A recent article in ThePrint argues that India’s free trade agreements have failed because bilateral trade deficits with FTA partners have grown faster than deficits with the rest of the world: 381 per cent with ASEAN, 318 per cent with Japan, 268 per cent with Korea, against 142 per cent with non-FTA countries. The numbers are correct, but the inference drawn from them is not. Bilateral trade deficits are an accounting artefact, not a measure of harm, and a trade policy built on minimising them will make India poorer.
Let’s start with an everyday observation. Every household runs enormous bilateral trade deficits. We buy groceries, electricity, and streaming subscriptions from dozens of suppliers, and we don’t sell our labour to the grocer, the electricity board, or the streaming platforms. A family that employs a domestic worker runs a 100 per cent trade deficit with her: money flows out every month, and she buys nothing from the family in return. Nobody loses sleep over this, because everyone understands that the household balances its books in aggregate, by selling its labour to an employer who, in turn, buys nothing like the full value of what the household consumes.
“I have a chronic deficit with my barber, who doesn’t buy a darned thing from me,” Nobel laureate Robert Solow once quipped.
The other half of the ledger completes the point: each of us runs a chronic surplus with our employer, and both relationships leave us better off.
Countries are no different. Switzerland imports the raw materials for watchmaking from everywhere: gold from Ghana and South Africa, steel from developing economies, leather for straps, sapphire glass. It then exports finished watches priced far beyond the reach of most consumers in the very countries that supply the gold and the steel. Switzerland will run bilateral deficits with these suppliers in perpetuity, and nobody in Bern regards this as a policy failure, because a Ghanaian gold refiner cannot be expected to buy a Rolex every time Geneva buys an ounce of gold.
Look at the sum, not the parts
Balanced bilateral trade demands that every supplier also be a customer of equal size. No specialised economy can satisfy that condition, and no sensible one would try. India imports laptops and servers, overwhelmingly from China, and uses them to export over $200 billion of software services, overwhelmingly to the United States and Europe. The bilateral deficit with China and the bilateral surplus with the US are two halves of a single production process. Netting them country by country tells you nothing about whether the process is worth running.
The clearest illustration is now India’s proudest export statistic. In FY26, iPhone exports from India crossed Rs 2 trillion, making the iPhone India’s single largest branded export across every product group in the Harmonised System. Nearly every component inside those phones is imported, overwhelmingly from China, South Korea, Taiwan, and Japan. The chips, the displays, the camera modules, and the casings all arrive from abroad. Each container of phones shipped West widens India’s bilateral deficit with East Asia. On a country-by-country ledger, India’s flagship manufacturing success looks like a failure with its suppliers and a triumph with its customers, which is exactly what specialisation is supposed to look like. Similarly, the gems and jewellery trade imports rough diamonds to export polished ones worth $11 billion, the pharmaceutical industry imports Chinese active ingredients to export $30 billion worth of medicines, and the refining industry imports crude to export petroleum products worth over $40 billion.
The string is not the kite’s problem. The string is what holds the kite up.
The bilateral framing obscures a macroeconomic point. A country’s overall trade balance is determined by the gap between its savings and investment, not by its trade agreements. India invests more than it saves, so it runs an overall current account deficit; that arithmetic holds whether India signs 10 FTAs or none. What FTAs change is the composition of trade: which partners, which products, at what prices. Cheaper inputs from FTA partners are a benefit, not a cost, to the firms and consumers who buy them. Blaming the ASEAN agreement for the aggregate deficit is like blaming the grocer for the household’s savings rate.
