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Boosting ASEAN-India Relations: A Pathway through an FTA – IMPRI Impact and Policy Research Institute

Boosting ASEAN-India Relations: A Pathway through an FTA - IMPRI Impact and Policy Research Institute

Prabir De

One of India’s finest Prime Ministers (PMs) Atal Bihari Vajpayee is remembered for his leadership in shaping India’s engagements with the Southeast Asia. Several path-breaking decisions taken by him laid a solid foundation for Asean-India relations. Two of such initiatives are worth noting.

First, it is PM Vajpayee who convinced us that the building relation with Asean was irreversible. He co-chaired the first Asean-India Summit in 2002 in Phnom Penh. In this manner PM Vajpayee carried forward the work of another great Prime Minister of India, PV Narsimha Rao who initiated India’s “Look East Policy” in 1992. Strategic relations have to be underpinned by strong economic ties. This was the reason why India decided to sign the Framework Agreement of the Asean-India Free Trade Agreement (FTA) in the following year.

Second, PM Vajpayee attended the second Asean-India Summit, held at Bali in 2003, where India signed the Framework Agreement of the Asean-India FTA in goods. In 2004, Dr Manmohan Singh assumed office as PM. Due to a lack of experience and dilly-dallying on the part of Asean and India, it took almost seven years to conclude negotiations on the Asean-India FTA. Finally, the Asean-India Trade in Goods Agreement was signed and entered into force on January 1, 2010. A new era of the Asean-India partnership had commenced.

Asean-India trade took over a decade to double the value of trade. The bilateral trade was $ 57 billion in 2010-11, when the FTA came into effect, and rose to $ 131 billion only in 2022-23. While India’s exports to Asean increased from $ 25.63 billion in 2010-11 to $ 43.51 billion in 2022-23, its imports also increased from $ 30.61 billion to $ 87.59 billion in the same period. India’s trade balance with ASEAN has deteriorated after the implementation of the FTA. With Vietnam, the surplus in trade balance in 2010 changed to a deficit in 2020, standing at $ 1068.6 million.

After the implementation of the Asean-India FTA, surplus in trade balance has been recorded with Cambodia, Lao PDR, the Philippines and Myanmar. This indicates that Asean has gained a trade surplus on the current account, and India has witnessed a trade deficit. Increasing asymmetry in the balance of trade for India has raised concerns. Therefore, it is worth examining the trends in bilateral trade between Asean and India and the trade linkages. This is one of the vital factors to reassess India’s trade share with Asean and make a comparison with global trade. This may help the participating countries to strategise and formulate the future course of action.

This is no denying that the global headwinds in the past had slowed down Asesan-India trade. India’s trade increased significantly with rest of the world and also with Asean, and the trends show an almost similar cycle and movement.

Studies show that both of their trade with the world had faced three major shocks since 2010-11:

(i) collapse in oil prices during 2014 to 2016,

(ii) the US-China trade war starting at 2016, and

(iii) the Covid-19 induced pandemic. These events triggered the plunge of trade and resulted in slowing down the economic growth in India as well as Asean. Both India and Asean witnessed V-shaped recovery in their respective global trade in the post-pandemic period.

Today, Asean and India are all set to review the FTA in goods. The outline of the review has been agreed upon by both the parties. India’s interests would be to strengthen the production linkages, besides improving the market access in strategic trade areas. Asean’s interests would be to continue the expansion of export directed towards the Indian market. Reaching higher trade equilibrium with rising Indian merchandise export to Asean is possible provided both of them agree to reduce barriers to trade, particularly non-tariff barriers, and improve the digital and physical connectivity. Some important recommendations highlighted in the recent study by De et al. (2023), which are worth noting.

First, trade in non-oil and/or non-mineral better represents the quality of trade integration. India’s non-oil and non-mineral export to Asean continued to increase. This is a good sign for India. India’s imports from Asean have been dominated by non-oil and non-mineral products in the post-FTA phase, which include textiles, electronic goods, chemicals, and machinery. These products are vital to India’s manufacturing and services sectors, and the significant increase in their imports in 2021 suggests the growing demand for these products in India.

