As New Delhi pursues trade deals across Europe, the Gulf and North America, a report by the Global Trade Research Initiative (GTRI) warns that several structural weaknesses are deepening. Rising trade deficits, limited use of FTA benefits by exporters, manufacturing distortions and growing regulatory burdens are among the issues that could erode the gains from India’s widening network of trade agreements.
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The findings are outlined in GTRI’s FTA Report Card 2026, which evaluates the performance of existing agreements and highlights risks that could influence future negotiations.
The report comes at a crucial juncture for India’s trade policy. The country has 15 operational FTAs covering 27 countries, while another nine agreements involving 42 countries are awaiting implementation, nearing conclusion or under negotiation. Together, these 69 countries account for 75.3% of India’s exports and 65.5% of its imports.
With FTAs increasingly central to India’s trade strategy, GTRI argues that the focus has been disproportionately on the pace and scale of deal-making rather than on measurable economic outcomes.
The report identifies six challenges that policymakers can no longer afford to overlook: widening trade deficits, low utilisation of preferential market access by Indian exporters, worsening inverted duty structures, the shifting of manufacturing activity to partner countries, expanding obligations under new-generation trade agreements, and emerging carbon-linked trade barriers, particularly from the European Union.Also Read: India’s rising export champion faces a critical credibility test
Trade deficits widening much faster with key FTA partners
The report’s most prominent concern is the sharp deterioration in India’s trade balance with several countries that have long-standing FTAs with India.
According to GTRI, India’s trade deficit with ASEAN countries increased by 381.4% between the pre-FTA period of 2007–09 and 2023–25. The deficit with South Korea rose by 267.9%, while the gap with Japan expanded by 317.9%.
The numbers reveal a significant divergence from global trends. During the same period, India’s trade deficit with the rest of the world increased by 142.2%.
The report notes that over the past three years, India’s average annual trade deficit with ASEAN, Japan and South Korea has reached roughly $62 billion.
A closer look at the data shows the scale of the change.
With ASEAN, India’s average annual trade deficit widened from $6.8 billion before the FTA to $33 billion in 2023–25. With South Korea, it expanded from $4 billion to $14.7 billion. In Japan’s case, the deficit increased from $3.4 billion to $14.2 billion.
The trend is also visible in India’s newer trade agreements.
In FY2025, India exported $48.6 billion worth of goods to the UAE, Australia, Mauritius and EFTA countries combined. Imports from these partners, however, approached $100 billion, resulting in a trade deficit exceeding $50 billion.
The report cautions that as tariff reductions deepen under these newer agreements, import growth could accelerate further.
South Asia remains a notable exception. India’s trade surplus with neighbouring South Asian countries increased from $6.7 billion to around $20 billion during the same period.
Tariff asymmetry lies at the heart of the problem
According to GTRI, rising trade deficits are largely rooted in a fundamental mismatch between India’s tariff structure and those of its FTA partners.
Many of India’s trading partners had already liberalised their tariff regimes before signing agreements with India. Singapore’s average MFN tariffs are effectively zero, while Japan, Australia, Malaysia and the UAE generally maintain average tariffs below 4%.
India’s trade-weighted MFN tariff, by contrast, remains around 12.6%, with rates ranging from zero to as high as 150%.
The result is that tariff reductions under FTAs often provide a much larger commercial advantage to foreign exporters entering India than to Indian exporters selling overseas.
The report illustrates this through actual import patterns.
Almost all imports entering Singapore already face zero duty under MFN rules. More than 80% of imports into Japan and Malaysia are duty-free. In the EU and the UK, more than half of imports enter without customs duties.
In India, however, only around 6% of imports receive duty-free treatment under MFN rules.
This means exporters from partner countries often secure substantial tariff savings through FTAs when accessing the Indian market, while Indian exporters receive only marginal additional benefits because tariffs abroad were already low before the agreements were signed.
