After read this article you can solve this UPSC Mains PYQ:
What are the challenges before the Indian economy when the world is moving away from free trade and multilateralism to protectionism and bilateralism? How can these challenges be met? 2025 (GS-2, Economy)
Context:
India’s recently announced closure of negotiations for a free trade agreement (FTA) with New Zealand marks a maturing in New Delhi’s approach to global trade.
Recent FTAs at a Glance (2024–2025):
1. India-New Zealand FTA
- 100% Duty-Free Access: New Zealand has provided zero-duty access for 100% of Indian goods immediately upon entry into force.
- Investment Guarantee: Includes a commitment of $20 billion FDI into India over 15 years.
- Skilled Mobility: A new “Temporary Employment Entry” (TEE) visa with a quota of 5,000 professionals for sectors like IT, Healthcare, and Education.
- AYUSH Focus: First-ever dedicated chapter on Traditional Medicine (AYUSH), recognizing Indian wellness systems alongside Maori health practices.
- Sensitive Protections: India has completely excluded Dairy (milk, cheese, etc.) and specific agricultural products like sugar and honey to protect local farmers.
2. India-Oman CEPA
- Market Reach: Nearly universal duty-free access (98% of tariff lines) for Indian exports like textiles, gems & jewelry, and engineering goods.
- Hiring Flexibility: Omani authorities have committed to permanent flexibility in hiring Indian professionals, allowing firms to employ up to 100% Indian workforce in certain categories.
- Energy and Services: Secured commitments in 127 service sub-sectors; 100% FDI allowed for Indian companies in major Omani service sectors.
- Pharma Fast-Track: Established a mechanism for fast-tracking approvals of Indian pharmaceutical products already approved by major global regulators (USFDA, EMA).
3. India-EFTA TEPA
- Binding FDI: The first FTA in global history where partners (Switzerland, Norway, Iceland, Liechtenstein) have legally pledged $100 billion investment and 1 million jobs over 15 years.
- Tech & Innovation: Focuses on high-tech manufacturing, R&D, and precision engineering.
- Trade Balance: EFTA countries have eliminated duties on 99.6% of Indian exports. In return, India will gradually reduce duties on Swiss watches, chocolates, and high-end machinery.
- Generic Medicines: India successfully defended its right to produce generic drugs by resisting “data exclusivity” clauses that would have extended patent monopolies.
4. India-Australia CECA
- Beyond ECTA: Building on the 2022 interim deal (ECTA), the Comprehensive agreement (CECA) is in its 11th round of talks (as of Aug 2025).
- Digital Trade: Newer rounds focus on Digital Trade, Government Procurement, and stricter Rules of Origin to prevent Chinese goods from being rerouted through Australia.
- Critical Minerals: A major strategic pillar involves securing supply chains for Lithium and Cobalt for India’s EV mission.
- Double Taxation: Already resolved under the first phase, saving Indian IT companies millions in taxes.
5. India-UAE CEPA
- Trade Volume: Bilateral trade surged past $100 billion in FY 2024-25, a nearly 20% increase since the FTA became operational.
- Bharat Mart: Establishment of a massive retail and warehouse complex in Dubai to act as a gateway for Indian MSMEs to the Middle East and Africa.
- Gold TRQ: India introduced a transparent competitive bidding process for the gold import quota granted under the CEPA to ensure fair access for domestic jewelers.
- Food Security: Collaborative “Food Corridors” where UAE invests in Indian food parks to secure their supply chain.
Reasons for This New FTA Push:
1. Countering Protectionism & Trump Tariffs
- Market Diversification: With the US administration imposing significant “reciprocal tariffs” on Indian goods in 2025, India is moving away from over-reliance on the US and China.
- Safety Net: FTAs with the UK and EU act as “diplomatic insurance,” ensuring stable market access even if global trade wars escalate.
2. Shift from “Shallow” to “Deep” Agreements
- Learning from the Past: Previous FTAs (ASEAN, Japan, S. Korea) led to widening trade deficits because they focused mainly on raw materials and low-end goods.
