India's Free Trade Gamble

History teaches us building walls protects a nation, but Economics teaches us that opening doors makes it richer. India has spent centuries figuring out its right policy.

India has always practiced protectionist trade policy, where it shielded the home industries by sky reaching tariffs and super strict restrictions. Even though it did prosper some significant industries, it limited nations presence in international trade. Today, India's strategy looks completely opposite to it. India has signed 13 Free Trade Agreements (FTAs) and 6 Preferential Trade Agreements (PTAs), while actively negotiating major trade deals with the European Union, the United Kingdom, and the United States.

This change illustrates our commitment to trade liberalization. As every Indian seeks the dream of becoming a developed economy by 2047, so really about whether our nation is ready to compete with its full potential,

The Big Promise of Free Trade !
We need to start by understanding a Free trade Agreement is nothing but a formal agreement between countries to eradicate their trade barriers. Generally, these barriers include Tariffs(the additional tax imposed on goods) and import quotas (a specific on the quantity of goods that can be imported).There are other regulations that add on to the cost and time of trade that makes them less productively efficient. By lowering these barriers, firms of these nations can increase their supply of raw materials and get access to larger markets.

This is the primary reason why plenty of countries over the globe advocate for free trade. The argument of that side is usually similar, where counties should specialize in producing goods that they have the most comparative advantage of. The reasoning behind it is how specialization increases efficiency, lower prices and the biggest promise of how it raises the overall economic welfare of the globe.

Why did India Change its Trade Strategy ?

India had a couple of experiences where, earlier agreements like the ASEAN Trade Agreement, where imports into India surged, domestic industries struggled to compete, this deepened trade deficits in several sectors. Due to which, India had to be more selective and conscious with such agreements, where it then prioritized protection of its industries over trade liberalization.

The crucial turning point of our nation's trading story was the 2019 pandemic. Where Multinational companies diversify their supply chains beyond China. This ‘China +1’ strategy cum policy was the greatest opportunity given to us to get established as a global export house.

Now the government has aligned its trade policies with broader goals like Made in India and Vikisit Bhartat 2047. As of today's date, manufacturing already accounts for a significant 17 % portion of India's GDP, and the government wants to raise it to 25%. This will create millions of jobs and also make India a developed economy by 20247.

How Free Trade will Benefit India?
Free trade agreements can become powerful engines of India's economic growth. When india lower its trade barriers, Indian businesses get the opportunities to expand their access to larger markets. This benefit thrives the textile economy of Gujarat and the pharmaceuticals of Hyderabad, to sell their products abroad at more competitive prices.

The benefits go beyond commercial exports. Lower trade restrictions incentivises more Foreign Direct Investments (FDI), as MNCs look favorable upon the countries that give them easier access to international markets. Therefore, companies are likely to start factories and supply chains in India, while cheap materials, efficiency and minimal restrictions further make India more attractive for FDIs. Additionally, it brings technology, expertise and more employment opportunities in India.

India-EFTA Trade and Economic Partnership Agreement (TEPA), is a successful example. In this agreement the EFTA nations (Iceland, Liechtenstein, Norway, and Switzerland) have committed to investing about USD 100 billion in India over the span of next 15 years, which is about to generate a total of one million of total jobs. Additionally,it would also add on to the potential efficiency of our nation in sectors like manufacturing, infrastructure and research, making India more globally competitive.

If negotiated and executed well, it will integrate India into global value chains. Employing such strategies would definitely make India a desired hub of investment, manufacturing, and exports.

The Hidden Costs

Despite all the good things stated above, there's another side to the coin, as FTAs come with risks. Opening markets to a really competitive globe puts pressure on the domestic firms. This more applicable if we consider our nation, as India's Micro, Small and Medium Enterprises (MSMEs), contribute around 30% of the country's GDP, 36% of manufacturing output, and nearly 45% of exports, would face a high pressure through cost cutting and establishing market presence. Many MSMEs lack the tech, scale and the financial capital to compete against market giants.

India's agriculture is a crucial and a sensitive sector. The ongoing India-USA negotiations over American agriculture and dairy, is a huge threat to the Indian farmers. This is because American farmers experience significant economies of scale on their farm lands, which keeps their costs low and makes it easier for them to reduce prices of their products into the Indian market, while the Indian farmers who harvest little amount of crops from their little area of farmland, can not afford to cut down their prices. If tariffs are significantly reduced, it will certainly threaten the living of millions of farmers in India.

The ultimate risk is the risk of widening trade deficits. Even though FTAs have the potential to increase trade and exports, they do not guarantee it. If Indians run faster behind the foreign goods, than the pace of its firm's production, it will certainly ruin India's trade accounts. Which will put more pressure on domestic forms and even foreign exchange reserves.

What India Must FIX to Win the Race?

The real success of FTA lies within each clause of the agreement and the strength of the domestic industries. If we want to benefit from free trade, we must address some structural changes.

Logistics ! the biggest obstacle, where India's logistics coasts are estimated around 13-14% of the GDP. Higher transport, storage and port costs make Indian goods more pricey and less competitive in the international market . To solve this Indian industries have to work on sustainability and innovation and the government has to work on better infrastructure and subsidies. Increased vocational training, simpler labour and reduced bureaucratic regulations will incentivise to scale more efficiently. Additionally, MSMEs should be supported with more convenient financial and logistic networks.

Lastly we need to understand FTAs create opportunities but does not guarantee. We need t be more strategic and trade diplomatic, invest in infrastructure and build a more productive workforce and incentives to make competitive industries.

In the end, trade agreements don't make countries rich, productive economies do, and that's the truth.