India ASEAN Free Trade Agreement

Introduction

India and the association of South East Asian Nations (ASEAN) have concluded negotiations for a free trade Agreement (FTA) after years of difficult negotiations.

This agreement will be signed into a treaty at India-ASEAN summit to be held in Bangkok on February 26,2009 (Economic times, January 27, 2009) if every thing goes as planned. Expectation from India ASEAN FTA are high. Joint Media statement of Sixth ASEAM Economic Minister (AEM)-India consultations states that “the AIFTA (ASEAN-India free trade agreement) could be major avenue in harnessing the region’s vast economic potentials towards sustained progress and improved welfare not only for ASEAN and India but for greater East Asian regions as well”.

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The India-ASEAN FTA is the result of many international and domestic factors on one hand, the trend of international regionalization and the proliferation of FTA’s and the failure of the Doha round of Multilateral talks to yield concrete results led both India and the ASEAN countries to consider alternative solution towards free trade. On the other hand the adoption policies by India and ASEAN to develop better cooperation with their immediate neighbours in recent years has helped accelerate this negotiation. (www. e_pao. net)

India and ASEAN: Historical Background

Although India and ASEAN countries have shared cultural and historical ties, India’s interaction with ASEAN countries was quite limited during the cold war as the two pursued policies which were not very conducive to deep rooted interaction. Soon after the end of second world war, India championed the process of decolonization and drew recognition and appreciation from different parts of the world. It become one of the founding members of Non-aligned Movement (NAM). Even though Indonesia was also a member of NAM alongside India, this relationship did not extend beyond that (Sinha, 2007 pg. 357)

The arrival of bipolar politics in southeast Asia, the Vietnam crisis and India’s close ties with the Soviet union led to the adoption of divergent policies by both India and ASEAN. ASEAN was formed in 1967 during the Vietnam war primarily to diffuse regional conflict and to promote better relations between members. Communists victory in Vietnam, Laos and combodia soon worsened the already fragile security situation of southeast Asia. Thus by 1976, ASEAN was forced to contemplate to become an association with security as its main concern. The reunification of veitnam and the Vietnamese invasion of Cambodia created another security dilemma. Sinha, 2007 pg. 350). While ASEAN chastised Vietnam, India supported Vietnam. ASEAN’s suspicions of the soviet union and the paronoia it had with anything communist led many including India, to regard ASEAN as allies of the capitalists and pro-American bloc. Suspicions was so high during this time that refused to hold dialogues with ASEAN twice in 1975 and 1980. But with end of the cold war, interactions between India and ASEAN became more frequent: and relations between the two began to improve at very fast pace. Following the end of cold war and collapse of soviet union, India began to adopt liberalization policies.

Mean while, ASEAN has also emerged as an important regional organization with great potential and opportunities for growth. The transformation of the international system and new outlook led to the adoption of the Look East policy in 1991, it marked a strategic shift in its foreign policy and perceptions towards its eastern neighbours. ASEAN’s strategic importance in the larger Asia-Pacific region and the potentials it has in becoming India’s major partner in trade and investment also added an impetus to India to develop closer ties with it.

In addition, considering the proposed South Asian Free Tade Area (SAFTA) is unlikely to produce any solid outcome, this policy shift and agreement on the part of India is a strategic s it is important. In continuance of India’s Look East policy, the process of interregional cooperation was institutionalized with India becoming a sectoral Dialogue partner of ASEAN in 1992; a full dialogue partner in 1995 and member of the ASEAN Regional Forum (ARF) in 1996. India because a summit level partner of ASEAN in 2002 and concluded the ASEAN-India partnership for peace, progress and shared prosperity in 2004.

India also became enganged in regional initiatives such as Mekong-guga cooperation (MGC) and Bay of Bengal Initiative for Multi-Sectoral Technical and Economic cooperation (BIMSTEC). India has also became member of EAST Asia Summit (EAS) in December, 2005, (Chakraborti, World Focus, 2008, 436).

