Navigating the FTA maze

This article is authored by Probir Roy Chowdhury, partner & corporate chair, JSA Advocates and Solicitors.

As India approaches its economic goals, including exploring the path of free trade agreements (FTAs), like many other growing economies, India faces an important challenge: maximising the potential of its IT sector, while preserving local manufacturing under the Make in India campaign. Achieving this requires a delicately balanced legal and policy framework which embraces global opportunity without signing away national interest.

Tech

The Make in India initiative has been the forefront of the current government’s economic development initiative since 2014 – with an aim to increase the contribution of India’s manufacturing sector to 25% of India’s total Gross Domestic Product (GDP) by 2025. However, due to increasing foreign competition through imports, its contribution has stagnated between 14% - 17% as of 2024.

FTAs globally have produced mixed results. For example, FTAs such as the India-UAE Comprehensive Economic Partnership Agreement (CEPA) and India-Singapore Comprehensive Economic Cooperation Agreement (CECA) have increased exports in industries like engineering, textiles and gems and promoted IT collaboration. However, FTAs with the Association of South East Asian Nations (Asean), Japan, and South Korea have increased trade deficits driven by cheaper imports from China in sectors such as electronics and textiles. These imports, often rerouted through FTA partners (like Asean), damage domestic manufacturing operations. Consequently, these FTAs risk undermining Make in India. Further, exports are also impacted by a stronger nationalistic ideology in these regions.

India's IT sector is positioned to benefit from FTAs, as these could improve market access – especially in territories like the European Union (EU), where relaxing visa requirements could significantly expand service export opportunities. However, other non-tariff barriers, such as EU's regulatory standards (e.g., GDPR compliance) and high import standards create substantial compliance costs. Further, FTAs with open procurement clauses might also expose smaller Indian IT companies to competition from global giants.

India has signed 15 FTAs till date and is currently engaged in negotiations with key partners like the US, and the EU. Import surges and increased global competition pose challenges for sensitive sectors, such as agriculture, pharma, and smaller IT companies, necessitating policy adjustments. There is a need for India to align FTAs with our national priorities as FTAs without proper strategic safeguards could run the risk of prioritising imports over domestic production, and increasing dependence on foreign players, which could impede Make in India and Atmanirbhar Bharat.

Measures that may be taken include:

· Establishing robust review mechanisms such as joint working groups with partner countries, to monitor import surges, non-tariff barriers, and the overall impact of the FTA.

· Protecting sensitive sectors like agriculture and small-scale manufacturing from tariff concessions, similar to what India has done in the past, to protect domestic industries.

· Investing in research and development to enhance the competitiveness of domestic industries and create a niche for Indian products as a result of increased quality.

· Maximising IT benefits through the following:

• Prioritising services by negotiating strong services chapters in FTAs, focusing on easing visa restrictions and promoting digital trade, as seen in the India-EFTA TEPA.
• Assisting with mitigating compliance costs by providing support and training to smaller IT firms to help them meet foreign regulatory standards, such as the GDPR.
• Enhancing skills by investing in training in cutting-edge areas like AI and cybersecurity.

Current government initiatives like the Production-Linked Incentive (PLI) scheme, have significantly contributed to the growth in key sectors like manufacturing and export of smartphones. FTAs can further enhance these policy measures by securing reciprocal market access for Indian IT services, thereby off-setting import pressures. PLI coupled with FTAs can also lead to increased foreign investment in domestic IT sector, thereby enhancing not just the service component of India’s IT sector but also the product and software development component.

Strategically supporting local companies may also be achieved through government procurement policies. By reserving such contracts for domestic IT and manufacturing companies, India can encourage innovation, while adhering to FTA commitments.

It is also crucial to handle infrastructure bottlenecks, such as high logistics costs, which erode manufacturing competitiveness. By integrating FTAs with domestic strategies, incorporating safeguards to enable domestic developers to benefit from technology and knowledge transfer, and granting domestic manufacturers a clear and legally enforceable recourse against unfair trade practices, India can create a level playing field and become Atmanirbhar.

Aligning FTAs with domestic priorities is important for India to maximise its growth potential and establish itself as a leading economic powerhouse. This requires a balanced strategy of openness and resilience, which includes stronger review mechanisms, prioritized reciprocal access, eased professional mobility, fostered technology collaborations, and investments in skills and infrastructure. These efforts will be key to solidifying India's IT leadership and advancing Make in India (for the world).

This article is authored by Probir Roy Chowdhury, partner & corporate chair, JSA Advocates and Solicitors.