stress and pollution. This report suggests that sustainability-related restrictions could be imposed to address these environmental concerns. While Indian goods already enjoy duty-free access to the UK market, there won’t be significant gains in terms of tariff concessions, as most other items attract a low tariff of 5 percent. In contrast, only 3 percent of product lines on UK exports to India enter tariff-free, with UK exports facing an average tariff of 14.6 percent.
Given the UK’s strong manufacturing base, the trade talks are expected to focus heavily on products. India should prioritize service negotiations and seek concessions in sustainability compliance requirements. While tariff elimination presents opportunities for the Indian apparel sector, negotiators must aim to minimize burdensome compliance requirements. India should proceed cautiously in navigating novel sustainability issues during negotiations.
Negotiations with the UK have already begun, as they prepare to implement a carbon levy for imported goods. India is pushing for provisions that can offer relief to its exporters.
