The New Normal, Why India’s FTAs Are Poised to Deliver Like Never Before
When FY26 began, the outlook for Indian exports was gloomy. The United States had announced its tariff policy, and the situation worsened with the imposition of additional tariffs in August, reaching as high as 50% on some products. The picture looked challenging. Estimates varied on the effect on exporters and the final impact on GDP growth.
Yet by December-end, a surprising picture emerged. Overall exports to the US saw 9.7% growth compared to 5.7% for the same period in 2024-25—and much higher than the 2.4% growth witnessed at the aggregate level. How did this happen?
As Madan Sabnavis, Chief Economist at Bank of Baroda, explains, several factors were at play. Important products like pharmaceuticals and mobile phones were exempted. There was frontloading of exports in the earlier months. Some exports were re-routed through other countries. And negotiations with import partners on pricing helped maintain some contracts.
But the bigger story lies ahead. The free trade agreement (FTA) with the European Union and the deal with the United States will now place export prospects on a higher trajectory. These are India’s largest export destinations, and the agreements promise to reshape the landscape of Indian trade.
The Details Matter
For exporters in industries such as textiles, chemicals, leather products, marine products, and gems and jewellery, the FTAs offer significant advantages. These markets will open up new opportunities, and India will have an edge over rivals like Bangladesh and Vietnam that face slightly higher tariffs.
But the benefits are not one-way. Imports will also increase, posing competition to domestic industry. The details thus become critically important. FTAs in general offer reciprocal benefits for both sides, and the precise terms of each agreement will determine who gains what.
The US deal generates additional interest because of its geopolitical dimensions. President Trump has spoken about India buying oil not from Russia but from the US and Venezuela. Indian refiners need clarity on this front. Russian oil costs less, and freight costs would be higher for alternatives. Moreover, imports cannot be reduced to zero overnight; the phasing of any reduction will be crucial.
The EU deal also demands close scrutiny. While tariffs have been lowered for over 95% of exported goods, non-tariff barriers can remain a concern. The West is known to enforce rules such as phytosanitary conditions to block farm product imports from emerging markets. Environmental issues come with certification requirements. Labour conditions are scrutinised. These non-tariff barriers can be as restrictive as tariffs themselves, and navigating them requires expertise and resources.
Do FTAs Really Work?
History provides interesting clues. In the past, various agreements—FTAs, Comprehensive Economic Partnership Agreements, Comprehensive Economic Cooperation Agreements—have not moved the needle significantly for India.
Consider the numbers. Singapore’s share in Indian exports came down from 5.3% in 2006 to 3% in 2024-25. Japan’s share dropped from 2.1% in 2012 to 1.4%. South Korea’s share fell from 2.2% in 2009 to 1.3%. These are not the outcomes one would expect from agreements designed to boost trade.
There were some success stories. Malaysia’s share went up from 1.3% in 2012 to 1.7%. Mauritius’s share rose from 0.2% in 2023 to 0.5%. But these were exceptions rather than the rule.
The picture changes, however, when we look at post-Covid agreements. The UAE’s share increased from 7% to 8.4%. Australia’s share rose from 1.5% to 2%. These more recent deals have been more effective, suggesting that something has changed in how India negotiates and implements FTAs.
The post-Covid deals augur well for prospects with the UK and US. If the pattern holds, these agreements could deliver meaningful gains.
The Geopolitical Shift
The geopolitical scenario has changed dramatically. The tariff actions by the US have made countries talk to one another more often than before. The World Trade Organization is now widely acknowledged as a failure, unable to discipline protectionism or advance multilateral trade liberalisation.
In this context, FTAs have become a buffer against US backlash. Countries are signing agreements among themselves to create alternative markets and reduce dependence on any single trading partner. In a way, the US president has brought countries closer to one another, fostering higher levels of trade through bilateral and regional agreements.
More importantly, countries have begun lowering their tariff rates. While the lower rates are restricted to those signing deals, they have fostered a culture of openness in imports and therefore trade. The momentum toward freer trade, paradoxically accelerated by protectionist pressures, is a welcome development.