- Investment-Led Growth: The new “benchmark” (seen in the EFTA TEPA) includes legally binding investment pledges. India now demands FDI commitments ($100bn from EFTA, $20bn from NZ) as a prerequisite for market access.
3. Operationalizing “China Plus One”
- Global Value Chain (GVC) Integration: India aims to replace China as the “World’s Factory.” FTAs with developed nations allow for the duty-free import of high-tech components and machinery, which are then used in the Make in India and PLI schemes to export finished goods.
- Critical Minerals: Agreements like the Australia CECA and UK CETA are designed to secure raw materials (Lithium, Cobalt) essential for India’s green energy and EV transitions.
4. Leveraging India’s Services Strength
- Professional Mobility: Unlike older deals, new FTAs prioritize “Movement of Natural Persons.”
- Social Security Savings: The India-UK deal (2025) includes a Double Contribution Convention, saving Indian firms and workers over ₹4,000crore annually by removing dual social security payments.
- New Quotas: Deals like the NZ FTA (2025) include specific visa quotas (5,000+) for Indian IT, healthcare, and educational professionals.
5. Geopolitical & Strategic Autonomy
- Strategic Ties: FTAs are now used as tools of diplomacy. Strengthening ties with the UAE and Oman secures India’s energy interests in West Asia, while the EFTA deal balances India’s relationship with Europe.
- Soft Power (AYUSH): Recent deals (Oman, NZ) include dedicated chapters on Traditional Medicine, gaining global recognition for Ayurveda and Yoga.
6. Reducing Non-Tariff Barriers (NTBs)
- Regulatory Alignment: India is now willing to negotiate on “WTO-Plus” issues (Labor, Environment, Digital Trade) to prevent developed nations from using “Green Taxes” (like the EU’s CBAM) to block Indian exports.
Significance of New-Age FTAs:
1. Shift to Investment-Led Trade (The “FDI Pillar”)
For the first time, India is using FTAs to secure legally binding investment commitments.
- Guaranteed FDI: The India-EFTA TEPA (2025) includes a historic pledge of $100 billion in FDI over 15 years. Similarly, the New Zealand FTA (Dec 2025) brings a $20 billion investment commitment.
- Job Creation: These investments are specifically tied to generating direct employment (e.g., 1 million jobs targeted via the EFTA deal), moving the FTA narrative from “cheap imports” to “domestic manufacturing.”
2. Trade as “Diplomatic Insurance” (The Geopolitical Pillar)
In a fragmented global order, FTAs are now tools of Strategic Autonomy.
- China Plus One: By signing deals with high-tech Western nations (UK, Switzerland), India integrates into global value chains as a reliable alternative to China.
- Countering Protectionism: As major economies (like the US in 2025) lean toward protectionism, bilateral FTAs ensure that Indian goods have “privileged access” and are shielded from sudden tariff hikes.
- West Asia Pivot: Deals with the UAE (2022) and Oman (Dec 2025) secure India’s energy corridor and provide a gateway to African and European markets.
3. Services-First Approach (The “Mode 4” Pillar)
India is leveraging its strength in the Services Sector (IT, Healthcare, Education) more aggressively.
- Professional Mobility: New FTAs focus on the “Movement of Natural Persons.” For example, the India-UK CETA (2025) eases visas for Indian professionals and includes a Double Contribution Convention, saving Indian firms ₹4,000+ crore by eliminating dual social security payments.
- Niche Service Quotas: The India-NZ FTA provides specific quotas for Indian chefs, yoga instructors, and traditional medicine (AYUSH) practitioners.
4. Supply Chain & Resource Security (The “Critical Inputs” Pillar)
Modern FTAs are designed to feed India’s domestic “Make in India” and “Green Energy” goals.
- Critical Minerals: Agreements with Australia and the UK focus on securing Lithium, Cobalt, and Copper—essential for India’s Electric Vehicle (EV) and semiconductor missions.
