India’s FTAs and impact on dairy and agriculture

This article is authored by Shivpriya Nanda and Zain Pandit, partners, JSA advocates and solicitors.

Free Trade Agreements (FTAs) are selective international trade agreements that offer preferential tariff concessions to member nations while excluding non-members. FTAs do not entirely eliminate trade protectionism but naturalise opportunities according to the economic needs of participating countries. Successful examples like NAFTA and the Vietnam-UK FTA (UKVFTA) demonstrate that calculated trade-offs between trade creation and diversion, complementary trade profiles, and efficient domestic supply chains, required to counter import competition, are essential features of a mutually beneficial FTA.

Dairy and agriculture (File photo for representation)

Agriculture and allied sectors employ nearly half of the Indian population and contribute 16-18% to the national GDP, making them economically and politically significant. Policy reforms face complications due to the vulnerability of agricultural workers and the substantial political heft of farming organisations. Historical examples demonstrate this challenge: India's withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2020 was attributed to protecting its 100 million dairy farmers, and the repeal of the infamous farm bills following widespread protests in 2020-2021 illustrates how agricultural interests can effectively resist sudden policy changes and show their predisposition against potentially beneficial reforms.

Following the shift to tariff-focused global trade during the current Trump era, countries have scrambled to finalise FTAs to protect their economic interests. With 13 active FTAs and more in negotiation, India faces criticism from trading partners regarding its highly protective stance in specific sectors, such as its agricultural market. The stance of India’s largest trading partner is a case in point. US commerce secretary Howard Lutnick has called for India to liberalise its agrarian markets, highlighting the high tariff margin between the two nations, which stands at 32.4%. A subset of the agricultural sector, the Indian dairy market also exemplifies this protectionism, with India imposing 39.78% tariffs on US dairy products (compared to just 1.54% US tariffs on Indian dairy) and a weighted average tariff in the 30-60% range across all trading partners. Despite pressure from countries like Chile and New Zealand, India has strongly pushed back, including on dairy in its FTA frameworks, to protect its small and vulnerable agrarian community. Considering the standalone national economic contribution of the dairy sector in the range of 4-5%, such a decision is based on various constraints, some of which go beyond the standard economic rationale of free trade. For instance, India’s pushback on US dairy imports emanates from India’s religious sentiments, which prohibit the import on the grounds of non-vegetarian/ blood meal feed being fed to cattle. Indian food laws do not recognise milk and milk products as non-vegetarian. If India cedes to such international pressure and allows such products to enter the Indian market, there is a strong possibility that the Indian government would need to amend food laws, including changing the statutory definition of non-vegetarian food to include milk and milk products, and harmonise its labelling regulations to preserve the interests of India’s vegetarian section of the population.

India's prevailing agricultural protectionism must be observed from the context of its historical pursuit of self-sufficiency. State initiatives like the Green Revolution and Operation Flood successfully transformed the country from production deficits to surpluses, enabling India to become the world's largest milk producer (an estimated production 240 million tonnes in FY 2023-24, approximately 25% of the global output) and among the world's leaders in food grain production. However, at this juncture of growing international trade factionalism in the current 21st century, India finds itself at a policy crossroads: continue with its insulated agricultural sector or embrace market liberalisation that could address structural weaknesses and potentially uplift the output and increase welfare of the Indian agrarian community.

India’s agricultural market is plagued with systemic issues and an inefficient domestic demand, which simple reforms cannot redress. The problems range from low productivity, fragmented small producers, and distorted supply chains (which fail to provide farmers with an adequate price for their produce). Further, a lack of technological advancement in agricultural practices results in subpar production levels. Another level of complexity is the issue of agriculture being closely linked to the livelihood of most of the population. Hypothetically, were India to choose to liberalise agriculture and allied sectors, there would be an increase in competition and a surplus of imported varieties of agricultural and dairy products. Small farmers will bear the brunt since they are adversely impacted due to prevailing market weaknesses, lack of infrastructure and inadequate production facilities. An all-out effort to ease trade barriers may not be the best-suited path for the Indian agricultural sector. However, progressive liberalisation may be a good step via steps such as slowly easing non-tariff barriers, such as import and certification restrictions on genetically modified feed for cattle, with a steady focus on remedying the ill-effects of redistribution via calibrated state intervention. While steadily opening the markets, policy making can aid in advancing central support to adversely impacted farming groups losing out due to import competition, while leveraging the technological and management skillsets of developed countries, which are at the forefront of producing certain goods.

A case in point would be the India-New Zealand relationship. They have reopened FTA talks after a decade. New Zealand currently exports approximately NZ$ 57 million (~ ₹ 287 crore) worth of dairy products to India, which ranks as its 12th two-way trading partner. As both parties attempt to reach an understanding in the negotiations for the FTA, steps are being taken to promote a stronger relationship between the countries, such as New Zealand sponsoring for India’s permanent candidature in the United Nations Security Council and the two countries entering into fresh Memorandums of Cooperation for education, defence cooperation, horticulture and sports. Indian regulators can take a lesson from New Zealand’s dairy industry, one of the most robust in the world, making it the leader in milk exports (with roughly a 95% market share in the export of whole milk powder). Fonterra, the leading milk producer in New Zealand, is an entirely farmer-owned dairy cooperative and a specialist in dairy management systems and efficient supply chains (very similar to the brand Amul, owned by the Gujarat Cooperative Milk Marketing Federation). Recently, the New Zealand government has introduced an amendment bill to restructure its existing dairy export licensing regime to grant indigenous farmers broader avenues for export engagement. 

Further, using its world-class information technology and services sector as a bargaining chip, India could negotiate and secure binding commitments for upskilling small dairy farmers in India and the transfer of technology to increase milk production yield, thereby streamlining operations and resulting in better price discovery, surplus management, and enhanced profitability. Another solution could be to foster FDI in these sectors and grant limited market access with conditions that ensure the involvement of local farming communities. Joint ventures with Farmer Producers Organisations (FPOs), a significant initiative of the GoI which has vastly increased the collective bargaining power of the vulnerable small farmers, and dairy cooperatives with rules regarding investment directed towards medium to long-term capital formation in the dairy sector can also be favoured to create other homegrown brands with international footprints like Amul. Such initiatives can also be curated to boost domestic employment in India. Last, continuing key central policies such as the Revised National Programme for Dairy Development, Prime Minister Dhan-Dhaanya Krishi Yojana, must be supplemented by regular oversight. Key inputs may be incorporated via a multi-stakeholder forum involving international partners. Simultaneously, steps such as widening the coverage of enhancement of credit facilities and ensuring priority access to funds, which have aided the smaller farming groups, must remain in place. 

The heart of the matter remains that India must leverage its position and take advantage of international trade dynamics to improve its internal markets. While an embrace of free markets cannot be brazenly adopted in the agricultural sector, considering India’s unique circumstances, it is pertinent that New Delhi takes steps to advance its image as a liberal trading partner and positions itself to conducive trade talks.

This article is authored by Shivpriya Nanda and Zain Pandit, partners, JSA advocates and solicitors.