Source: Textiles Committee, Ministry of Textiles, Government of India Mumbai

Implementation of the Free Trade Agreement (FTA) with Association of South East Asian Nations (ASEAN) from 1st January 2010, India has achieved an important milestone in pursuance of its objective to expand its economic and political relationship with the neighbouring nations. ASEAN consists of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. The ASEAN-India FTA (AIFTA) is considered a major step of India into the formidable regional trade block of south Asia. Indias engagement with ASEAN started with the Look East Policy in 1991 and became a sectoral dialogue partner in 1992, further upgraded to Summit level in November 2001. A framework agreement on Comprehensive Economic Cooperation between ASEAN and India was signed on 8th October 2003. The AIFTA of trade in goods (TIG) was signed in August 2009.The agreement enshrined progressive liberalization of duty to enhance bilateral trade. Under the agreement each of the partner countries are allowed to keep a small number of products out of the coverage of the agreement and size of those products will not exceed 5 percent of the bilateral traded imports. Since ASEAN is more efficient in some sectors of production such as agriculture, light manufacturing (includes T&C, plastic manufacturing etc), auto and auto components, etc, India resorted to a negative list approach to these sensitive products and without a provision of protection, these industries would be adversely affected.

The macro scenario

The rationale behind the AIFTA is clearly in favour of Indias entry into the formidable south Asian regional trade block which has greater significance in political maneuvering than trade. In the angle of trade, the negative trade balance of India with ASEAN has been perpetuity in the recent years. In spite of the fact that India has preferential trade regimes with Thailand, Singapore and Myanmar separately and/or as a part of the Bay of Bengal Initiatives for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) trade group, the performance of Indian trade has not improved much. India has adverse balance of trade with these partners and over the years, it is worsening (See table 1). The overall Indo-ASEAN bilateral trade deficit during 2007 is around US$15 billion and that too has significantly gone up to this level very recently. In spite of this, economic theory propounds inherent trade creating possibilities of the FTAs by better flow of goods and services between the regions besides helping transfer of technology for better production practices. The combined Gross Domestic product (GDP) of the ASEAN10 is larger than India and has a much larger per capita income of the ASEAN indicating economic development of the later (Table 2). The per capita income (PCI) of Singapore is approximately 38 times of that of India, Brunei Darussalam about 36 times, Malaysia more than 8 times, Thailand about 4 times and Indonesians income is double of the Indians. The combined import of the ASEAN from the world during 2008 is US$ 895 billion about 4.7 fold of the Indian export to the world. Given the economic and development strength of the ASEAN, the FTA between India and ASEAN may trigger a positive trade flow of goods and services in this region. Studies indicate that the trade between India and ASEAN is below its potential (Bhattacharya, R and Mandal Avijit, 2009). A large number of studies are strongly pitching in favour of AIFTA (Sen, Asher and Rajan (2004), Mehta (2005), Yong (2005), Joseph and Parayil (2004), Joseph (2009), Karmakar (2005), Mukherji et al (2003). Though overall gain on account of expanded bilateral trade is predicted, there has been widespread skepticism on trade diversion and sensitivity of some sectors (Agriculture, Textiles, Auto and auto components, Electronics etc) that are vulnerable to the ASEAN imports, the sectors in which the member countries of ASEAN have efficient production systems in place. There is also skepticism that India may not benefit from the tariff liberalization of ASEAN as most members have low prevailing duty and further lowering of duty will not provide enough room for accelerating exports from India (Pal, P and Dasgupta, M (2008)).

Read Full Report

Dr. P Nayak is an expert in Market Research and International Trade. He has been instrumental in creating the trade related capacity building in textile sector in India. An eminent scholar and speaker he has served in various ministries of Government of India and is currently working as the Director in the Textiles Committee, Mumbai in the Ministry of Textiles; a statutory organization of Government of India.