India counters Trump pullback with FTAs, e-rupee

Global geopolitics is urging countries to diversify for greater economic choices and national security. India is not an exception. 

For some years in the recent past, particularly during the tenure of President Joe Biden in the US, India worked actively with the US and its strategic partners to reduce sourcing dependency on China. An important part of the effort comprised encouraging friend-shoring of supply chains. 

Several supply chains, including critical ones like food, automobiles, pharmaceuticals and batteries, have adverse implications for national economic security if they become dysfunctional due to sourcing difficulties. India has been working closely with the US and other partners in the Indo-Pacific region to safeguard critical supply chains through various initiatives. The most prominent of these was the Indo-Pacific Economic Framework for Prosperity (IPEF).

Comprising more than a dozen economies from the Indo-Pacific region, the IPEF focused on making regulations for safeguarding critical supply chains. India was actively involved in the rulemaking on supply chains. The ostensible idea was to make IPEF members collaborate with each other for diversifying sourcing, identify choke points in supply chains arising from excessive dependencies on single sources, and share business intelligence for preventing potential disruptions. 

Apart from the IPEF, which was a successful regional initiative involving the US, Japan, South Korea, India, Australia, Singapore, Malaysia and some other regional economies, India’s supply chain resiliency efforts included those with the Quadrilateral Security Dialogue (Quad) countries (US, Australia, Japan) and the resilient supply chain initiative with Japan and Australia. The onset of Trump 2.0 in the US has led to a noticeable lack of interest of the US in the IPEF. As a regional effort, the China+1 diversification strategy has lost some momentum.

The unilateral trade restrictive measures announced by the US during the last year made India, along with almost all other major economies, realise the importance of diversifying from the US as well. India has high trade dependencies on both China and the US. China is its largest source of imports while the US is its largest market for exports. 

As the US reciprocal tariffs began biting, limiting market access for various labour-intensive exports, it became clear that India needed to deepen trade links with other markets for compensating the loss of market access in the US. This realisation increased the urgency for concluding bilateral free trade agreements (FTAs) with various economies of the world. 

India has been robustly negotiating FTAs with various trade partners during the last three to four years. Its active interest in pursuing FTAs arose from the objectives of enhancing global exports of goods and services; attracting more export-oriented foreign investments in India; obtaining essential imports from a wider group of source countries; and building deeper strategic links with global trade partners. 

Apart from the economic benefits offered by FTAs, India is pursuing these for geopolitical gains as well, given that FTAs also act as political confidence-building mechanisms between countries. They also help in enlarging strategic influence by cultivating a bigger group of global allies, at a time when the global order is fragmenting fast. 

The FTAs offer India excellent opportunities for diversification. The last year has been a particularly noteworthy year for India in this regard. It concluded negotiations on FTAs with the UK, New Zealand and Oman. Last month, it concluded FTA negotiations with the EU and followed up with a trade deal with the US. These trade agreements follow those that it has signed earlier in recent years with Australia, the United Arab Emirates (UAE) and the EFTA (European Free Trade Association) group of countries. It is also negotiating FTAs with Israel, Chile and the GCC (Gulf Cooperation Council) countries. 

Apart from safeguarding supply chains and entering multiple FTAs, India’s efforts to reduce economic dependence has motivated it to settle more trade in its local currency. However, these efforts have not yielded as much results as expected. India’s trade partners have found it difficult to use the Indian currency in their other external transactions as the currency is not fully convertible in all capital account transactions. Similar problems also exist for the Chinese RMB. Like the RMB, the Indian rupee is yet to develop into a global reserve currency for third-party transactions. 

What might, however, change the scenario considerably is greater acceptability and use of India’s sovereign digital currency. The e-rupee is being used in retail transactions and is picking up traction among customers. It is the second largest pilot on sovereign digital currency after the e-CNY. This might pave the way for its greater use in trades with a lot of other countries, especially those piloting their own sovereign digital currencies. These include China, Russia, Brazil, South Africa, Saudi Arabia, Qatar, Indonesia and the UAE. It is noteworthy that almost all these countries are members of the BRICS group.

Interoperability between digital currencies of the BRICS group will go a long way in enhancing the use of these currencies and increasing their wider acceptability. It will also contribute to their lesser dependence on the US dollar as the main currency for invoicing their trade and external financial transactions. 

For India — along with the goals of diversifying sourcing by working with other countries on strengthening supply chains and increasing prospects of exports and investments through FTAs — currency diversification is also an important goal. The latter is a key determinant for national economic security at a time when reducing external dependence and increasing self-reliance are non-negotiable goals. 

(The author is Senior Research Fellow and Research Lead (trade and economics) in the Institute of South Asian Studies in the National University of Singapore. Views are personal.)

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