Relevance for UPSC: GS III (Economy – External Sector, Trade Policy) | Source: NITI Aayog, “Trade Watch Quarterly”

Context

India has pursued Free Trade Agreements (FTAs) to expand exports and integrate with global value chains. However, NITI Aayog’s Trade Watch Quarterly highlights that India’s trade deficit with its FTA partners widened by about 59 percent during April–June 2025 (year-on-year), raising concerns over the quality of trade integration rather than its scale alone.

Key Findings

• India’s imports from FTA partners rose sharply, driven by:
  • Petroleum and mineral fuels
  • Gold compounds
  • Electronic components
• Exports to ASEAN partners declined, contributing significantly to the deficit.
• Electronics exports recorded double-digit growth, now contributing a rising share of India’s merchandise exports, reflecting gains from manufacturing-linked policies.

Conceptual Clarity

• Trade Deficit: Occurs when imports exceed exports. A persistent deficit with preferential partners may indicate structural competitiveness gaps rather than temporary demand shocks.
• Free Trade Agreements: Reduce tariffs, but benefits accrue only if domestic industries can scale production, meet standards, and move up value chains.

Policy Implications

• High dependence on import-intensive sectors weakens FTA outcomes.
• Misuse of rules of origin and limited value addition constrain export gains.
• Positive signals from electronics show the importance of aligning FTAs with industrial policy.

Way Forward

• Strengthen domestic manufacturing of intermediates and components.
• Improve FTA utilisation by small and medium enterprises.
• Periodically review FTAs based on sector-wise performance.

One-Line Takeaway: Free Trade Agreements deliver benefits only when supported by competitive domestic manufacturing and value-added exports.

Q. A widening trade deficit with Free Trade Agreement partners mainly indicates:
A. Uniform failure of all FTAs
B. Structural weaknesses in export competitiveness
C. Excessive domestic consumption alone
D. Decline in global trade