Why Indian exporters barely use FTA benefits
The same tariff imbalance also explains another major challenge highlighted by the report: India’s poor utilisation of FTA preferences.
GTRI estimates that only 20–30% of India’s eligible exports make use of FTA benefits.
The reason is that claiming preferential treatment under FTAs involves costs. Exporters must satisfy rules of origin requirements, obtain certificates and complete additional documentation.
When MFN tariffs in destination markets are already zero or only 1–3%, many exporters find that the savings do not justify the compliance burden.
The report provides additional evidence.
Imports facing MFN tariffs below 5% account for 100% of imports into Singapore, 91.9% in Japan, 86.4% in Malaysia, 73.9% in Vietnam and 66.5% in South Korea.
India’s corresponding figure is only 28.3%.
As a result, exporters shipping goods into India have a far greater incentive to utilise FTAs. Only 4.6% of India’s imports enter duty-free under MFN treatment, while 68.7% continue to face normal customs duties.
Because tariff savings in India are significant, import-side utilisation rates are estimated at 60–70%.
The report argues that rising imports and low export utilisation are not separate problems but two outcomes of the same tariff asymmetry.
FTAs worsening India’s inverted duty structure
The report identifies worsening inverted duty structures as another unintended consequence of India’s trade agreements.
An inverted duty structure exists when duties on raw materials and industrial inputs are higher than those on finished products.
According to GTRI, this issue has existed for years but has become harder to address because many finished products now enter India at low or zero tariffs under FTAs with ASEAN countries, Japan, South Korea, the UAE and Australia.
Meanwhile, Indian manufacturers often continue paying duties on imported inputs sourced from countries outside those FTAs.
The report highlights the steel and engineering sectors as examples.
Steel and aluminium can attract MFN duties of 7.5–10%, but machinery and industrial equipment manufactured using those materials may enter India duty-free under several FTAs.
Indian manufacturers therefore pay higher input costs while competing against imported machinery produced using globally priced raw materials.
The same pattern appears in chemicals, plastics, rubber and textiles.
Inputs such as caustic soda, soda ash, polypropylene, PVC and styrene-butadiene rubber attract duties that raise domestic production costs, even as finished products in those sectors can be imported at low or zero tariffs.
The result, according to GTRI, is a tariff system that protects producers of basic materials while penalising downstream manufacturers and reducing domestic value addition.
Manufacturing may be shifting abroad
The report argues that inverted duty structures are creating incentives for companies to manufacture outside India.
When firms can import finished products duty-free under FTAs but must pay duties on industrial inputs inside India, producing abroad may become more attractive.
ASEAN economies are increasingly benefiting from this dynamic.
The report notes that Chinese companies have invested heavily in manufacturing operations in Vietnam, Thailand and Indonesia. Indian firms have also established factories and joint ventures in these countries to take advantage of lower production costs and duty-free access to the Indian market.
Industries affected include electronics, steel, chemicals, plastics, engineering products and consumer goods.
According to GTRI, when it becomes cheaper to manufacture in an ASEAN country and export to India than to produce domestically, investment and jobs inevitably follow.
The report warns that FTAs can inadvertently encourage a model of “Make in ASEAN, Sell in India” rather than “Make in India.”
New-generation FTAs increasingly shape domestic policy
Beyond economic outcomes, GTRI warns that the nature of FTAs themselves is changing.
Traditional trade agreements focused on border measures such as tariffs, quotas and customs procedures. New-generation FTAs increasingly reach into domestic policymaking through rules governing labour standards, environmental regulations, digital trade, government procurement, competition policy, anti-corruption measures, gender provisions, MSME policies, intellectual property rights and data governance.
The report argues that developed-country partners are increasingly seeking to align India’s domestic laws and regulatory frameworks with standards established in advanced economies.
Government procurement concerns
One of the most sensitive issues identified is government procurement.
