Micro, Small, and Medium Enterprises (MSMEs) are the blood running in the veins of the Indian economy, accounting for nearly half of the country’s global exports and contributing a substantial 29% to the GDP. The government recognizes the importance of these enterprises and envisions a significant boost in their contribution.
However, a notable segment of existing MSME exporters operate through export houses, flagging a need to enhance the understanding of documentation procedures, non-tariff barriers (NTBs), and quality standards. Implying, transparent communication and up-to-date information are vital to cultivate a dynamic global trade landscape.
MSMEs also struggle with unique hurdles when navigating trade policies. Restrictions on the flow of goods and services create daunting barriers, particularly for those who seek to explore new markets. Due to their lack of resources, MSMEs are at a disadvantage compared to multinational enterprises while maneuvering complicated regulations. Additionally, laws enforcing new standards result in higher compliance costs, which further hinders MSMEs’ ability to adapt to shifting regulatory environments.
India has made significant strides in executing several Free Trade Agreements (FTAs), providing a boost for MSMEs in the global market. Here’s how FTAs positively impact MSME exports:
- Streamlined connection and logistics are essential following the pandemic Governments provide assistance through initiatives that include training sessions and financial incentives. This enables MSMEs to take advantage of the benefits offered by FTAs, thereby boosting their level of international competitiveness..
- The inclusion of Rules of Origin provisions in FTAs encourages MSMEs to join global value chains. MSMEs will receive favorable status if they source their inputs from FTA partner nations, strengthening their position on the global market.
- For MSMEs, the cost of trade is dramatically reduced through streamlined customs processes and lighter administrative requirements. FTAs also give MSMEs the opportunity to diversify their export markets outside traditional ones, enhancing their resistance to market changes.
- FTAs streamline MSMEs’ access to overseas markets by eliminating or reducing tariffs and non-tariff obstacle Increased exports and less reliance on a single market result from this expanded market access, which improves economic stability.
- Indian products are more competitive in partner countries as a result of FTAs’ reduced trade restrictions and tax. This could end up in raised export rates and greater export prices, thus enhancing India’s standing in the world market.
- Additionally, MSMEs also have access to cluster programs (an emerging trend) across various sectors, global Participation of MSMEs in these programs at a global level promises to push India to unprecedented levels of growth. Sectors like aerospace and defense, semiconductor healthcare, artificial intelligence, and cybersecurity present untapped opportunities for MSMEs to flourish.
Conversely, it is worthwhile to note that India has so far signed 13 Free Trade Agreements, which differ in their scope and nature. But the majority of these agreements have failed to produce their desired results and have contributed to the country’s high trade deficit.
India’s imports from its FTA partners have increased more than its exports between 2017 and 2022. Furthermore, India’s exports to its FTA partners have increased by 31%, while its imports increased by 82%.
The utilization of remains very low at around 25% whereas the utilization for developed countries is between 70 to 80%. This highlights an alarming failure of the nation to take advantage of the benefits made available through its bilateral and multilateral trade agreements.
Henceforth, recognizing the effectiveness of these FTAs the Indian government began reviewing them in 2019.
All things considered, MSMEs are positioned to be the engine that propels the nation’s export prowess in the Indian subcontinent. Despite the positive outlook that FTAs provide, it is important to recognise their varied scope and character. Given the low use of FTAs, stakeholders and the government must work together to support MSMEs and increase the effect of their initiatives. Furthermore, it’s crucial to have an extensive understanding of specific provisions of contracts and the difficulties unique to each business. MSMEs can fully utilise the potential of FTAs and help India move towards becoming one of the world’s greatest economies with comprehensive support, including trade facilitation measures, capacity-building programmes, and initiatives to improve product quality
Acknowledgement – This article by Mr Guru Prasad Sowle was originally published at Financial Express. https://www.financialexpress.com/business/sme-explained-the-role-of-indias-free-trade-agreements-in-boosting-msme-exports-3259133/ .
