Behind the handshake: Tariff cuts in FTAs may cost India ₹1 trn in FY27 | Economy & Policy News
The country’s customs revenue sacrificed for FTAs stood at ₹98,569 crore in FY26, higher than the budget estimate of ₹94,172 crore for the same year.
Among partner countries and blocs, the revenue impact is estimated to be highest in the case of the Association of Southeast Asian Nations (Asean), at ₹40,833 crore in FY27. India has highlighted the need for an urgent review of the trade agreement with ASEAN, as imports from ASEAN countries have been growing at a much faster rate than India’s exports. In August 2023, the two sides agreed to complete the review of the existing goods agreement by 2025. However, they missed the deadline and India expressed displeasure over the slow pace of the review process.
Among other countries, FTAs with Japan (₹11,365 crore) and South Korea (₹10,872 crore) and Australia (₹5,107 crore) are expected to contribute significantly to India’s lost customs duties. The India-UAE trade deal, which came into force in May 2022, is expected to contribute ₹9,267 crore to lost customs revenue in FY27.
India’s Most Favored Nation (MFN) tariffs remain higher than those of many major economies, particularly in sectors such as agriculture, automobiles and some consumer goods. As a result, FTA negotiations typically require New Delhi to undertake substantial tariff reductions to provide commercially meaningful market access. Over time, as more tariff lines become eligible for preferential treatment and import volumes increase, the notional revenue impact increases.
The issue has long sparked internal debate. Finance ministry officials have in the past argued that steep tariff cuts constrain customs revenue, which accounts for around 6-7 per cent of the Centre’s gross tax revenue in recent years. Trade policy makers, however, argue that tariffs are not intended primarily as a revenue-raising instrument but as a trade policy tool. They argue that lower tariffs on inputs can improve competitiveness, integrate India into global value chains and potentially broaden the tax base through greater economic activity.
The government has estimated that customs duty collections would rise by 5 per cent in FY27 to ₹2.7 trillion, compared to a 10 per cent increase recorded in FY26. However, experts believe that the 2.9 per cent increase in foregone customs revenue for FY27 forecast in the budget could be an underestimate as India has entered into nine trade agreements involving 38 countries over the past five years and many of them will likely come into effect in the current financial year.
“The actual fiscal impact depends on utilization rates by importers, trade diversion effects and changes in supply patterns,” said a trade economist, speaking on condition of anonymity.
Commerce and Industry Minister Piyush Goyal recently said India now enjoys preferential access to almost 70 per cent of global trade through FTAs.
Recently concluded trade agreements included the European Free Trade Association (EFTA), the United Kingdom, Oman, New Zealand, the European Union and an interim trade agreement with the United States. While the EFTA trade agreement came into force in October 2025, others, involving a significant reduction in customs duties, are expected to take effect in FY27.
