India’s trade deficit with ASEAN has increased from about US$2 billion in 1998 to around US$15 billion in 2007. The widening trade deficit is a reflection of India’s trade trends with ASEAN. In 2004-05, India’s total imports from ASEAN were worth roughly $9 billion, with exports amounting to $8 billion. In 2007-08, total imports ($22 billion) continued to exceed exports ($16 billion), with a trade deficit around $6 billion. But total trade between the two has been increasing rapidly.
India has been willing to extend tariff reduction commitments on 89 per cent of its tariff lines through the AIFTA. India has also signalled its intention to lower tariffs on highly sensitive items like palm oil, tea, coffee and pepper. The import duties on these commodities will be lowered to around 40-45 per cent by 2019. The stance that India has taken on these agricultural commodities, in the face of domestic resistance, indicates the store the government puts on the agreement. It is also an indication of India’s long-term economic interest in ASEAN and the synergy that it envisages it could develop with the region over time.
In the last decade, India has not had trade surpluses with most of the ASEAN member countries. Notable exceptions are Cambodia, Laos, Brunei, the Philippines and Vietnam. While India may want to expand its trade with these countries, there is little doubt that, as India opens its economy, and as its business interests expand, there is much scope for its companies to grow in this part of the world. If, at this point in time, India does not evince adequate interest in ASEAN, India may lose market share to China. India can ill afford to suffer a late-mover disadvantage.
India is keen to establish its commercial presence in ASEAN. India has an active interest in exporting chemicals, pharmaceuticals and refined petroleum products. These are areas where India may choose to explore possibilities in ASEAN. ASEAN countries are an important base for for export-oriented manufacturing, particularly in electrical and electronic products, automobiles and related equipment, as well as other light manufacturing goods. Indian companies could compensate for their current lack of competitiveness in these areas by forging partnerships with ASEAN firms. The agreement will make access to ASEAN markets easier; it also provides a platform for Indian companies that want to engage with ASEAN companies by offering their expertise and technological capabilities in exporting to third country markets.
Significant outcomes can be expected, out of the AIFTA, via trade in services and investment. Indian business is coming of age, and there is evidence that the increasing maturity is accompanied by growing confidence in investing globally. The larger Indian multinational companies have already begun to spread their wings in the developed economies. ASEAN is likely to be a favoured target for the less ambitious (and more cautious) companies. Aside from manufacturing, chemical and pharmaceutical products, ASEAN countries offer opportunities in the services sector. The horizons here are broad and deep. Obvious candidates are banking and financial services, with initial forays already being made into Singapore. But the list could easily extend to insurance, outsourcing, tourism and logistics. India could leverage on its massive Muslim population (160 million, and the third largest in the world) to connect with Islamic banking and finance and the halal food market.
Perhaps the most exciting aspect of India’s engagement with ASEAN is its importance to establishing a cooperative Asian economic community. Indian cooperation with ASEAN in science, technology, research and development, and capacity building can provide a foundation for broader cooperation in building an Asian economic community. As India joins the club of major players who have signed FTAs with ASEAN (Japan, China, Korea, Australia and New Zealand), it clears the path for a more integrated Asian economic community.
Shankaran Nambiar is Senior Research Fellow at the Malaysian Institute of Economic Research