India's Trade Policy: FTAs, Tariffs, and Export Promotion
July 19, 20268 min read
In 1991, India's total trade was $42 billion. By 2024, it had crossed $1.6 trillion — a 38-fold increase. Yet India's share of global exports remains stuck at ~2% — far below its demographic and economic potential. China, by comparison, holds 14% of global exports. India's trade policy oscillates between ambition (the $2 trillion export target by 2030) and caution (high tariffs on many goods, protection of agriculture and MSMEs). The UPSC syllabus tests this tension — and the instruments India uses to navigate it.
Trap: Confusing FTAs with 'free trade'. FTAs are PREFERENTIAL trade agreements, not completely free trade. Members agree to reduce tariffs on specific goods/services. Sensitive products (agriculture, dairy) are often excluded. India's FTAs have 'sensitive lists' — items on which tariff concessions are NOT given.
Most confused: India's average tariff rate vs bound tariffs. India's simple average MFN (Most Favoured Nation) tariff is ~18% (2024) — one of the highest among major economies. But bound tariffs (WTO ceiling) for many items are much higher (up to 300% for agriculture). Applied tariffs are typically lower than bound rates.
Key anchor: India's Foreign Trade Policy (FTP) 2023-28 — 'From Assistant to Enabler'. Targets: $2 trillion exports by 2030. Shift from incentive-based (duty exemption schemes) to remission-based (RoDTEP — duties remission) and production-linked (PLI) models.
Current affairs hook: India-UK FTA (negotiations since 2022, likely 2026). India-EU FTA re-launched (2022). India has signed FTAs with UAE (2022), Australia (ECTA 2022), and EFTA (2024). India's withdrawal from RCEP (2019) — continuing debate. PLI scheme for 14 sectors ($25bn outlay).
Mains hinge: "India's trade policy needs to simultaneously promote exports, protect domestic industry, and integrate with global supply chains. Critically evaluate whether the current policy framework balances these conflicting objectives."
1991 Reforms: Drastic tariff reduction (from >100% to ~35% by 2000), removal of import licensing, rupee devaluation, EXIM policy announced every 5 years
2000-2014: Global integration — India became a WTO member (1995), signed some FTAs (Sri Lanka FTA, SAFTA, India-ASEAN, India-South Korea CEPA, India-Japan CEPA). Export growth accelerated
2014-2025: 'Make in India', 'Atmanirbhar Bharat' — increased tariff protection (18% average), FTA recalibration (exit RCEP, focus on bilateral FTAs with developed partners), PLI scheme for manufacturing
Tariff Structure: India's simple average MFN applied tariff is ~18% (2024), one of the highest among G20 economies. Tariff peaks (high tariffs) on:
Automobiles: 100-125% (luxury cars); 60% for ordinary cars
Electronics: 15-20% (mobile phones 20%)
Textiles: 10-20%
Gold: 6% (recently reduced from 15%)
Recent FTAs:
India-UAE CEPA (2022): Comprehensive Economic Partnership Agreement. First FTA in a decade. Tariff elimination on 80%+ of goods. Boosted bilateral trade to $85 billion (2023-24).
India-Australia ECTA (2022): Economic Cooperation and Trade Agreement. Duty-free access for 96% of India's exports to Australia. Australian coal, wool, education services get preferential access.
India-EFTA TEPA (2024): Trade and Economic Partnership Agreement with Switzerland, Norway, Iceland, Liechtenstein. India gets $100 billion investment commitment over 15 years.
India-UK FTA: Under negotiation since 2022. Sticking points: UK wants tariff cut on whisky and cars; India wants easier visas for professionals and data secure status.
India-EU FTA: Re-launched in 2022 after 9-year pause. Covers goods, services, investment, and geographical indications.
RCEP exit (2019): India withdrew from the 16-nation bloc fearing Chinese goods flooding the market. RCEP now operates with 15 members (ASEAN+5).
Export Promotion Schemes:
RoDTEP (Remission of Duties and Taxes on Exported Products): Replaced MEIS (Merchandise Exports from India Scheme) in 2021. Refunds embedded duties/taxes not exempted/exempted earlier. WTO-compliant.
SEIS (Services Exports from India Scheme): Incentives for service exporters.
PLI (Production Linked Incentive) Scheme (2020-21): ₹1.97 lakh crore ($25bn) outlay for 14 sectors — electronics, automobiles, pharma, textiles, food processing, solar, batteries, etc. Aim: boost domestic manufacturing and exports.
India's main trading partner: USA ($120bn), China ($118bn), UAE ($85bn)
Previous Year Questions
Year
Stage
What was tested
2024
Prelims
India-EFTA TEPA covers which countries? Switzerland, Norway, Iceland, Liechtenstein
2023
Mains
"India's decision to withdraw from RCEP was justified in the light of its domestic economic considerations." Critically examine.
