Why India Keeps Walking Away from Trade Deals — And Whether That's Smart

Why India Keeps Walking Away from Trade Deals — And Whether That's Smart

Category: Politics Author: Black Bear Labs Desk Date: 6 April 2026

India walked away from the Regional Comprehensive Economic Partnership (RCEP) in 2019. It has been negotiating a free trade agreement with the European Union for over a decade without conclusion. Its trade deal with the UK has been in various stages of "almost done" for years. Meanwhile, smaller and arguably less influential economies — Vietnam, Indonesia, Bangladesh — have signed multiple trade agreements and are actively integrating into global supply chains.

India's reluctance to sign comprehensive free trade agreements is frequently characterised as protectionist, short-sighted, or anti-growth. The reality is more nuanced. India's trade negotiation stance reflects genuine domestic economic constraints that most commentary glosses over — and understanding these constraints is essential for assessing India's trade policy trajectory.

Why Free Trade Agreements Are Complicated for India

A free trade agreement reduces or eliminates tariffs (import duties) on goods traded between signatory countries. The economic logic is straightforward: lower tariffs increase trade, which increases specialisation, which increases efficiency, which increases growth. This logic is broadly correct at the aggregate level.

But the aggregate level conceals distributional consequences that are politically explosive. When India reduces tariffs on dairy products under an FTA with New Zealand or Australia, Indian dairy farmers — millions of small-scale producers operating at thin margins — face competition from industrialised dairy operations that produce at a fraction of the cost. The aggregate economy may benefit from cheaper dairy products, but the specific farmers who lose their livelihoods experience real, concentrated harm.

This is the fundamental political economy of trade agreements: the benefits are diffuse (slightly cheaper goods for 1.4 billion consumers) while the costs are concentrated (devastating impact on specific industries and regions). The consumers who benefit do not form organised political constituencies. The producers who lose do.

India's agricultural sector employs approximately 42% of the workforce while contributing only 18% of GDP. This implies extremely low per-worker productivity and thin margins. Exposing this sector to unrestricted competition from countries with industrialised agriculture (Australia, New Zealand, EU, US) would create adjustment costs that India's social safety net is not equipped to absorb.

The RCEP Decision

India's withdrawal from RCEP negotiations was the most high-profile manifestation of this trade-off. RCEP included China, Japan, South Korea, Australia, New Zealand, and the 10 ASEAN nations. It would have been the world's largest free trade bloc by population.

India's primary concern was China. India already runs a massive trade deficit with China — approximately $85-100 billion annually. Indian manufacturers feared that RCEP's tariff reductions would flood the Indian market with cheap Chinese goods, particularly in electronics, steel, chemicals, and textiles, without generating equivalent export opportunities for Indian companies in the Chinese market.

The concern was not hypothetical. India's experience with previous FTAs — particularly with ASEAN and South Korea — showed that trade deficits with FTA partners widened after the agreements took effect. Indian imports from these countries increased faster than Indian exports to them, suggesting that India's export competitiveness was insufficient to capitalise on improved market access.

Critics argued that staying out of RCEP would exclude India from the supply chains being built within the bloc and that the long-term cost of exclusion would exceed the short-term cost of adjustment. This argument has merit — supply chains, once established, are sticky, and India's absence from RCEP has made it harder for Indian companies to participate in regional production networks.

But the counter-argument — that India was not ready for RCEP-level liberalisation and that premature trade opening would damage domestic industry without building new export capacity — also has merit. The question is not whether free trade is good in theory but whether India's specific economy, at its specific stage of development, with its specific institutional capacity for managing adjustment, was prepared for a specific trade agreement at a specific time.

What India Actually Wants from Trade Deals

India's negotiating priorities in trade agreements reveal its strategic calculation. India consistently pushes for liberalisation of services trade (where India has competitive advantage in IT, professional services, and healthcare) while resisting liberalisation of goods trade (where India is less competitive in many categories).

This is entirely rational. India's services exports are globally competitive and growing. Opening services markets in developed countries — particularly easing movement of professionals and recognition of Indian qualifications — would generate significant economic benefits. But developed countries resist services liberalisation because it implies immigration and domestic labour market disruption — the mirror image of India's resistance to goods liberalisation.

India also seeks strong rules of origin in trade agreements — provisions that ensure goods claiming FTA tariff benefits are genuinely produced in the partner country and not merely transhipped through it. Without robust rules of origin, an FTA with Country X becomes a backdoor for Chinese goods to enter India through Country X, circumventing tariffs that India maintains on direct Chinese imports.

Intellectual property provisions are another sticking point. India's pharmaceutical industry depends on its ability to produce generic drugs, which requires a patent regime that balances innovation incentives with affordable access. Trade agreements with the US or EU typically push for stronger IP protections that could delay generic drug entry and increase medicine costs for Indian consumers.

The Bilateral Approach

Having stepped back from mega-regional agreements, India has pursued bilateral and limited multilateral trade deals. The India-UAE Comprehensive Economic Partnership Agreement (CEPA), signed in 2022, and the India-Australia Economic Cooperation and Trade Agreement (ECTA), signed in 2022, represent this approach.

These bilateral deals are narrower in scope than RCEP, allowing India to negotiate sector-by-sector — opening sectors where it is competitive while maintaining protection in sensitive areas. The India-UAE CEPA, for instance, provided preferential access for Indian jewellery, textiles, and agricultural products in the UAE market while managing the exposure of Indian sectors to UAE (and by extension, broader Gulf) competition.

Bilateral deals also allow India to tailor provisions to specific partners rather than accepting a one-size-fits-all framework. The trade-offs with the UAE (an energy exporter with a large Indian diaspora) are fundamentally different from those with China (a manufacturing powerhouse with a competitive relationship) or the EU (a bloc with strong IP, environmental, and labour standards).

The Strategic Calculation

India's trade policy is ultimately a bet on sequencing: build domestic manufacturing capacity first through PLI schemes, infrastructure investment, and industrial policy, then liberalise trade from a position of strength rather than vulnerability.

This approach has historical precedent. South Korea, Japan, and China all used strategic protection of domestic industries during their early industrialisation phases, liberalising trade progressively as their industries became globally competitive. Whether India can execute a similar trajectory — building competitive industries behind temporary protection and then opening up — depends on whether the protection is temporary and purposeful or permanent and rent-seeking.

The risk of India's approach is that protection becomes permanent — that domestic industries, sheltered from competition, never develop the efficiency and quality needed to compete globally. This has happened in multiple Indian sectors where decades of protection produced inefficient incumbents rather than globally competitive champions.

The opportunity is that India uses the current window — when geopolitical shifts are creating demand for China-alternative supply chains — to build genuine manufacturing capability. If India can combine strategic protection with aggressive export promotion, skills development, and infrastructure investment, the sequencing bet could pay off.

Trade policy is not a binary choice between free trade and protectionism. It is a continuous calibration of openness and protection, sector by sector, partner by partner, year by year. India's cautious approach to trade agreements reflects this calibration — imperfectly executed, sometimes excessively defensive, but not irrational.

The question is whether India's pace of industrial development will justify its trade caution, or whether the opportunity cost of delayed integration will compound into a permanent competitive disadvantage. That question will be answered not by trade negotiations, but by what India builds at home while the negotiations continue.

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