Why India Just Inked a New Free Trade Deal

Welcome to Foreign Policy’s South Asia Brief.

The highlights this week: India signs a free trade agreement with four European states, New Delhi’s controversial Citizenship Amendment Act goes into effect, and Pakistani police say they foiled at an attack at the prison holding former Prime Minister Imran Khan.

India Signs Trade Deal With EFTA

This week, India announced a new free trade deal with the European Free Trade Association (EFTA), which includes Iceland, Liechtenstein, Norway, and Switzerland—countries not in the European Union.

In a statement released Monday, Indian Prime Minister Narendra Modi described the deal as a “landmark pact.” It was finalized after more than 15 years of negotiations and will remove import tariffs on industrial goods from EFTA states. The agreement entails $100 billion worth of investments across a range of sectors in India, including manufacturing.

The EFTA deal comes on the heels of announcements of trade agreements with Australia and the United Arab Emirates, which are both already close Indian partners. It suggests a shift in policy for a country that has embraced protectionism in trade negotiations, even three decades after liberalization reforms better integrated India into the global economy. Domestic politics, which have held India back from pursuing free trade agreements in the past, may be a key driver in this shift.

For decades, India sought to project self-sufficiency in economic development, emphasizing the need to strengthen domestic industries and distancing itself from free market ideology. Modi has made the issue political through initiatives that aim to boost domestic production capacities, such as the “Make in India” program. Economic decisions have fueled India’s historic aversion to free trade agreements, too: Many Indian industries are powerful at home but not globally competitive, and they stand to suffer when import tariffs are removed.

Indian officials have long feared the negative implications of cheap imports for the agriculture sector, which is a key source of employment in India. Those employed in powerful but globally uncompetitive industries—including farmers, as well as those working in steel and automobile manufacturing—are constituencies that politicians can’t afford to alienate. This helps explain why New Delhi declined in 2020 to sign on to the Regional Comprehensive Economic Partnership, a massive trade accord with a membership equivalent to one-third of the world economy.

So, what accounts for the policy change? Indian government messaging around the new trade agreements is telling, describing the deals as pro-people, pro-business, pro-growth, and pro-jobs. The EFTA accord aims to generate 1 million jobs in India over 15 years. Unemployment is a persistent challenge in India, despite robust economic growth, and has become a periodic spark for protests. Jobs are a central issue in this year’s election campaign, and the timing of the announcement about the EFTA deal may be no coincidence.

Notably, agriculture isn’t a big part of the new trade deals, reflecting continued political imperatives for protectionism. The EFTA deal excludes several top Indian products, including dairy and coal, from export tariffs. Little has been said publicly about the trade deal with the UAE, which appears to be an accessory to a new connectivity project to better link India to Europe via the Middle East. And free trade agreements with many of India’s biggest trade partners—including the EU, the United Kingdom, and the United States—remain elusive.

Still, a free trade agreement inked by a country that long embraced import substitution policies is significant. The EFTA deal is a logical move for India, which is increasingly engaged in the global economy, scaling up ties with Western countries that embrace free trade, and reliant on global imports ranging from fuel to weapons. Political factors may necessitate some attachment to protectionism, but economic imperatives could soon make that position more untenable.

What We’re Following

India implements citizenship law. On Monday, India announced that it would implement a controversial citizenship law, known as the Citizenship Amendment Act (CAA), more than four years after it received parliamentary approval. The law provides fast-track citizenship for certain persecuted religious minorities that entered India from Afghanistan, Bangladesh, or Pakistan, before Dec. 31, 2014; it excludes Muslims, even though many Muslim communities face discrimination in those countries.

The passage of the CAA prompted mass protests in India. Notably, the law provides a safety net for those without the documentation necessary for the country’s proposed National Register of Citizens (NRC), an initiative that would require people to prove their citizenship. The CAA would allow for other options for those without the mandated documents—a provision that would not apply to Muslims. A national register was rolled out in the northeastern state of Assam in 2019, with nearly 2 million people unable to prove their citizenship.

