FTAs must drive manufacturing, GVC integration and high-tech investment

In a welcome step, commerce ministry has constituted a committee to monitor implementation of India's recently signed FTAs, with a particular focus on obstacles preventing industry from using them to expand exports. Tracking non-tariff barriers in destination markets - including rules of origin, sanitary and phytosanitary requirements, technical standards, and certification hurdles - is essential, especially because MSMEs cannot benefit from FTAs while these frictions persist.

But the committee's mandate needs to go further. India's export profile is undergoing a structural shift. Traditional labour-intensive sectors now account for only a small and declining share of merchandise exports: 3.8% for textiles and clothing, 2.8% for marine products, and 2.0% for rice.

The centre of gravity has moved towards electronics, pharmaceuticals, chemicals, transport equipment, electrical equipment and machinery. Together, these industries contribute more than 40% of manufacturing value added, and over 45% of merchandise exports.


But they are also import-intensive, relying heavily on foreign components, intermediates, sub-assemblies and machinery. India can scale its presence in these industries only by deepening its participation in GVCs, where import efficiency - fast, predictable and low-friction access to inputs - is essential for competitive exports.

The monitoring exercise should, therefore, reflect the changing composition of India's export basket and give equal attention to barriers affecting imports into India. It should examine rationalised tariffs on intermediate goods, greater regulatory alignment, mutual recognition agreements, and investment-facilitation measures that make tech-intensive production in India commercially viable.

The committee should also review third-party FTAs between two different countries, one or both being a partner country of India, and how their deal impacts India. This will enable India to deal with trade diversion from its own market potential.

The deeper test of success is whether India's FTAs with capital- and tech-rich partners attract investment that upgrades the country's manufacturing base and enables deeper integration into GVCs. The committee should also assess whether India's GVC participation can rise from 37-38% to 55% levels typical of more globally integrated economies of comparable size. The fastest route to that goal is to attract tech-rich FDI into these sectors.

Deeper GVC participation does more than expand exports. It accelerates technology diffusion, upgrades domestic suppliers, aligns production standards with global benchmarks, and connects Indian firms to larger markets. In doing so, it multiplies the productivity impact of foreign investment.

Foreign capital contributes only about 7% of total investment, or roughly 1.5% of GDP. India must raise that share towards 10% and lift net FDI flows to 2.5-3% of GDP. Fortunately, we are now looking at FDI in many of our FTAs.

India should, therefore, shed its bias against assembly-led investment in hi-tech industries. No economy enters complex value chains by producing every component domestically from the outset. The usual path is sequential: countries begin with assembly, depend on imported inputs and foreign technology, and then build domestic capabilities around those activities. Over time, local firms learn, components are localised, engineering skills deepen, and production moves into higher-value segments.

India's automobile industry demonstrates this trajectory. The same progression must now be repeated in electronics, electrical equipment, pharma, machinery and defence industry. Industrial policy should deliberately move firms from assembly to component manufacturing, from components to engineering, and from engineering to design and IP. The objective should not be to reject imported inputs, but to use initial integration as a platform for progressively increasing domestic value addition.

FTAs with capital and tech-rich partners must, therefore, be implemented as industrial accelerators, not just as routine market-access deals. India has a rare window: a large domestic market, a widening industrial base and a geopolitical moment favouring the diversification of GVCs. That opportunity will slip away unless FTAs are used to sharpen domestic policy, close regulatory gaps and push through long-delayed reforms.

The measure of success should not simply be whether tariffs fall or exports rise, but whether more factories, technologies, suppliers and high-productivity jobs are created in India.