Why has the India–ASEAN FTA generated concern regarding trade imbalances and revenue impact?

Among India’s FTA partners, the revenue impact is highest with ASEAN, estimated at over ₹40,000 crore in FY27. This has coincided with a widening trade deficit, as imports from ASEAN countries have grown faster than India’s exports to the bloc. Such asymmetry has prompted India to seek a review of the agreement on goods, although the review process has been delayed.The concern arises from two interconnected issues: Trade imbalance affecting domestic manufacturing competitiveness.Revenue forgone from tariff reductions without commensurate export gains. If preferential tariffs mainly facilitate imports rather than exports, domestic industries may face adjustment pressures.However, it is also important to examine whether imports consist of intermediate goods that support Indian exports. The policy challenge lies in ensuring that FTAs are structured to promote reciprocal market access and safeguard sensitive sectors.

Understanding Tariff Cuts: India's Customs Duty Foregone by FY27

India's customs duty losses due to FTAs may surpass ₹1 trillion in FY27, with Asean nations leading the impact on revenues.

Surya

•February 16, 2026•5 mins read

FTA Gains Rise, Customs Revenue Falls

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Customs Duty Forgone under FTAs: Fiscal Impact and Trade Policy Debate

1.Rising Revenue Forgone under Free Trade Agreements

India’s customs duty forgone due to preferential tariff reductions under free-trade agreements (FTAs) is projected to cross ₹1 trillion in FY27, according to Budget documents. This marks a significant fiscal impact of India’s expanding trade liberalisation agenda.

In FY26, customs revenue forgone stood at ₹98,569 crore, exceeding the budget estimate of ₹94,172 crore. The increase reflects both higher utilisation of FTA concessions and expansion in trade volumes under preferential arrangements.

As more tariff lines become eligible for preferential treatment and additional trade agreements come into force, the notional revenue impact is expected to rise further. This brings into focus the balance between fiscal prudence and trade competitiveness.

FTA-led tariff reductions reduce immediate customs collections but may enhance long-term economic activity. If not carefully managed, however, they can strain fiscal planning and widen trade imbalances.

2. Partner-wise Revenue Impact and Asean Review

Among India’s trade partners, the revenue impact is highest in the case of the Association of Southeast Asian Nations (Asean), estimated at ₹40,833 crore in FY27. Imports from Asean have grown faster than India’s exports, prompting concerns about widening trade deficits.

India has sought an urgent review of the Asean goods agreement. Although both sides agreed in August 2023 to complete the review by 2025, the deadline has been missed, leading to dissatisfaction over the pace of negotiations.

Other major contributors to customs duty forgone include:

Japan: ₹11,365 crore
South Korea: ₹10,872 crore
UAE: ₹9,267 crore
Australia: ₹5,107 crore

This highlights how FTAs can produce asymmetric outcomes if export competitiveness does not keep pace with import liberalisation.

Trade agreements must be periodically reviewed to correct structural imbalances. Failure to recalibrate can entrench trade deficits and weaken domestic industry confidence.

3. Customs Duties: Revenue Instrument vs Trade Policy Tool

An internal policy debate persists between revenue authorities and trade policymakers. Customs duties account for roughly 6–7% of the Centre’s gross tax revenue in recent years, making them fiscally relevant.

Revenue officials argue that deep tariff reductions constrain collections and complicate budget management. However, trade policymakers maintain that customs duties are primarily a trade policy instrument rather than a revenue-raising mechanism.

Lower input tariffs can reduce production costs, improve export competitiveness, and integrate India into global value chains (GVCs). Over time, increased economic activity may expand the broader tax base through GST and direct taxes.

“Trade policy is growth policy.” — Jagdish Bhagwati

Viewing customs duties solely as a revenue source may limit trade reform. However, ignoring fiscal implications may weaken macroeconomic stability. A balanced approach is essential.

4. Tariff Structure and Negotiation Constraints

India’s applied Most-Favoured-Nation (MFN) tariffs remain higher than those of many major economies, particularly in sectors such as agriculture, automobiles, and certain consumer goods. As a result, FTA negotiations often require India to undertake substantial tariff cuts to offer meaningful market access.

Over time, as preferential coverage expands and imports rise, the estimated revenue forgone increases. This reflects both policy choices and structural features of India’s tariff regime.

Commerce and Industry Minister Piyush Goyal has stated that India now enjoys preferential market access to almost 70% of global trade through its FTA network. Recent agreements include:

EFTA (in force since October 2025)
United Kingdom
Oman
New Zealand
European Union
Interim trade deal with the United States

Many of these are expected to come into force in FY27, potentially increasing fiscal impact further.

Higher baseline tariffs make FTA concessions more fiscally visible. However, sustained integration into global trade requires calibrated but credible tariff rationalisation.

5. Revenue Projections and Underestimation Concerns

The government has projected customs duty collections to increase by 5% in FY27 to ₹2.7 trillion, compared to a 10% rise in FY26. Meanwhile, customs revenue forgone is assumed to rise by 2.9% in FY27.

Experts suggest this may underestimate the fiscal impact, given that India has concluded nine trade agreements involving 38 countries in the last five years. As these agreements become operational, preferential utilisation rates may rise significantly.

The actual fiscal effect depends on:

Utilisation rates by importers
Trade diversion effects
Changes in sourcing patterns

Therefore, static projections may not fully capture dynamic trade responses.

Budget forecasting must account for behavioural changes in trade flows. Underestimation can create fiscal pressures, while overestimation may discourage necessary liberalisation.

