India seeking fair market access ahead of the India-Asean FTA review

India aims to modernise and update the deal to align with current times, considering that the trade agreement was signed over a decade ago

Last year, Commerce and Industry Minister Piyush Goyal called the free trade agreement (FTA) between India and the 10-member Association of Southeast Asian Nations (ASEAN) nations an “ill-conceived” agreement and “unfair” to the Indian industry at a public forum.

Goyal’s remark was a reflection of the inordinate delay in the review of the pact with ASEAN–comprising Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam – that came into force in January 2010. FTAs are generally reviewed within a year or two of its implementation, especially to resolve differences, if any.

India, for more than half a decade, flagged the need for an urgent review of the trade agreement since imports from ASEAN nations grew at a much faster pace as compared to exports from India. That apart, the Indian industry had sought fair and equal market access across all ASEAN nations.

Eventually, in August last year, both sides announced the aim to complete the review of the existing agreement in goods between two regions by 2025, giving hope to the industry of a possible course correction.

Government officials said that India wants to make the deal more modern and upgrade it with changing times, since the trade deal was signed over a decade ago. They also want the agreement to be more user friendly and trade facilitative, considering that the utilisation rate of regional trade agreements has been low.

“Greater market access of goods, flexible rules of origin and addressing the issue of non-tariff barriers are also being discussed during the review meetings,” one of the officials told Business Standard.

Biswajit Dhar, distinguished professor at the Council for Social Development said that there’s a need for a careful assessment of why India’s finished products are not getting adequate market access, and what are the barriers that have resulted to this.

“Tariffs are not major issues (since tariff reduction has been done by the trade bloc). The (FTA) review should focus on what are the non-tariff barriers and if there are any other hindrances not letting Indian exports get adequate market access,” Dhar said.

 

Imbalanced trade
 

The share of bilateral trade with ASEAN is almost 10 per cent of India’s total trade. India's trade with the ASEAN more than doubled from $56 billion in 2009-10 to over $131 billion in 2022-23, but mainly on the back of higher imports from the region.

For instance, exports to the bloc stood at $44 billion in 2022-23, up nearly 4 per cent as compared to the same period a year ago. Imports however remained much higher at $87.57 billion, up over 28 per cent on-year. As a result, the trade deficit widened to $43.57 billion in 2022-23 from $25.76 billion the previous year. It was just $5 billion in 2010-11.

Some of the key exported products to ASEAN include petroleum products, electronics, electrical machinery, automobiles, medicines, gold jewellery, diamonds. Top imported items include laptops, computers, palm oil, petroleum products, machinery, iron and steel, among others.

In the case of some imports, India is heavily dependent on ASEAN nations. Supply of palm oil, coal and other raw materials and commodities account for over 50 per cent of imports from ASEAN, according to a report prepared by Delhi-based think tank GTRI.

For instance, during the financial year 2022-23, half of India’s imports from Indonesia were that of coal. Similarly, nearly 28 per cent of inbound shipments from Malaysia consisted of palm oil.

It is also important to note that while the trade bloc comprises 10 countries, the trade is dominated by five of them–Indonesia, Singapore, Malaysia, Thailand, Vietnam. These countries account for 92.7 per cent of India’s exports and 97.4 per cent imports to ASEAN.

Engineering Export Promotion Council of India (EEPC) Chairman Arun Kumar Garodia said that the incidence of high duties on raw materials compared to final products makes imports of some finished goods cheaper from ASEAN into India.

“This inverted duty is a serious concern. Industry is also of the view that trade diversion is happening from China through ASEAN under preferential routes,” Garodia said.

Garodia also believes that the emergence of the China-backed Asian trade bloc Regional Comprehensive Economic Partnership (RCEP), which New Delhi is not a part of, has impacted India’s exports to the ASEAN region. “The government needs to consider the implications of RCEP on India’s trade dynamics while reviewing the ASEAN FTA,” he said.

According to the GTRI report,the $23.6 billion worth of imports from Singapore included items such as coal, iron and steel, gold and smaller amounts of fertiliser, even though the country does not produce these items.

“Firms may be transhipping these from Singapore. But this adds to cost and is bad business. Such imports must be out of the FTA, but need investigation why they are happening in the first place. Rules of origins may be checked for use of value addition norms for Electronics products, gold etc. India has a separate FTA with Singapore with more relaxed rules of origin. The two FTAs may be studied together,” it said.

The way forward

Ajay Sahai, director-general and chief executive officer at the Federation of Indian Export Organisations (FIEO) believes one of the top priorities of the review should be to bring flexible or product-specific rules (PSR) for value addition norms in the case of imports.

In any FTA, duty concessions are given to imported goods that are produced or originated in the exporting country. This is done to avoid routing of products manufactured in a third country. This is generally determined by factors such as the percentage of value-addition that has been done during manufacturing, under the rules of origin (ROO) norms.

Most of the trade deals signed by India, including with ASEAN, have a single rule for all goods that are produced. In the case of the India-ASEAN FTA, rules of origin norms require minimum 35 per cent value addition.

However, in most of the new trade agreements being signed and negotiated by India in recent times, PSRs are also being negotiated to claim the origin of the product.

PSRs offer flexibilities and value addition norms can be customised depending on the need of the product. This is considered a practical approach, considering the current era of different countries contributing a small part of the entire value chain.

Dhar warned both sides need to set up a mechanism through which implementation of PSR can be monitored. “The review should look into the non-tariff measures and ROO is one of them. Then there are standards. Standards are not imposed in a transparent manner by most countries and have become the new form of market access barrier now,” Dhar said.

On India’s part, the government must do a thorough analysis and find out the reasons why India’s exports are suffering. “...and then take it up during the review and ask the member nations if they have failed to provide clean market access to Indian products,” Dhar said.