India, FTAs and Trade Deficits: Lessons from Electronics Exports

Context

Recent analysis highlights that India’s trade deficit with several FTA partner countries is widening, even as overall trade volumes increase. At the same time, electronics exports have emerged as a strong performer, indicating a sector-specific success within India’s trade and industrial ecosystem. This mixed outcome raises important questions about the design of FTAs and India’s export competitiveness.

1. What is a trade deficit and what does the recent data indicate for India?

1. A trade deficit occurs when a country’s imports exceed its exports.
2. Key Observation:
   1. India imports more goods from many FTA partners than it exports to them
   2. This has led to a persistent and widening trade deficit with certain FTA countries
3. Why this matters:
   1. A rising trade deficit can pressure domestic industries
   2. It raises concerns about long-term trade sustainability

2. What are Free Trade Agreements (FTAs) and why does India enter into them?

1. A Free Trade Agreement (FTA) is an agreement between two or more countries to reduce or eliminate import duties on goods traded between them.
2. Objectives of FTAs:
   1. Increase exports
   2. Integrate into global value chains
   3. Attract foreign investment
   4. Provide cheaper inputs to domestic industries
3. India has FTAs with ASEAN, Japan, South Korea, UAE, and Australia, among others.

3. Why is India’s trade deficit widening with several FTA partner countries?

1. Surge in Imports
   1. Lower tariffs make imports cheaper
   2. Indian industries depend on imported components and machinery
   3. Partner countries have stronger manufacturing competitiveness
2. Limited Export Diversification
   1. India’s exports remain concentrated in:
      1. Petroleum products
      2. Textiles

• Gems and jewellery

1. High-technology exports remain limited in many FTA markets

3. Weak Enforcement of Rules of Origin
   1. Rules of Origin decide where a product is actually manufactured
   2. Weak enforcement allows third-country goods to enter India through FTA routes

4. How can India’s FTA-related trade deficit be explained using economic theory?

1. Using comparative advantage theory, countries specialise in goods they can produce efficiently.
2. India’s Situation:
   1. FTA partners specialise in:
      1. Electronics
      2. Machinery

• Chemicals

1. India imports these goods due to cost and quality advantages

3. However, due to incomplete domestic manufacturing capability and limited value addition, India’s imports rise faster than exports, leading to a structural trade deficit.
4. Thus, the deficit reflects asymmetric competitiveness, not merely policy failure.

5. Why have electronics exports emerged as a standout performer?

1. Despite overall trade deficits, electronics exports have grown rapidly.
2. Key Drivers:
   1. Global supply chain diversification away from China
   2. Large domestic market enabling scale
   3. Improved logistics and infrastructure
   4. Government incentives for domestic manufacturing
3. Major export items include:
   1. Mobile phones
   2. Electronic components
4. This indicates a structural shift in India’s export profile.

6. What role has industrial policy played in boosting electronics exports?

1. India’s electronics success highlights the importance of targeted industrial policy.
2. Role of PLI Schemes:
   1. Incentivise higher production
   2. Encourage global firms to manufacture in India
   3. Promote technology transfer and skill development
3. According to infant industry theory, temporary state support helps new industries become globally competitive.
4. Electronics exports validate this approach when policy, scale, and global opportunity align.

7. Does a widening trade deficit with FTA partners necessarily harm the Indian economy?

1. A trade deficit is not always harmful.
2. When it can be acceptable:
   1. Imports include capital goods that improve productivity
   2. Deficit is financed sustainably
   3. Exports grow in high-value sectors over time
3. When it becomes problematic:
   1. Persistent consumer goods imports
   2. Weak domestic manufacturing
   3. Job losses in import-competing sectors
4. Thus, the quality of imports matters more than the size of the deficit.

8. What policy lessons and corrective measures emerge for India’s future trade strategy?

1. Key Lessons
   1. FTAs must align with domestic manufacturing capacity
   2. Export competitiveness is as important as market access
2. Corrective Measures
   1. Strengthen domestic manufacturing ecosystems
   2. Enforce Rules of Origin strictly
   3. Promote export diversification into electronics, green tech, and defence
   4. Design future FTAs with stronger safeguard clauses
3. India’s trade strategy must balance openness with self-reliance.

Conclusion

India’s widening trade deficit with FTA partners highlights structural weaknesses in manufacturing competitiveness, not a failure of trade integration itself. At the same time, the success of electronics exports demonstrates that when industrial policy, global opportunity, and domestic capability align, India can achieve export-led growth. The challenge ahead lies in replicating this success across other sectors while redesigning FTAs to support long-term economic resilience.