India’s FTA Utilisation At 20–30% Amid Compliance Costs & Tariff Distortions: GTRI

New Delhi, Jun 9 (KNN) India is extracting far less value from its free trade agreements (FTAs) than its partners, with just 20–30 per cent of eligible exports utilising FTA preferences, compared with 60–70 per cent for exporters shipping goods into India — a disparity that particularly discourages small firms, according to the Global Trade Research Initiative (GTRI).

The think tank said on Tuesday that the asymmetry stems from a combination of high compliance costs, already low tariffs in partner countries, and structural distortions in India’s tariff architecture — all of which blunt the practical benefits of trade pacts for Indian exporters while giving foreign suppliers a significant price advantage in the domestic market, PTI reported.

The Inverted Duty Problem

GTRI said FTAs have worsened India's long-standing inverted duty structure, where manufacturers pay higher duties on imported inputs than on the finished goods they compete against. 

Many finished products now enter India at zero or low duty from FTA partners such as ASEAN nations, Japan, South Korea, the UAE, and Australia, while the raw materials and components used to make them continue to attract higher most-favoured-nation (MFN) tariffs.

As an illustration, the report noted that steel and aluminium attract MFN duties of 7.5–10 per cent, yet machinery and engineering products made from these materials can enter India duty-free under several FTAs — placing domestic manufacturers at a structural cost disadvantage.

India's High Tariffs Create Asymmetric Gains

India's trade-weighted MFN tariff stands at approximately 12.6 per cent, with rates ranging from zero to 150 per cent. In contrast, average MFN tariffs are close to zero in Singapore and below 4 per cent in Japan, Australia, Malaysia, and the UAE — meaning that when India cuts tariffs under an FTA, foreign exporters gain a substantial price advantage in the Indian market, while Indian exporters gain comparatively little in already open markets.

GTRI Founder Ajay Srivastava noted that, "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 per cent tariff reduction, for example, can translate into a major cost advantage over competing suppliers," as quoted by PTI.

Beyond Tariffs: Policy Flexibility at Stake

Srivastava warned that newer-generation FTAs extend well beyond tariff reduction and increasingly regulate areas such as government procurement, healthcare, digital governance, the environment, and intellectual property. 

He cautioned, "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."

India's average annual trade deficit with ASEAN, Japan, and South Korea alone has reached approximately USD 62 billion over the past three years, the report noted.

What GTRI Recommends

To address these structural gaps, the GTRI founder recommended a revision of India's tariff schedules to resolve the inverted duty problem, strengthening domestic manufacturing ecosystems and supply chains, setting up a dedicated FTA Impact Monitoring Authority to track utilisation rates, and prioritising mutual recognition of standards and testing procedures to reduce non-tariff barriers for 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," Srivastava said.

India's FTA Landscape at a Glance

India currently has 15 implemented FTAs covering 27 countries, with a further nine agreements pending implementation or under active negotiation covering 42 additional countries. Together, these 69 countries account for more than three-quarters of India's total exports — underscoring how central trade agreements have become to the country's overall export strategy.

Concluded but unimplemented pacts include those with the UK and New Zealand. Talks with the EU have been concluded, while negotiations with the US, Israel, Canada, the Gulf Cooperation Council, and the Eurasian Economic Union are ongoing.

(KNN Bureau)