Column

Mukul Asher & Amitendu Palit

The India-ASEAN Free Trade Agreement (FTA), more correctly the Preferential Trade Agreement (PTA), will reportedly be formalised at the India-ASEAN (for Association of Southeast Asian Nations) summit in Bangkok in December 2008. It aims at greater substance to India’s ‘Look East’ policy initiated in 1992. It also represents ASEAN’s recognition that a deeper engagement with India can lend greater resilience to its economies.

The details of the magnitude of tariff reductions on different products, negative lists, rules of origin and other aspects of the PTA are not yet public. But the signal from the PTA announcement augurs well.

The merchandise trade between India and ASEAN has grown from only US$2.3 billion in 1991-92 to US$38.4 billion in 2007-08. Despite the acceleration since 2003, bilateral trade is only 2.1 per cent of India and ASEAN’s total trade with the rest of the world. For India, there is a need to increase this share, as well as address its large trade deficit with ASEAN, which has increased to US$6.9 billion in 2007.

Such a reduction, however, must be undertaken in a market-consistent and efficient manner. ASEAN is a valuable supplier of energy, forest and other resources to India. It is also an important source of intermediate inputs and capital goods essential for India’s competitiveness.

This will also reduce the current asymmetry in trade. At present, ASEAN accounts for only a tenth of Indian exports and 9.5 per cent of Indian imports. ASEAN’s merchandise trade with the rest of the world is much higher than its trade with India. Addressing this asymmetry will give India better leverage with ASEAN.

Larger flow of investments by Indian companies in the ASEAN region, and by domestic and multi-national companies (MNCs) based in ASEAN in India will deepen market-based integration while addressing India’s large bilateral deficit.

India and ASEAN’s GDP at market exchange rates is roughly similar. The combined GDP in 2007 was US$2.4 trillion, out of which India’s GDP was US$1.1 trillion. But ASEAN’s per capita income at US$2,277 is slightly more than double that of India’s (US$1,025). It is this difference in per capita income that India must rely on to boost its exports to the region and reduce trade deficit.

The effects of the PTA will depend on two crucial factors. The first is the details of the agreement, as the fine print may often mitigate the impacts.

Second, the euphoria over the signing of the PTA should not divert attention from effective implementation with low transaction costs. The ASEAN Free Trade Agreement (AFTA) has under its purview only 5 per cent of total intra-ASEAN trade, which is a quarter of ASEAN’s global trade. Many businesses do not utilise AFTA as transaction costs are higher than the benefits.

So, both India and ASEAN need to ensure implementation integrity and low transaction costs. India should strengthen its trade-monitoring mechanisms including enhancing surveillance and commercial intelligence systems both within India and in individual ASEAN countries. India should continue to enhance monitoring and strategic functions of its Electronic Data Interchange (EDI) and build requisite human resources. As India is set to introduce a comprehensive Goods and Services Tax (GST) by the beginning of the next decade, these steps will also assist in its implementation.

To strengthen commercial intelligence in ASEAN, the trade documentation and reporting procedures of key ASEAN countries must be understood. India-ASEAN PTA must also be made consistent with the bilateral agreements which are already on between India and Thailand and India and Singapore.

India also anticipates commitments from ASEAN in commercial services as the relative market access gains in the goods PTA are expected to be greater for ASEAN.

However, ensuring that neither side impinges on each other’s core interests is essential for Asian economic integration.

Mukul Asher is professor of Public Policy, National University of Singapore; Amitendu Palit is visiting research fellow, National University of Singapore