2022
Prelims
RoDTEP replaced which earlier export promotion scheme? MEIS
2021
Mains
Discuss the potential benefits and challenges of India signing FTAs with developed economies like the UK and EU.
2020
Prelims
PLI scheme was initially launched for how many sectors? 14 sectors
2019
Mains
Evaluate India's trade policy in the context of rising global protectionism.
2018
Prelims
India's share of global merchandise exports is approximately? ~2%
Statement Elimination Guide
Correct: "RoDTEP scheme refunds embedded duties and taxes on exported products — making Indian exports more competitive without violating WTO subsidy rules."
False: "RoDTEP gives direct export subsidies to Indian exporters."
Trap: "FTAs completely eliminate tariffs on all goods between the partner countries." (False. FTAs are preferential, not free. Both countries maintain 'sensitive lists' on which tariffs are NOT eliminated or only reduced.)
Correct: "India's withdrawal from RCEP in 2019 was driven by concerns that the trade deficit with China would worsen and that domestic industry (agriculture, dairy, steel) would be adversely affected."
False: "India was forced to withdraw from RCEP due to ASEAN objections."
Trap: "The PLI scheme is an export subsidy scheme." (The PLI scheme incentivises DOMESTIC production for sectors where India has potential. Exports are an expected outcome, but PLI payments are based on incremental production, not exports.)
Correct: "India's service trade surplus ($150 billion) partially offsets the merchandise trade deficit ($240 billion), resulting in a lower current account deficit."
False: "India runs a surplus in merchandise trade."
Current Affairs Hook
India's trade policy is at a critical juncture. With the India-UK FTA approaching conclusion (likely 2026), India is prioritising FTAs with developed economies — a departure from the earlier focus on developing-country FTAs (ASEAN, South Korea, Japan). The India-EU FTA negotiations have resumed after a 9-year gap. India is also negotiating with Canada, Israel, and Peru.
The PLI scheme has shown early success: electronics manufacturing has doubled since 2020, with mobile phone exports crossing ₹1 lakh crore. Apple's contract manufacturers (Foxconn, Wistron, Pegatron) have made India a major smartphone export hub. However, the PLI scheme faces criticism for being 'assembly-focused' rather than building deep supply chains.
The import management system for certain products (electronics, steel, chemicals) has raised concerns with WTO members about non-tariff barriers. India's high tariffs on electronics and automobiles are seen as protectionist by the US and EU.
The $2 trillion export target by 2030 requires export growth of 13-15% annually — higher than the current ~5% growth. Key constraints: complex regulatory environment, high logistics costs (~14% of GDP vs global average ~8%), lack of trade finance for MSMEs, and non-tariff barriers in partner countries.
Manufacturing (Economy): PLI scheme, Make in India, and their impact on export competitiveness.
Agriculture (Economy): High agricultural tariffs protect Indian farmers but limit FTA ambition.
Digital Economy (S&T): Cross-border data flows, data localisation, digital trade rules in FTAs.
Foreign Policy (IR): FTAs are geopolitical tools — UAE CEPA strengthens West Asia ties; UK/EU FTAs signal post-Brexit alignment.
Common Mistakes
"India has a trade surplus": India has a persistent merchandise trade deficit (imports > exports). Services trade is in surplus, but overall current account is usually in deficit (rarely surplus).
"PLI is a direct export subsidy": PLI is a production-linked incentive based on incremental domestic production — not tied to exports. It aims to boost manufacturing, with exports being a secondary benefit.
"FTAs eliminate all trade barriers": FTAs are preferential trade agreements that reduce tariffs on many (not all) goods. Both countries maintain sensitive lists. Rules of origin prevent transshipment.
"India's share of global trade is 5%": India's share of global merchandise exports is ~2%. Including services, it's ~2.5%. China's share is 14%.
"India import-substituted until 1991 only": The import substitution era lasted from 1950 to 1991. Even post-1991, India maintained significant tariff protection.
Revision Snapshot
Trade policy evolution: Pre-1991 (import substitution, 100%+ tariffs) → 1991 (reforms, tariff cut) → 2000-14 (FTA expansion ASEAN/Japan/Korea) → 2014-25 (Make in India, Atmanirbhar, higher tariffs, FTA rethink). Tariffs: average ~18% (high by global standards). FTAs: UAE CEPA (2022), Australia ECTA (2022), EFTA TEPA (2024), UK (pending), EU (relaunched 2022). India exited RCEP (2019). Export schemes: RoDTEP (WTO-compliant duty remission, replaced MEIS), PLI (14 sectors, ₹1.97L cr). Trade: $1.6T total; deficit $240bn; exports target $2T by 2030. Exports: engineering, petroleum, pharma, gems, textiles. Imports: oil ($120bn), electronics ($80bn), gold ($50bn). Share of global exports: ~2%. Key challenge: logistics costs 14% GDP vs global 8%.