India’s FTA with ASEAN signed on 13 August 2009 (FTA) in Bangkok will come into force from January 2010. This FTA is part of the Comprehensive Economic Cooperation Agreement (CECA) between the two sides to integrate the two globally important economic blocs towards mutually beneficial fiscal gains and trade.

ASEAN has been India’s major trading partner for a long time and accounts for about 10 percent of global trade. In the last financial year, bilateral trade between India and ASEAN was more than US$40 billion, and still growing at a compounded annual growth rate of 27 percent since 2000 and it is expected to touch US$50 billion by 2010.

Post FTA Scenario

The FTA will phase out tariffs on more than 4,000 products, agricultural as well as industrial, that account for more than 80 percent of the trade in goods between the two sides. Tariffs on these products would be reduced to zero by 2016 and on nearly 10 percent (500 items) of products on the sensitive track, tariffs will not be eliminated totally but will be scaled down to 5 percent.

The FTA with ASEAN is India’s first-ever arrangement with a trade bloc in which 10 countries with a combined Gross Domestic Product (GDP) of over US$2 trillion are involved. The FTA calls for gradual elimination of duties on items which account for 75 percent of the trade between India and ASEAN. These include electronics, textile, machine and chemical goods. The agreement also provides additional market access to Indian exporters and may fuel growth in bilateral trade and investment, especially those dealing in machinery, steel, agriculture products, auto components, chemicals and synthetic textiles. In addition, Indian manufacturers also get to source products from abroad at competitive prices from ASEAN members.

Strategic

The FTA points to the enlargement of India’s ‘Look East Policy’ (LEP) for engaging multilaterally with ASEAN nations. In a sense, this has finally been achieved with the FTA. From the Indian point of view, the FTA will open up the US$1.1 trillion ASEAN market to Indian exporters and gradually reduce their over-dependence on the West. Therefore, it is expected that this FTA will escalate overall trade turnover between India and the 10-country bloc by over a fourth to as much as US$50 billion.

India’s nearest ASEAN country is Myanmar, with which India shares a 1,643 km-long border. Myanmar links India’s Northeast with that region. So the trade pact is crucial for both India and the ASEAN, especially when global trade continues to shrink; the new multilateral global trade pact under the Doha round of talks continues to be obscure; and exports to the West from both the regions have diminished.

As prescribed by the agreement, tariffs on most of the trade between India and ASEAN will be cancelled by 2016, while duties on 489 ‘very sensitive’ products will be retained. The agreement for duty reduction will cover items such as pepper, coffee, tea, rubber, palm oil and cashew. This duty cut has raised fears in many domestic quarters, who call it disastrous for states such as Kerala at a time when an agrarian crisis is unfolding.

Domestic Criticism

There is also criticism that India was too liberal with the FTA. India’s trade with ASEAN is 9.6 percent of its global trade, while ASEAN’s trade with India is only 2 percent of its global trade. The points of criticism are that even among ASEAN members only less than 5 percent trade takes place at zero percent duty. Considering the complex Rules of Origin (ROO), certification requirements and paper work, the importers prefer to pay the duty and expedite clearances rather than opt for duty concessions.

Labour organisations, farmers, civil society organisations and experts have cautioned the Government against implementing the FTA in its present form. Protestors have highlighted the adverse impact on Kerala’s economy of the liberalised import of rubber, tea, pepper, marine products and edible oil into the country and warned of a million job losses in Kerala’s fishing industry, because of liberalised sea food imports. They argue that duty-free or low-duty imports would dampen domestic prices, hurt the fishing economy and hit the livelihood of workers and traders linked to the marine sector.

Safeguards

On the other hand, the Government of India argues that India’s safeguards can take care of the sensitivities of the agriculture sector through the protection of a number of agricultural commodities on the Negative List which includes items produced in Kerala such as natural rubber, areca nut, coconut, cashew nut, cardamom, fish and shrimp.

The Government battles the criticism with the stand that the agreement provides for adequate safeguard mechanisms to protect bilateral trade in case of a sudden surge in imports in future, where measures like imposition of safeguard duties up to 4 years.

The Commerce Ministry has pointed out that duty cuts on highly sensitive farm goods such as black tea, coffee, pepper, crude palm oil and refined palm oil would have a longer implementation period until December 2019; tariff cuts will be spread across 10 years. At the end of the gradual cuts, the final duty on sensitive farm products will be in the range of 37.5 percent to 50 percent. Furthermore, India has 489 items, mostly farm products, on the negative list that would not be subject to any tariff cuts. Thus, the current applied rates for most sensitive products will continue to remain lower than the bound rates that will apply after the full implementation of the FTA.

Industry’s Stand

The domestic industrial bodies hope that this FTA will become meaningful, only if it covers the services and investment sectors too. Indian professionals and service providers hope to gain greater market access to the ASEAN region once the FTA in services come into effect. At present, the balance of merchandise trade between the two regions is tilting towards the ASEAN. So services and investments are to be incorporated into the treaty to offset imbalance, in whatever manner.