What is behind India and ASEAN’s decision to review a 2010 FTA agreement?

Photo: ASEAN Secretariat

At the 16th ASEAN Economic Ministers (AEM)-India Consultations, an agreement was reached for a review of the free trade agreement (FTA) between the two sides. This will be the first review of the pact in a decade.

By Maegan Liew

At a meeting between Economic Ministers from the ten ASEAN member states and the Minister of Commerce and Industry of the Republic of India in Bangkok last month, ASEAN members agreed to India’s request to review the ASEAN-India Trade in Goods Agreement (AITIGA).

The intention is to simplify the FTA, which came into effect in 2010, by making it more user-friendly and facilitate Business-to-business (B2B) trade. A Joint Committee will be set up to initiate the review and officials tasked to work on the details of the review are expected to submit an update at the 17th AEM-India Consultations.

India has not seen favourable results from its FTAs with ASEAN and the rest of the world

Rising unhappiness among Indian businesses over existing FTAs has prompted the Department of Revenue to revisit the agreements. India’s trade imbalance has doubled since 2011, hitting a record high of US$176 billion in the 2018-19 financial year.

A trade deficit, which occurs when countries import more than they export, can lead to currency devaluation (the rupee is already Asia’s worst-performing currency) and inflation. In India, there is a widespread perception that cheap foreign imports, particularly from China, are harming local businesses and fuelling the trade deficit.

India’s Ministry of Finance believes that shortcomings in the nation’s FTAs are creating the trade imbalances. Growth of Indian exports to FTA partner countries and non-partner countries has been worryingly comparable. Today, India’s FTAs contribute to 11% of the country’s total trade but make up 23% of India’s trade deficit. Of the FTAs with significant trade deficits for India, five are with ASEAN member states.

According to Commerce and Industry Minister Piyush Goyal, India has also extended requests to Japan and South Korea to review their FTAs with India.

In 2003, a Framework Agreement on Comprehensive Economic Cooperation between ASEAN and India was reached to establish an ASEAN-India Regional Trade and Investment Area (RTIA), which would provide a basis for subsequent FTAs covering goods, services and investment.

The first of these, and the free trade pact presently under scrutiny is the ASEAN-India Trade in Goods Agreement (AITIGA), which was signed in 2009. The ASEAN-India Trade in Services Agreement was ratified by all parties in 2018. Efforts for the full ratification of the ASEAN-India Investment Agreement are on-going.

ASEAN-India economic relations have grown, but India is missing out on its share

Economic cooperation between India and ASEAN has grown since the AITIGA came into force in 2010. Trade between the two sides increased by more than 37% between 2011 to 2012. On average, trade between ASEAN and India has grown at an annual rate of 23% over the past decade.

On the sidelines of the ASEAN-India Summit, Indonesian President Joko Widodo held a bilateral meeting with Indian Prime Minister Narendra Modi at Taj Diplomatic Enclave Hotel in New Delhi on Thursday, January 25, 2018.
Photo: President of Indonesia

Today, India is the sixth-largest trading partner of the Southeast Asian economies. Two-way trade in goods between ASEAN nations and India reached US$80.8 billion in 2018, a 9.8% increase on 2017 figures. Up to 37% of foreign direct investment (FDI) inflows into India come from ASEAN countries. In 2018, this amounted to US$16.41 billion. Among ASEAN Dialogue Partners, India is also ASEAN’s sixth most significant source of FDI.

However, for India, imports have risen at a much higher pace than exports. While Indian exports to the 10 ASEAN member states grew by 9% year on year, hitting US$37.4 billion in 2018-19, Indian imports grew at 25% to reach US$59.31 billion. Policymakers believe that existing FTAs are detrimental to India’s manufacturing sector, which is the target of New Delhi’s ‘Make in India’ initiative, designed to boost manufacturing growth and job opportunities.   

In its trade with ASEAN, India has moved to eliminate tariffs on up to 75% of 12,000 tariff lines. A report from the National Institution for Transforming India (NITI Aayog) found that this had led to the trade balance worsening in 13 out of 21 sectors, including textiles, leather and minerals.

Procedural issues in ASEAN countries and lax implementation of Rules of Origin (ROO) norms have allowed the routing of cheap goods through ASEAN countries into India. This is among the primary causes of the rising trade imbalance with ASEAN nations, as non-FTA partners (including China) route cheap products into India through the India-ASEAN FTA. 

India seeks to review its bilateral FTAs as it sits on the fence on RCEP

The review of the ASEAN-India FTA comes as negotiations for the Regional Comprehensive Partnership Agreement (RCEP), a proposed FTA between the 10 ASEAN member states and six other regional partners (Australia, China, India, Japan, Korea and New Zealand), persist.

The parties have been unable to reach a deal since negotiations began in 2012. India’s hesitance to accept the RCEP’s tariff requirements has become a primary obstacle to negotiations. This reluctance emanates from the trade deficit India already runs with ASEAN and the partners of RCEP which has risen from US$9 billion in 2005 to US$83 billion in 2017.

India is reluctant to grant substantial market access to China, with which it has a $60 billion trade deficit, accounting for over 60% of India’s trade deficit with members of the proposed RCEP.

With RCEP requiring tariff eliminations beyond what was negotiated under AIFTA, India’s concerns are mounting.

Can India ‘Act East’ in the Indo-Pacific?

At the Singapore Symposium 2019 held in Mumbai in August, Singapore’s Minister for Home Affairs and Law K. Shanmugam warned that India could face a “very stark” future outside RCEP. His visit to India took place as GDP growth in the country dipped to a six-year low.

RCEP will potentially be the largest economic bloc in the region, and India must make its call. The review of ASEAN-India FTA can work towards allaying India’s concerns over its trade interests – but it should not be seen as a substitute for RCEP.