India’s Look Best, ASEAN Look West Policies

The real turning point in India-ASEAN relations came with economic liberalization in 1991, the end of the cold war and enunciation of India’s “Look East” policy by Prime Minister PV Narsimha Rao. As publication of Indian ministry of external affairs observed. “There was confluence of nterests. A new world order, the economic Reforms in India along with its “Look East” policy, coincided with ASEAN’s “Look West” and regionalization drive. (Baru, February 2001 pg. 13. ) Under the “Look East” policy pursued increased trade and investment cooperation with South Korea and Singapore. Apart from extending India’s enduring relation with Vietnam, the policy also pursued greater economic relations with Malaysia, Thailand and Indonesia. India became a ‘Sectoral Dialogue Partner’ of ASEAN at the ASEAN’s Singapore, summit in 1992, and a ‘Full Dialogue partner’ of ASEAN at the Bangkok Summit in 1995.

In February 1995 the ASEAN-Indian Business council was set up. India was invited to the meeting of ASEAN Regional Forum (ARF) in July, 1996. At this it was decided that ARF would only admit as participants countries that have a direct influence on the peace and security of East Asia and pacific region. (Baru, 2001; pg 13). A key objective of India and ASEAN to move from derivative to direct relationship so that there are no distortions, no misperception, no ignorance and no intermediation.

There has been doubling of trade between India and ASEAN countries in 1990s and a marked increased in joint ventures and foreign direct investment between the two. Section VI and VII provide a comprehensive account of India-ASEAN trade and investment relation. Suffice it to say that ASEAN has emerged as the third largest foreign investor in India’s after US and EU. There are two dimensions of India’s new relationship with ASEAN. First, the trade and investment dimensions; second, the foreign policy and strategic dimension.

Neither of these relations has equal value to all the ASEAN countries clearly, India’s economic relations with some are more developed than with others. Similarly India’s political and strategic relation with some are more developed than with others. Suffice it to say that in no case is the relationship purely undimensional (Baru, 2001, pg 14)

Deepening Relationship Between India and ASEAN

The deepening of relationship between India and ASEAN is reflected in the buoyancy of trade figures between the two. During April-September 2007-2008, trade grew from US$ 15. 06 billion to US$ 17. 2 billion that is trade grew by 13 percent. India foreign trade with ASEAN, according to directorate General of commercial intelligence and statistics (DGCIS), is also on the rise. During the period 2005-06 to 2006-07 India’s export to ASEAN registered a growth rate of 20. 67 percent. Similarly India’s imports from ASEAN during the same period registered a growth rate of 66% India ASEAN trade stoo at US$ 38. 37 billion in 2007-08 and is projected to reach US$ 48 billion during 2008-09 (Economics times, Jan 10). At the first India-ASEAN summit held at Phnom Penh on November 5, 2001.

India called for an India-ASEAN within a 10 year time frame. In this context the second India-ASEAN summit held at Bali on October 8, 2003 was significant landmark in India-ASEAN relations. The summit saw the signing of the framework agreement for comprehensive economic cooperation between India and ASEAN. This agreement envisaged the establishment of an FTA within a period of ten years. In March 2004, an ASEAN-India Trade Negotiation committee (Al-TNC) was established to Negotiate the implementation of the provisions of the framework agreement.

India, since than entered into numerous agreement with ASEAN. (Sharma, Third concept vol 21, pg 9,10) At the Sixth India- ASEAN summit held at Singapore on November last year, India proposed to increase its bilateral trade with ASEAN to the time of US$ 50 billion by the year 2010. The latest agreement is therefore the result of many years of tactfull policies that led to the thawing of the ice between these two important emerging power in Asia. In addition to these agreements with ASEAN, India has also made consistent efforts to develop bilateral ties with ASEAN members.

With Thailand, India has 61 years of diplomatic relation. India also has free trade agreement with Thailand that was signed in 2004. The framework agreement on bilaterals FTA of 2003 was the basis of this FTA with Thailand. Trade b/w the two increased from a mere US $ 606 million to US$ 3. 14 billion in 2006-07. With the CLV countries Cambodia, Laso and Vietnam, India entered into a number of bilateral agreements for cooperation in the fields of trade, science and technology, agriculture, defence, visa exemption, tourism, IT and culture.