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A redundant certificate
The article’s second claim deserves a more careful answer, because it sounds rigorous: only 20 to 30 per cent of eligible Indian exports use FTA preferences, against 60 to 70 per cent for exporters selling in India, so the agreements are a one-way street. But utilisation rates measure paperwork, not gains. An exporter claims an FTA preference only when the saving—the gap between the ordinary MFN tariff and the FTA rate—exceeds the cost of proving origin. The empirical literature consistently finds that preferences go unclaimed when this margin falls below roughly five percentage points. Japan’s applied MFN tariff on most manufactured goods is zero or near zero, so an Indian engineering exporter to Osaka has nothing to claim and rationally files nothing. India’s average applied tariff, by contrast, is among the highest of any major economy, so the margin for a Korean or Japanese exporter shipping into India is fat, and the certificate of origin is worth the trouble. The asymmetry in utilisation rates is not evidence that our negotiators were outwitted. It is a mirror held up to India’s own tariff wall.
Further, the low utilisation of FTA preferences is not an Indian pathology. Preference utilisation runs well below 100 per cent in every major trading economy, because rules-of-origin compliance is a fixed cost that small firms everywhere struggle to carry. In much of the world, moreover, the certificate has become simply redundant. Decades of liberalisation have brought ordinary MFN tariffs on most manufactured goods down to zero or near zero in Japan, Singapore, and most rich economies, so there is no preference left to claim and nothing for a utilisation rate to measure. Switzerland took this logic to its conclusion in January 2024, unilaterally abolishing import duties on nearly all industrial goods on the reasoning that the tariff revenue was not worth the paperwork the country imposed on its own firms. When the ordinary rate is zero, the certificate of origin is irrelevant, and so is the utilisation rate. Where real margins remain, the fixes are self-certification of origin, digital filing, and simpler value-content rules. These are reforms India can negotiate and, in its own customs administration, simply implement. The answer is not to treat every FTA as a suspect.
The bilateral-deficit fallacy has already cost India once. It was the central argument for walking out of the Regional Comprehensive Economic Partnership (RCEP) in 2019. The decision left Indian firms outside the world’s largest trading bloc while Vietnam integrated deeper into exactly the electronics value chains India now courts through production subsidies. If India’s $1 trillion export target is to be met, it will be met the way every trading nation has achieved such goals: by importing more from whoever sells the cheapest, and worrying about the only balance sheet that matters. That is the aggregate one, and it is set in Mumbai’s savings and investment decisions, not in Hanoi’s or Seoul’s customs data.
The commerce ministry should stop publishing bilateral deficit numbers as if they were report cards, and start publishing the two numbers that matter: total trade as a share of GDP, and the import content of our exports. On both, more is better.
Shubho Roy is a legal researcher at XKDR. Views are personal.
(Edited by Prasanna Bachchhav)
Bidisha Bhattacharya’s response
The rebuttal to my piece on India’s FTA utilisation gap makes a case I never contested. Its central argument, that bilateral trade deficits are an accounting artefact, not a scorecard, is correct, and nothing in my article claimed otherwise. I did not argue that India’s growing deficits with ASEAN, Japan, and Korea are themselves evidence of failure. I argued that the widening gap, read alongside the 20-30 per cent utilisation rate on our own exports against 60-70 per cent on imports, is a symptom of a narrower problem: Indian exporters are not claiming the preferences we negotiated for them.
On this, the rebuttal and my opinion are not as far apart as its framing suggests. Its explanation for the utilisation asymmetry, that Indian goods often face near-zero MFN tariffs abroad already, while foreign exporters face India’s own high tariff wall, is the same mechanism I laid out, sourced from GTRI’s own analysis. Its prescriptions, which are self-certification, digital filing, simplified rules of origin, are close cousins of the FTA Impact Monitoring Authority and SME compliance support I called for. We are arguing for much of the same fix while disagreeing about what the diagnosis was.
Where we do part ways is on the RCEP. I cited India’s 2019 walkout not as a defence of that decision but as evidence that bilateral-deficit reasoning has already shaped major trade policy once before. It was a descriptive point about how these numbers get used in Delhi, not a normative one about whether the withdrawal was wise.
The utilisation gap is not a case for abandoning FTAs, and I said so. It is a case for building the machinery—monitoring, simplification, exporter support—that lets Indian firms actually use the agreements our negotiators sign. That is the string. Without it, the kite of $1 trillion in exports does not fly further.
With this, ThePrint closes the discussion.