- Zero-Duty Inputs: The India-NZ FTA allows duty-free import of wooden logs and coking coal, which are vital raw materials for Indian infrastructure and steel industries.
5. Balancing Ambition with Sensitivity (The “Protectionist” Pillar)
India has mastered the “Calibrated Liberalization” model.
- Dairy & Agri Safeguards: Despite immense pressure from New Zealand (a global dairy giant), India completely excluded the dairy sector from the 2025 FTA to protect the livelihoods of 80 million Indian dairy farmers.
- Pharma Sovereignty: In the EFTA deal, India successfully resisted “data exclusivity” clauses, ensuring that the Indian Generic Drug Industry can continue to provide affordable medicines globally without patent hurdles.
Key Concerns & Challenges:
1. The Challenge of “Asymmetric Gains” (Trade Deficits)
- Historical Baggage: Past FTAs with ASEAN, Japan, and South Korea saw imports into India grow much faster than Indian exports (e.g., ASEAN imports grew 234% while exports grew only 130% between 2009-2023).
- Current Fear: Even with new partners like the UK and EFTA, there is a risk that high-value imports (machinery, electronics, and chemicals) will widen the trade deficit further, despite duty-free access for Indian labor-intensive goods.
2. The “Inverted Duty Structure” (Manufacturing vs. Trading)
- Concept: This occurs when the import duty on finished products is lower than the duty on the raw materials/intermediate goods required to make them.
- Impact: FTAs often lower duties on finished goods to zero. If domestic manufacturers still pay higher duties (or taxes like GST) on raw materials, it becomes cheaper to import and trade than to manufacture in India, directly contradicting the Atmanirbhar Bharat vision.
3. Low FTA Utilization Rate
- Complexity: India’s FTA utilization rate is significantly low—estimated at only 25%—compared to 70–80% in developed countries.
- Reasons: Small and Medium Enterprises (MSMEs) often find the paperwork and Rules of Origin (ROO) certification too complex and costly, opting instead to pay the standard Most Favoured Nation (MFN) duties.
4. “Green Protectionism” and Non-Tariff Barriers (NTBs)
- CBAM (Carbon Tax): The EU’s Carbon Border Adjustment Mechanism (starting Jan 2026) could impose 20–35% taxes on Indian steel, aluminum, and cement, effectively neutralizing any “zero-duty” benefits gained through an FTA.
- Sanitary and Phytosanitary (SPS) Measures: Indian agri-exports (like grapes, rice, and shrimp) frequently face rejection in EU and UK markets due to stringent pesticide residue norms that go beyond international standards.
5. “WTO-Plus” Issues (Sovereignty vs. Trade)
Developed nations (UK, EU, EFTA) are pushing for standards in areas where India has traditional sensitivities:
- Labour & Environment: Recent deals like the EFTA TEPA (2025) and India-UK CETA include chapters on sustainability. India is concerned that these could be used as “disguised protectionism” to block Indian goods if domestic labor reforms (Labour Codes) are not fully implemented.
- Data Exclusivity in Pharma: Partners often demand “Data Exclusivity,” which prevents Indian generic companies from using existing clinical trial data to launch cheaper drugs, potentially threatening India’s status as the “Pharmacy of the World.”
India’s Modern Approach:
1. The “Investment-First” Paradigm
The most significant shift in India’s modern approach is the inclusion of legally binding investment commitments.
- The EFTA Benchmark: The India-EFTA TEPA (Operational Oct 2025) is a global first, where partner nations committed to $100 billion in FDI and 1 million direct jobs in India over 15 years.
- The “Clawback” Mechanism: In the New Zealand FTA (Dec 2025), the $20 billion investment pledge is reportedly backed by a mechanism where market access can be reviewed if investment targets are not met.
- Impact: This ensures that FTAs lead to “Made in India” manufacturing rather than just turning India into a consumption market for foreign goods.
2. Strategic “Safety Nets” (Geopolitical Alignment)
In 2025, as the US implemented aggressive “reciprocal tariffs” (reaching up to 50% on some Indian goods), India used FTAs to insulate its economy.