India has major projects I in the projects in the field of education entrepreneurship development and IT in these three countries. In 2004, India extended a credit line of US$ 27 million to Vietnam. Malaysia is a major source of foreign direct investment (FDI) for India, particularly in the areas of LPG, power plant and highway construction. Trade between the two rose from US$ 2. 2 billion in 2002-03 to US$ 6. 6 billion in 2006-07. India public sector undertaking such as BHEL and IRCON have also undertaken and completed a number of projects in Malaysia (www. _pao. net). Presently after India-ASEAN FTA negotiations, it is reported that about 150 Indian Engineering firms are eying to diversify their export base in ASEAN markets and are planning to make Malaysia the Regional hub to penetrate the region. Many of these companies are exploring the possibilities of joint ventures, technology transfer and investment opportunities. It was mainly because of the insistence of Indonesia that India became a part of the East Asia summit in 2005. Relations between the two had been very good for many years.

Bilateral trade between the two increased by 44% from 2005-06 to 2006-07. India has a comprehensive Economic cooperation agreement (CECA) with Singapore since 2005. This agreement include bilateral investment promotion treaty. Double taxation avoidance agreement, an air service agreement and an FTA. Singapore, along with Indonesia had been an important factor for India’s inclusion into the East Asian summit. In addition, it was Singapore’s role that paved the way for India’s association with the ARF. Singapore is the biggest source of FDI for India among ASEAN countries.

During the period 2000to 2008, the cumulative FDI of Singapore into India was worth a whooping US $ 4. 35 billion. Concurrently, over two thousand Indian companies were based in Singapore (www. e_pao. net) India also has plans for a free trade area with Brunie, Indonesia and Malaysia by 2011 and with the remaining ASEAN countries by 2016. Since 1995, India have actively engaged Myanmar in Trade. It has singed several agreements and MOU’s including Tripartite Maritime Agreement with Myanmar and Thailand, border trade Agreement and for cooperation between civilian uthorities between India and Myanmar. Since 2000, a number of high level visits have taken place. During these visits, several agreements and MOU’s have been signed in areas ranging from hydroelectric projects on the Chindwin River and IT cooperation to cultural exchange programs. In year 2003 alone, Seven Agreements/ MOU’s were signed to promote trade and communication facilities. By 2006-07 bilateral trade between India and Myanmar reached US$ 650 Million as compared to US$ 341. 40 million in 2004-05 (www. e_pao. net).

Recently Concluded Free Trade Agreement Between India and ASEAN

India is in process of signing a free trade agreement (FTA) with ASEAN. On 28 August 2008, India ASEAN concluded a trade in goods agreement which will operationalize the FTA in merchandize trade. They will formally signing this TIG agreement in ASEAN-Indian Summit now to be held on 26 Feb 2009. (Economic times, 27 Jan 2009). When India and ASEAN Kicked off Negotiation on the bilateral FTA in 2002, they were supposed to finalise a comprehensive agreement that covers goods, service and investment.

However, regional grouping prevailed in India to conclude talks on goods, first and than move on to service and Investment. However signing of TIG Agreement was delayed as the negotiation got stuck a few times due to difference between parties on the coverage of the negative list. In free trade agreement countries are allowed to keep a small number of products out of coverage of the agreement. The issue of the negative list or the list of items that would be excluded from proposed FTA agreement had at one stage brought negotiations to a stands till. The items on the list would have limited or no tariff concession.

Indian negotiaters were cautious as there were apprehensions that the ASEAN countries are more competitive in sectors like agriculture, textile, auto and auto components and electronics. India would face negative consequence unless sensitive items in these sectors are protected India submitted a list of aground 1414 products as a negative list. These products counted for 42% of total exports of ASEAN to India. But as the Negotiations from ASEAN insisted that the products include in the FTA, should cover at least 90% of exports to India, a pruning of negative list was done by Rao, Inderjit Singh, (India’s Deputy Minister for Defence).

He reduced the number of items to be placed on a negative list from 1414 to 850 on 27 July 2006. In August 2006 These items were further reduced to 560 items. At the end it was decided that each signatory country of INDO-ASEAN FTA can have at most 489 products in its negative list provided that these products do not exceed more than 5% of total bilateral imports. India’s negative list includes 302 agriculture items, 81 items from textile and clothing, 52 items from machinery and auto and 32 items from chemicals and fertilizer plastics.

