With a projected 7% growth rate for the current fiscal year, the Indian economy is on track to have the highest growth rate among the world’s major economies. Furthermore, the unfolding geoeconomic and geopolitical forces that will sustain India’s consumption-driven growth phenomenon will drive investment and production in the coming years.
Regional Trade Agreement (RTA)
- A regional trade agreement (RTA) is a treaty between two or more countries in a specific region that aims to reduce or eliminate trade barriers such as tariffs and quotas in order to facilitate increased trade between the member countries.
- Free Trade Agreements, Customs Unions, Common Markets, and Economic Unions are all examples of RTAs.
What exactly is a Free Trade Agreement (FTA)?
- A free trade agreement (FTA) is a type of RTA that eliminates tariffs and other trade barriers on goods traded between member countries.
- FTAs may also include provisions on trade in services and investment, but they are primarily focused on reducing tariffs on goods.
India’s experience with RTAs/FTAs
- India’s signing of bilateral trade agreements has increased dramatically since 2021.
- Some examples include the India-Mauritius CECPA in 2021, the India-UAE CEPA, and the Australia-India ECTA in 2022.
- Talks on these topics are underway with the United Kingdom and Canada, and serious intentions to sign FTAs with the EU and Israel have also been expressed.
Geoeconomic Implications
India-UAE Comprehensive Economic Partnership Agreement (CEPA):
- Western QUAD: The India-UAE CEPA strengthens India’s commitment to I2U2 (Israel, India, the United Arab Emirates, and the United States), also known as the Western QUAD, a regional force convened in October 2021.
- Access to Western Neighbors: This agreement gives India access to Western Neighbors, which can help India negotiate trade agreements in the absence of China.
- Advantage for India-GCC FTA: It moves India closer to establishing an India-GCC (Gulf Cooperation Council) FTA, thereby improving relations with the gulf countries.
- Economic boost: The trade agreement is expected to nearly double bilateral commodity trade by 2027, increase service trade, and create 10 lakh jobs in labor-intensive sectors.
The Economic Cooperation and Trade Agreement between Australia and India (ECTA)
- The Australia-India ECTA strengthens Australia-India ties on a variety of fronts, including geopolitics.
- Once the two countries sign a more comprehensive FTA, known as the CECA (Comprehensive Economic Cooperation Agreement), various other areas such as services, investments, government procurement, and intellectual property will be covered.
- Even within the QUAD, Australia and India’s strong relationship will aid in the development of an Australia-India niche.
Prosperity in the Indo-Pacific Economic Framework (IPEF)
- The IPEF, a Biden administration-led economic initiative with fifteen participating member countries, has the enormous potential to ink a regional trade agreement and establish a trade bloc without China.
- If that occurs, India, as a member, will undoubtedly benefit.
How will FTAs affect consumption-driven growth?
- FTAs can increase consumption demand through two channels.
- Increase consumer choice: FTAs will allow for cheaper commodity imports and will increase consumer choice.
- The second point to make is that the direct multiplier effect of increased trade and employment will have a multiplier effect on domestic incomes.
- Increase purchasing power: When both forces are combined, consumers’ purchasing power and consumption demand will increase.
Factors that put India at Competitive Advantage
- The demographic dividend in India: India’s comparative demographic dividend over China provides it with a competitive advantage. The under-30 population in India is approximately 52 percent, compared to around 40 percent in China, which is expected to shrink faster over the next decade. The young population is expected to drive consumption-led growth by increasing consumption, saving, and investing.
- Second, according to 2019 estimates, the average Indian wage is 10% of that of China, resulting in relative cost-competitiveness for products manufactured in India when compared to China. Foreign investment is already being attracted.
- National Infrastructure Pipeline: India’s massive emphasis on physical infrastructure through projects such as the National Infrastructure Pipeline (NIP) for FY 2019-25 and growth in the transport sector will lower transaction costs.
- Reforms in the business environment: India has worked extensively to reform its business environment through effective policy practises, such as the Production Linked Incentive (PLI) scheme, or by bringing about significant changes in its tax regimes, or by liberalising Foreign Direct Investment (FDI) policies in manufacturing, among other things.
- It includes both digital literacy and English language skills. On both counts, Indian youth outnumber Chinese youth.
- Strong Indian Diplomacy: Indian diplomacy is also playing an important role, with trade agreements serving as important diplomatic instruments. This is true for the UAE, Australia, and collaborations such as QUAD (or even IPEF) and I2U2.
@the end
Without a doubt, FTAs are emerging as important economic diplomacy tools for India as it seeks deeper levels of engagement with friendly nations. At the same time, India’s FTAs are a two-tiered game. It must negotiate with the concerned nation/s at the international level, while it must negotiate with various contending constituencies at the domestic level. However, the role of FTAs as a growth driver through trade and investment cannot be overlooked. Furthermore, with India set to overtake China as the world’s most populous country in January 2023, it will be the world’s largest product and factor market.
Source: https://www.investopedia.com/terms/f/free-trade.asp