Trading across the Bay of Bengal

Issue 24 - Mar 2009

Mukul G Asher & Amitendu Palit

INDIA’s LOOK East Policy (LEP) initiated in 1992 is set to enter a new phase with the signing of the India-ASEAN Free Trade Agreement (FTA). The FTA-more correctly the Preferential Trade Agreement (PTA)–is expected to be formalised at the next India-ASEAN summit. The formalisation, which was expected in December 2008, has been delayed due to political developments within ASEAN, particularly in Thailand, which is hosting the summit.
The indications are that notwithstanding the ongoing global economic crisis, the agreement will be signed towards end of April 2009, after the ASEAN summit involving the dialogue partners. The agreement is a milestone in India’s and ASEAN’s efforts to construct a Regional Trade and Investment Area (RTIA). The RTIA aims to create a framework enabling an integrated market for goods, services and capital flows between India and ASEAN.
India’s economic engagement with South-East Asia has expanded rapidly since the early 1990s. Merchandise trade between India and ASEAN has grown from US$2.3 billion in 1991-92 to US$38.4 billion in 2007-08. Bilateral trade has become increasingly diversified in terms of commodity composition. Moreover, an increasing proportion of the trade is taking place directly between India and individual ASEAN members, thereby lessening Singapore’s transshipment role. The direct linkages are essential to expand the volume of trade, and to reduce information and perception gaps between India and the individual ASEAN members.
Acceleration in India-ASEAN trade coincided with the onset of a robust period of expansion for the global as well as the Indian economy. Bilateral trade with ASEAN currently constitutes 9.4 percent of India’s total. India is keen on increasing this share, apart from addressing its large merchandise trade deficit with ASEAN, which stood at US$6.9 billion in 2007. While information on services trade balance is not available on a disaggregated basis, this balance is also likely to be positive for ASEAN, primarily due to its greater competitiveness and external orientation in tourism, transport and financial sectors.
The negotiated PTA involves only trade in goods. Details of the extent of tariff reductions on different products, negative lists, rules of origin and other aspects of the PTA are not yet in public domain. It is encouraging that both sides have successfully overcome contentious issues faced during negotiations.
ASEAN is an important source of energy, food, forest and other resources for India. India can achieve significant economies of scale and scope by securing larger share of ASEAN’s markets for intermediate inputs and capital goods. There is also considerable scope for further improving connectivity and density of relations with Indonesia and Vietnam, two of India’s major trade partners in ASEAN.
India has strong commercial and strategic synergies particularly with Indonesia. Apart from being two of the world’s most populous democracies, India shares a long maritime boundary with Indonesia. The two countries can collaborate effectively in securing sea lanes through the Indian Ocean. Both countries may also take the lead in encouraging moderate Islam where both India and ASEAN have strong stakes.