6. Broader Implications: Trade Deficit, Competitiveness and GVC Integration

The rising revenue forgone must be assessed alongside trade performance. If FTAs lead to higher imports without commensurate export growth, trade deficits may widen, as seen in concerns over Asean.

However, if lower tariffs reduce input costs and boost manufacturing competitiveness, India can integrate more deeply into global value chains. This aligns with GS3 objectives of export promotion, industrial growth, and Make in India.

The challenge lies in synchronising tariff liberalisation with domestic capability building—logistics, infrastructure, ease of doing business, and standards compliance.

FTAs are neither inherently beneficial nor harmful; their impact depends on domestic competitiveness. Without complementary reforms, tariff cuts alone may not yield export gains.

Conclusion

India’s projected customs duty forgone crossing ₹1 trillion in FY27 reflects the expanding footprint of its free-trade agreements. While the immediate fiscal cost is significant, the long-term developmental impact depends on export performance, competitiveness gains, and integration into global value chains.

A calibrated approach—periodic FTA reviews, realistic revenue forecasting, and complementary domestic reforms—can ensure that trade liberalisation strengthens growth without undermining fiscal stability. In this balance between revenue and competitiveness lies the sustainability of India’s trade policy trajectory.

Quick Q&A

Everything you need to know

Customs duty forgone under FTAs refers to the notional revenue the government does not collect because it offers preferential tariff reductions to partner countries. When India reduces tariffs on imports from FTA partners, eligible goods enter at lower or zero duties instead of the standard Most-Favoured-Nation (MFN) rates. The Budget estimates that such forgone revenue may cross ₹1 trillion in FY27, reflecting the expanding scope of India’s trade agreements.

However, this figure should not be interpreted simply as a fiscal loss. Customs duties are primarily trade policy instruments rather than revenue-maximisation tools. The intent behind tariff reductions is to enhance competitiveness, lower input costs, and integrate domestic firms into global value chains (GVCs). The actual fiscal impact depends on utilisation rates, trade diversion effects, and increased economic activity.

Therefore, the concept of revenue forgone must be assessed in a broader macroeconomic context, balancing short-term revenue implications against potential long-term gains in GDP growth and tax buoyancy.

Among India’s FTA partners, the revenue impact is highest with ASEAN, estimated at over ₹40,000 crore in FY27. This has coincided with a widening trade deficit, as imports from ASEAN countries have grown faster than India’s exports to the bloc. Such asymmetry has prompted India to seek a review of the agreement on goods, although the review process has been delayed.

The concern arises from two interconnected issues:

Trade imbalance affecting domestic manufacturing competitiveness.
Revenue forgone from tariff reductions without commensurate export gains.

If preferential tariffs mainly facilitate imports rather than exports, domestic industries may face adjustment pressures.

However, it is also important to examine whether imports consist of intermediate goods that support Indian exports. The policy challenge lies in ensuring that FTAs are structured to promote reciprocal market access and safeguard sensitive sectors.

Revenue department officials often highlight that customs duties account for around 6–7% of the Centre’s gross tax revenue. From this perspective, deep tariff cuts could constrain fiscal space, particularly when social and infrastructure expenditures are rising.

Trade policymakers, however, argue that tariffs are distortionary instruments. High input tariffs raise production costs, discourage integration into global value chains, and ultimately reduce competitiveness. Lower tariffs may initially reduce customs collections but could expand the tax base through higher economic activity, corporate profits, and GST collections.

The critical question is whether FTAs are strategically negotiated to maximise dynamic gains. If agreements lead to productivity improvements and export growth, short-term revenue forgone may be offset by long-term fiscal gains. Conversely, poorly structured agreements could erode revenue without stimulating competitiveness.

The fiscal impact of FTAs depends not merely on tariff reductions but on how importers utilise preferential provisions. Utilisation rate refers to the proportion of eligible imports that actually claim FTA benefits. Low utilisation may limit revenue loss, while high utilisation increases forgone duties.

Trade diversion is another key factor. If imports shift from non-FTA countries to FTA partners solely to benefit from lower tariffs, the net welfare effect may be limited. However, if FTAs encourage efficient sourcing and greater competition, consumer and producer welfare improves.

For example, new agreements with the EU, UK, and EFTA may alter sourcing patterns in machinery, pharmaceuticals, and automobiles. Policymakers must continuously monitor data to ensure that FTAs generate genuine trade creation rather than inefficient diversion.

The India–UAE Comprehensive Economic Partnership Agreement (CEPA), operational since May 2022, is expected to contribute over ₹9,000 crore in revenue forgone in FY27. Similarly, the EFTA agreement, effective October 2025, involves significant tariff reductions. These agreements provide Indian exporters preferential access to key markets while lowering input costs for domestic industries.

For instance, cheaper imports of advanced machinery from Europe could enhance manufacturing competitiveness under initiatives such as ‘Make in India’. Simultaneously, exporters gain improved access in sectors like textiles, pharmaceuticals, and engineering goods.

Such examples illustrate that FTAs function as strategic tools for integrating India into global trade networks, even if they temporarily reduce customs collections.

With preferential access covering almost 70% of global trade, India is positioning itself as a major participant in international commerce. This expansive FTA network can reduce tariff barriers for exporters, attract foreign direct investment, and facilitate integration into global supply chains.

However, broader access also demands structural reforms—improving logistics, enhancing state capability for rules-of-origin compliance, and strengthening domestic competitiveness. Without these complementary reforms, preferential access may not translate into sustained export growth.

Ultimately, the success of this strategy depends on leveraging FTAs to drive productivity gains while managing fiscal implications prudently. If aligned with domestic industrial policy, the expanding FTA network could serve as a catalyst for higher long-term GDP growth.