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EY India Tax and Economic Policy (International Trade) Associate Partner

Leads the international trade vertical and has held various positions in trade related agencies of the Indian government. He is a travel enthusiast and likes to cook and explore different cuisines.

I ndia is course-correcting its approach towards FTAs according to the changing needs of its economy, domestic policy initiatives and dynamics of global trade. It is specifically seeking to enhance its role in global value chains and expand the market for value added goods and modern services.

Indian FTAs are shifting direction towards the markets in the West such as the UK, the EU, the UAE and Eurasia apart from Australia. In these recent agreements, an increased focus on goods and services of specific interest is visible. Sectors such as gems and jewelry, plastics, engineering goods, agro-processed foods, textiles, technology services and financial services are likely to gain in the near future as a result of this focus.

India has so far signed 13 FTAs1, which include the FTAs with Japan, Korea and ASEAN. Agreements with Mauritius, the UAE and Australia have been concluded recently. To examine the impact of FTAs and their changing architecture, and evaluate the benefits, EY brought together domain leaders and policymakers in a virtual roundtable. The panel was moderated by Uday Pimprikar, National Indirect Tax Leader, EY, and the panelists included Ajay Srivastava, former Additional Director General (Foreign Trade); Bipin Menon, Development Commissioner, Noida SEZ; and Agneshwar Sen, Associate Partner, Tax and Economic Policy Group, EY. 

The panelists noted that there has been a shift in the architecture of the earlier FTAs with Japan, Korea and ASEAN and the recent FTAs with the UAE, Australia and the one under negotiation with the UK. The UAE and Australian FTAs have created specific opportunities for Indian companies. There are higher expectations from the ongoing negotiations with the UK, the EU and Canada. 

The earlier FTAs have been a mixed bag for India. While the outcome with Japan, Korea and ASEAN was balanced overall, with ASEAN, India did not gain much in exports though imports increased. India’s global imports during the 2010-21 period rose by 63%, but imports from ASEAN alone grew about 120%. Exports did not see a similar level of increase mostly due to the fact that countries such as Singapore and Malaysia do not have duty on many products. Therefore, Indian exports where duties are zero did not gain from the FTA route. India’s exports to South Korea increased to double of the global exports after the FTA was signed. However, due to lack of post-FTA outreach initiatives regarding new market opportunities, among other reasons, the benefits did not scale up.

Based on past learnings and changing dynamics of global trade, India’s FTA architecture has changed. While the earlier FTAs focused on eastern countries under the ‘Look East’ policy, the recent FTAs are more focused on Western geographies such as the US, the UK, the EU, and Eurasia. The bulwark of this shift is India’s need to look for supply chain partners that are credible and resilient, while offering investment and access to technology. Given the strong political will and diplomatic ties with these regions, such a change may be win-win. 

Another difference is that traditionally, FTAs focused on goods trade and related measures. The new FTAs, however, seek deeper economic integration, reflecting the changing paradigm of international trade agreements. India, through the new agreements, is expressing its understanding of these changes and adopting the imperatives that drive the modern economic trade order. 

While the FTAs with Australia and the UAE are a mix of traditional and modern elements, the agreements with the UK and the EU have more modern elements. The agreement with Australia has a two-tier structure in terms of tariff concessions and robust rules of origin, observed the panelists. The UK FTA not only negotiates on tariffs or domestic barriers and services but also talks about sustainability, labor, supply chain resilience, and digital trends like unhindered data flow. The agreements with the UK and the EU will have more than 20 policy areas2.

Every day seems to bring changes in indirect taxation around the world, including new taxes, and new reporting and compliance obligations.

Specific opportunities for India: India’s FTAs with various countries offer distinct trade opportunities.

The ongoing negotiations with the UK are expected to lead to a comprehensive agreement and would include products such as automobiles and whiskey. In the services sector, financial services will require multiple negotiations. The agreement with the EU may be complicated as it involves 27 countries. The new FTAs can also help start-ups looking for opportunities abroad. 

Factors critical for creating India-centric value chains 

In the recent FTAs, based on learnings from past agreements, India is increasing its focus on goods and services of specific export interest. Products like electronics, computers and laptops are already included in value chains. The new agreements will, however, also include a variety of finished products, not necessarily hi-tech, like shirts, shoes and bicycles. India is the largest exporter of cotton yarn, which is woven into fabric largely in China, dyed in Spain or Lesotho, and then sent to Ethiopia, Bangladesh or Vietnam, from where the final apparel is distributed around the world. Therefore, the value chain for a smaller product such as a shirt is like that of complex electronic products. Similarly, bicycles, pedals and brakes come from Japan, saddles from Italy, and frames and wheels from China. This means assembly can be anywhere in the world. India must identify the products, understand the value chain and take proactive steps to export the final value-added product on that chain.

To have a bigger role for exports, India must improve efficiency of ports, shipping, customs etc. via automation. Improved efficiency, along with low or nil duties, can also be a big boost for participation by Micro, Small, and Medium Enterprises (MSMEs). The existing value chains are being disrupted as many organizations and countries feel the need to develop alternate sources of supply in which all the components are available in the domestic vicinity or within the country’s own economy. Therefore, India has to look at a hybrid model to source from the most efficient suppliers, including domestic suppliers. There is a need to build capacities across the value chain.

In developed economies, cutting-edge technology and products are changing the nature of products. So, FTAs may be a good way for India to build bridges to reach out to those markets.

FTAs help our economy grow and develop through trade. They are a good tool to gather the various factors of production – capital goods, intermediates and raw materials; specialized labor; technology and know-how; services etc. – at competitive prices from the FTA partner countries on preferential terms. However, while negotiating, India must adopt a balanced position considering domestic imperatives such as Production-linked Incentive (PLI) schemes that seek to provide impetus to Indian manufacturing. Moreover, unlike many other countries, India’s focus is not solely on trade as there is a huge domestic market as well.

While indirect tax is a part of everyday life in most countries, the rise of new technologies and expanding global trade adds additional layers of complexity.

In recent years, issues related to managing indirect taxes — such as VAT, GST, customs and excise duties — have risen on the corporate agenda.

Comprehensive FTAs will not only deliver on new export opportunities but also support national ambitions of becoming a developed nation. 

EY India Tax and Economic Policy (International Trade) Associate Partner

Leads the international trade vertical and has held various positions in trade related agencies of the Indian government. He is a travel enthusiast and likes to cook and explore different cuisines.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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