Author : Nilanjan Ghosh

Originally Published 2015-11-16 10:23:15 Published on Nov 16, 2015
FTAs have helped consumer well-being by increasing consumer choices at affordable prices. However, the problem is that for any government to sign an agreement of this character would necessitate a better feasibility study report that is more holistic in nature.
FTA-fetishism to hurt Indian industry in the long run

Over the last few months, while working on a research paper on the impacts of tariff liberalization on the Indian economy, my attention was drawn towards the plethora of Free Trade Agreements (FTAs) signed by successive governments of our country in the new millennium. There are as many as 20-odd FTAs already signed by Government of India (GoI). Of these, as many as six have been signed with east and south-east Asian economies and trading blocs.

The momentum of signing FTAs continues unabated. The Government through its Ministry of Commerce is in the process of negotiating more of such agreements with Australia, New Zealand, Canada and European Union (EU). GoI's unequivocal argument in favour of signing agreements of this type is that trade expansions as a result of tariff reduction will benefit all the signatories.

The general practice that has been followed before signing FTAs has been to constitute joint study groups, which generally come up with their sets of inferences. As a recent example, a significant development in trade-relations between India and New Zealand trade relations is the discussions over FTA or Comprehensive Economic Cooperation Agreement (CECA) between the two economies. In 2007, erstwhile New Zealand Trade Minister, Phil Goff and Indian Commerce Minister, Kamal Nath agreed to explore the possibility of such an agreement, if only an economic analysis revealed its viability.

During 2008 and 2009, a Joint Study Group of officials investigated the current state of the trade and economic relationship. The findings of the Study can be summarised as follows: there is considerable potential to increase bilateral trade and economic relations, particularly if tariffs and other current barriers are adequately addressed through a comprehensive CECA/FTA; Computable General Equilibrium (CGE) modelling showed that both countries' welfare would rise over and above business as usual levels; welfare gains expected to continue to accrue as investment decisions impacted positively on levels of trade; and significant complementarities exist between the Indian and New Zealand economies.

Rounds of negotiations have been following ever since, and the FTA may be signed at any point in time. However, it ignored a host of issues in the wave of enthusiasm that has resulted in the FTA-fetishism. The first is the impact on trade balance (exports minus imports) that can have a significant impact on the balance of payments. Between 2001-02 and 2014-15, India-New Zealand bilateral trade increased by six times, though its percentage in total Indian trade diminished from 0.15% to 0.11%. However, India's trade increased with other nations, especially East and S-E nations with whom India signed FTAs. This is also associated with a manifold increase in bilateral trade deficit of India (while trading with New Zealand) from around 20 million USD in 2001-02 to 571 million USD in 2011-12, and hovering around 300 million USD recently.

The situation in the context of bilateral trade of India with the six east and south-east Asian economies is almost identical. Rather, India's bilateral trade deficit with these nations and trade blocs increased manifold after India signed the FTAs. In all these cases, the imports increased much faster than the exports thereby resulting in a net outflow. Even at an aggregate level, the Indian trade deficit has increased by almost 20 times between 2001-02 and 2014-15, in this era of FTAs. Though India-New Zealand trade is a minuscule proportion of the total Indian trade, this is tantamount to subscription to the philosophy that can lead to bigger macroeconomic problems through the Balance of Payments route. This, of course, does not augur well for an economy.

The second issue is the uncertain impact on value chain. A recent research on the impacts of India-Malaysia FTA on edible oil value chain reveals that while consumers have benefited from FTAs, the processing industry, labour markets, and oilseed producing farm community has been negatively affected. Somehow, the macro-modelling frameworks adopted by the joint study groups conducting the feasibility studies relied heavily on CGE frameworks that have so far failed to capture such impacts across the value-chain. Not capturing such important issues in a study can lead to uninformed policy formulation.

My third and final contention here is with the implications of FTA on the Make in India philosophy. This is something that I have stated in my previous column in this forum ( As such, cheap imports make it lucrative for consumers than the Indian counterparts of the products. Indian alternatives prove too costly due to higher costs of production, fragmented tax structures (unless the passage and implementation of GST occurs), outmoded labour laws, and infrastructure bottlenecks. With the domestic market being captured by the importing economies, can the domestic industry be able to compete and survive? Already such forces are seen in the cases of electronics, ICTs, white goods, and edible oils.

My contention is not blindly against the FTAs. FTAs rather have helped consumer well-being by increasing consumer choices at affordable prices. My problem is that for any government to sign an agreement of this character would necessitate a better feasibility study report that is more holistic in nature, concerning itself with more variables and more dimensions than it usually entails. Therefore, I have raised these few red flags.

(The writer is a Senior Fellow at Observer Research Foundation, Kolkata)


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Nilanjan Ghosh

Nilanjan Ghosh

Dr Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF) in India, where he leads the Centre for New Economic Diplomacy (CNED) and ...

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