Prime Minister Narendra Modi’s government is taking advantage of India’s growing appeal as the world’s fastest-growing major economy and an alternative to China for global supply chains to clinch a number of free trade pacts.
Credit: Bloomberg Photo
Gautam Nair is preparing to ramp up production at his clothing factory in Gurugram, betting on a surge of orders from brands like Marks & Spencer and Next as India pursues more free trade pacts with the rest of the world.
Within three years, he expects Matrix Clothing Pvt Ltd.’s exports to the European Union and the UK to more than double from current levels. “The industry is very excited,” Nair, who co-founded the company, said by phone.
Prime Minister Narendra Modi’s government is taking advantage of India’s growing appeal as the world’s fastest-growing major economy and an alternative to China for global supply chains to clinch a number of free trade pacts.
India expects its deals with countries from the UK to Australia will help boost its manufacturing and soak up the tens of millions of young people entering the workforce in the years ahead.
The latest, and among the most ambitious, was a trade and investment pact signed with four European countries, including Switzerland and Norway, on March 10.
It signaled India’s readiness to take on commitments in areas such as labor, environment and sustainability and gender — topics it had shied away from in the past. It was also the first time India secured an investment commitment — of Rs 8,27,520 crore ($100 billion) over 15 years — in such a deal.
India has now signed four FTAs in quick succession since 2021 after a gap of about nine years where no agreements were inked. The latest pact with the European bloc of countries, known as the European Free Trade Association, or EFTA, was hailed by Modi and comes just weeks before elections in which he’s seeking to extend his decade in power.
Negotiations with the UK and Australia are likely to culminate after the Indian elections in April-May, while talks with Oman have already concluded and an agreement may be signed as soon as this month, people familiar with the matter said, asking not to be identified because the negotiations are private.
The hope is that such deals will give a level playing field to India’s textiles sector, which comprise more than 14 per cent of the nation’s annual exports, employs over 45 million people directly, and contributes over 4 per cent to gross domestic product. Marine goods, auto and machine parts, chemicals, leather and footwear and gems and jewelery products are also poised to benefit.
In a departure from its protectionist past, India is embracing trade deals in a bid to cash in on shifting global trade alliances. Companies from Apple Inc. to Samsung Electronics Co. have boosted manufacturing in India, taking advantage of production incentives offered by Modi’s government.
“This is India’s big historic moment, probably its biggest opportunity on the world stage since India gained its statehood in 1947,” said Alex Capri, a lecturer at the Lee Kuan Yew School of Public Policy in Singapore.
To seize that opportunity, the South Asian nation must plug infrastructure gaps and improve the ease of doing business by cutting down on over regulation, taxation and red tape. “Delhi is pulling out all the stops. They know they must fix this,” Capri said.
By integrating into global value chains, India can create 80 million jobs by 2030, according to a government report.
India makes progress on trade deals.
Credit: Bloomberg Photo
Geopolitically, New Delhi has been forging deeper ties with Group of Seven nations. Now, it’s aiming to align economically as well in order to compete with countries such as Vietnam and Bangladesh that are also positioning themselves as alternative manufacturing destinations to China.
The services sector, which makes up more than half of the nation’s GDP, is also expected to get a fillip. The trade deals will help India secure easier access for professionals in sectors including IT, health and accounting.
For counterparts, India and its market of 1.4 billion people holds massive appeal. On the sidelines of the 13th World Trade Organisation ministerial conference last month, EU Trade Commissioner Valdis Dombrovskis noted the “willingness to move forward when we know that traditionally India has been a relatively closed market.”
Tim Ayres, Australia’s assistant trade minister, said early results from the interim trade deal showed strong outcomes for businesses and noted the two nations are working toward phase two.
Yet for all that enthusiasm, roadblocks remain. India and the UK still haven’t resolved differences on issues including investment protection, social security agreements and market access for British apples and cheese.
Non-Tariff Barriers
At home, there’s pockets of resistance too. For instance, the confederation of Indian alcoholic beverage companies has expressed concern over opening up the market without getting reciprocal treatment.
Vinod Giri, Director General of the association, said that while most of the focus of trade talks has been duty concessions, non-tariff barriers such as maturity requirements for whiskey in the UK and Europe have made Indian beverages uncompetitive.
Giri said the UK law requires whiskey be matured for a minimum of three years, whereas in warm climates like India’s, whiskey matures 3-5 times faster than in the colder climates of the UK and EU.
“Most of our whiskey is unable to hit those markets due to these barriers and we want them removed,” Giri said, adding that the longer maturation condition pushes up production costs by as much as 35 per cent. “As long as FTAs are fair and equitable, we have no problem.”
And many are still finding it difficult to do business in India. While there’s a rise in the number of corporates mentioning India or Indian investment on earnings calls, that doesn’t always translate into commitments, said Deborah Elms, Head of trade policy at the Singapore-based Hinrich Foundation.
“In many cases, the obstacles to investment or development on the ground in India remain significant,” she said. “These gaps are creating problems for businesses, which means that the positive story around Indian prospects might not be delivered.”
India’s government is aware of the challenge. It’s helping states simplify rules, decriminalising minor offenses and repealing redundant laws.
The government has also come out with a single window system to speed up the process of getting approvals and clearances needed by investors while cutting compliance burdens.
For Matrix’s Nair, he’s also tempering his optimism. "Companies are wary, because we have been waiting for a long time for the deals to happen," he said.