While procurement featured only in limited form in earlier agreements such as the India–Japan CEPA and India–UAE CEPA, the recently concluded India–UK CETA goes much further.
According to the report, UK firms will gain legally guaranteed access to approximately 40,000 Indian central government tenders annually across sectors including infrastructure, healthcare, energy and transport.
The agreement also gives UK companies access to India’s e-procurement portal.
GTRI argues that the arrangement may weaken India’s domestic procurement preferences because UK firms can qualify as “Class II Local Suppliers” with only 20% UK content, a category originally intended to support Indian firms under the Make in India programme.
The report also questions whether Indian companies will receive comparable opportunities in the UK, noting that foreign suppliers generally account for only a small share of procurement spending across Europe.
Intellectual property and pharmaceutical concerns
The report raises concerns about provisions encouraging voluntary licensing of medicines, arguing that they could weaken India’s ability to rely on compulsory licensing during public health emergencies.
It also highlights changes in patent-related requirements that could make it harder to determine whether patents are being commercially worked in India, potentially delaying the entry of generic alternatives.
Data exclusivity pressures
Another area of concern is pressure from the EU and the US for “data exclusivity” provisions.
Such rules would prevent regulators from relying on existing test data when approving generic pesticides and agrochemicals.
The report notes that these obligations are not required under the WTO TRIPS Agreement and are therefore considered “TRIPS-plus” commitments.
The issue is particularly important because India has emerged as the world’s third-largest agrochemical exporter, with exports rising from $1.7 billion in 2012–13 to $4.4 billion in 2024–25.
GTRI warns that accepting such provisions could increase import dependence and raise costs for farmers.
Digital trade and data sovereignty
Digital trade is another growing battleground.
The report says developed countries, particularly the US, continue to push for stronger commitments on cross-border data flows and digital governance.
It also points to ongoing pressure for India to accept a permanent moratorium on customs duties on electronic transmissions.
According to GTRI, such commitments could limit India’s future policy options in areas such as artificial intelligence, cybersecurity, data protection and digital industrial strategy.
EU carbon measures could neutralise FTA gains
The sixth challenge identified in the report centres on Europe.
While India and the European Union are moving towards one of India’s largest trade agreements, GTRI warns that tariff benefits could be undermined by an expanding web of EU regulatory requirements.
The biggest concern is the Carbon Border Adjustment Mechanism (CBAM), under which the EU began imposing carbon-related charges on imports of steel, aluminium, cement, fertilisers, hydrogen and related products from January 2026.
The mechanism is expected to expand further from 2028 to cover around 180 additional steel- and aluminium-based manufactured products.
The report argues that this creates a potentially uneven outcome. European goods may receive lower tariff access to India under an FTA, while Indian exports face new carbon costs when entering Europe.
GTRI warns that CBAM-related charges could effectively eliminate many of the tariff benefits negotiated under the trade agreement.
The report also highlights additional EU regulations, including the Deforestation Regulation, Foreign Subsidies Regulation and Corporate Sustainability Due Diligence requirements, which could increase compliance costs and function as non-tariff barriers, particularly for small and medium-sized exporters.
Competitiveness, not FTAs alone, will determine outcomes
The report concludes that signing more trade agreements will not automatically improve India’s export performance.
Instead, it recommends a comprehensive review of India’s tariff structure, systematic elimination of inverted duty structures, stronger domestic manufacturing ecosystems, and the creation of an FTA Impact Monitoring Authority to track utilisation rates, sectoral gains, import surges, trade deficits and regulatory impacts.
It also calls for greater emphasis on mutual recognition of standards, testing and conformity assessments to reduce non-tariff barriers, along with stronger accountability mechanisms for trade negotiators.
The central message running through the report is that FTAs can only deliver meaningful benefits when domestic industry remains competitive. Without reforms at home, the report warns, India risks creating a trade architecture that encourages higher imports, offshore production and reduced industrial capacity even as the number of trade agreements continues to grow.