There are 22 other items from various other sectors which are also part of negative list (Thakurta, South Asian Journal, 2007, 107-108). It has been decided in Negotiation that for products which are not in negative list duties will be reduced in phased manger starting from 2009 and the duty cut will be completed by 2018. Under the pact, India and ASEAN will eliminate import duties on 71% products by December 31, 2012 and another 9% by 2015. Duties on 8-10% products that have been kept in the sensitive list will also be brought down to 5%. For all product in non negative list duty will be reduced to zero by 2018.

India has also identified 611 products, which will only get a partial duty cut. Among these products India has put five products on highly sensitive list. They are Tea, Coffee, pepper, palm oil and refined palm oil (The Economic Challenger, 2008). India stances during the negotiations indicates some what defensive position in goods sector. This is not surprising because India runs a fairly large trade deficits vis-a-vis ASEAN. Acc to data of Direction of Trade Statistics (DOTS) published by IMF, India had a trade deficit of $ 14,562 million in 2007 with ASEAN. This is around 15% of India’s total trade deficits.

Fore individual ASEAN members, India Trade Pattern show that for the last 10 years (1998-2007) it has a trade deficit each year with Singapore, Malaysia, Indonesia, Thailand and Myanmar. India runs a trade surplus with other ASEAN member including Vietnam and Philippines (TABLE 1).

Table 1: India’s Trade surplus/Deficits with ASEAN

Source: - (EPW, 15 Nov 2008) However, overall trade balance is significantly negative. The concern is that if India has already such a huge trade deficit, reduction of tariff rates may worsen the situation unless there is a significant export boost.

Among ASEAN members, India already has preferential trade agreement with Thailand Myanmar and Singapore. India, Myanmar and Thailand are part of the Bay of Bengal Institute for multi sectoral technical and economic cooperation (BIMSTEC) which is now knows as Bangladehs, India, Myanmar, Sri Lanka, and Thailand economic cooperation (BIMSTEC) (Thakurata, South Asian Journal No. 16, pg 108). India also has a seprate FTA with Thailand. India and Singapore have signed a comprehensive Economic cooperation agreement (CECA) few years back.

Though the terms and tariff reduction conditions of these agreements may be different from the present agreement but still it can be assumed that the marginal impact of Indo-ASEAN FTA will be less for these three ASEAN countries (i. e. Myanmar, Thailand and Singapore). Among other ASEAN members, India has significant trade with Malaysia, Indonesia and Philippines. Though the current volume of trade with Vietnam is low, Vietnam is one of the fastest growing countries in the world and trade potential between India and Vietnam is considered to be significant. Nityanand Deva, India’s look-East policy, www. indianmba. com/occasional_papers/ OP104/ OP104html.

How Tariff Profile Effects FTA?

Tariff reduction, especially of custom duties on imports of Agricultural commodities, is an extremely sensitive issue in India. Till India initiated economic reforms in 1991, the peak custom duty rate used to be as high as 150 percent. (Thakurata, South Asian Journal, pg 110). One assumed that India will have some advantage in the ASEAN market because of tariff margin given TIG agreement.

The India-Asean pact on goods trade will result in the signatory countries abolishing customs tariffs on 80% of goods including key raw material like Iron ore and aluminum, plastic goods and certain kinds of machinery. The deal is likely to be operational from January 2009 when the signatories to the pact will begin cutting import tariff in phased manner, import duties on normal goods will be reduced to zero over a period of six years and on items in the sensitive list will have a partial tariff reduction over longer period of time. (The Economic challenger, pg 18).

It look six long years for the two sides to conclude the negotiation of ROO’s (Rules of origin). ROO means that goods exported from certain destination must have a minimum value addition in the country of origin of proportion specified. India has reportedly agreed to have 35 percent value addition and changes in tariff at level of sub heading whereas in case of bilateral arrangements with individual countries like Thailand and Singapore, the rules specify 40% value addition and tariff changes at the level of headings. ROO’s are major reason why negotiations between India and Thailand over expansion of items in FTA list are stalled.

