India’s Stance on FTAs and the Implications for MSMEs in a Multipolar Global Economy

India stands at a pivotal junction in the global trade ecosystem. Once a staunch advocate of multilateralism under the WTO framework, it has now actively engaged in the development of bilateral and regional Free Trade Agreements (FTAs). India’s trade policy is not merely shaped by economic complexities but also by geopolitical considerations, domestic political economic pressures and the ongoing structural transition of its industrial base. With strategic ambivalence toward multilateral trade deals like the Regional Comprehensive Economic Partnership (RCEP), yet aggressive pursuit of bilateral FTAs post-2020, India demonstrates a unique, often contradictory trade position. 

India’s economic position on the global stage is a reflection of its complex balancing act between global trade liberalisation and domestic industrial protection. India is evolving its stance on FTAs in the context of its growing but vulnerable Micro, Small, and Medium Enterprises (MSMEs). The nation’s trade strategy is driven by a dual logic — protecting its domestic industrial base, particularly MSMEs, while attempting to achieve a globally competitive manufacturing and export-oriented economy through selective liberalisation. MSMEs, which account for approximately 30% of India’s GDP, 45% of its exports, and nearly 111 million jobs, lie at the heart of this policy conflict. The broader question, therefore, is not whether India should embrace or reject FTAs, but how to design and negotiate them to achieve sustainable and equitable growth. In this process, India must navigate a world of multiple power centers, growing geopolitical tensions, shifting supply chains, and a divided global trade system. 

India was historically an active participant in WTO‑led multilateralism but became disillusioned by perceived asymmetries and the stagnation of the Doha Round, prompting a shift in the 2000s toward regional and bilateral agreements that allow for tighter control over terms and safeguard clauses. The 2009 ASEAN‑India FTA, despite being hailed as a game‑changer, ultimately widened India’s trade deficit due to tariff asymmetries and low utilization by MSMEs; similarly, the 2010 India‑Korea CEPA and the 2011 India‑Japan CEPA saw surges in Korean exports—particularly electronics and autos—while Indian exports struggled against stringent foreign standards. More recently, the 2022 India‑UAE CEPA has provided a strategic foothold in West Asia, and the 2022 India‑Australia ECTA emphasizes services, education, and strategic minerals trade. India also signed a historic FTA with the UK, aiming to deepen economic ties through reduced tariffs and enhanced cooperation in sectors like digital trade and services. India’s decision to withdraw from RCEP reflects concerns over chronic trade deficits (notably with China), MSME competitiveness against zero‑duty imports, weak rules‑of‑origin enforcement, and vulnerability in agriculture and dairy. In the post‑2020 era, the nation has pursued more pragmatic, tailor‑made FTAs (CEPAs and ECTAs) with sectoral carve‑outs and safeguard mechanisms; however, questions remain about whether MSMEs have the institutional support needed to capitalize on these new opportunities. 

India’s MSME sector, often hailed as the backbone of the economy, is structurally diverse but heavily skewed toward low-technology, labor-intensive industries. While a small segment, particularly in IT services, pharmaceuticals, and auto components, operates at high productivity and is globally competitive,

the vast majority of MSMEs remain informal and unregistered, with limited access to credit and formal supply chains. This fragmentation is compounded by persistent challenges. Despite the availability of government initiatives like Mudra loans and SIDBI assistance, credit access remains severely constrained. Technological adoption is equally limited, with minimal R&D investment and a lack of even basic digital infrastructure among most enterprises. Regulatory compliance poses another hurdle: MSMEs frequently struggle to meet the sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) standards embedded in FTAs, curtailing their export potential. Infrastructure bottlenecks, such as high logistics costs and inadequate cold-chain or port facilities, further erode competitiveness. In terms of global integration, Indian MSMEs lag significantly behind counterparts in countries like Vietnam and Thailand, due to weak industrial clusters, underutilization of FTAs, and limited awareness about export opportunities. Collectively, these structural weaknesses hinder the sector’s ability to benefit from India’s evolving trade strategy and tap into global value chains. 

