India’s free trade agreement (FTA) with the Association of Southeast Asian Nations (Asean), which kicked off in January 2010, is perhaps the country’s most important trade agreement because it is integral to its “look east” policy of integration with Asia. The 10-member Asean’s combined GDP of $1.5 trillion is not very different from that of India’s GDP of $1.2 trillion. An FTA, thus, is bound to open up a substantial market for our goods. India, too, can benefit from services trade with Asean. Greater engagement with this grouping will spur the globalising drive of India Inc eastwards as it forms partnerships, alliances and joint ventures to leverage the bustling business prosperity of this region.
However, despite evidence that this FTA might result in a boom in bilateral trade that can easily touch $70 billion by 2012, up from $50 billion in 2010, such local stakeholders as farmers in states like Kerala and India Inc are far from gung-ho about this agreement. Indian industry nurtures a deep-seated ambivalence over the benefits of such bilaterals due to the persisting domestic handicap of inverted duty structures. This contributes to a skewed pattern of trade tilted against India. Presumably, the only ones who remain enthusiastic are bureaucrats and politicians — especially the so-called reformers in their midst, who are susceptible to the need to show that India has arrived on the world stage!
Professor Jagdish Bhagwati of Columbia University and other economists specialising in trade are also extremely sceptical that such FTAs have anything to do with free trade. Far from it, they form an unruly mass of crisscrossing strings, that he called a “spaghetti bowl”, that hampers rather than facilitates free trade for those left out. Such FTAs entail different rules of origin and preferences that benefit only member countries. Whether the trade creation for such member countries is welfare-enhancing for their stakeholders like farmers and local industries is also far from certain. Such agreements are at best a second-best option to a multilateral WTO deal that wraps up the Doha Round.
Even if such agreements are second-best options, India is unlikely to derive much benefit if there is a persisting sense of ambivalence among stakeholders regarding the potential gains. Closer economic engagement with Asean is simply not on without a greater degree of self-confidence on the part of India Inc. If India desires to be part of the broader Asian community, a degree of openness is necessarily called for. Is India Inc ready for a greater degree of openness? After having experienced decades of tariff protection, it is certainly not easy to be prepared for accelerated reductions in import duties. But being defensive about one’s market is hardly the best way to gain from two-way trade.
Considering its nascent stage – the agreement is not fully in place as only eight of the ten members have ratified it. Vietnam and Cambodia are expected to do so in the near future – it is hardly surprising that there are no detailed impact assessments of this agreement by think-tanks and researchers. A good report is the recent Deloitte-FICCI white paper on “India Asean Free Trade Agreement: Implications for India’s Economy” that argues that the success of the FTA is “critically dependent on the existence of good institutions in the country and an efficient regulatory environment such that they act as true enablers for the benefits to flow through and disperse throughout the economy.”
On the goods front, this agreement will benefit Asean more than India although it will provide greater competitive advantage to several of our industries like chemicals, pharmaceuticals, textiles and handicrafts, according to Deloitte. Extending the FTA to services is, therefore, critical for India if it has to leverage its full potentiality. To be sure, negotiations between India and Asean have been facing problems on services, especially over the issue of movement of natural persons. India, however, is unfazed by these setbacks as it has concluded a comprehensive economic cooperation agreement (CECAs) with Malaysia, like it has with Singapore. CECAs with Thailand and Indonesia are also on the anvil. India certainly can benefit from greater services trade with such important Asean members.
This FTA, thus, is likely to be our most ambitious trade agreement. But so long as we have a defensive mindset in trading off long-term benefits with short-term costs, we wouldn’t be able to leverage its full potential. Indian business must be ready for a greater degree of openness to benefit from trade agreements and take proactive measures to form alliances with the Bhumiputras in Malaysia and local non-Chinese businessmen in, say, Indonesia. This should not be difficult in principle as doing business in Asean is hardly different from India. In this connection, an extremely positive development is that the Indian government is thinking of appointing a dedicated ambassador to Asean who will be based in Jakarta. This should help in giving more attention to a crucial building-block of India’s drive to integrate with Asia.
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