Free Trade Agreements are immensely beneficial to the MSMEs operational in the country. They result in increased export revenues and investment flow on the one hand and strengthen harmonious trade relations on the other.
Over the last five decades, Indian MSMEs have dynamically emerged to become the most empowering sector of the economy. They are the most stabilizing sector generating consistent revenues by providing employment opportunities at the widest scale.
Thus, MSMEs in India play a significant role as the catalyst for the transformational changes in the economic development of the country.
The deep-rooted role of MSMEs in the economic development of the country can be well-perceived by the NSSO survey of 2015-2016, which indicates that there are a total of 6.3 crores MSME’s in India generating employment for over 111 million people. They contribute over 45% to the total industrial production and almost 40% to the export revenues and also account for 30% GDP of the country.
All micro, small and medium enterprises involved in the export of goods and services from India are MSME exporters. The MSME Act in India became functional on 2nd October 2006. They are classified into two categories namely manufacturing enterprise and service enterprise.
Challenges faced by the MSME exporters
Even though MSME exporters have contributed substantially to the country’s revenue and have had remarkable growth, they have had to resiliently face certain challenges that have limited their growth quite a bit, over the years. Some of the problems that became a hurdle for the MSME exporters are:
- Lack of implementing innovative technology in the quality and packaging of the products as per the international market
- Lack of awareness of the existent international trade agreements
- No knowledge about the export promotion and assistance programs initiated by the Indian government
- No familiarity with the regulatory framework of the countries sought to be traded with
A strategic action plan is already being implemented to remove all limitations that are hindering the progress of MSME exporters. But besides this, it is also essential that MSME exporters utilize the benefits offered by India’s FTAs to increase their financial returns.
Free Trade Agreement is a deal or an agreement between two or more countries or a trading bloc that taxes, regulatory laws, quotas and preferences on goods and services to be traded between them will be reduced or eliminated to foster better trading relations and returns.
FTAs may also include clauses with respect to intellectual property rights (IPRs), investments, government procurement, etc.
Important features of FTAs
Under FTAs, markets are opened completely, and the FTA partners get advantageous reciprocal trade.
- Removal of Import and export duties on several products
- The partner countries are treated equal even if they are at a disparity on socio-economic levels.
- Partner countries cannot discriminate between their domestic companies and foreign exporters.
Benefits of FTAs
Countries that enter into FTA agreements benefit in a number of ways. The countries that enter into FTA get easy access to each other’s market due to the reduction or removal of tariff and non-tariff barriers. Other beneficial aspects of FTAs for countries are-
Easier access to markets
The low prices owing to tariff cuts place the products of the partnering countries more advantageously thus bringing new trade opportunities. Thus, entry to the markets of partnering countries becomes easy and hassle-free.
Low tariff barriers
Tariff barriers inhibit trade and make products costly. By reducing these barriers the countries that are participants in the agreement experience the free flow of trade and in result their economies flourish.
Low cost in importing raw materials
Raw materials essential for products may be available at lower prices in the markets of the partnering countries. This makes imports of raw materials cheaper, which in turn reduces the cost of a product.
Countries india has a free trade agreement with
Though India has not entered into any new FTA for the past three years, there are several countries India has a Free Trade Agreement with. The countries are-
- Sri Lanka
- ASEAN [Association of South-east Asian Nations]
- Japan and Korea
- South Korea
FTA is under negotiation with countries-
- New Zealand
MSME exporters and India’s FTAs
MSME sector contributes majorly to the revenues and economic development of the country, as they are the biggest sector to generate employment. Thus, it is essential that the existing or new free trade agreements of India contain provisions to bring maximum growth opportunities for the MSME exporters of the country.
To extract the maximum benefits of the FTA, it is therefore essential that MSME exporters go through each provision of the FTA and assess how it can be used.
Out of 28.5 million MSMEs in India, 25 million are micro-enterprises that cannot compete against the enterprises from developed economies.
The key provisions in an FTA can significantly affect the MSME sector and the MSME exporters in India. Following are the provisions and how they may affect the functioning of the MSME sector:
Since the MSME sector lacks a well-secured marketing facilities network, increase in import competition with partner countries infiltrating the domestic markets can pose a big threat to the Indian MSME sector. “Most MSMEs do not have money to invest in market research, advertisement, packaging and are unable to carry out design and technical improvements to keep up with market demands” (P.254, SIDBI, 2010a). However, in certain situations, FTAs may also have a detrimental effect on MSMEs.
Import duty cuts for a partner country can cause a threat to domestic MSMEs. For example, toy imports from China, flooding the Indian market, came as a major setback for the MSME toy industry in India when applied duties were removed.
MSMEs in India lack the facilities to produce as high standard goods as produced in the developed countries. FTAs have stringent norms regarding standardization and quality of products. It becomes easier for MSMEs to standardize their products, as there are clear rules as per FTAs regarding the quality of products. By complying with the quality standards according to the FTA, MSME exporters can indisputably enter the markets and increase their export turnover.
Rules of origin
Rules of Origin identify the originating region or the country of the exported goods. Since Rules of Origin are different under each FTA, to receive preferential benefits, MSMEs must meet the required Rule of Origin applicable to specific products and the specific FTA.
MSME exporters can only ensure benefits from India’s FTAs through strict compliance of quality standards including packaging facilities. To get the maximum benefits of FTAs, they can take help of the government schemes to facilitate their production and quality standards and answer to the following questions can help them further:
- What is the HS code of their product?
- Which countries have India FTAs with?
- Is the product they manufacture being imported into or being produced in the partner countries?
- Is their product on the sensitive lists (not included in the duty cuts) in the signed FTAs?
- Have duties been reduced to zero in India or the partner countries?
- Are their products competitive in terms of prices and quality as compared to FTA partners?
- What is the current duty on their product in the partner country?
- Will duties be less on their exports to FTA partners?
FTAs serve the vital purpose of reducing trade barriers such as quotas or tariffs between countries. Lowering trade barriers helps the partner countries to boost their outreach and increase their sales. They witness a wider range of products and at lower and more competitive prices under an FTA. MSME exporters can benefit from the FTAs if they skillfullymaneuver the provisions in the FTA after understanding them intricately.