With the India-Oman agreement taking effect on June 1, India now has 15 FTAs covering 27 countries. Another nine agreements with 42 countries are nearing completion. Once finalised, India’s FTA partners will total 69 countries and could account for nearly 75 per cent of the country’s exports.
As India expands its network of FTAs, four recurring challenges demand attention: Rising trade deficits, low utilisation of FTA benefits by Indian exporters, worsening inverted duty structures, and the relocation of manufacturing to FTA partner countries.
Let’s examine how these challenges are shaping India’s trade patterns, industrial competitiveness, and economic outcomes.
First, a rising trade deficit. Between 2007-09 (before the FTAs took effect) and 202-25, India’s trade deficit with ASEAN grew by 381 per cent, that with Japan by 318 per cent and that with South Korea by 268 per cent. In comparison, its trade deficit with the rest of the world increased by 142 per cent. Over the past three years, India’s average annual trade deficit with ASEAN, Japan and South Korea has reached about $62 billion.
The newer FTAs are also associated with large trade deficits. In FY2025, India exported $48.6 billion to the UAE, Australia, Mauritius and EFTA countries, but imported nearly $100 billion, resulting in a trade deficit of over $50 billion. As tariff cuts under these agreements deepen, the deficit may increase further.
South Asia remains the major exception, where India’s trade surplus expanded from $6.7 billion to $20 billion during the same period.
The difference between India’s tariff structure and those of its FTA partners helps explain why imports often grow faster than exports after FTAs. Most of its FTA partners are already open economies with low tariffs. Average MFN tariffs are close to zero in Singapore and below 4 per cent in Japan, Australia, Malaysia, and the UAE. In contrast, India’s trade-weighted MFN tariff is about 12.6 per cent, with rates ranging from zero to 150 per cent. 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. Indian exporters, however, often gain little additional market access because tariffs in partner countries were already low or zero before the agreement.
The difference becomes even clearer when actual trade flows are examined. Almost all imports into Singapore enter duty-free under MFN rules, while more than 80 per cent do so in Japan and Malaysia. In the EU and the UK, more than half of imports face zero customs duty. In India, however, only about 6 per cent of imports enter duty-free under MFN treatment. As a result, FTAs often give foreign exporters a much bigger advantage in the Indian market than Indian exporters receive abroad.
Second, low utilisation of FTA benefits. The same tariff asymmetry also helps explain why Indian exporters make limited use of FTAs. When MFN tariffs in partner countries are already zero, there is little benefit in exporting under an FTA. Even where MFN tariffs are low — say 1 to 3 per cent — the savings are often too small to justify the costs of complying with rules of origin, certification requirements, and paperwork. As a result, only an estimated 20-30 per cent of India’s eligible exports take advantage of FTA preferences. Many small firms prefer to avoid the compliance burden for modest tariff savings.
The incentives are very different for exporters selling to India. Since India’s MFN tariffs remain relatively high, tariff reductions under FTAs can generate substantial savings. As a result, import-side utilisation rates are estimated at 60-70 per cent. Thus, rising imports and low export-side utilisation are not separate issues. Both stem from the same tariff asymmetry between India and its FTA partners.
Third, worsening inverted duty structures. An inverted duty structure arises when duties on raw materials and industrial inputs are higher than those on finished products. While this problem has existed for years, FTAs have made it harder to fix because many finished goods now enter India at low or zero duty from partners such as ASEAN, Japan, South Korea, the UAE and Australia. As a result, Indian manufacturers often pay high duties on imported inputs, especially those sourced from non-FTA countries, while competing against finished products imported duty-free under FTAs.
For example, steel and aluminium attract MFN duties of 7.5-10 per cent, but machinery, industrial equipment and engineering products made from these materials can enter India duty-free under several FTAs. Indian manufacturers, therefore, face higher input costs when competing with tariff-free imported machinery produced with globally priced inputs.
Similar distortions exist in chemicals, plastics, rubber and textiles. Duties on inputs such as caustic soda, soda ash, polypropylene, PVC and SBR raise production costs. At the same time, many finished products in these sectors can be imported at low or zero duty. The result is a tariff structure that protects producers of basic materials but disadvantages downstream manufacturing, making it harder to achieve higher domestic value addition and the goals of Make in India.
Fourth, make in ASEAN, sell in India. An equally significant consequence of FTAs and resulting inverted duty structures is the growing incentive for firms to manufacture outside India rather than within it. When raw materials and components attract duties in India, but finished products can be imported duty-free from FTA partners, companies may find it more profitable to locate production abroad and export back to the Indian market. In such cases, FTAs effectively encourage offshore manufacturing at the expense of domestic value addition.
ASEAN countries are increasingly becoming manufacturing hubs for supplying the Indian market. Chinese companies have invested heavily in countries such as Vietnam, Thailand and Indonesia. At the same time, some Indian firms have also set up factories and joint ventures there to benefit from lower production costs and duty-free access to India under FTAs. Similar trends can be seen in electronics, steel, chemicals, plastics, consumer goods and engineering products.
When it becomes cheaper to manufacture in an ASEAN country and export duty-free to India than to produce in India, investment and jobs tend to move abroad. As a result, FTAs can encourage firms to “Make in ASEAN, Sell in India” rather than “Make in India”.
Unless India’s tariffs on industrial inputs are better aligned with its FTA commitments, these agreements may encourage firms to produce abroad rather than in India, weakening domestic manufacturing and supply chains.
The government and industry must work together to address these four challenges so that FTAs strengthen India’s manufacturing base instead of encouraging higher imports, overseas production, and loss of industrial capacity.
The writer is founder, GTRI
The difference between India’s tariff structure and those of its FTA partners helps explain why imports often grow faster than exports after FTAs. 
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