India’s FTAs: At a time when global trade is fragile and protectionism is rising, India is signing trade agreements to secure export markets. The recent visit of South Korea’s President produced agreements across shipbuilding, digital security, advanced manufacturing and supply chains. India and South Korea have also agreed to work towards nearly doubling bilateral trade to around $50 billion by 2030.
The direction is clear. Even as advanced economies hesitate on trade, bilateral pacts remain an instrument of economic strategy. But India’s experience with Japan and South Korea shows that intent does not guarantee outcomes. Trade agreements open doors. Domestic capability decides whether firms can walk through them.
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FTA strategy faces a capability test
India’s approach is to partner with capital- and technology-rich economies while leveraging its own market size and labour pool. The logic is sound. The weakness lies in execution.
India’s agreement with South Korea was signed in 2009. The agreement with Japan followed in 2011. Both reduced tariffs across a large number of product lines. Yet, more than a decade later, India continues to run large deficits with both economies. India’s trade with Japan in April 2024-January 2025 stood at $21 billion, with exports of $5.1 billion and imports of $15.9 billion. With South Korea, bilateral trade crossed $27 billion in 2024-25, but the deficit remains a major concern in the ongoing review of the CEPA.
These are not temporary gaps. They reflect structural asymmetry.
Trade deficits reflect structural weakness
Japan and South Korea are high-income economies deeply integrated into global value chains. Their firms operate at scale, invest heavily in research, and dominate high-value manufacturing. Indian firms remain more fragmented. Logistics costs are higher. Quality systems are uneven. Export finance is harder to access, especially for smaller firms.
The result is visible in trade composition. Japan and South Korea export automobiles, electronics, machinery, capital goods and components to India. India exports more raw materials, intermediates and a limited basket of specialised products.
India’s exports to South Korea include petroleum products, marine products, aluminium, petrochemicals, cotton and textile inputs. These often feed Korean manufacturing, where higher value addition takes place. Japan imports some higher-value products from India, but not enough to offset the imbalance.
This explains why tariff liberalisation has helped partner-country firms more. Korean and Japanese companies have used lower duties to expand sales in India. Indian exporters have not achieved comparable penetration in those markets.
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Rules of origin limit FTA gains
The missing link in India’s FTA debate is utilisation. A trade agreement matters only when exporters can actually claim its benefits. That requires compliance with rules of origin.
Rules of origin decide whether a product qualifies as originating in the exporting country. They usually require local value addition, substantial transformation, or product-specific processing. Exporters must also provide certificates and documentation when customs authorities seek verification. The government’s own explanation of rules of origin for trade agreements makes this clear: tariff concessions apply only when origin conditions are met and supporting documents can be produced.
This is not a technical footnote. It can decide whether an Indian exporter gets preferential access at all.
For SMEs, the problem is sharper. Supply chains are fragmented. Imported inputs are common. Documentation costs are high. Where margins are thin, the cost of proving origin can exceed the benefit from the tariff preference. This helps explain why tariff cuts written into an agreement may not translate into realised exports.
The India-Korea CEPA shows how restrictive origin rules can affect specific sectors. A study on India-Korea trade noted that the CEPA’s 35% value-addition requirement made it difficult for cut and polished diamonds to use zero-duty concessions. More recently, Indian industry has sought changes in rules of origin in agreements with Japan and South Korea to help exports such as nickel sulphate used in electric-vehicle batteries.
The lesson is clear. The problem is not only competitiveness. It is also whether agreements are usable by firms.
India’s FTAs: Services and investment are underused
A second gap is the narrow focus on goods trade. India’s comparative advantage lies partly in services. Yet, past FTAs have delivered limited gains in this area.
The India-Japan CEPA covers goods, services, investment and economic cooperation. The India-Korea CEPA also goes beyond goods. But services trade has not become the balancing force India would have expected. One review of India’s FTAs noted that past agreements were dominated by goods trade, while services remained constrained by non-tariff barriers and limited market access in practice.
Investment matters as well. Japanese and Korean firms have built strong positions in India’s automobile, electronics and consumer durables markets. That investment has created jobs and capacity. But it has also reinforced import dependence where domestic suppliers have not moved up the value chain.
This is not an argument against foreign investment. It is an argument for deeper supplier development. If Japanese and Korean investment does not create stronger Indian component ecosystems, trade deficits will persist even when manufacturing expands in India.
Standards and quality remain binding constraints
Japan and South Korea demand consistent quality, technical compliance and certification. Indian exporters often struggle with these requirements. Tariffs may fall, but non-tariff barriers remain.
This is where industrial policy and trade policy must meet. Export success requires testing labs, standards bodies, traceability systems, skilled workers and firm-level quality discipline. Without these, preferential access remains underused.
India’s recent trade negotiations show some recognition of this problem. Newer agreements are trying to build more flexible product-specific origin rules. The India-UK agreement, for example, includes a “co-equal” rule that allows exporters in some sectors to qualify through alternative origin criteria. That approach reflects a broader lesson from earlier FTAs: rules must protect against transshipment, but they should not make legitimate exports unviable.
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Diversification needs competitiveness
India continues to pursue agreements with advanced economies while trying to reduce dependence on China. This is sensible. But diversification without competitiveness will not transform exports.
The external environment is also less supportive. Growth in advanced economies is slowing. Japan and South Korea face ageing populations. Protectionist pressures are rising. Export growth cannot depend on favourable global conditions.
India must therefore focus on domestic constraints. Logistics remains a major bottleneck. Port delays, inland transport costs and uneven infrastructure reduce competitiveness. Industrial capability is still shallow in several sectors. Firms need scale, quality systems, design capability, branding and patient capital.
Access to finance remains especially difficult for small exporters. Recent export promotion measures, including support for e-commerce exporters and alternative trade instruments, address parts of the problem. They do not remove the deeper constraints.
Trade policy cannot substitute for industrial capability
Trade agreements create opportunities. They do not create competitiveness by themselves. India’s experience with Japan and South Korea shows the same pattern: tariff cuts expand imports faster when domestic firms lack scale, quality and supply-chain depth.
The next generation of FTAs must therefore be judged by three tests. Do they improve market access in sectors where India can compete? Are the rules of origin simple enough for exporters to use? Do services and investment provisions help Indian firms move up the value chain?
If the answer is no, trade agreements will remain politically attractive but economically limited.
India does not need to retreat from FTAs. It needs to make them work. That requires better agreement design, higher FTA utilisation, stronger standards infrastructure and a deeper industrial base. Without these, trade strategy will continue to outrun industrial capability.