OPINION | Budget 2026 tests India’s FTAs at customs and borders

The next phase of global trade, competitiveness will be shaped less by who signs agreements, and more by whose borders are designed to let trade flow with confidence. (Representative image)

As India approaches Budget 2026–27, the centre of gravity in trade policy has quietly shifted. The question is no longer whether India should pursue free trade agreements, those decisions have largely been made; but whether its domestic trade architecture is capable of delivering the market access that these agreements promise. In an environment marked by geopolitical fragmentation and supply-chain reconfiguration, the effectiveness of a Free Trade Agreement (FTA) is determined less by negotiated tariff schedules and more by how goods are treated once they arrive at the port.

Customs: The operational face of free trade

The ground level interface between FTAs and the Indian economy is the Customs administration. This is where treaty commitments meet domestic law, and where commercial certainty is either reinforced or eroded. While FTAs create preferential tariff entitlements, Customs law operationalises them through a dense matrix of statutory provisions, rules and regulations, notifications, procedures, and verification powers. Over time, this interface has become increasingly compliance-heavy, shifting the focus from facilitation to risk containment. Budget 2026-27 presents an opportunity to rebalance this equation without weakening legitimate safeguards.

Rules of origin (RoO) sit at the core of this friction. RoO are inherently technical since they are designed to ensure that only genuinely originating goods benefit from preferential tariffs. India’s post-2020 framework, however, has transformed them into a high-stakes compliance exercise. Under the current regime, importers are expected to substantiate the origin of goods through detailed disclosures relating to value addition, sourcing, and production processes undertaken outside India. For companies embedded in global value chains, where components cross borders multiple times, such granular visibility is neither commercially realistic nor contractually guaranteed.

Preferential claims that were once settled at the time of import are now routinely reopened months or years later. Retrospective denial of benefits, extended verification timelines, and provisional assessments have become familiar features of FTA-linked imports. Many companies now treat FTA benefits as contingent rather than assured, adjusting pricing models to absorb potential future duties. For MSMEs, which lack negotiating leverage over foreign suppliers, the risk is often prohibitive, leading them to avoid preferential routes altogether.

This compliance burden has directly impacted the utilisation of India’s existing FTAs. Budget 2026-27 could address this by introducing clearer thresholds for verification, parameters that could qualify as regional value content, limiting inquiries to defined risk scenarios, and restoring finality to origin determinations within reasonable timeframes.

Regulatory bottlenecks do not end with origin. Quality Control Orders (QCOs) have emerged as an equally consequential constraint on FTA effectiveness. Issued to enforce product standards, QCOs are often implemented mechanically without sufficient alignment with India’s trade commitments or the compliance capacities of partner countries.

Adverse long term impact

The cumulative impact of these practical constraints is a widening gap between trade policy intent and trade outcomes. India’s recent and ongoing FTAs with advanced economies are designed to attract investment and embed Indian firms in global value chains. Yet, such integration is dependent on predictable border processes. Investors are less deterred by tariffs than by uncertainty.

There is also a strategic trade-off embedded in these choices. Excessively defensive Customs administration may safeguard revenue in the short term, but it can discourage participation in complex supply chains that could potentially drive productivity gains. Conversely, a calibrated, risk-based approach can preserve enforcement while enabling scale, specialisation, and investment. Budget 2026-27 must navigate this trade-off with precision, recognising that facilitation is not dilution, but design.

Why FTAs succeed only when companies can adjust 

Signing free trade agreements by themselves may not generate economic momentum. The real economic dividend of an FTA materialises only when companies respond by reallocating capital, reconfiguring supply chains, and upgrading their production facilities to exploit new comparative advantages. Tariff reductions must, at best, be construed as enabling conditions. Whether they translate into trade creation or not will depend on domestic adjustment capacity, and how quickly labour, land, and capital can move towards sectors that gain from openness. For companies who have taken these steps, the risk of a customs officer, with unhindered power, can even question the same, acts a deterrence for them.

Agreements with high-income economies offer complementarities with India exporting labour-intensive goods and services while importing capital- and technology intensive items. However, this is dependent on Indian entities being flexible and amenable to claim this advantage.

India’s uneven experience with the past FTAs highlights this constraint. Low usage and imbalanced trade outcomes are often viewed only as deficits and surpluses, overlooking a more nuanced situation where many companies find it costly and risky to adjust to new trade regimes.

Conclusion

As a result, even well-negotiated FTAs remain underused, with businesses preferring the certainty of normal tariffs over compliance-heavy preferential routes. For Budget 2026-27, the message is straightforward, if India wants FTAs to deliver real economic value, trade diplomacy must be backed by domestic reforms that simplify origin rules, improve border predictability, publish utilisation data, and enable firms to scale and integrate into global value chains with confidence. The next phase of global trade, competitiveness will be shaped less by who signs agreements, and more by whose borders are designed to let trade flow with confidence.

(SR Patnaik, Partner (head - taxation); Shivam Garg, Principal Associate and Navya Bhandari, Associate - Cyril Amarchand Mangaldas.)

Views are personal and do not represent the stand of this publication.