​Compounding gains: On the India-New Zealand FTA

The India-New Zealand Free Trade agreement (FTA) signed on Monday might look underwhelming when viewed in isolation, but is nevertheless significant when looking at what has been happening over the last five to six years. This impression is because New Zealand’s economy is one-sixteenth the size of India’s, and makes up less than 1% of India’s total trade. Yet, this view ignores the fact that the FTA comes soon after the signing of, or closure of negotiations on, seven other trade agreements in the past three and a half years or so. It also ignores the larger policy goals that India is trying to achieve through such deals. The COVID-19 pandemic and the U.S. tariff frictions have shown India that it needs to diversify supply chains on the import and export sides. Weaning off imports from China is a tough task. Yet, any chipping away of the 16% of India’s imports that China accounts for would be welcome. Importantly, the strategic need to diversify export destinations, especially while the mercurial Donald Trump is in charge of India’s largest export market, is clear and urgent. The trade deals with Mauritius, the UAE, Australia, the EFTA nations, the U.K., the EU, Oman, and now New Zealand all provide Indian exporters opportunities that they should take advantage of. Finally, dismissing this FTA on the basis of its size would be unfair to India’s negotiators who have done well to use India’s comparative advantage to push through key victories.

The first key strength of the FTA for India, and unprecedented, is that New Zealand will remove all goods tariffs immediately on execution of the agreement. The second strength is that India managed to avoid providing any concessions on any of its sensitive sectors. Key among these exclusions is dairy, something New Zealand had been especially keen to include. The third positive is New Zealand’s commitment to facilitate investments in India worth $20 billion over 15 years. This is similar to the provisions in the EFTA trade pact, wherein the four EFTA countries committed to facilitate $100 billion of investments in India over 15 years. To be sure, these are commitments to facilitate and not commitments to invest, but getting them included in the text of the deal is nevertheless significant. To help this along, India will create a dedicated desk to address any issues New Zealander investors might face. Such a targeted approach to foreign investment is necessary if India wants to achieve the multiple goals of weaning off China, increasing and diversifying exports, creating jobs, bolstering the capital account, and generally increasing incomes. The other long-standing need of helping domestic manufacturers scale up remains a sticky problem.