Free Trade Agreements & the growth of MSME in India

As the world experienced the shock of Covid19, followed by the Ukraine-Russia war & US tariff shocks last year, it has become clear that we have moved from globalisation to protectionism in the 30 year journey of international trade. The gulf war this year has further enforced the necessity of supply lines & assured markets.

In these times, the government of India has been working with urgency to put together trade agreements that will assure market assess for Indian companies, especially MSME. The major challenge that MSME face with regard to Free trade agreements (FTAs) is lack of clear understanding & how to use these to their advantage.

MSME : The challenges & How they fit in

1. The Utilization Problem: The "Preference Gap"

Trade data consistently reveals that "FTA utilization rates"—the proportion of eligible exports actually claiming preferential tariff treatment—remain stagnant, typically ranging between 20% and 30%. When Indian exporters default to Most Favoured Nation (MFN) rates despite an active FTA, they effectively pay higher tariffs than their global competitors, eroding their price competitiveness in high-value markets. This "preference gap" is a significant structural lost opportunity.

2. The MSME Opportunity: Scale and Potential

With over 80 million registered enterprises, the sector contributes approximately 30% of GDP and over 45% of merchandise exports. From Ludhiana’s knitwear and Moradabad’s brassware to Tiruppur's garments and Pune's auto components, these clusters are already export-oriented. The challenge is ensuring they can leverage modern FTA frameworks.

Competitors such as Vietnam and Bangladesh have demonstrated that systemic, state-supported outreach can push utilization rates toward 40–50%.

The shift & status of current FTAs

The India-UAE Comprehensive Economic Partnership Agreement (CEPA), implemented in May 2022, served as the modern template for this new era, effectively bridging goods and services trade. India is no longer viewing trade agreements solely as instruments of market access, but as vital mechanisms for supply chain repositioning, investment attraction, and geopolitical alignment in the new world order.

As of mid-2026, the following table summarizes the key engagements currently in force or at advanced stages of implementation.

Agreement	Partner(s)	Status	Key MSME-Relevant Sectors
India-UAE CEPA	United Arab Emirates	In Force (2022)	Jewellery, textiles, pharma, IT services
India-Australia ECTA	Australia	In Force (2022)	Critical minerals, textiles, pharma, IT
India-ASEAN FTA	10 ASEAN Nations	In Force (2010)	Chemicals, auto components, electronics
India-Japan CEPA	Japan	In Force (2011)	Engineering goods, auto parts, steel
India-South Korea CEPA	South Korea	In Force (2010)	Chemicals, machinery, electronics
India-Singapore CECA	Singapore	In Force (2005)	Financial services, fintech, IT, logistics
India-Mauritius CECPA	Mauritius	In Force (2021)	Financial services, ICT, textiles, seafood
India-Sri Lanka FTA	Sri Lanka	In Force (2000)	Textiles, tea, rubber, manufacturing
India-MERCOSUR PTA	Brazil, Arg, Par, Uru	In Force	Agriculture, chemicals, auto parts
India-EFTA TEPA	Swiss, Norway, Ice, Liech	In Force (2025)	Pharma, green tech, financial services
India-Oman CEPA	Oman	In Force (2026)	Engineering goods, pharma, textiles
India-UK CETA	United Kingdom	Signed (2025)	Textiles, leather, auto, IT services
India-EU FTA	European Union	Concluded (2026)	Pharma, agri-processing, digital services
India-New Zealand FTA	New Zealand	Signed (2026)	Horticulture, wool, education, engineering
India-GCC FTA	Saudi, Qatar, Kuwait, etc	Negotiation (2026)	Energy, petrochemicals, logistics

 

MSME Barriers to Utilization: Why MSMEs Lag?

1. Awareness Deficit: FTA schedules are voluminous and technically daunting & the technical text of an FTA often results in missed opportunities.
2. Rules of Origin (RoO) Complexity: To claim preferences, goods must prove they originate in India. For MSMEs with globalized supply chains, verifying RoO compliance is technically and financially burdensome, often exceeding the tariff-saving benefits.
3. Documentation Burden: The requirement for Certificates of Origin (CoO) adds to the paperwork & costs.
4. Limited Market Intelligence: Accessing a tariff line is insufficient without market intelligence. MSMEs often lack the data to identify active buyers, navigate specific quality standards, or understand foreign competitive dynamics.
5. Non-Tariff Barriers: Beyond tariffs, Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) measures remain. Exporters to the EU and UK must navigate complex testing and labeling requirements that require specialized investment.
6. Institutional Constraints: Many micro-enterprises lack the digital readiness, trade finance access, and negotiation capacity required for international commercial contracts.

The Solutions

MSME in India need to master the art of utilizing these FTA to ramp their exports up, establish their presence overseas and learn how to comply with the conditions of these FTAs.

Simple approach; explore the latest FTAs listed below:

1. India–European Union (EU) FTA (Concluded Jan 2026): Covering 97% of EU tariff lines, this deal offers privileged access to a 450-million-strong market. It prioritizes "NextGEN" sectors like AI, semiconductors, and green technology, while maintaining sensitive domestic safeguards in agriculture.
2. India–United Kingdom CETA (Signed May 2025): This "services-first" agreement eliminates tariffs on 99% of Indian exports to the UK. Crucially, it provides social security exemptions for Indian professionals and opens 108 service sub-sectors, significantly bolstering the IT, healthcare, and consultancy industries.
3. India–Oman CEPA (Operational June 2026): Acting as a gateway to the Middle East, this agreement includes a global first: structured commitments on traditional medicine (AYUSH) across all modes of supply, alongside industrial integration in plastics and precision instruments.
4. India–New Zealand FTA (Signed April 2026): This pact focuses on long-term market stability, positioning India as a primary provider of skilled labor in construction, IT, and healthcare, while formalizing cooperation in cultural sectors.

Complex Approach: Think Lateral

A slightly complex but highly gainful approach is to understand FTAs that other countries have signed with markets that are tough for India. If we pick up Vietnam as an example, if an Indian company sets up a structure in Vietnam, it can use the FTAs of Vietnam with China, ASEAN & RCEP countries ( including Japan, Australia, NZ, South Korea etc) and with just 40% local content, they can use Indian components to capture these markets.

Conclusion

Given the way world markets have moved, using FTA is not an option but a necessity for them. It is time for Indian MSME to claim their place in the new world that is emerging.