Market Reactions
The markets in India have reacted very positively to these developments. The currency has been a beneficiary. One of the main reasons the rupee came under relentless pressure was the absence of a deal with the US. Uncertainty about trade relations weighed on investor sentiment and created volatility.
Now that a formal agreement is on the anvil, the rupee has steadied. This provides comfort to the Reserve Bank of India, which has otherwise had to intervene frequently to manage currency fluctuations.
The stock market has also responded. While there have been fluctuations, the general thrust has been positive since the India-US deal was announced. This augurs well for foreign portfolio investors, whose muted activity in the Indian market was partly due to uncertainty surrounding the trade deal. Now, hopefully, it will be business as usual.
The New Normal
FTAs between countries and blocs will be the new normal in the coming years, galvanised by US actions on tariffs. This is welcome from the point of view of fostering a new global economic order where freer trade with fewer restrictions prevails.
But the agenda is not complete. While the fate of goods appears to be more straightforward, services is one area that must be focused upon in future negotiations. India has a comparative advantage in services exports, particularly in IT and professional services. Ensuring that FTAs adequately cover services will be critical for realising the full potential of these agreements.
Conclusion: A Different Trajectory
The FTAs with the EU and US are not just another set of trade agreements. They come at a moment of geopolitical realignment, when the old certainties of the multilateral trading system have faded and countries are seeking new partners and new arrangements.
The evidence from post-Covid deals suggests that India has learned from past experiences. The agreements are more effectively negotiated and better implemented. The gains are more visible.
If this pattern holds, the EU and US deals could mark a turning point for Indian exports. They could open new markets, create new opportunities, and boost growth. The details matter, and implementation will be key. But the direction is clear: India’s FTAs are poised to work better than before.
Q&A: Unpacking India’s FTA Strategy
Q1: How did Indian exports to the US manage to grow despite high tariffs in 2025?
A: Several factors contributed. First, important products like pharmaceuticals and mobile phones were exempted from the highest tariffs. Second, exporters frontloaded shipments in the earlier months before additional tariffs took effect. Third, some exports were re-routed through other countries to circumvent restrictions. Fourth, negotiations with import partners on pricing helped maintain some contracts. As a result, overall exports to the US grew 9.7% in the first part of FY26 compared to 5.7% in the same period of FY25, outperforming aggregate export growth of just 2.4%.
Q2: Why have past FTAs not delivered significant gains for India?
A: Historical data shows mixed results. Singapore’s share of Indian exports fell from 5.3% in 2006 to 3% in 2024-25. Japan’s share dropped from 2.1% in 2012 to 1.4%. South Korea’s share declined from 2.2% in 2009 to 1.3%. These outcomes suggest that earlier agreements may have been poorly negotiated, inadequately implemented, or undermined by non-tariff barriers. However, post-Covid deals with UAE and Australia have shown better results, indicating that India has improved its FTA strategy.
Q3: What makes the EU and US deals potentially different from past agreements?
A: Three factors stand out. First, the geopolitical context has changed, with US tariff actions pushing countries toward bilateral and regional agreements as a buffer. Second, post-Covid deals have been more effective, suggesting India has learned from past mistakes. Third, the EU and US are India’s largest export destinations, so even modest gains in market share can have significant impact. The combination of improved negotiation strategy and favourable geopolitics creates conditions for success.
Q4: What are the key details that need scrutiny in the EU and US deals?
A: For the US deal, the critical questions involve energy imports—specifically, the commitment to buy oil from the US and Venezuela instead of Russia, and the phasing of any reduction in Russian oil purchases. For the EU deal, non-tariff barriers are the main concern. Phytosanitary conditions, environmental certification requirements, and labour standards can all function as hidden protectionism even when tariffs are low. Exporters need clarity on these issues to take full advantage of tariff reductions.
Q5: How have financial markets responded to the India-US deal?
A: Markets have reacted positively. The rupee, which had been under pressure partly due to uncertainty about US trade relations, has steadied. This provides comfort to the Reserve Bank of India, which had been intervening frequently to manage currency volatility. The stock market has also shown positive momentum since the deal was announced. Foreign portfolio investors, whose activity had been muted due to uncertainty, are expected to return to normal engagement now that the trade outlook is clearer.
