India’s free trade agreement with Asean has spurred a globalising drive by India Inc, and the region has emerged as a significant destination for India’s outward investment.
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 similar to India’s GDP of $1.2 trillion. This FTA is already resulting in substantial two-way trade. India, too, can benefit from the services trade, once the agreement is in place. But the best news so far is that it has spurred the globalising drive of India Inc in an effort to benefit from the prosperity of this region.
Considering its nascent stage — this FTA is not fully in place, as only eight of Asean’s 10 members have ratified it — the uptrend in bilateral trade is extremely encouraging. Two-way trade volumes can easily touch $70 billion by 2012, up from $50 billion in 2010-11. Shedding its earlier ambivalence towards bilaterals like this FTA — thanks to the persisting domestic handicap of inverted duty structures, among other reasons — the more positive development is that India Inc is exhibiting greater self-confidence to engage with the region through foreign direct investments (FDI) since the agreement kicked in.
Asean, in fact, has emerged as a significant destination for India’s outward FDI, amounting to $12 billion, or 27 per cent of overall investments of $43.9 billion, in 2010-11. During the first two months of the current financial year, this regional grouping absorbed 21 per cent of India’s outward investments of $5 billion. On a year-on-year basis, India Inc’s investment forays in Asean doubled to $1 billion during April-May 2011, from $542 million in April-May 2010. These investments are in joint ventures and wholly owned subsidiaries, according to the latest month-wise numbers released by the Reserve Bank of India (RBI).
Within Asean, the overwhelming favourite destination for Indian investors is the city-state of Singapore with its open trading and business environment. Singapore alone accounts for 98 per cent and 92 per cent of India’s FDI to Asean in 2010-11 and April-May 2011 respectively. Much smaller amounts went to Vietnam ($76 million), Malaysia ($75 million), Philippines ($32.4 million), Indonesia ($29.4 million), Thailand ($9.6 million) and Laos ($2 million) during 2010-11. The same pattern continued in April-May 2011 as well, as these countries accounted for 8 per cent of India’s FDI to Asean.
To be sure, India Inc’s significant investments in Singapore since the India-Asean FTA took effect — which amount to one-fifth of India’s outbound FDI so far this year — does include big-ticket FDI by companies like Reliance Communications, Tata Steel and Lanco Infratech Ltd. But there is a notable contribution made by small- and medium-sized companies as well. The fact that India’s investments in the city-state grew by 69 per cent in April 2011 and 114 per cent in May 2011 on a year-on-year basis indicates that they have acquired critical mass to accelerate further in the future.
India Inc certainly can engage with this regional grouping more intensively, as the conditions for doing business there are not very different from back home. Constraints due to the paucity of strategic information to penetrate each other’s market therefore might not appear very different in India and Asean. India’s lowly ranking at 134 out of 183 countries this year is only a tad better than Cambodia (147), Philippines (148), Laos (171) and Myanmar. At the other end, Singapore leads the way, followed by Thailand (19), Malaysia (21), Vietnam (78), Brunei (112) and Indonesia (121).
Vietnam does business better than India! To be sure, setting up a new business there takes 44 days. Business spends 941 hours each year filing taxes. By contrast, in India it takes 29 days to start a new business while business spends 258 hours filing taxes. But to get an electricity connection, it takes fewer procedures (five) but more time (142 days) to get it there, when compared to seven procedures and 67 days to get it in India, according to the World Bank. Indonesia’s problems regarding legal uncertainties, corruption, inflexible labour laws and appalling roads, seaports and infrastructure are akin to those in India.
A far bigger problem for India Inc’s ambitions, however, is the presence of a vast overseas Chinese Diaspora that provides a strategic advantage to China. There are over 20 million of them living in this region, and their networks serve as a valuable bridge for China’s integration with Asia. Forty families, mostly overseas Chinese, dominate the economies of Southeast Asia and create formidable barriers of entry for Indian businessmen who want to penetrate Asean. They are hardy competitors and are mostly medium-size in scale. They have acquired big stakes in China’s booming economy.
India Inc must come to terms with this formidable rival if it is to set up outposts for business in Asean. Managers must better understand the competitive implications arising from this economic dominance in the region by overseas Chinese businessmen. They must make up for the paucity of strategic business information in the region by relying on the Indian Diaspora, including alliances with the Bhumiputras or local non-Chinese elites in Malaysia and Indonesia, who resent the dominance of the overseas Chinese. Ultimately, India must fall back on its historic association with Asean to succeed.
The upshot is that India’s FTA with Asean is beginning to rock’n’roll. The uptrend in bilateral trade and rising FDI are worthy of note. India’s comprehensive economic cooperation agreement with Malaysia is already operational and is bound to result in greater FDI. The country’s market opening pacts with Indonesia and Thailand will also see more ambitious forays by India Inc. Plans by Indian infrastructure companies to invest $3-5 billion to build airports in Bali and Java exemplify a growing self-confidence to engage with a $1.5 trillion entity. All of this would receive a further boost with the government’s plans to appoint a dedicated ambassador to Asean based in Jakarta to further India’s drive to integrate with this booming regional grouping.