- Trade Insurance: By locking in zero-duty access to the UK, Oman, and EFTA, India created alternative hubs for its labor-intensive sectors (textiles, leather) to bypass US tariff walls.
- China Plus One: FTAs are now used to secure Critical Mineral supply chains (Lithium from Australia, High-tech from Switzerland) to reduce dependence on China.
3. Managing “WTO-Plus” Issues
India has shown a newfound willingness to negotiate on complex, non-tariff issues that it previously avoided:
- Sustainability & Labor: The India-UK CETA (2025) and EFTA deals include chapters on environment and labor. India’s approach is to accept these standards only if they do not act as “disguised protectionism.”
- Data & Digital Trade: India is moving from a rigid “data localization” stance to a more fluid “trusted corridor” approach, as seen in the 2025 Digital Personal Data Protection (DPDP) Rules which facilitate cross-border data flows with FTA partners.
4. Tactical Safeguards & “Red Lines”
- Exclusion as a Tool: India has institutionalized a “Red Line” policy for sensitive sectors. It successfully excluded Dairy from the New Zealand deal and Gold duty changes from the EFTA deal.
- CAROTAR 2020: Modern FTAs are paired with strict Rules of Origin (ROO). Importers must prove that a significant portion of value addition happened in the partner country, preventing Chinese goods from being “re-labeled” and dumped into India.
Way Forward:
1. Structural & Fiscal Reforms
- Addressing Inverted Duty Structures: As signaled in the 2025 Budget, India is rationalizing customs duties—reducing the number of tariff rates to eight. The priority is to ensure duties on raw materials (like lithium, cobalt, and laboratory chemicals) are consistently lower than finished products to incentivize Make in India.
- National Manufacturing Mission: Integrating FTAs with the “National Manufacturing Mission” to help MSMEs upgrade technology and meet the quality standards of developed markets.
2. Boosting FTA Utilization & Ease of Doing Business
- Unified Trade Portal: To solve the low utilization rate (currently ~25%), the government is developing a single searchable national portal. This will provide MSMEs with easy access to Rules of Origin (ROO) certification and duty drawback codes.
- Export Hubs: Operationalizing District Export Hubs to identify localized products (one district, one product) that have competitive advantages under specific FTAs.
3. Countering “Green Protectionism” (CBAM)
- Domestic Carbon Pricing: India is fast-tracking its own Carbon Credit Trading Scheme (CCTS), set for full implementation by October 2026. This allows Indian exporters to pay carbon taxes domestically, which can then be credited against the EU’s Carbon Border Adjustment Mechanism (CBAM) to avoid double taxation.
- Technology Transition: Utilizing PLI (Production Linked Incentive) schemes to help the steel and aluminum sectors pivot to “Green Hydrogen” and low-emission technologies to remain competitive in the EU/UK.
4. Leveraging Services & Mobility
- Mutual Recognition Agreements (MRAs): Moving beyond visa quotas to ensure that Indian professional degrees (Doctors, CAs, Engineers) are legally recognized in partner countries.
- Social Security Portability: Expanding the Double Contribution Convention (found in the UK deal) to other partners to save billions for Indian IT firms and professionals working abroad.
5. Digital & Intellectual Property Strategy
- Trusted Data Corridors: Using the Digital Personal Data Protection (DPDP) Act 2023 to create “trusted zones” for data flow with FTA partners, facilitating the growth of India’s Fintech and Global Capability Centers (GCCs).
- Generic Sovereignty: Maintaining a firm stance against “Data Exclusivity” in all future negotiations (like the ongoing India-EU FTA) to protect the domestic generic pharma industry.
Conclusion:
India’s recent FTAs represent a “Goldilocks” approach—liberal enough to attract high-tech investment and market access, yet cautious enough to protect the livelihoods of millions of farmers and MSMEs. As India eyes the $5 trillion economy mark, these “new era” pacts will be the engines of its external growth.