New Delhi fears that further relaxation of ROO’s could lead to imports for third world via Thailand that would, in turn, antagonize Indian industry. (www. bilaterals. org/article. php3? id_artilce=13650) India lowered its duties on crude palm oil (CPO) and refined palm oil to 37. 5 and 45% (against 80%) respectively. It has also agreed to lower duties on coffee and tea to 45% and pepper to 50% (against 100%). Under the pact India-ASEAN will eliminate import duties on 71% products by December 31, 2012 and another 9% by 2015.

Duties on 8-10% products that have been kept in the sensitive list will also be brought down to 5%. India will keep 489 items in negative list of products to be excluded from tariff reduction commitments. Tariff rates in manufacturing goods in India is high whereas in major ASEAN countries are quite low. Therefore India is unlikely to get too much advantage because of tariff preference (The Economic Challenger, vol41, pg 18). On the other hand, the FTA is likely to allow the ASEAN countries to take advantage of the large gap between high Indian applied tariff rates and the preferential rates.

It is expected that agreement will open up considerable market for ASEAN countries in Agriculture, electronics, motor car equipment and other light manufacturing goods in India. This way negatively affect domestic farmer in agriculture and small and medium enterprises in light manufacturing including textile in India. There are reports that Asian development bank to contribute to a fund to help compensate industries that likely to be hit by Indo-Asean free trade agreement (Dasgupta and PAL, EPW Nov, 15, 2008).

What Are Effects of Service Trade on FTA

The crux of welfare gains from India ASEAN market integration does not rest on free trade in goods, but on free flow of service and investment. That is India’s service industries-IT services, design services and call operators-have long been a hub or source of outsourcing and off shoring from develop economies especially United States and the European Union. The India-ASEAN FTA that successfully liberalises trade in service and investment will therefore provide economic opportunities companies in ASEAN countries to strengthen their competitiveness in global market by fragmenting their production and establishing industrial clusters. www. bilaterals. org/article/phg3? id_article=13650). A treaty which involves services will be extremely important for India also because India sees a big market for its services export in ASEAN. India presently is one of top exporters of services and according to WTO data it is ranked 10th in the world ahead of ASEAN countries like Singapore (ranked 16th), Thailand (ranked 27th) and Malaysia (ranked 20th). In 2006 reports of services from India were around $74 billion.

India is particularly strong in Information technology enables services (ITES), professional services, telecommunication services, health care, financial services and distribution services. ASEAN is also big market for service imports. It is not importer of services and according to WTO (2007), total imports of service by ASEAN members was close to $ 150 billion in 2006. To put this figure in perspective, US imports of services was around $ 300 billion in the same year. ASEAN also has a major export interest in some services sector. Tourism in one of the most important services trade for ASEAN countries.

Apart from that they are major exporter of air transport, construction, logistics insurance and financial services. (Dasgupta and PAL, EPW Nov 15, 2008). When India and ASEAN kicked off negotiations on the bilateral FTA in 2002, they were supposed to finalize a comprehensive agreement that covers good, service and investment. However, regional grouping prevailed on India to conclude talks on goods first and then move on to services and investment. India’s trade with the ASEAN, its fourth largest trading partner after the EU, US and China has been growing at a compound annual growth rate of 27%.

Bilateral trade stood at 38. 37 billion in 2007-08 and is project to reach $ 48 billion in 2008-09. The agreement on services allow Indian service providers to access the ASEAN Market and set up operation there. The investment agreement in expected to work both ways in terms of attracting FDI from ASEAN member, especially Singapore and Malaysia, and providing opportunity to Indian companies in sectors like pharmaceuticals, coal mining and automobiles to invest in ASEAN region (Economic times, Jan 10, 2008).

For a major region which has liberal policies for merchandise trade, services trade in ASEAN in highly regulated. As Karmakar (2005) points out, services trade in ASEAN in highly regulated for foreign suppliers but the restrictions are also there for intra ASEAN, trade. Efforts are being made to gradually integrate service trade among ASEAN members. The ASEAN Framework agreement on services (AFAS) provide broad framework to achieve this.

