India & the world - Articles

During the last few years, the nature and scale of India-ASEAN economic relations have expanded considerably, bringing in new avenues for economic cooperation and further consolidating the ongoing engagement. With total India-ASEAN trade at approximately US$31 billion in 2006-07, the India-Singapore Free Trade Agreement (FTA) operationalized, and negotiations underway on various bilateral (India-Thailand, India-Malaysia) and regional (India-ASEAN) FTAs, India is poised for greater economic integration with ASEAN. While justifying economic logic as the building block of India's Look East Policy (LEP), the expanded and intense economic engagements are symptomatic of (a) global economic trends and (b) emerging trends in the respective economies of India and ASEAN countries.

There are two most obvious trends characterizing the changing Asian economic landscape. First, China and India have emerged as two most important drivers of economic growth in Asia, as evident from their robust annual economic growth of approximately 9 per cent, their big market size with ever-hungry consumers and their manifold increase in FDI outflows. Second, while Asia continues to be one of the largest recipients of global FDI, the continent also registered one of the largest outflows of FDI. According to the World Investment Report 2007, released by the UNCTAD, the continent received US$260 billion in FDI and invested US$117 billion in 2006 in the rest of the world.

An examination of India-ASEAN relations also points towards two distinctive trends, which could facilitate India's greater economic integration and act as important incentives for ASEAN economies towards furthering economic ties with the former. The most obvious trend is the growing gap between India's exports to and imports from ASEAN. While India's trade deficit with ASEAN was a meager US$472 million in 2005-06, it shot up to approximately US$5.5 billion in 2006-07. India's imports from ASEAN countries registered a growth of 66 percent in 2006-07 compared to 2005-06, whereas India's exports only grew by 22 percent between 2005-06 and 2006-07. Such a scenario puts forth a complementary situation pitting India as a consumption driven economy against the export led ASEAN economies.

The above-mentioned complementarity is also evident from the India-Thailand Early Harvest Programme (EHP). Within one year of the implementation of the EHP, India's exports to Thailand grew by around 40 percent, whereas Thailand's exports to India expanded by 120 percent. India as a huge market offers an important incentive for some ASEAN economies (Thailand, Indonesia, Malaysia) in need of external demand given continued slump in their domestic demand since the 1997 economic crisis.

The World Investment Report 2007 identifies another important aspect of the Indian economy - substantial increase in the FDI inflow and equally substantial outflow of FDI led by private capital. India registered total FDI inflow of US$17 billion in 2006, registering more than 150 per cent growth from the previous year. Following a similar upward trend, India's FDI outflow increased by five times in 2006 from the figure of 2005. Interestingly, it is the private companies in India such as Tata Steel, Tata Power, Satyam, Mittal Steel, which have emerged as the main drivers of FDI outflows.

The Indian private investment through mergers and acquisitions has also taken place in the ASEAN region. Besides acquiring the Anglo-Dutch steelmaker Corus Group, Tata Steel has also acquired NatSteel, Singapore's largest steel maker company and two steel rolling mills in Vietnam. Tata Power acquired two Indonesian thermal coal companies - PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia in March 2007 at the cost of US$1.1 billion. Such a trend is also noticeable among other Indian companies, which are expanding their operations in the Southeast Asian market.

However, the scope of India-ASEAN economic relations is still very limited and has, of late, faced domestic challenges. There has been growing resistance from certain interest groups and lobbyists against giving further concession to ASEAN over the issue of India-ASEAN FTA in goods. The fear of severe losses to Indian farming communities and SMEs has gained further ground with the import of palm oil constituting the largest share of increased Indian import from ASEAN. Since the signing of India-ASEAN Comprehensive Economic Cooperation Agreement in 2003, more than 21 rounds of trade negotiations have already taken place but no final agreement is in sight.

Moreover, India has not been able to become part of the East Asian seamless production process, which stretches from Japan in the East to Thailand or Singapore in the Southeast. As a result, India has not received much from the high-end technology application in the manufacturing process. Finally, although both bilateral trade and investment has gone up, they are still insignificant compared to the trade between ASEAN and other East Asian countries such as China and South Korea. Though both ASEAN and Indian economies have experienced large-scale FDI outflow, much of the outflow has gone to the third country, leaving bilateral scale of investment very limited.