The India-ASEAN services and investment agreement is expected to provide a fillip to the growing bilateral trade, which currently stands at around $80 billion, up from $40 billion in 2009, prior to the goods FTA being signed, and is expected to touch $100 billion in 2015. The ASEAN is India’s fourth-largest trading partner after the EU, the US and China.
The FTA in services and investment assumes significance as intra-regional trade offers better potential, especially at a time when global merchandise trade is slowing. It is well known that the dynamism of services sector has contributed significantly to India’s growth story. Also, in recent years, India has not only attracted foreign direct investment, but has also emerged as a significant investor of outward FDI. Given the importance of both services and investment to India’s liberalisation strategy, the completion of this FTA is timely and relevant.
India’s key interests in services trade has always been in Mode 4, pertaining to the movement of Indian professionals, and the recently concluded FTA is expected to enhance the flow of skilled professionals from India into the region, which aligns with India’s economic interests. The ASEAN market also offers significant investment opportunities for India, particularly in areas like information and communications technology, automobiles, engineering and pharmaceuticals. It is, of course, not a one-way street, as ASEAN countries have strengths in construction services, engineering services, shipping and transportation services and the like. With regard to investment flows into the Indian market, prime sectors for the ASEAN include energy, transport and logistics.
Given the heterogeneity of ASEAN countries, the agreement is not “clean”, in that it follows a 8+1+1 pattern that implies there will be three separate arrangements, one pertaining to eight ASEAN members and two concerning Indonesia and the Philippines respectively. The specific terms for these two countries are due to the fact that services represent a vital share of their economic growth, and there are concerns that they might lose more than they gain in competing with India’s strong services sector. While both Indonesia and the Philippines are worried about competition from India in IT services, it appears to be a bigger concern for the Philippines, with more than half of its workforce engaged in outsourcing.
Given the individual concerns in ASEAN, India has also been negotiating bilateral trade agreements with individual members. It already has bilateral FTAs with Singapore and Malaysia and is in the process of negotiations with Indonesia and Thailand. Notably, the Comprehensive Economic and Cooperation Agreement (CECA) with Singapore (operational since 2005) has played a pivotal role in fostering economic relations between the two countries, and has resulted in Singapore becoming India’s largest trade and investment partner in the ASEAN block, with the country also emerging as a key offshore logistics and financial hub for many Indian corporations. While the CECA with Singapore primarily covers provisions for liberalisation in trade in goods and services, the CECA with Malaysia (signed in 2011) is relatively more limited in scope.
India also has Comprehensive Economic Partnership Agreements (CEPAs) with other east Asian economies such as Japan and Korea. The CEPAs with Korea and Japan, in comparison to India’s other FTAs in the region, go beyond the traditional provisions of tariff liberalisation, services, investment and trade facilitation to cover issues of government procurement and competition policy, which are fundamental to furthering holistic economic engagement through FTAs.
At a time when the APEC countries (of which India is not a member) are discussing the possibility of creating a Trans-Pacific Partnership (TPP) involving the US and countries in Asia and Latin America, India’s FTA with the ASEAN is welcome, given that some studies have suggested that it is on the whole trade-creating rather than diverting. However, this and future such FTAs cannot be seen as substitutes for much-needed domestic reform, as well as other facilitation measures, to create a better overall trading environment if India is to come close to emulating the trading success of its East Asian counterparts.
Co-authored by Sasidaran Gopalan. Ramkishen S. Rajan and Gopalan are professor of international economic policy and research scholar, respectively, at George Mason University, US, firstname.lastname@example.org