Second, India’s trade with Asean has transformed from trade in agricultural raw materials and food to trade in manufactured goods. The export of manufactured goods has increased from 35.29% in 2010 to 39.53% in 2020, whereas their imports have climbed from 32.12% in 2010 to 38.57% in 2020. This shift in export composition is driven by transport equipment, chemicals and textiles. Interestingly, imports of transport equipment from Asean are increasing at a higher rate than their exports.

The most striking feature is that India’s export and import of fuels to and from Asean are declining over time. The fall in share of imports of minerals, mineral fuels, and oils from Asean countries indicates that India has been diversifying its energy sources and reducing its dependence on imports of these products from Asean. Declining shares of exports and imports of minerals, mineral fuels and oils in the post-FTA indicate that trade between Asean and India has diversified into non-oil non-mineral sectors, suggesting higher value addition of these products, which is one of the primary objectives of the Asean-India Trade in Goods Agreement.

Third, the review of the FTA should also involve an assessment of the exclusion lists products, which may have a significant impact on the effectiveness of the FTA in promoting trade. In a total of 12,169 tariff lines between Asean and India, around 75% of the tariff lines are governed by the normal track commitments. Among the 1297 tariff lines put under the exclusion list by India, a prominent proportion of the commodities in the agricultural sector are excluded for any reduction or elimination in tariffs. Around 17% of the tariff lines in the exclusion list tend to come from tariff lines in the textile and apparel industry.

Asean countries have varying numbers of products in their exclusion lists, ranging from 150 to 2,057. Among the Asean countries, Vietnam has the highest number of products in its exclusion list (2057 products), followed by Myanmar (1,613 products). With Vietnam, the number of tariff lines in imports has increased from 1,306 to 1,963. Ideally, items placed in the exclusion list must not see an increase in their imports as they are kept out of the ambit of any tariff reduction/elimination.

However, in the case of India’s imports from Asean, traction in the opposite direction could be seen. In a substantial number of exclusion list items, the import has gone up after the implementation of the AIFTA. Most of the exclusion list items of the machinery category saw a rise in imports from Asean, regardless of no tariff reduction offered by India.

Fourth, India has witnessed mixed performance in comparative advantage with the Asean. India’s revealed comparative advantage increased in products such as other vegetable textile fibres, paper yarn and woven fabrics of paper yarn and cereal between 2010 and 2020. In a decade, India’s comparative advantage in ships, boats and floating structures has strengthened considerably.

The RCA index has doubled in export of ships, boats and floating structures between 2010 and 2020 with the Asean. India’s exports of lead and articles to Asean were not highly specialised in 2010; however, they have grown to gain revealed comparative advantage in 2020. Similarly, India’s specialisation in exports of zinc and articles to Asean was apparent before the FTA as well as after the FTA. The RCA index score for organic chemicals has also increased, however, marginally.

Fifth, Asean and India should be doing is to streamline NTMs through harmonisation of standards and regulations, mutual recognition of conformity assessment and reduction of border procedures. Making equivalence of standards between Asean and India is the way forward. Asean and India should identify the potential products that are of interest and should build cooperation to work in areas where there are difficulties in recognising or validating certificates of testing and inspections and strengthen the use of international standards, mandatory documentation of equivalence procedure and adopting Codex consignment rejection guidelines, standards in English language and agreement on self-certification.

Indian accreditation authorities should enter into mutual recognition agreements (MRAs) with similar agencies in Asean countries. Only then can any regional trade agreements effectively promote trade and investment activities.

Sixth, while renegotiating the agreement, India’s interests should be to gain higher market access in Asean and the rest of the world in those products which offer the GVC interests, both forward and backward linkages, and the products gaining comparative advantage. A new study at the product-level may be undertaken by India to design the trade strategy at greater details.

To conclude, PM Vajpayee in his remarks at the 2nd Asean-India Summit in 2003 said: “Framework Agreement is a “major breakthrough” in Indo-Asean relations and should contribute significantly to an increasing integration over the coming years.” Today, although the Asean-India trade has turned lopsided, India-Asean relations have gained and have been transformed into a long-lasting friendship, value of which is beyond a mere ‘trade deficit’.

Prabir De, Professor at Research and Information System for Developing Countries (RIS), New Delhi.

The article was first published in Hindustan Times as Reactivating the Asean-India partnership through an FTA on June 20, 2023.

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