✒ India on a Free Trade Deal Signing Spree?
India is on a trade deal striking spree, and our latest partner is Australia. Here's what this deal means for both countries.
After over a decade of inaction, India is now on a roll.
Just this year, we have signed not one but two free trade agreements.
The latest one happens to be with Australia.
But what are these free trade agreements and do we even need them?
Free Trade Agreements
Everything in life comes with a lot of tariffs, taxes and duties. These taxes are the government's way of earning money. But they also impact the products' popularity. Especially imported products.
Not everyone can afford highly marked-up imported products, so they stick to local products.
And while this may seem good, each country's exports are impacted.
So, to boost exports, countries often sign free-trade agreements.
What this means is two or more countries come together to create a trading system where tariffs are either reduced or completely removed from imported products.
So, these products become cheaper and hence more popular.
This is why India has signed a free trade agreement with Australia.
A Win-Win for Both
Under the Economic Cooperation and Trade Agreement signed with Australia, 96.4% of the products that India will export to Australia will be 100% duty-free.
These products include jewellery, textiles, furniture, machinery and lots more, impacting over 6,000 Indian sectors.
So far, these products had a 4%-5% customs duty for Australians.
And Australia already had free trade agreements with several other countries.
So, compared to other imported products entering the country, ours were more expensive and hence less popular. But the FTA gives us a level playing field.
Okay, and what benefit is Australia getting from this whole deal?
Well, 85% of Australian exports to India will be duty-free for now. And this number is expected to go up to 91% by 2030.
This whole exercise is set to increase bilateral trade from $27bn to $45-$50bn in the next five years.
But seeing as we import more stuff from Australia than Australia does from us, won't the move be harmful for us?
Well, no. You see, most of our major imports from Australia include raw materials like coal, natural gas and wool.
Coal alone accounts for 74% of Australia’s exports to India. So, this import is not a substitute, but a requirement for our country, as we grapple with shortages.
Plus, cheaper raw materials will drive down costs for our industries making them more competitive.
In sectors where Australian goods could negatively impact Indian products, we have not reduced tariffs.
For instance, milk, dairy products, chickpeas, wheat and a lot of agricultural produce from Australia will still be taxed. Same goes for iron ore and gold.
In the services sector, we have asked for post-study work visas for students and 4-year work visas for chefs and yoga teachers.
It looks all good. But it’s necessary to read the fine print. The agreement will allow Australian companies to bid in Indian government tenders or to enter the Indian market.
This could negatively impact some industries and MSMEs.
More Free Trade Agreements Coming Soon
This is just the beginning.
India is also going to negotiate agreements with the EU, New Zealand, Israel and the UK.
But perhaps one of the most beneficial agreements will be with the Gulf countries (part of the Gulf Cooperation Council). After all, who doesn’t want oil for cheap?
This is exactly why India had refused to be a part of the world's biggest trade agreement between 15 countries: The Regional Comprehensive Economic Partnership.
Signing such bilateral (between two countries) agreements appears to be more beneficial for us as we can negotiate and tailor the terms to our advantage.
Had we become a part of the RCEP, our imports would have increased more than our exports (you can read about this in detail here).
In the last few years, we have not signed any new agreements. This is why our exports have lagged at around $300 billion, only crossing the $400 billion mark this year. If we want to achieve our goal of having exports worth $2 trillion by 2030, we have to sign more such agreements.
Signing free trade agreements is exactly how China became one of the world's number one exporters.
And now that several countries (including Australia) have a strained relationship with China, India can step in as an alternative.
What do you think is our competitive advantage as compared to China?
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