Australia’s high-income status originates in its strengths in the primary sector, including minerals and livestock products, education and financial services. India, despite being a lower-middle income country, has a more diverse and complex economic base, underpinned by human skills, information technology (IT)-enabled services, pharmaceuticals and diversified agriculture. It is also the fifth largest economy in the world.

In 2021-22, about 2% of India’s merchandise exports were destined for Australia, and 2.7% of Indian imports originated in Australia. ECTA attempts to bolster those shares, and the Union ministry of commerce (in its November statement) projected the total trade between the two countries to rise from the current $31 billion to $45-50 billion in five years.

FTA-induced changes in trade are dependent on three important factors: The initial tariff barriers, the extent of tariff reduction, and the size of the market. India’s tariffs are high, and its market is large. Hence, if India reduces its tariffs appreciably, imports are likely to rise.

Australia’s average tariffs for all countries are only 2.5%, and half the product lines are duty-free. Hence, India’s export gains are likely to be concentrated in sectors where current Australian tariffs are above average, or where imports are price sensitive. Such gains are likely, for example, in engineering goods, labour-intensive products such as apparel and footwear, pharmaceuticals and jewellery.

India’s average tariffs are 15%. Once ECTA enters into force, duties on 85% of the value of Australia’s current exports to India will be eliminated, and an additional 5% will be eliminated within 10 years. This will likely increase exports of a large number of primary products and minerals where Australia is highly competitive, including cotton, coal, LNG, alumina and critical mineral. Australian wine imports will get progressively cheaper over the next 10 years. Notable exclusions from the agreement include dairy products, iron ore, cereals, sugar, and sunflower oil.

The likely increase in India’s bilateral trade deficit with Australia after FTA will be good for India. Australian exports provide critical inputs for Indian firms, and cheaper intermediates and raw materials will strengthen their competitiveness. Consumers will also benefit. Moreover, some of the increase in Australian exports to India will occur at the expense of third-party countries such as the United States (US), and to that extent will not increase India’s total trade deficit.

Services and foreign investment commitments remain shallow at this interim stage of the agreement. Under the interim agreement, income tax relief on remotely provided software services for Australia has been secured, saving them from a “royalty” withholding tax of 30%. Tax savings for Indian IT companies are expected to be in the range of $145-200 million. Australian service suppliers in 31 sectors and sub-sectors will be guaranteed the same treatment as any future FTA partner by India, including in higher education and business services. Australia’s post-study work visa regulations are non-discriminatory by country of origin of students and not special to Indian students.

The real promise of FTA goes beyond merchandise trade, work visas and double taxation avoidance — drawing on mutual strengths, technology collaboration and FDI. Australia is ranked 25th out of 132 countries in the Global Innovation Index, while India is ranked 40. Australia needs skilled manpower — the number of skilled occupations experiencing shortages has doubled from 2021 to 2022, according to its National Skills Commission — and hence can draw on Indian youth who are eager to educate themselves in Australia. Australia’s rare earth reserves and world- class mining technology can aid in India’s green transition and semiconductor manufacturing ambitions. Indian agribusiness can be transformed with Australian know-how. Australia’s high-cost pharmaceutical industry can benefit significantly from India’s globally competitive and innovative pharmaceutical sector. Joint ventures in different sectors can contribute to food security, climate change, supply chain diversification, and overall technological progress.In the final report card, such innovation-based exchanges may be the key gain.

Sanjay Kathuria is a senior visiting fellow, Centre for Policy Research, adjunct professor at Georgetown and Ashoka Universities, and Global Fellow, Wilson Center. TG Srinivasan is a senior visiting fellow, Centre for Policy ResearchThe views expressed are personal