India's billion-dollar FTA gambit backfires: Deficits soar as liberalization outpaces export growth

While pursuing a spree of new free trade deals, India confronts a painful paradox—its existing agreements with Asia's largest economies have widened trade deficits far faster than global trends, even as exports struggle to keep pace with surging imports.

India faces a fundamental imbalance across its free trade agreement network: between 2007-09 and 2023-25, trade deficits with ASEAN jumped 381%, with Japan 318%, and with South Korea 268%—all vastly outpacing a 142% increase with the rest of the world. Worse, Indian exporters utilize only 20-30% of available FTA preferences, while partner-country exporters claim 60-70%. These asymmetries have prompted India to launch a major review of its ASEAN pact (ongoing, expected through 2026-27) and to renegotiate its South Korea agreement (targeting conclusion by mid-2027), both seen as poorly balanced against India's interests. The core structural problems remain: India's high import duties were slashed post-FTA, giving foreign competitors immediate price advantages on entry to Indian markets, while many FTA partners already had low Most Favoured Nation tariffs, negating India's export edge. Add inverted duty structures—where raw material imports carry 7.5-10% tariffs while finished goods enter duty-free—and Indian manufacturers face a cost squeeze that imports do not. Meanwhile, India's overall merchandise trade deficit widened to $119.30 billion in FY26 from $94.66 billion in FY25, with imports rising 6.47% against export growth of just 4.22%. India is simultaneously rushing to conclude new pacts (the EU deal in January 2026, EFTA in October 2025), betting that better-negotiated agreements can deliver balanced trade rather than repeat the old pattern of opening to imports without securing real export gains.

How could this affect you

Traced by who's actually in the path of this — not everyone is.

Direct

Indian manufacturers in automotive, electronics, machinery, and engineering sectors

Inverted duty structures in FTA frameworks allow finished goods to enter duty-free while raw material imports face tariffs, raising production costs. Any failure to address this in ASEAN or South Korea renegotiations could further erode competitiveness relative to imported alternatives.

Likely

Indian exporters of goods seeking FTA preferential access

Low utilization rates (20-30%) point to high compliance costs and complex rules of origin. If renegotiations tighten rather than simplify these rules, export performance could worsen; if simplified, uptake could accelerate but only if supported by deeper investment in supply chain integration.

Likely

Indian policymakers focused on current account stability

Trade deficits with FTA partners are growing faster than overall deficit ratios. If new agreements (EU, EFTA) follow the old pattern of facilitating imports over exports, India's merchandise trade imbalance could widen further, adding pressure on the rupee and inflation.

Possible

Domestic Indian industries competing against tariff-free FTA imports

Industries such as textiles, chemicals, and machinery face pressure from partners offering zero-tariff access to Indian markets while Indian firms export to partner countries that already had low MFN tariffs. Successful renegotiation to address tariff asymmetries could ease margin pressure; failure would extend the current squeeze.

Off-Lens

Who is covering this — and who is not.

Perspectives not in sources

🇮🇳 India

Analysis

Coverage of India's FTA troubles concentrates heavily on Indian sources (think tanks, ministry statements, media), reflecting New Delhi's appetite for self-critique and policy adjustment. What is notably absent is sustained analysis from ASEAN, Japanese, and South Korean perspectives—the supposed beneficiaries. Are these countries aware of or concerned by India's growing pushback? Do their exporters see renegotiation as a threat? Japanese and Korean business communities have lobbied hard to preserve favorable terms in past FTA disputes; their silence or participation in India's renegotiation process would reshape the story's framing. The reporting gap leaves unexamined whether these partners view India's grievances as legitimate claims for balance or as protectionist backsliding.

Chanakya's Move

Whose move this was, what they're betting on, what could counter it.

India is playing a two-board game. On one board, it renegotiates older pacts (ASEAN, South Korea) to reclaim lost ground—trying to address the asymmetries that made those deals one-way streets into Indian markets. On the other, it signs new deals (EU, EFTA, pending US agreement) betting that fresh negotiators and a more robust India can demand better terms. The strategic bet is that newer agreements, negotiated from a position of greater economic strength and political leverage, can avoid the structural traps (inverted duties, poor rules of origin, low partner MFN tariffs) that hollowed out the old deals. The risk is reputational: if the new pacts replicate the old deficits, India's trade negotiators lose credibility, and the "Act East" strategy—once a centerpiece of Modi's statecraft—becomes a symbol of strategic naïveté. India is implicitly betting that it can learn from failure and that renegotiation, not retreat, is the answer.