INDIA-ASEAN Trade and Investment Story, and the Road Ahead

Cover Story By Nilanjan Banik

“Evidence of cross border investment and trading activities between ASEAN and Indian firms suggests that there is complementarity, and this partnership is sustainable. The source of complementarity in trading arises as India has demand for edible oil, rubber, wood products, and electrical items.”

This article is about why India needs to have a better trade and investment relationship with ASEAN. Between 2008 and 2013, India’s trade with the ASEAN region increased faster than two of its two largest trading partners, namely, European Union and the United States. There is huge trade potential for India-ASEAN trade to grow. During 2014, India-ASEAN trade as a percent of India’s total trade with world hovered around 10 percent. This figure is around 13 percent for European Union, 8 percent for the USA, and 2 percent for Japan.

In fact, evidence of cross border investment and trading activities between ASEAN and Indian firms suggests that there is complementarity, and this partnership is sustainable. The source of complementarity in trading arises as India has demand for edible oil, rubber, wood products, and electrical items. These are the products which ASEAN economies produce in abundance. Similarly, India can supply pharma products, iron and steel, and precious stones – items of interests for the ASEAN consumers.

However, like any other economic partnership, because of implementation of Free Trade Agreement between India and ASEAN, there will be some gainers and losers – some sectors in which India has comparative advantage will gain whereas sectors where the ASEAN has comparative advantage, India is likely to lose. Table 2, is about the sectors in which India and ASEAN have comparative advantage, and the sectors that India is likely to compete with ASEAN economies.

The encouraging point is that India can still gain substantially by participating in the South-East Asian production network. First, as cost of production is lower in Laos, Cambodia, and Myanmar, it means that Indian firms could gain significantly by investing in these countries. Second, investing in these regions meant a bigger market for Indian firms. Third, Indian firms could evade protectionist measures targeted against their exports if they started exporting from Southeast Asian countries. Fourth, investing in these regions will also ease out some of India’s energy requirements, enabling Indians to access cheaper foreign energy (oil and power) and minerals from Cambodia, Myanmar and Vietnam. Fifth, and more importantly, participating in the South-East Asian production network will enable India to increase its manufacturing base besides creating jobs for its young population.

Additionally, there is complementarity in investment relations. Myanmar has opened up, and provides a huge investment opportunity for Indian firms, especially in oil and natural gas exploration sector. At a government-level, there is a precedence of joint work. In 2002, Government of India launched a Remote Sensing and Data Processing Program, to help Myanmar with weather forecasting, determination of forest cover, and other land use. Indian firms, such as Larsen and Toubro, Adani Port and NTPC Limited can invest in Myanmar with money and technical expertise to build infrastructure, such as container docks and coastal ships, power stations, and cement factories. Indian telecommunication companies such as Bharti Airtel and Reliance Telecommunication, have the expertise for laying down optical fibre cables and telecommunication network, something in need for countries, such as Myanmar, Cambodia and Laos. There are around 17,000 islands in Indonesia. Indonesia is building six economic corridors to become locally integrated and internationally connected. Each of these corridors – Sumatra corridor (known for energy reserves), Kalimantan corridor (known for mining activities), Sulawesi corridor (known for oil and gas exploration), Java corridor, Bali Nusa Tenggara corridor and Papua Maluku island corridor – offer huge investment opportunities for Indian oil exploration and construction firms, such as Oil and Natural Gas Corporation Limited, Reliance, Bharat Heavy Electrical Limited, and Larsen Toubro. Indian companies already have many joint ventures with their Indonesian and Singaporean counterparts. For example, Bajaj Auto has a joint venture for the assembly and production of three and two wheelers. Other Indian companies with significant investment in Indonesia include Aditya Birla Group (Indo-Bharat Rayon), S.P. Lohia Group (Indo-Rama Synthetics), Ispat Group (Ispat-Indo), and Essar Group (ESSAR Dhananjaya). In the case of Singapore, one of the largest trading partners of India in the ASEAN region, joint ventures are mainly in the fields of shipping, aviation, automobile and computer accessories, and chemicals. For instance, Port of Singapore Authority has started investing and developing sea ports in Southern States of India (Tamil Nadu and Kerala). Tata group from India and Singapore Airlines have jointly launched airline named, “Vistara”. Sing Tel has invested in India’s Bharti Telecommunication, and Voltas and Dow Chemical Pacific Limited has set up joint venture for a water waste treatment plant. India’s own urban and infrastructure development has already attracted interests of firms from Malaysia and Singapore.

