Economic relations between Australia and India have improved in recent years. India is now Australia’s third-largest export market and its fifth-largest trading partner. Australia is India’s sixth largest trading partner. In 2009-10, India’s exports to Australia stood at just US$1.38 billion, while imports amounted to a whopping US$12.4 billion, translating into an Indian trade deficit of about US$11 billion with Australia. At the same time Australia’s and India’s relative importance to each other has grown. The share of Australia in India’s imports is 3.5 per cent and Australia exported about 8.1 per cent of its total exports to India and imported around 0.9 per cent of its total imports from India.

Services exports to India from Australia have also grown rapidly, from US$273 million in 2000 to US$2.4 billion in 2008. Australia’s dominant services export to India in 2008 was education-related services; a reflection of the number of Indian students studying in Australia. India’s service exports to Australia moved modestly upwards from US$123 million in 2000 to US$519 million in 2008. India exports a range of services to Australia, including IT-enabled services and software. With a 23.2 per cent trend growth rate over the past five years, India has become Australia’s fastest-growing services export market after China. Though education exports have taken a knock, they are likely to come back, and the problems in this area are by no means the most important in the relationship.

India has had a Bilateral Investment Promotion Agreement (BIPA) with Australia since 2000. The BIPA will be covered under the proposed India-Australia FTA and the FTA is expected to provide a more liberal investment regime. Australian foreign direct investment projects in India have been steady. Total investment was A$2051 million in 2001and A$2018 million in 2008.  Australian portfolio and financial investment is much stronger in India than direct investment. Australian portfolio investment assets grew from AU$155 million in 2000 to AU$3.7 billion in 2007 but declined in 2008 to AU$900 million.

On the economic front, the major concern is India’s burgeoning trade imbalance with Australia, which was the second largest that India had with any of its trading partners. Indian authorities are seeking greater access for Indian IT, pharmaceutical and fruit in the Australian market. However, Australian tariff rates and other trade restrictions are low and Australia has an open market and one of the lowest tariff rates among OECD countries. So the trade imbalance would not seem to be a consequence of Australian trade restrictions; rather, it is the inability of the Indian manufacturing and services sectors to penetrate the Australian market and compete with products from other countries, particularly from China and Southeast Asia that appears to be the main problem.

There are a number of other initiatives, including the agreement signed in November 2009 to upgrade relations between the two countries to the level of a ‘Strategic Partnership’. As part of the partnership, Australia and India issued a Joint Declaration on Security Cooperation to ensure closer and more regular collaboration in security areas. Other notable agreements include MoUs on Defence Cooperation, Customs, Information and Communications Technology, Combating International Terrorism, Water Resource Management, Air Services, Intellectual Property signed in May 2008, and a MoU on science and technology cooperation signed between CSIRO and its Indian counterpart in July 2008.

How can the two countries take their engagement to the next stage? Can both countries look for a military alliance as part of the strategic partnership? Moreover both countries are partners in a number of international forums. Recently Australia’s Foreign Minister Kevin Rudd reiterated Australia’s strong and long-standing support for a permanent seat for India on the UNSC. Yet, there is uncertainty over Australia’s stand on India’s membership of the world’s four non proliferation-export control regimes, namely, the Wassenaar Arrangement, the Nuclear Suppliers Group (NSG), the Australian Group, and the Missile Technology Control Regime (MTCR).

Perhaps the biggest issue between the two countries is uranium. India has been demanding that Australia lift the ban on uranium exports to India, pointing out that nuclear energy could be a climate-friendly way of helping to meet the massive electricity needs of a nation seeking to lift hundreds of millions out of poverty. This has become a central issue and a ‘barometer of trust in the relationship’ for India and a thorn in Australian government policy as it considers whether it can encompass selling uranium to India for civilian use as it does to China and Russia and reduce Indian misperceptions of Australia ‘tilting China’s way’.

India’s nuclear deterrent is small and both India and Australia reiterated recently their strong support for nuclear non-proliferation and disarmament. Estimates cited in the Bulletin of Atomic Scientists suggest that Pakistan has steadily expanded its nuclear arsenal, putting the number nuclear weapons between 100 and 110 — far ahead of India. Australia knows that China is finalising a deal to technically support and provide necessary fuel to set up nuclear plants in Pakistan. So the general perception in India is that Australia is feigning ignorance by not telling China that their move undercut NPT.

It is believed that Australia’s reluctance to supply uranium to India as a clean source of energy has delayed free trade talks between the two countries. A joint study group recommended a comprehensive trade agreement in May 2010. But the process hasn’t progressed any further. The draft note for starting bilateral trade negotiations with Australia is awaiting political approval from the Indian ministry of external affairs (MEA). It remains an open question whether India’s prime minister will make an official visit to Australia later this year — beyond attending the Commonwealth summit in Perth — since, without movement on the uranium front, Indians will continue to wonder whether what then Australian Minister of Foreign Affairs described in February 2008 as ‘the era of inactivity and neglect’ is really over.

Nabeel A. Mancheri is a Postdoctoral Associate with the National Institute of Advanced Studies, Bangalore.