India-ASEAN FTA: Gap Between Expectation and Reality

05 Sep, 2014    ·   4644

Aparupa Bhattacherjee analyses India's failure to the sign the Free Trade Agreement with the ASEAN nations, and its macro and micro implications 

Aparupa Bhattacherjee
Aparupa Bhattacherjee
Research Officer
Indian External Affairs Minister Sushma Swaraj’s maiden official visits to Southeast Asian countries have highlighted India’s increasing thrust towards its Look East Policy (LEP). During her visit to Vietnam, she emphasised that India should “Act East” instead of simply “Look East.” India, under the new leadership of Prime Minister Narendra Modi, has generated expectations of greater cooperation of trade and investments in the nature of its foreign policy. Modi and Swaraj’s visits to the neighbouring countries such as Bhutan, Bangladesh, Nepal, Myanmar and other Southeast Asian nations have added to this expectation.

However India’s last minute failure to sign the Free Trade Agreement (FTA) on services and investment with the ASEAN countries has raised questions regarding the newly-generated expectation. Is the new government justified in suspending the process at the last minute? Will this impact the expectations that the new government generated?

India-ASEAN FTA: A Brief Primer
India and the ASEAN signed the FTA on goods, and was operationalised in 2010. The FTA on services and investment was to be signed by the finance ministers of the 10 ASEAN countries and India in the ASEAN Economic Ministers Meeting that was held in Myanmar on 27 August, 2014. This was a much-awaited agreement and had it been signed, would have provided greater opportunity to Indian businessmen and service sectors in the Southeast Asian countries. However, India decided to postpone signing this agreement. The Minister of State (independent charge) for Commerce and Industry, Nirmala Sitharaman, cancelled her three-day visit to Myanmar at the last minute. She stated that her trip had to be cancelled because her presence at the launch of Modi’s Pradhan Mantri’s Jan Dhan Yojana on 28 August, was mandatory. Sitharaman is the in charge of the incumbent government’s aforementioned new scheme that intends to provide every Indian household with a bank account and insurance coverage.

It is surprising that Sitharaman took till the last moment to realise that her presence for the launch of this scheme was essential – despite the fact that both events had been scheduled much in advance. There could be two reasons for her absence: First, India, under Modi’s leadership is not confident of signing the FTA at this juncture, and is buying time. As economist Dr. Amita Batra states, it is possible that “India is re-evaluating the FTA and the gains from it for the country.” The government definitely sought more time to study the pros and cons of the agreement.

Second, as has been highlighted by the event, there exists a problem of communication gap between the Indian Finance Ministry and the External Affairs Ministry (MEA). Swaraj was vocal about the significance of the aforementioned FTA in both the meetings with her ASEAN counterparts, as well as in other multilateral meetings. It was echoed by Secretary (East), MEA, Anil Wadhwa, in the official statement which said the signing of this agreement will signal India’s commitment to achieve the goal of $100 billion (presently $80 billion) worth trade with the ASEAN by 2016. However, within hours of Wadhwa’s statement, Sitharaman cancelled her visit, making evident the MEA’s cluelessness of the cancellation.  Modi, in his Independence Day speech, had stated that he will emphasise on ensuring that different ministries work in cohesion with each other, but the aforementioned event indicates otherwise.

The Big Picture
The FTA on services and investment is not the only agreement India hasn’t signed yet. India also refused to sign the World Trade Organisation’s Trade Facilitation Agreement (TFA). India has delayed signing the TFA because of its objection to a clause that says farm subsidies cannot be over 10 per cent of the value of the agricultural product – which contradicts India’s Food Security Act. 

The delay in or averseness to signing these agreements will impact India’s image on the global economic platform. India already spoiled its reputation with its dismal investment levels in Myanmar. Myanmar’ Union Minister of Information, Ye Htut, publically expressed Naypyidaw’s unhappiness over the lack of Indian investment in the country. As rightfully blamed, Indian investors only visit Myanmar but are not interested in investing in the growing economy.  India has also garnered criticism due to the delay in completion of its projects, the Kaladan Multi Modal Project, and the India-Myanmar-Thailand Trilateral Highway Project. Furthermore, most ASEAN countries have blamed India to be import-heavy which was noticed in the FTA on goods with these countries. In fact, India’s trade with Myanmar too is import-heavy on India’s behalf. India depends on Myanmar for importing wood and pulses.

The new government has created high hopes of India’s proactive economic involvement with its immediate neighbours and the Southeast and East Asian countries. Prime Minister Modi’s recent Japan visit has further increased expectation from the New Delhi. India, therefore, has to undertake extra efforts to make these expectations into a reality.