Some Indian analysts have compared the CAA to legislation in other countries meant to protect religious minorities arriving from abroad, such as the U.S. Lautenberg Amendment. But critics view the CAA as discriminatory and another example of the Hindu nationalist politics that have boosted Modi’s popularity while worsening the plight of Muslims in India. The announcement of the CAA’s implementation just weeks before India’s national election will harden the views of those that see the CAA as part of Modi’s playbook.

Pakistan announces new cabinet. Pakistan swore in a new 19-member cabinet on Monday, all but one of whom are men. The new minister for information technology is a woman, but she will hold the less-senior rank of state minister; the other cabinet members are all federal ministers. The critical finance portfolio was given to Muhammad Aurangzeb, a former J.P. Morgan executive who was, until recently, the head of Pakistan’s biggest bank.

Aurangzeb was selected over Ishaq Dar, a previous finance minister, and Shamshad Akhtar, a former central bank governor who held the finance minister role during last year’s caretaker government. Prime Minister Shehbaz Sharif likely hopes that a technocrat without political baggage will be well positioned to lead Pakistan out of its economic mess.

Meanwhile, Dar was given the post of foreign minister—a striking appointment for someone with no formal experience in diplomacy. Sharif likely intended to appease a Dar, who is a key ally of both the prime minister and his brother, former Prime Minister Nawaz Sharif, who chairs the ruling party. The appointment also seems to reflect how negotiations with partners abroad for financial aid will be a major foreign-policy priority for the new government.

Indian election commissioner resigns. As the national vote approaches, India’s election commission is missing two of three mandated members. Commissioner Arun Goel abruptly announced his resignation last Saturday, and another commissioner, Anup Pandey, retired last month. Plans are in place to move quickly to select Goel’s replacement; it is unclear when Pandey will be replaced. Managing the world’s biggest democratic election is for now in the hands of Chief Election Commissioner Rajiv Kumar.

Reports indicate that Goel resigned over technical differences with Kumar, which don’t seem serious enough to warrant a resignation, especially so close to the elections. The opposition has alleged that the move was political, albeit without evidence. Significantly, recent legal changes now give the prime minister more of a role in the selection process. Modi will head the selection committee charged with finding Goel’s replacement.

Whatever the reason for Goel’s sudden departure, the speculation around it has raised unsettling questions for India’s election process. The country’s much-praised efforts to oversee and carry out elections with nearly 1 billion eligible voters have long been relatively insulated from domestic politics.

Under the Radar

On Thursday, Pakistani police announced that they had foiled an attack on the main prison in the city of Rawalpindi, popularly known as Adiala Jail. According to a police statement, three suspects from Afghanistan were arrested with a map of the prison and heavy weapons, and the jail was “saved from major destruction.” The alleged plot is especially significant because former Pakistani Prime Minister Imran Khan is one of the inmates at Adiala.

Pakistani officials have said little about the incident since the suspects were arrested. On Tuesday, they announced a ban on anyone meeting with Khan for two weeks, citing security concerns. The suspects’ potential motives are murky; terrorists have previously staged jailbreaks in Pakistan, but it’s unclear if any high-profile militants are held in Adiala. The incident will only add to the anxieties of Khan’s large support base regarding the former prime minister’s well-being in prison.

But perhaps the takeaway from the alleged plot, assuming the details are accurate, is Pakistan’s inability to deter cross-border terrorism. Neither a border fence nor counterterrorism operations have addressed the problem, deepening tensions between Pakistan and the Afghan Taliban regime, which are closely allied with Tehreek-e-Taliban Pakistan, a group that targets Pakistan from across the border.

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Regional Voices

Kathmandu Post columnist Mohan Guragain writes about Nepali Prime Minister Pushpa Kamal Dahal’s challenges, including young people leaving the country. “A country without youth awaits ruin, but visionary leadership and conscious effort can change that,” he argues. “It’s up to Dahal whether to soar in his mission or submit to the fate of a haphazardly governed poor nation.”

An Express Tribune editorial urges authorities in Pakistan’s Punjab province to do more to fight serious smog: “Through coordinated action and cooperation, this is the perfect opportunity for Punjab, under a new leadership, to leverage collective expertise and resources to achieve significant progress in its environmental agenda,” it argues.