India's biggest trade bet comes with six red flags

The Global Trade Research Initiative (GTRI) released its "FTA Report Card 2026: Six Challenges India Can No Longer Ignore," presenting a critical assessment ...

What Happened

The Global Trade Research Initiative (GTRI) released its "FTA Report Card 2026: Six Challenges India Can No Longer Ignore," presenting a critical assessment of India's FTA outcomes and structural weaknesses in the country's trade policy framework.
India currently operates 15 FTAs covering 27 nations, but FTA utilisation by Indian exporters stands at only 20-30% of eligible exports — compared to 60-70% utilisation rates by exporters from partner countries accessing the Indian market under the same agreements.
India's newer FTAs with the UAE, Australia, Mauritius, and EFTA have collectively resulted in a trade deficit exceeding $50 billion in FY2025, with imports from these partners reaching nearly $100 billion against exports of $48.6 billion.
The India-ASEAN Free Trade Agreement, in force since 2010, has seen the trade deficit with ASEAN rise by 381% between 2007-09 and 2023-25, with deficits against Japan and South Korea increasing by 318% and 268% respectively over the same period.
GTRI identifies six systemic red flags: low export utilisation, widening trade deficits with FTA partners, the inverted duty structure, inadequate safeguards against trans-shipment and duty circumvention, weak rules of origin enforcement, and the failure of FTAs to drive domestic manufacturing upgrades.
The report warns that tariff preferences alone are insufficient to boost exports, and that structural issues — including high compliance costs, poor supply-chain integration, and weak domestic manufacturing capacity — limit India's ability to fully benefit from preferential market access.

Static Topic Bridges

FTA Utilisation Rate and Compliance Costs

FTA utilisation rate measures the proportion of trade that actually benefits from preferential tariffs under a free trade agreement, expressed as a share of total eligible trade. Low utilisation rates indicate that exporters are not claiming preferential duty rates — either because compliance costs make it uneconomical, because already-low applied tariffs leave little preferential margin to exploit, or because exporters lack awareness or administrative capacity to obtain certificates of origin.

India's FTA utilisation rate of 20-30% is among the lowest among major emerging economies; by comparison, Thailand's utilisation rate exceeds 60% and South Korea's exceeds 70%.
Compliance costs include obtaining a Certificate of Origin, maintaining records of input sourcing, and managing documentation audits — costs that can outweigh the tariff saving for small and medium exporters.
GTRI estimates that India's FTA compliance architecture remains fragmented, with different documentation requirements across agreements adding to transaction costs.

Connection to this news: The utilisation gap is the most actionable red flag — it means India is "leaving money on the table" through administrative friction rather than structural trade barriers, and is a problem amenable to domestic policy reform without renegotiating treaty terms.

Inverted Duty Structure and Its Trade Distortion Effects

An inverted duty structure exists when the import duty on a raw material or intermediate input is higher than the duty on the finished product made from it. This creates a situation where domestic manufacturers of the finished product face higher input costs than foreign competitors who assemble overseas and import the finished product — making imported finished goods artificially cheaper than domestically manufactured ones.

India's basic customs duty (BCD) structure has historically taxed raw materials and inputs at rates of 7.5-15%, while FTAs have reduced tariffs on finished goods closer to zero in partner countries.
Inverted duty distortions are particularly acute in electronics, chemicals, textiles, and leather goods.
The inverted duty problem creates incentives for manufacturers to relocate production to FTA partner countries (notably Vietnam, Thailand, and Indonesia) and import finished goods into India at zero duty, rather than manufacturing in India.
Union Budget 2023-24 and 2024-25 attempted partial corrections to the inverted duty structure in specific product categories, but systemic resolution remains incomplete.

Connection to this news: GTRI's red flag on inverted duties directly challenges the assumption that FTAs promote domestic manufacturing — they can instead accelerate deindustrialisation if the domestic duty structure remains misaligned.

Trade Deficit as an FTA Policy Risk

A trade deficit with an FTA partner occurs when imports from that country exceed exports to it, widening after the agreement takes effect. While economic theory suggests that FTAs improve overall welfare even when they generate bilateral deficits, persistent and widening deficits can signal trade diversion (cheaper imports displacing domestic production) rather than trade creation (new economic activity stimulated by the agreement).

India's trade deficit with ASEAN widened from approximately $7.5 billion in 2011 (when the ASEAN FTA entered into force) to approximately $44 billion by 2023.
The ASEAN FTA has been criticised for allowing Chinese goods to be re-routed through ASEAN countries with minimal value addition, exploiting weak rules of origin to gain duty-free access to the Indian market.
India's overall merchandise trade deficit in FY2024-25 was approximately $244 billion, making deficit management a central concern in FTA design.

Connection to this news: The GTRI report uses the ASEAN precedent to caution against replicating the same design flaws — particularly weak rules of origin and inadequate safeguards — in India's new-generation FTAs with the UK, EU, and GCC partners.

Rules of Origin (RoO) and Trade Circumvention

Rules of Origin (RoO) determine the "economic nationality" of a product and are the primary mechanism to prevent duty circumvention in FTAs. Weak RoO — such as requiring only minimal processing or a low threshold of local value addition — create loopholes for third-country goods (particularly from China) to be lightly processed in an FTA partner country and then exported to India as "originating" goods, capturing the preferential tariff benefit without genuine value addition in the partner economy.

India's CAROTAR (Customs Administration of Rules of Origin under Trade Agreements) Rules, 2020, require importers to maintain records demonstrating compliance with origin criteria for five years.
Post-CAROTAR implementation, the Department of Revenue has authority to conduct retrospective audits of preferential duty claims.
GTRI and the Ministry of Commerce have both flagged that even with CAROTAR, enforcement capacity at customs points remains inadequate for systematic origin verification.
The minimum value addition threshold in India's FTAs typically ranges from 30-40% of the FOB value of the exported good.

Connection to this news: RoO enforcement is identified as one of the six red flags precisely because existing mechanisms remain inadequately enforced, allowing the ASEAN-channel circumvention pattern to persist a decade after it was first identified.

Key Facts & Data

India operates 15 FTAs covering 27 nations (as of June 2026).
Indian exporter FTA utilisation rate: 20-30% of eligible exports.
Partner-country exporter utilisation of India's FTA preferences: 60-70%.
Trade deficit with UAE, Australia, Mauritius, EFTA combined (FY2025): over $50 billion (imports ~$100 billion; exports $48.6 billion).
India-ASEAN trade deficit growth: +381% between 2007-09 and 2023-25.
India-Japan trade deficit growth over same period: +318%.
India-South Korea trade deficit growth over same period: +268%.
India's overall merchandise trade deficit FY2024-25: approximately $244 billion.
CAROTAR (Customs Administration of Rules of Origin under Trade Agreements) Rules enacted: 2020.
GTRI report title: "FTA Report Card 2026: Six Challenges India Can No Longer Ignore."