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Fast-Growing Trade Deficit Spurs India to Renegotiate ASEAN FTA

ASEAN agrees to review of 10-year-old agreement in light of India's concerns over supposed unequal benefits.

Photo: Crate expectations: India’s exports to its ASEAN partners have not enjoyed the anticipated growth. (Shutterstock.com)
Crate expectations: India's exports to its ASEAN partners have not enjoyed the anticipated growth.
Photo: Crate expectations: India’s exports to its ASEAN partners have not enjoyed the anticipated growth. (Shutterstock.com)
Crate expectations: India's exports to its ASEAN partners have not enjoyed the anticipated growth.

The 10-year-old Free Trade Agreement (FTA) between India and the ASEAN bloc is to be reviewed. The move, a long-term objective of the Indian government, follows growing concerns that both parties are not benefitting equally from the pact. In particular, India maintains that, while its level of ASEAN-origin imports has soared since the deal was signed in 2010, its own level of exports to members of the Southeast Asian bloc has only enjoyed comparatively modest expansion.

India's concerns are, indeed, borne out by a study published by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) in July this year. This showed that between 2005 and 2016, India's exports to ASEAN member nations increased to US$25.2 billion from $10.41 billion. While this may, at first sight, appear commendable, the figures from the ASEAN side of the equation tell a different story.

Over the same period, the ASEAN bloc's exports to India almost quadrupled to $39.84 billion from $10.81 billion. According to ASSOCHAM, India's exports to ASEAN had a compound annual growth rate (CAGR) of about 9.2%, while the corresponding ASEAN-India export CAGR was 14%.

The upshot of this was that, over the 10-year period, India's deficit with its ASEAN trading partners surged to $14.6 billion from $0.5 billion. At the same time, while the ASEAN share of India's total imports increased to 10.5% from 7.3%, in 2015-16, India's share of total ASEAN imports declined to 9.6% from 10.1%.

Concern was further nurtured by recent research from Niti Aayog, the government's sustainable development think-tank, which showed that India's trade deficit with ASEAN countries was $10 billion in 2017, double the $5 billion recorded for 2011. In terms of the latest figures, the trade deficit for the current year is expected to be $22 billion, compared with 2018's $13 billion.

Overall, the growing trade gap is largely seen as down to many Indian exporters being deterred from taking advantage of the ASEAN FTA agreement by the complexity of the regulatory process. In light of this, one of the key demands from the Indian renegotiation team is that the terms of the treaty should be simplified and made much more user-friendly.

It is also expected that India will want to raise a number of its longstanding concerns over various breaches of Rules of Origin protocols on the part of several of its ASEAN partners. At the same time, it will also be looking for greater liberalisation on the trade in services front, an area where India is seen as particularly strong. While such a clause was in the original agreement, it is believed that, to date, little progress has been made in terms of delivering on it.

The need to renegotiate the treaty has become particularly pressing of late due to the poor performance of the Indian economy overall. This has seen its level of external trade drop dramatically, while its once rapid economic expansion has slowed notably. This has also threatened to undermine the Make In India strategy, the key element in the government's commitment to overhauling and modernising the country's manufacturing sector.

With the 10 ASEAN nations having now assented to a formal review of the FTA, the Indian government has appointed a taskforce of senior ministers to present its case for the requested changes. It is believed that this will be submitted during the next round of ASEAN Economic Ministers-India Consultations.

Mitra Dave, Mumbai Consultant

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