The recently signed FTA between India and ASEAN is an important step in bringing India more centre stage in Asia.
The recently-concluded Free Trade Agreement (FTA) between India and ASEAN is a significant development from both sides on multiple dimensions. It lays the foundation for improved trade between two strongly emerging economic regions, but will also be extended to embrace capital flows and services.
But the impact of this event is likely to be felt far beyond the confines of the mere trade and investment boost both India and ASEAN are likely to receive. India could leverage its higher visibility achieved through the trade agreement to seek to improve its geo-political status not only in ASEAN, but also in wider Asia. Similarly, a strategic relationship with India, beyond just the economic could present a credible alternative to ASEAN to its China exposure. Trade always precedes other relationships between countries and almost always leads to other associations over time. Given their ease relative to WTO negotiations, FTAs have dominated world trade arrangements. The India-ASEAN FTA is a unique hybrid of looking like a bilateral arrangement, but the fact that the ASEAN is a block of 10 disparate countries makes it a very interesting case study of how multi-lateral arrangements can be successfully negotiated.
GDPs of India and ASEAN are $1.1 trillion and $1.3 trillion respectively. ASEAN grew in 2007 at a rate of 6.4 per cent. Their respective trades are currently valued at approximately $400 billion and $2 trillion. They boast a market capitalisation of $ 1.8 trillion and $1.4 trillion (main five exchanges) — as of the end of 2007. They have a population of 1.1 billion and 560 million and savings rate of 30 per cent or more. As can be seen from these figures, both sides have strong economic and demographic bases, which getting better over time.
Despite healthy progress on international trade on both sides, the trade between India and ASEAN has remained much below potential at $38.4 billion for the last year, which represents less than 2 per cent of their total combined external trade. This represents a great opportunity to increasing this trade, especially given the complementarity of markets and resources. Edible oil, wood and pulp, timber and forest products, energy baskets (comprising natural gas, coal and oil), manufactured products such consumer durables, electronics and communication equipment, as well as agri- and marine-based products offer themselves as ready firsts as far as India’s needs are concerned and which are in abundance in ASEAN countries.
Similarly, a wide basket of agricultural, metal, equipment and heavy engineering goods, are possible exports from India. Large markets on both sides are also a point of great attraction to the private sector with the additional advantage of lower trade barriers. There are obviously apprehensions among those that are already engaged in these businesses on the impact of freer trade on their existing business. But history has demonstrated that expanded trade favours competitive incumbents given their first-mover advantage. The first big impact of this FTA is therefore making existing players more competitive and advanced.
The real fun however, begins when the agreement is extended to services and investments. The huge savings and capital markets present in these regions as well as the presence of the large retail financial savings, which are getting bigger, will open innumerable opportunities for cross-border investment flows. For instance, many countries of ASEAN such as Singapore and Malaysia are ahead of India in infrastructure development and can explore serious investment opportunities here. Similarly, Indian manufacturers seeking to look to diversify manufacturing bases, especially to locate them nearer customers could explore setting up facilities in ASEAN locations. Retail investment, both equity and fixed income will flow in good measure in response to the strong cross-border wealth management industry that will develop on the back of an agreement to ease investment flows between Indian and ASEAN. The well-developed capital markets and financial systems in both regions have the potential to provide a sharp offtake.
Tourism, health, education, IT and ITES are service sectors replete with possibilities to provide very viable cross-border investment opportunities. For instance, ASEAN boasts of at least 15 of the top tourist destinations of the top 50 world tourist destinations. India has an underdeveloped tourism potential and can easily benefit by inviting the world class hospitality and tourism providers of ASEAN to come and invest in India. Similarly, Indian IT and ITES can diversify their delivery centres throughout ASEAN, given their cheaper operating cost if labour movement is facilitated. Apart from the tremendous investment flows that will occur as mentioned earlier, the financial sector itself will benefit tremendously from greater access to the larger combined regions of India and ASEAN. Both India and ASEAN are replete with SMEs. Offering freer investment access will make for exciting new opportunities for the SMEs in both economies.
Apart from the commercial and economic aspects, both India and ASEAN can look to build more strategic geopolitical advantage, leveraging the visibility that this FTA might provide. For India it is very important to become more involved with ASEAN and ASEAN +3 blocks which now include China, Japan and Korea. In a sense India has been isolated from most of Asia. This isolation from mainstream Asia is no longer a good thing for India, given its economic progress and potential. There is increasing desire building up in east Asia to look at India both because of the attractive market it represents now and also as a good hedge against China on whom it has become so dependent. Though I am not competent to comment on the importance of the Indian Ocean to military strategy, literature suggests it is important and hence can be also incorporated in the geopolitical discussions between ASEAN and India.
Lastly, ASEAN is a 10-country block which is itself trying to find a common ground amongst its disparate members. The membership is spread between rich and the not-so-rich (Singapore has the highest per capita income of $35,000 versus Myanmar at $234). It is, in many senses, a microcosm of the bigger world with ethnic diversities, conflicting economic and military interests, regulatory and legal systems, laws, openness to globalisation, etc. For this disparate group of countries to come together and negotiate this agreement with India now — and before this with China, Japan and Korea — means that a tremendous amount of convergence must have already been achieved within these countries in ASEAN. This signing of FTAs offers a rich case study of how the vexatious multi-lateral negotiations such as the WTO can perhaps accomplish more by regrouping like-minded countries to a converged voice to make the multilateral process more efficient.
The FTA that India has signed with ASEAN is therefore a truly landmark deal that holds many more possibilities than just an expansion in trade, which by in itself is an important goal to achieve. But for realising the tremendous potential, policymakers from both sides should take the relationship that has begun, to its logical conclusion. We should thus be looking for, as next steps, the expansion of this agreement to services and investments. But the real glory will be achieved when the ASEAN +3 is expanded to ASEAN + 4 to include India.
The author is the Managing Director & Regional Head of Standard & Poor’s, South Asia, and the views expressed in this article are personal. He can be contacted at r_ravimohan@standardandpoors.com
