In 2003, India and ASEAN agreed to start negotiations for establishing a FTA. Three years later, the FTA is far from reality. While there are problems, the Fifth ASEAN-India Summit kept alive hopes for future negotiation because both sides showed some flexibility. There are hopes now for finalization of a FTA by July 2007 that would create a large market of 1.5 billon people with a combined GDP of US$1.8 trillion. This would supplement India's foreign trade policy which aims to achieve a target of 2 per cent share in world trade by 2009.

After the deadlock in the Doha round of WTO talks, regional trade agreements are the next best option before India. However, the regional FTA in South Asia (SAFTA) is limited in its potential as the members have low GDP and their trade baskets are almost the same. Thus, a FTA with ASEAN becomes essential for India.

China has signed a FTA for services with ASEAN, which is a step towards the establishment of ASEAN-China FTA by 2015. Due to the delay in establishing a FTA with ASEAN, India is lagging behind China in tapping the trade opportunities available in Southeast Asia.

However, the ASEAN is a group of ten nations and for the success of an agreement it is necessary that interests of each country be taken into account. Against this background, despite the complementary nature of the economies of India and ASEAN, India has had a direct conflict of interest with some ASEAN members over particular issues like palm oil with Malaysia and Indonesia, and tea with Vietnam. Therefore, FTA negotiations have become all the more complicated.

India's high duty on sensitive items like palm oil, tea, and pepper has emerged as one of the main obstacles. Palm oil is the most crucial with India having a clash of interests here with Malaysia and Indonesia. Palm oil accounts for 20 per cent of India's imports from ASEAN and around 99 per cent of this palm oil comes to India from Malaysia and Indonesia. Although domestic production in India is much less than the demand, farmers do depend on palm oil production in states like Kerala. Therefore, to protect their interests India levies high duties on this commodity. It is not possible for India to bring it down drastically because this economic issue has domestic political implications too. The president of the Congress (I), Sonia Gandhi, has cautioned that in the negotiations for the FTA the interest of the farmers should not be compromised. ASSOCHAM has also expressed concerns regarding trade in agricultural commodities.

The other stumbling block in the India-ASEAN FTA is the issue of the negative list. The items under the negative list are excluded from tariff cuts. Both sides have their negative lists but their size has created a widening gap in the approaches of India and ASEAN towards each other.

In the fifth summit, ASEAN accepted India's offer of a negative list of 490 items and India responded by agreeing to cut the tariff on four sensitive commodities by 50 per cent by 2022. In contrast to its previous stand, India is also considering the removal of the five-year moratorium on duty cuts over these commodities after the establishment of the FTA, if ASEAN is ready to accommodate India on other issues like reduction of items in ASEAN's negative list. Another positive development is that both sides have agreed to reduce their tariff on the 700 items from 0-5% till 2018 with the remaining items being finalized through further negotiations so that an FTA can be established by July 2007.

India has adopted a cautious approach due to its previous experiences with FTAs with Sri Lanka and Thailand. The FTA with Sri Lanka hurt the interests of farmers in south India. With Thailand, although India's exports increased, those from Thailand increased much more. This FTA also created problem in India because Japanese subsidiaries in Thailand became the major beneficiaries of the FTA.

However, negotiations on the India-ASEAN FTA are not a zero sum game. A deadlock in the negotiations is not in the interests of either. The main reason behind the delay in FTA negotiations is that both sides are trying to calculate the cost of side payments they would have to pay for mutual cooperation. So the successful culmination of this FTA depends on how both sides adjust their costs. In the case of India, this side payment comprises the interests of the domestic farmers. It implies that duty reduction should be made in a phased manner while compensating Indian farmers through special packages or subsidies. Despite the problems in the negotiations, the FTA is nevertheless, a win-win proposition for both. This FTA could be the building block for a long lasting economic relationship between India and ASEAN and the means by which the Southeast Asian "arc of advantage" along with India can be converted into a "sphere of prosperity."