As the few decades old Look East Policy of India evolved into the Act East Policy under the Narendra Modi administration, it has placed special emphasis on India-ASEAN cooperation in our domestic agenda on infrastructure, manufacturing, trade, skills, urban renewal, smart cities, Make In India, cooperation in space, Connectivity projects and many more. The main objective of “Act East Policy” being promotion of economic development and cultural ties.
What is ASEAN?
10 States ― Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 1 Observer – Papua New Guinea.
Association of South East Asian Nations (ASEAN) comprising 10 nations, if treated as a single entity, would rank as the third largest economy in Asia and seventh largest in the world. ASEAN is on the brink of major economic and demographic change. ASEAN’s international trade has almost tripled over the last decade. Foreign-direct investment (FDI) has been flowing into the region, with multinationals hoping to capitalize on its rapidly expanding middle class and strategic location at the intersection of China, Japan and India. Over the past decade, trade and investment relations between India and ASEAN have continued to improve. Total bilateral trade increased more than threefold from US$21 billion in 2005-06 to US$65 billion in 2015-16. However, this has been accompanied by a rising trade deficit with ASEAN from US$ 0.5 billion in 2005-06 to US$14.6 billion in 2015-16- Under ASEAN India Free Trade Agreement (AIFTA) entered into force on January 1, 2010, tariffs on over 4,000 product lines will be eliminated by 2016 and sensitive products have been given a longer timeframe for tariff liberalisation. (ASSOCHAM)
Last month at the 16th AEM, India headed by Commerce and Industry Minister Piyush Goyal and the ASEAN have agreed to initiate a review of the bilateral free trade agreement (FTA) in goods to make it “more user-friendly, simple and trade facilitative”. Piyush Goyal and Thai Deputy Prime Minister Jurin Laksanawisit, representing ASEAN issued a joint statement saying “The Ministers tasked officials to work on the details of the review and submit an update at the next ASEAN Economic Ministers (AEM)-India Consultations”, at the end of the AEM-India Consultations in Bangkok.
India has been unhappy about the fact that its trade deficit with ASEAN has widened significantly since the pact was implemented in January 2010. NITI Aayog revealed that India’s trade deficit with ASEAN doubled to $10 billion in 2017 from $5 billion in 2011. One of the reasons for the growing deficit is the low utilisation of the FTA route by Indian exporters to ASEAN countries because of difficulties faced in negotiating the rules. A review of the India-ASEAN FTA could help improve utilisation in India by making the pact simpler and more India-friendly.
After the ASEAN-India FTA, the trade deficit with these nations increased and various sectors, including agriculture and industry, were badly hit. Steel, glass, telecom and various other industries are the worst affected due to the pact. It is believed that the review will help in going towards a more equitable and balanced trade.
The Ministers also expressed their support and welcomed the recommendations of the ASEAN-India Business Council to further promote the potential of bilateral trade for the 4th ASEAN-India Business Summit which was held in Manila 5 days ago and was attended by President Ram Nath Kovind.
Although, based on preliminary ASEAN data, two-way goods trade with India grew by 9.8 per cent from $73.6 billion in 2017 to $80.8 billion in 2018.
The review decision hopefully will help the government side to cure the economy, as the government is desperate to infuse some positivity in the sliding economy. Many in the government feel that a favourable outcome of the review will help revive many sectors including manufacturing, agriculture, and PM Modi’s pet project of Make in India.
What the past had estimated~
While there are many benefits to the ASEAN-India FTA, there is concern in India that the agreement will have several negative impacts on the economy. As the two regions aim to reduce their tariffs on a majority of their traded goods, it allows them to increase the market access of their products. It is criticised, however, that India will not experience as great an increase in market access to ASEAN countries as ASEAN will in India. The economies of the ASEAN countries are largely export-driven, maintaining high export-to-GDP ratios (in 2007, Malaysia had a ratio of over 100%) Considering this, as well as the global financial crisis and India’s expansive domestic market, the ASEAN countries will look eagerly towards India as a home for its exports.
Since the early 2000s, India has had an increasing trade deficit with ASEAN, with imports exceeding exports by more than US$6 billion in 2007-2008. It is feared that a gradual liberalisation of tariffs and a rise in imported goods into India will threaten several sectors of the economy, specifically the plantation sector, some manufacturing industries, and the marine products industry. As a dominant exporter of light manufacturing products, ASEAN has competitive tariff rates that make it difficult for India to gain access to the industry market in ASEAN countries.
Before the agreement was signed, the Chief Minister of Kerala, protested against the FTA. The state of Kerala is an important exporter in the national export of plantation products. It fears that cheap imports of rubber, coffee, and fish would lower domestic production, adversely affecting farmers and ultimately its economy. Kerala has already experienced a flooding of its market with inexpensive imports under the South Asia Free Trade Agreement of 2006. Since then cheap coconuts from Sri Lanka and palm oil from Malaysia has hindered Kerala’s exports.