Very often, especially after India’s recent refusal to join the Regional Comprehensive Economic Partnership Agreement (RCEP), we hear that “the ASEAN-India FTA is not good for India". While India’s free trade agreement (FTA) with the 10-member Association of South East Asian Nations (ASEAN) was finalized in 2009 and came into effect in 2010, the country’s trade association with the bloc was not an isolated event, but a phenomenon that has emerged naturally and grown over time. The geographical zone it covers has disparate countries, but is a contiguous region that offers a unique space for various economic and geo-strategic interests to move hand-in-hand. Take economics. The opportunities presented by the ASEAN-India free trade area for goods, services and investments, and its associated arrangements, are growing and so are the means and ways for their utilization. The gains have been clear and there is scope to scale up the partnership further.
Since 2010, when the ASEAN-India FTA for goods was activated, trade between the two partners has almost doubled to reach over $87 billion in 2019-20. Bilateral trade between ASEAN and India presently accounts for almost 11% of India’s global trade, up marginally by 1% from 2010-11 to 2019-20. If we add numbers for China, Japan and Korea, then countries under the coverage of New Delhi’s Act East Policy (AEP) contribute about one-third of India’s global trade. Driven mostly by imports, India’s trade with ASEAN has grown faster than that with the world at large.
The gains are far from meagre. Let’s look at some recent numbers. For every $100 of global exports by India, $10.56 came from ASEAN in 2019, a proportion that rose slightly over 2004 to 2010, a period that witnessed a relatively intense engagement between ASEAN and India; and imports worth $11.89 came from ASEAN for every $100 imported by India from overseas. This trend underlines India’s import dependency, but also reveals much room to enhance trade between the two partners. India’s per capita exports and imports vis-a-vis ASEAN have increased since 2010, except for the later years when trade growth slowed down amid persistent trade tensions and a moderation in global economic growth. Policy uncertainties and anti-globalization measures have also affected foreign direct investment (FDI) flows between the two. India’s widening current account deficit with ASEAN, but with a capital account surplus, signals the need of a shift in India’s economic policy towards ASEAN. As of 2019, the net effect of both current and capital accounts is not in favour of India. To convert the deficit into surplus, India must strive for bigger ASEAN markets, seeking greater capital and trade.
Yes, the downside of the bilateral FTA is that both trade partners have failed to reduce their non-tariff barriers (or measures). India faces significant non-tariff measures in ASEAN that limit its exports to ASEAN, which faces the same on its exports to India. This is among the major hurdles in the expansion of value chains spanning ASEAN and India.
The services sector is another area where progress has been rather slow. India faces discriminatory standards applied by ASEAN countries to Indian service providers, and vice versa.
So, are deficiencies in the FTA holding back closer economic integration? There is no clear answer. The matter requires further investigation. However, to assess integrational benefits and costs, we should also consider some specifics, such as the stage of economic development, structure of the economy, production characteristics, demand preferences, trade regimes and policies, connectivity networks, trade monitoring systems, etc. If guided properly, today’s deficit can be tomorrow’s surplus. A review of the ASEAN-India FTA in goods is thus a welcome step.
What next? One of the key challenges to Indian exports in these uncertain times is to maintain competitiveness in global and regional markets by improving trade facilitation, not only at home, but also with trade partners. Along with it, upgrading the ASEAN-India FTA and its effective utilization may perhaps add the required momentum to trade flows. Besides, to strengthen trade relations, ASEAN and India should address matters related to sensitive lists, non-tariff measures, and customs cooperation, among others.
Another great opportunity to scale up the ASEAN-India engagement is the development of value chains. The current value-chain linkages between ASEAN and India are not substantial; total trade in parts and components between them amounted to about $5.8 billion in 2018. India’s vibrant private sector must actively work out new deals to enhance ASEAN-India relations. .
In the post-covid scenario, restoring the connectivity and resilience of supply chains will hold the key to economic integration, particularly the development of India’s northeast. The supply chain resilience initiative (SCRI) between India, Japan and Australia (with ASEAN likely to join) will aid the development of the ASEAN-India economic corridor. It may also facilitate investment and act as a spur for growth in the region.
Finally, regional cooperation, be it economic or non-economic, helps promote economic stability, competitiveness, growth and integration within the region. Today, it is possible for countries to pick their route to a destination from a multiplicity of available options. Sustaining these initiatives is a matter of scale, quality and trade costs. Think of it like a metro system (the accompanying diagram is modelled on Tokyo’s). Like a rapid transit system, trade flows need to increase all across a geography for its compound benefits to look attractive.
Prabir De is professor, ASEAN-India Centre, Research and Information System for Developing Countries, New Delhi These are the author’s personal views.
