India and the 10-member Association of South-East Asian Nations (ASEAN) grouping have concluded an agreement in August 2008 for a Free Trade Agreement ((FTA) to break duty barriers for goods in the 1.5 billion people strong market.

Accordingly, the FTA in goods will be signed at the ASEAN-India summit in Bangkok in December. The Economic ministers of ASEAN countries have welcomed the conclusion of the Trade in Goods (TIG) agreement, which took six years of negotiations.

Kamal Nath, India’s Commerce and Industry minister said: “The countries of East Asia are important drivers of growth with large consumption to drive global economies”.

Negotiations for trade in services and investment, as a single undertaking will begin soon, according to the joint statement issued by the leaders after the consultations. Singapore would coordinate for the services aspect while Malaysia would take care of the investment part.

Says Singapore’s Trade Minister Lin Hng Kiang, “India is ready. The onus is on ASEAN to gather its team and start negotiations on services and investment”. The talks on services and investment are scheduled to wind up by next year-end.

Indonesian Trade Minister Marie Pangestu said, “ASEAN and India had come to a level of understanding never experienced before.” She said the FTA in goods paved the way for more economic cooperation between the two sides. “This will lead to a greater integration between ASEAN and its dialogue partner,” the minister added.

Concerns

According to observers, some segments of the Indian industry as well as farmers, especially plantation owners, are still wary about implications of the FTA in terms of imported competition. But the government is confident that the overall benefits will outweigh any possible negative impact in some sectors.

The FTA will provide Indian trade and industry with access to a large and vibrant market in a region that is increasingly prosperous. This market is bound to expand further as the Asean trading bloc is already in talks with countries like China, Japan, South Korea, Australia and New Zealand for free or preferential trade pacts. If some of these materialise, it would pave the way for the eventual creation of a huge European Union-style common market.

India’s Strategy

Says G.K. Pillai, India’s Commerce Secretary, “More than economic benefits, the FTA would ensure a political advantage for India in linking with countries ranging from Myanmar to the entire East Asia. Besides that, ASEAN has an FTA with Japan, China and Korea and is due to launch one with New Zealand and Australia shortly. Once the FTAs of ASEAN with these major countries in Asia are in place, India’s engagement with ASEAN market would disappear if there had been no Indo-ASEAN FTA”.

Adds Pillai, “While every other country enjoying FTA with ASEAN would pay zero duty, India will end up paying MFN duty” and hence, the FTA is essential to maintain “our market share and it would be in the fitness of things that India also entered into an FTA with ASEAN.”

The FTA also needs to be viewed against the backdrop of the breakdown in the Doha round of multilateral trade talks and affirms India’s look-east policy. The scope of the agreement is likely to widen in the future as ASEAN begins negotiating on trade in services and investment flows.

Import tariffs on some 80 per cent of the goods traded between the signatory nations will be reduced to nil in a phased manner. This will benefit sectors like steel, some types of auto components and engineering goods and benefit India. There is little doubt that India has conceded some ground to accommodate the specific demands of countries like Vietnam, Indonesia and Malaysia.

The ASEAN members also showed flexibility from their earlier stand on India’s long negative list of goods that are to be free from any mandatory tariff cuts. The agreement permits India to retain a negative list of 489 items including products from agriculture, machinery, automobiles, chemicals, plastics and the like and, in addition, an even longer list of 606 sensitive goods identified for only partial duty reductions.

Agri-commodities Bother India

The main worry of India is with regard to items like tea, coffee, pepper and spices where tariffs will have to be slashed from the almost 100 per cent today, gradually over the next 10 years. In most other sensitive items, including palm oil, the reduction will only be in the bound rates, which are much higher than the actual tariffs that are applied.