Home >> South Asia >> India, Pakistan, Bangladesh, and Nepal

     Email   Print 

India-ASEAN scale new frontier following FTA

Pranamita Baruah - 8/20/2009

On August 14, 2009, after six years of intense negotiations, nine economic ministers of the ten-nation regional trade bloc ASEAN and Indian Minister of Commerce and Industry Anand Sharma finally inked the long-awaited free trade agreement (FTA) for duty-free import and export of 4,000 products over a period of eight years. The remaining state Vietnam would sign the pact once it is formally recognized by India as a ‘market economy’. The historic signing of this pact under the comprehensive economic cooperation agreement (CECA) took place during the meeting of the 41st ASEAN Economic Ministers (AEM) held at Bangkok from August 12 to 16. The pact would come into effect from January 1, 2010 and is expected to boost trade between ASEAN and India.
Under the new pact on trade in goods, the ASEAN and India have agreed to lift import tariffs on more than 80 percent of traded products (e.g., electronics, chemicals, capital goods, textiles) between 2013 and 2016.

The Indian government claims that India has managed to safeguard the interests of both its farmers and industry by identifying certain products as Sensitive, Highly Sensitive and products to be put in the Negative List. The ‘Negative and Exclusion’ list contains 489 items, including 303 items of agriculture sector, 81 items of textiles sector, 50 items of auto sector and 17 items of chemical sector. In this, products such as coconut, cashew, vanilla, nutmeg, coriander, cardamom, ginger, turmeric, copra, coconut oil, tobacco, natural rubber, and certain items of textiles have been incorporated. All these products will be kept out of the duty reduction. Products such as tea, coffee, pepper, crude palm oil, refined palm oil have been included in the Highly Sensitive List. Duties on these products will be reduced in a phased manner and brought to zero by 2019. However, duty on these items at no time will be eliminated. On their part, the ASEAN countries too have maintained similar exclusion list from the proposed tariff concessions and eliminations.

To address sudden surge in imports after the implementation of the pact, the FTA provides for bilateral safeguard mechanisms as well. In case of such an occurrence, if it hurts a domestic industry, safeguard measures including imposition of safeguard duties maybe imposed for a period of up to four years. The flexibility to invoke the safeguard measures will remain available for both sides for 7 to 15 years.

The response to the introduction of the new pact has been somewhat mixed so far. Thai Commerce Minister Porntiva Nakasai who chaired the 41st AEM meet, stated that the signing of the FTA serves as a signal to the international economic community that the ASEAN countries and India remain committed to trade liberalization even during the current global economic crisis. According to her, the new pact would be instrumental in bringing about an increase of trade between India and the ASEAN states from $40 billion in 2008 fiscal year to $60 billion by 2016. While echoing Nakasai’s sentiment on the issue, Indian Commerce and Industry minister Anand Sharma stated that the FTA has been signed to take the engagement between India and ASEAN to a new height. He further stated that the agreement with ASEAN is well – balanced and is in harmony with India’s Look East policy. The Federation of Indian Chambers of Commerce and Industry (FICCI) feels that the FTA will give Indian business access to the large ASEAN market.

According to many, the signing of the FTA will help integrating the two globally important economic blocs for mutually beneficial economic gains. ASEAN accounts for 10 percent of India’s global trade and are India’s fourth largest trading partner, after the European Union (EU), the US and China. In recent years, the India-ASEAN trade has grown rapidly in recent years (27 percent Compound Annual Growth Rate or CAGR since 2000) and both the parties have set an ambitious target of achieving bilateral trade of $50 billion by 2010. While on the one hand, through this new pact, India would gain market access for machinery and machinery parts, steel and steel products, agricultural products (e.g., oilseeds, wheat), buffalo meat, auto parts, chemicals and synthetic textiles, the ASEAN, on the other hand, would stand gain market access for its non-agricultural products.

ASEAN seems to be in a much advantageous position than India on this new FTA in goods. However, India is expected to have an edge once the trade agreements on services and investment between the two parties take effect. Both the parties are currently negotiating agreements on trade in services and investment, expected to be concluded by December 2009. India looks forward to access the vast services market of ASEAN. In 2006, while India’s total trade in services was $137.5 billion, the corresponding figure for ASEAN was around $280.9 billion. Similarly, FDI attracted by India during 2007-08 was $24.6 billion while ASEAN member countries attracted FDI worth $60.5 billion in 2007.

The farming community within India, however, does not seem to share the same enthusiasm expressed by the government and the business community. In fact, the All India Kisan Sabha, a prominent farmer’s body, slammed the Indian government for signing the FTA without addressing concerns of the Indian farmers adequately. According to them, the FTA will adversely affect the interests of those farmers cultivating coconut, tea, coffee and pepper. Similarly, it will also create livelihood problems for fishermen and workers who are working in textiles and manufacturing goods industries, as the pact is feared to open the floodgates for cheap imports from ASEAN states and hurt domestic planters as well as manufacturers. Considering that India is characterized by low levels of productivity and exorbitant costs of cultivation, it will be nearly impossible for Indian farmers to compete against cheap imports. An example will help in illustrating this point. Pepper productivity in Kerala is around 320 kg while Vietnam produces 1.2 tonnes and Indonesia 2.3 tonnes per hectare. As a result, the cost of cultivation is much higher in India than ASEAN member countries. Under the circumstance, the reduction of tariff rates will increase import from ASEAN countries and effect steep fall in prices of agricultural crops, adversely affecting Indian farmers.

It is often argued that liberalization of import of palm oil had already hit oilseeds production in India. The collapse of the Groundnut economy in states like Andhra Pradesh resulted in many farmers taking away their lives.

The claim that the FTA provides a bilateral safeguard mechanism to deal with sudden surge in imports has also been criticized as unrealistic as this safeguard mechanism will exist only for a period of up to four years. Besides, one aspect of the so called ‘Negative List’ is that while India is to maintain one consolidated Negative List of 489 items for all ASEAN states, individual ASEAN state can hold a Negative List of 489 tariff lines as per individual states’ sensitivity to Indian imports. This also limits the possibility of exports from India.

Overall, the farming community in India seems to be of the view that by signing the FTA, the Manmohan Singh government is sacrificing the interests of the peasantry, fishing community as well as a large number of workers in textiles and light manufacturing goods industry to please the corporate sector which is very keen to invest in ASEAN countries.

Nevertheless, the Indo-ASEAN FTA is significant for many reasons. Firstly, the agreement marks India’s first real foray into a formidable regional economic bloc. So far, India probably is the only emerging economy which was kept out of any large trade bloc. In the absence of a larger multilateral agreement fructifying at the WTO, it was vital for India to have been a part of such a bloc. Secondly, the inking of the FTA is the first major reformist success of the Manmohan Singh government after his assumptions of office in May 2009. Thirdly, the Indo-ASEAN FTA battle was an acid test for India’s new Commerce and Industry Minister-Anand Sharma. Sharma has a bigger battle ahead with WTO negotiations coming up soon. His shepherding of the FTA deal means he goes into the September Ministerial meeting of WTO (to be held in New Delhi) with good trade conduct on the part of India. Sabotage at the ASEAN FTA would have undoubtedly dented India’s image at the WTO.