The sectoral impact of FTAs on Indian MSMEs has been mixed, reflecting both opportunities and vulnerabilities across industries. In some sectors, FTAs have facilitated integration into global value chains and boosted export potential. For instance, the textiles and apparel sector initially benefited from preferential access under FTAs with ASEAN and SAARC; however, its competitive edge steadily eroded due to rising dominance of countries like Bangladesh and Vietnam. Similarly, the auto-components sector has leveraged FTAs with Japan and Korea to enhance export capacity and deepen participation in global production networks. On the other hand, several MSME-dominated sectors have experienced adverse effects. The electronics and toys industries, for example, have suffered from an influx of cheap imports from China and Southeast Asia, leading to widespread closures or a shift into the informal economy. In agriculture and dairy, the stakes are even higher: these sectors are politically and economically sensitive due to their employment base, and FTAs involving countries like New Zealand or Australia have been strongly resisted out of fear of large-scale dumping and livelihood disruptions. This uneven impact underscores the need for carefully calibrated trade strategies that consider sector-specific vulnerabilities and provide adequate support mechanisms for MSMEs. 

India’s policy landscape for MSMEs has evolved in recent years with a focus on self-reliance, formalization, and targeted sectoral incentives. Flagship initiatives like Aatmanirbhar Bharat emphasize import substitution and domestic value addition, while Production Linked Incentive (PLI) schemes aim to boost competitiveness in key sectors such as electronics, textiles, and pharmaceuticals. However, the benefits of these schemes have largely remained limited to formal, mid-to-large enterprises, with minimal penetration among the vast base of informal MSMEs. The UDYAM portal marks a significant step toward digital registration and formalization, aiming to build a comprehensive database of enterprises and improve policy targeting. Despite these efforts, institutional shortcomings persist. Coordination between the Ministry of MSME and the Ministry of Commerce remains weak, undermining cohesive trade support. Moreover, the absence of dedicated trade facilitation cells tailored for MSMEs has left many enterprises ill-equipped to navigate global markets. This is compounded by low awareness of FTA provisions, tariff schedules, and certification requirements—critical gaps that inhibit the sector’s ability to engage effectively in international trade. Strengthening institutional capacity and outreach is essential to bridge the disconnect between policy intent and on-ground implementation. 

To ensure more inclusive and MSME-friendly trade outcomes, India’s FTA strategy must evolve to explicitly account for the unique vulnerabilities of small enterprises. Future trade negotiations should

incorporate MSME-specific safeguard clauses, longer transition periods for tariff liberalization, and binding commitments on technical assistance. Complementing this, robust awareness campaigns, led by export promotion councils, industry chambers, and digital platforms, are essential to improve understanding of FTA provisions, tariff schedules, and compliance requirements. Addressing the chronic issue of access to finance, fintech-based supply chain financing solutions can play a pivotal role in bridging credit gaps and integrating MSMEs into anchor-led production networks. Equally important is the development of a supportive standards and certification ecosystem that can enable MSMEs to meet global quality and safety benchmarks. Finally, a focused sectoral push targeting 5–6 globally competitive MSME clusters through dedicated trade integration programs can serve as a high-impact strategy to boost exports and global market participation. 

India's approach to FTAs reflects a deliberate and often cautious realism. While the impulse to protect domestic MSMEs from premature exposure is understandable, a complete aversion to FTAs can be counterproductive. The challenge lies not in choosing between openness and protection but in sequencing reforms, building institutional capabilities, and aligning trade policy with the micro-reality of Indian businesses. In a fragmented global order, FTAs are not just economic tools but strategic instruments. MSMEs must be positioned not as collateral victims but as empowered stakeholders in this evolving landscape. India’s trade future will ultimately depend on how well it balances the twin imperatives of competitiveness and inclusivity.

By : Anwesha Sinha