Continuing this trend, India signed a free trade agreement (FTA) with ASEAN in August 2009.  The agreement came into effect in January 2010, and, under the terms of this FTA, bilateral trade is expected to reach $50 billion by 2010. In 2009, trade between the two was around $40 billion. This means that ASEAN is already India’s fourth largest trading partner after the EU, the US and China.

India will soon implement this FTA in goods with two more ASEAN countries (Indonesia and Cambodia) by slashing duties on hundreds of products including seafood, chemicals, apparel and tyres. For their part, Cambodia and Indonesia will also slash import duties on hundreds of Indian goods. Currently, the India-ASEAN FTA is functional with four members (Singapore, Thailand, Malaysia and Vietnam). The remaining four (Laos, Philippines, Brunei and Myanmar) will take more time to become complete members.

There are two major questions that still need to be answered: Will the India-ASEAN FTA help India step up its trade and make its presence stronger within the ASEAN region? Does this complex FTA compel India to pursue its economic reforms program more vigorously?

The answer to both questions is yes.

As to question one, with a combined population of 1.8 billion and GDP of US$2.75 trillion, the ASEAN-India FTA is one of the largest in the world. It offers huge growth opportunities to both ASEAN and India.  Currently, India’s share in ASEAN imports is 2.1 per cent against 13 per cent for China. Given the China-ASEAN FTA, which makes Chinese goods cheaper in the ASEAN market, India needs the FTA with ASEAN even to maintain this trade share..

But if the FTA manages to extend not only to goods but also services and investment, India stands to achieve even greater gains.  According to the Federation of Indian Chamber of Commerce and Industry, the ASEAN-India FTA will provide greater market access to Indian professionals and service providers. The ASEAN region is a net importer of services and it imported nearly $180 billion worth of services in 2007. In view of this and India’s competitive advantages in terms of cost and expertise in a range of areas, such increased access will be very beneficial.

As to the second question, in order to render the Indian market receptive to ASEAN investment, India will need to continue existing institutional reforms and make further bold policy changes. These reforms are essential for the Indian government to boost Indian economic resilience, increase export competitiveness and improve the Indian business environment. As the infrastructure and retail sectors are large targets for ASEAN investors, these sectors will require particular focus.

In addition, the FTA may drive labour market reforms, as India strives to compete as an exporter with China. These much needed reforms would only bolster the Indian domestic economy.

And finally, as a by-product, the India-ASEAN FTA may go some way towards stemming the growing Chinese economic dominance of Asia.  This would contribute to managing China’s rise in a peaceful and constructive way.

Will the ASEAN-India FTA have any negative impacts?

Many are concerned that the FTA will adversely affect India’s trade balance with some of the ASEAN countries. A few countries like China will route their products into India through ASEAN as the China-ASEAN FTA is also operational. The Indian domestic industry must be prepared to face the challenge of cheap imports from ASEAN flooding the Indian market. Even without this FTA, India faces large trade deficits with Indonesia and other ASEAN countries.

But overall, the ASEAN-India FTA must be considered to be a positive development. Both ASEAN and India need each other. For ASEAN, India’s working age population is growing while the working age population other Asian economies, such as China, Korea, and Japan, is declining. India is also a world leader in information technology and an attractive destination for FDI. For India, an FTA will drive existing economic reforms, assisting India to establish itself in Asia as a growing economic power.

Dr Geethanjali Nataraj is a Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan and Fellow, NCAER, New Delhi.