Utilization Surge Hindered: Low FTA Benefit Usage and Compliance Costs Are Clogging Indian Exports

Utilization Surge Hindered: Low FTA Benefit Usage and Compliance Costs Are Clogging Indian Exports​

The Global Trade Research Initiative (GTRI) has highlighted a significant inefficiency in India's trade policy, noting that the utilization of Free Trade Agreement (FTA) benefits remains critically low. Only 20-30 per cent of eligible exports utilize these advantages, standing against the 60-70 per cent usage observed by exporters shipping to partner countries. This gap is primarily attributed to high compliance costs and existing low tariffs within many FTA partners.

The Challenge of Inverted Duty Structures for Indian Goods​

FTAs have inadvertently complicated the issue of inverted duty structures in India. Since numerous finished goods now enter the country at zero or low duty from key partners like ASEAN, Japan, South Korea, the UAE, and Australia, Indian manufacturers face a disproportionate challenge. They often bear high duties on imported inputs, especially those sourced outside FTA countries.

For example, while steel and aluminium attract Minimum Formal (MFN) duties of 7.5-10 per cent, machinery and industrial equipment made from these materials can enter India tariff-free under various FTAs. This disparity means Indian manufacturers incur higher input costs when competing against tariff-free imported machinery produced with globally priced inputs.

The Economic Impact of Tariff Disparities​

GTRI states that low foreign tariffs coupled with compliance burdens actively discourage Indian exporters from leveraging FTA preferences, particularly small firms which find the compliance overhead prohibitive for modest savings. This situation is intensified by the fact that most of India's current FTA partners are already open economies operating with relatively low tariff structures.

The difference in trade regulation is stark: Average MFN tariffs in Singapore and Japan range near zero or below 4 per cent, whereas India's trade-weighted MNF tariff stands at approximately 12.6 per cent, with rates fluctuating between zero and 150 per cent. As GTRI Founder Ajay Srivastava notes, a 50 per cent tariff reduction by an FTA partner translates into a major cost advantage over Indian competitors.

Beyond Tariffs: Evolving Scope of Modern Trade Pacts​

Srivastava emphasized that modern FTAs are increasingly complex tools, moving beyond merely reducing tariffs and expanding trade. These agreements now heavily influence how governments regulate businesses, manage data, design industrial policies, support domestic industries, and pursue broader developmental goals.

He cautioned that while these provisions are presented as modernizing trade rules, they can limit India's policy flexibility and create new compliance burdens for exporters. Traditional trade pacts focused on tariff cuts, but newer generation deals involve deep regulation in areas such as procurement, healthcare, digital governance, and intellectual property.

Strategic Recommendations to Bolster FTA Utilization​

To mitigate these systemic issues, Srivastava suggested several critical steps. These include conducting a thorough tariff schedule revision and directly addressing the inverted duty structure problem. Strengthening domestic manufacturing ecosystems and supply chains is also vital for boosting competitiveness.

Furthermore, he proposed establishing an FTA Impact Monitoring Authority dedicated to tracking benefits utilization. Prioritizing mutual recognition of standards, testing, and conformity assessment would significantly reduce the non-tariff barriers faced by Indian exporters.

India's Global Trade Footprint: Implemented and Pending Agreements​

India currently has 15 implemented FTAs covering 27 countries, with another 9 agreements pending implementation or negotiation across 42 additional countries. These commitments underscore the central role of FTAs in shaping India’s trade strategy, as these 69 countries account for more than three-quarters of India's exports.

Notable FTAs implemented within India's first generation (pre-2012) include those with Singapore and Japan. The newer agreements implemented after 2020 include those with the UAE and Australia. India is actively engaged in negotiations with numerous partners, including the USA, EU, and various Gulf Cooperation Council nations.