The target is to make ASEAN a single market and production base through free flow of goods, services, investment, skilled labour and free flow of capital by 2015 (Dasgupta and Pal, EPW Nov 15, 2008).

How Energy Security Helpful to FTA?

Apart from other items, closer economic and political ties with ASEAN are likely to held India’s quest for energy security. Indian position on global civilian nuclear cooperation received a boost as the 16 leader’s of ASEAN and its dialogue partner signed what was described as landmark declaration on Energy security at the second East-Asia summit.

The Cebu Declaration on Energy security was signed by leaders of East Asia summit-an evolving regional forum that includes the ASEAN and six dialogue partners (China, Japan, South Korea, India, Australia and New Zealand). The declaration calls for reducing dependence on hydrocarbons and fossil fuel in the context of surging global crube oil prices and seeks to intensify the search for new and renewable energy resources and technologies with focus on civil nuclear power and biofuels (Thakurata, South Asian Journal No 16, pg 107).

India is heavily dependent on west Asia for oil imports, which is geopolitically tense part of the world. India is currently the world’s sixth largest energy consumer, and third largest oil and gas consumer in Asia after China and Japan. For India oil imports account for about 72% of total oil consumption of which 67% is being sourced from west Asia. Hence on external front India is pursuing diversification of supply sources and trying to significantly increase exploration of oil and gas. Among the ASEAN countries, India at present import crude oil from Malaysia and Brunei, which contributes 5. % of its total oil from Malaysia which comprises just 3. 5% of its total LPG import on the other hand, among the ASEAN countries, Indonesia, Malaysia and Vietnam have about 1% of total world’s proven oil reserves and 3% of the world’s proven gas reserves (Dasgupta and Pal, EPW Nov 15, 2008).

Conclusion

To conclude it can be said that the Indo ASEAN trade in goods agreement may not be beneficial for trade in short run but it can be thought of as a part of long runs strategy to improve India’s economic, and strategic presence in the neighbourhood.

Though India shares a land border with Myanmar and maritime border with Indonesia and Thailand, the ASEAN countries has never been economically very close to India. In fact India and the ASEAN countries are not considered natural trading partners. This is indirect contrast to China which was established a distributed regional network of production and trade in this region. The Indo-ASEAN FTA can be perceived as an intial step towards increased economic integration of India with South east Asia.

From a broader perspective, the Indo-ASEAN FTA can also be viewed as other cog in the wheel of increasing South-south cooperation. This is important because the world economic system is presently going through some significant changes. On the one hand there is severe economic showdown and major financial problem in the developed world. On the other hand there is talk of developing countries like China and India emerging as driver of southern economic growth. Though the impact of China on other developing countries is much stronger.

India can play a complementary role. While China provides a big market for exports, via a manufacturing supply chain for other Asian countries, India can potentially become a hub of services-led growth. If India aspires to play a prominent role in global economy and Governance, increased cooperation with ASEAN make a sense as a strategic move.

Bibliography:

1. Baru, Sanjay, “India and ASEAN: The Emerging States Relationship Towards a Bay of Bengal community”. Indian Council for Research on International Economic Relation, February, 2001.
2. Chakraboti, Tribdib, “India and Indo China states in the 21st century; Challenges and opportunities” World Focus Vol 347-348; Nov-Dec 2008.
3. Dasgupta and Pal, “Does a Free Trade Agreement with ASEAN make sense” Economic and Political weekly. Nov 15, 2008,
4. Economic Times, January 27, 2009.
5. Joseph and Parayil, “India-ASEAN cooperation in Information and Communication Technology: Issues and Prospects: RIS Discussion paper (www. ries. org. in) Sharma, Madan Lal, “India ASEAN Relation”; Third Concept Dec 2007, Vol 21. No 250.
6. Sinha, Prabha Chandra, Handbook of ASEAN and Regional Cooperation. 2th Summit and beyond 2007.
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8. NO. 16. “The Free Trade Agreement with ASEAN”. The Economic Challenger 2008, No 11, issue 11.

Websites:

1. www. aseansec. org/4920. htm
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