However, things could have been better. There are considerable elements of red tape and lack of connectivity (read, hard and soft infrastructure) which are undermining India-ASEAN trade relation. Indian policymakers need to invest in both hardware and software-type connectivity/infrastructure. Besides, hardware and software elements, there are problems associated with physical connectivity. Although South Asia inherited an integrated transport infrastructure from the British, this infrastructure was fractured by the partition of India. South Asian countries have seldom given land transit facilities, a necessary condition for developing economic corridors. For the business to flourish, it is also necessary for having easier procedures for doing business. A two prong approach would help. First, reduce red tape and invest in infrastructure. Second is to facilitate growth of services trade – a sector where India has comparative advantage over South-East Asian nations.

Within services, India has a strong comparative advantage in export of computer and information services, other business services such as financial, medical tourism, insurance, etc., and movement of natural persons such as IT professionals and sea farers. Considering the external sector, India always recorded trade surplus in services. In 2014, relative to most other South-East Asian neighbours, India enjoyed a healthy surplus in services trade with the world at large.

An important component for services sector liberalisation has to do with movement of skilled labour. Unfortunately, freer movement of human capital, arguably ASEAN's most important resource has not picked up. Most of the existing labour movement is because of corporate transfers, and not necessarily driven by requirement.

It is to be noted, with respect to labour movement, the commitments from ASEAN member countries are similar to those which are embodied in General Agreement on Trade in Services (GATS). The movement of natural persons in the ASEAN region is presently aimed at facilitating movements of professionals, managers, and technical staffs for intra-corporate transfers (particularly, falling under Mode 4 category).

Mobility skilled labour within ASEAN is promoted through Mutual Recognition Arrangements (MRAs) of professional services. ASEAN agreements encompass movement of professionals related to engineering, nursing, architecture, medicine, dentistry, tourism, geographical survey and accounting. However, such professionals constitute less than 1.5 percent of the ASEAN labour force. In the ASEAN region, countries such as Indonesia, Philippines, Laos, and Myanmar are net exporters of both skilled and unskilled labourers. Whereas, the more advanced economies such as Singapore, Thailand, and Malaysia import skilled labourers.

Notwithstanding, this present economic setup, India can gain. India has an abundant supply of skilled professionals. India has strong comparative advantage in export of computer and information services, other business services such as financial, medical tourism, insurance, etc., and movement of natural persons such as IT professionals and seafarers (See, Table 7). There is scope for deployment of Indian capital in IT and IT-enable services, professional services, and construction and infrastructure development related fields. IT and IT-enable services companies based out of India would be in a position to leverage existing MNC presence as well as local business related demand for new services such as data analytics, cloud based IT services, and process management services. The rise of e-commerce, especially in economies such as Malaysia and Thailand presents an opportunity for Indian IT firms.

India is not a lone case, as many ASEAN countries and others, have similar restrictions in terms of services. A primary reason for this has to do with failure to recognise one another’s degree/certification, and product standards. What is essential is to have an institution for mutual recognition of standards in the India-ASEAN bilateral services agreements. For instance, in spite of India having a services trade agreement with Japan and South Korea, Indian nurses, architects, and even yoga professionals are yet to get market entry. These two countries have not signed any mutual recognition agreements with India honouring educational and professional qualifications. Protests from local pressure groups, such as nurses in Japan, have prevented even the commencement of negotiations, leave alone any agreement. Although the Comprehensive Economic Partnership Agreement (CEPA) with South Korea had sought to allow access to Indian engineers, consultants and other professionals, there has been limited success with recognition of Indian engineering colleges.

When it comes to trade and investment relation, the potential is always there. In conclusion, some specific recommendations are as order:

• Developing connectivity between India and its neighbouring countries;

• Development of industrial parks that would allow Indian Micro Small and Medium Enterprises (MSMEs) low cost options for starting operations in countries such as Myanmar, Thailand, Bangladesh and leading to the development of India centred regional production networks;

• Ensuring Indian private sector participation through various risk mitigation or assurance schemes for such infrastructure development, and making the private sector share some of the risks, but allowing them to take the lead;

• Creating political consensus through active government to government and business to business engagement, and getting North Eastern states, and West Bengal to become active stakeholders in this initiative;

• Ensuring buy-in and effective project coordination among governmental stakeholders;

• Promoting and accepting sub-regional and subsequently regional transit (Formulation of a Transit Transport Agreement);

• Simplification and harmonization of trade procedures with due focus on cross-border trade;

• Promoting use of technology (e-invoicing, e-payment, e-receipts etc.) for encouraging paperless transactions;

• Institutionalizing mechanisms for prioritizing goods in transit to cross border;

• Setting up of single window for customs;

• Mutual recognition of documents like educational degrees, driver’s license etc.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.