Trade Agreements and the Impact on the Indian Economy.

After eleven years of trade negotiations, India sealed the deal with Australia, and together the countries signed the 'Economic Cooperation and Trade Agreement’ on 2nd April 2022. With this trade agreement in place, India- Australia bilateral trade would increase from US$27.5 billion to US$ 45 billion in five years. The increase in trade, would consequently expand and improve supply chain logistics in the Indo Pacific region and bring in economic stability.

Now, the Indo-Australia trade deal is one of the many economic trade agreements India is expected to sign this year. In early 2022, India drafted a comprehensive economic partnership agreement (CEPA) with the UAE, and at the time of publication, the country was already in trade talks with the United Kingdom. India's ongoing focus on trade agreements is to help the country reach its ambitious FY23 export target of US$450-500 billion.

This export target will help India compete against China, who currently holds an upper hand against India in terms of global exports. China has high export performances because the country is part of many successful trade agreements across the globe. In addition, initiatives like the One Belt One Road have helped China to maintain trade supremacy. In fact, in the annual World Competitiveness Index 2021, China ranks 16th while India maintains the 43rd rank, where in a high rank indicates the strong export capabilities of the nation. China procompetitive market has allowed for low market barriers and allows for easy market entry for new participants. This results in greater quantities of goods and services produced allowing for greater export quantity by China and hence is a major reason why China surges ahead of India in export quantities. However, China is currently facing pushback from other world economies due to its aggressive foreign policies. This provides India with an opportunity to step up and conquer exports share away from China. India’s Fy23 export target is a step in that direction.

Thus, trade agreements are a vital tool to help India in meeting export targets. This ultimately raises the question of why are trade agreements important for meeting export targets? A trade agreement or free trade agreement (FTA) promotes free trade. They either reduce or remove trade barriers, reduce or remove tariffs and ensure there is greater trade between nations than before the creation of the trade agreement. This results, in members of the trade agreement, having better access to other member markets. It can result in expanded export quantities allowing India to be successful in achieving its FY23 export target.

While trade agreements promote exports, they simultaneously bring in increased imports. Imports in a nation are a positive aspect since they bring in more alternatives for domestic consumers leading to increased choices and lower prices in the economy. But, when imports exceed exports, the balance of trade will become distorted and can lead to currency devaluations. India’s previous trade agreements between 2006 and 2011 have brought in more imports than exports and distorted the country's trade balance. This could have been the driving factor why the country did not sign any free trade agreements for over a decade. The trade deals with the ASEAN group, South Korea, Japan, Singapore, and Malaysia all lead to a widening trade deficit. With the South Asian Free Trade Agreement, India enjoys a trade surplus. Despite the trade agreements bringing in trade deficits, India did benefit from these trade agreements. This allowed India to become more integrated with the global supply chain and become a key political player in world affairs.

Overall, India needs to be careful when pursuing free trade agreements. Trade agreements can bring in many economic advantages- if the nation can negotiate a strong deal. They can promote technology sharing allowing India to get access to the latest technology. This allows India to get access to raw materials which would help improve manufacturing capabilities. The FTA with Australia that India just signed does provide our county with these advantages. Our Prime Minister Narendra Modi was very astute when he termed the signing of the trade deal ‘a water shed moment’.

By-

V Kanukurthi