India looks to East for market opportunities

The global economic crisis has led many governments into adopting, or at least considering, protectionist measures. At such a time, it is refreshing to see India signing a trade pact with the Association of Southeast Asian Nations (ASEAN), one which had been under negotiation for six years. To be sure, this is not a game-changing moment in global trade: bilateral trade between India and ASEAN is relatively small by international standards; national parliaments will have to approve the pact; and like many trade liberalisation measures, domestic lobbies have ensured that national champions are protected. But it remains a remarkable achievement of perseverance and sends a strong, positive signal. The trade accord has been in the making for a long time. India liberalised its economy in 1991 and within a year embarked on a "look East" policy to woo East Asian capital to India and forge stronger economic ties with the countries that were at that time dynamic, growing economies - the object of global envy and the model pupils of the World Bank-aided export-orientated model. East Asia was known for being an economic miracle. India sought membership of the Asia Pacific Economic Co-operation (APEC) forum and waited at the doorstep of ASEAN for stronger ties: sectoral partnership; dialogue partnership; and a seat in the ASEAN Regional Forum. (Those came, but took their time). India had hoped for an easy ride, as there are ancient ties between the regions. Indian influence in the region is palpable - witness the Cham empire of Vietnam, the temples of Borobudur, Pagan and Angkor Wat, the spread of Buddhism, Hinduism and Islam, the influence on dance and literature, cuisine and culture, and even languages. But ASEAN remained unmoved. Its anxiety was manifold. ASEAN, it must be remembered, was a creature of Cold War politics, created in 1967 as a pro-western alliance to prevent South East Asian nations succumbing to communism. India, ostensibly non-aligned, was considered to be part of the wider bloc of nations leaning towards the Soviet Union. Then, more specifically, India recognised the Vietnamese invasion of Cambodia to get rid of the murderous Pol Pot regime, which ASEAN had backed because of the region's concerns over communist expansion. India didn't look kindly at Sri Lankans toying with the idea of closer ties with ASEAN. Some ASEAN leaders raised concerns over bringing India into its fold in any way, because then Pakistan would be interested as well, changing the fundamental character of the regional grouping. What ASEAN had was new-found wealth, and the perception that it had got its economic fundamentals right. Its per capita income, for example, is nearly double that of India, no doubt skewed by two countries with small populations and very high GDPs - Singapore and Brunei. The bloc's combined GDP is more than US$1.5 trillion (Dh5.51tn) and its population 600 million; India's GDP is more than $1tn and its population 1.1 billion. ASEAN felt it had the bargaining power. Then the Asian economic crisis of 1997-1998 changed its mood. It realised that investments were headed towards India and China, and unless it developed a strategy to co-exist with both, and acted nimbly, its economic potential would not be met. ASEAN had to become more competitive and embrace the opportunities that India and China represented. And so, political misgivings aside, bilateral trade began to grow, from $2.3bn in 1991-1992 to $38.4bn in 2007-2008 - and provisionally $47bn last year - with a target of $60bn that has been set, although without any specific timetable in mind. ASEAN is now India's fourth-largest trading partner - after the EU, the US and China - and trade with the bloc accounts for nearly 10 per cent of India's global trade. Indian tourists are visiting ASEAN countries in increasing numbers, its share rising 50 per cent between 2004 and 2007. Singapore enjoys the largest share of bilateral trade with India, at 35 per cent of India's exports, with Malaysia and Indonesia each in the 20s. Singapore is also the third-largest investor in India, and Indian companies have turned to Singapore to establish their regional base for the region. The new pact will eliminate tariffs to zero, between 2013 and 2016, on more than 80 per cent of the total trade between the two sides, including industries such as textiles, electronics and chemicals. Services are not included. Software and the broader information technology sector, which is India's strength, is not yet covered because ASEAN fears being swamped, although India has several bilateral IT initiatives with Singapore. ASEAN's major exports include rubber, palm oil and coffee, which are areas of concern for India as there is strong domestic lobby that fears job losses if those sectors are not shielded. In his comment to investors, Deepak Lalwani, the director at Astaire and Partners in London, says the trade pact will be good for both sides because: both have growing economies; the US and the EU are either in or leaving recession, making sense for diversification; and it sends "a positive signal to the world of increased free trade at a time when protection could have been an easier option". There are broader, regional implications. As Mukul Asher, a professor of public policy at the National University of Singapore, explains: "This agreement gives a positive signal of India's engagement with the rest of Asia. As India's tariffs on goods are higher than in ASEAN, tariff reduction will likely benefit ASEAN more than India. "As some ASEAN sectors - like plantations - are more competitive than India's, it will mean India will need to improve its own productivity if it is to benefit from the pact in the longer term," he says. "It will also need to take measures to rapidly integrate its east and north-east with South East Asia, to expand trade." India's east and north-east have been traditionally low-growth zones, but more about that in a moment. The large Indian market will act as a spur to countries like Thailand and Malaysia - which are eager to move up from being middle-income countries - as well as export-orientated, less prosperous economies like Vietnam. Domestic support within India should not be taken for granted. The Indian political left, which rules the biggest state in India's east, West Bengal, has already criticised the pact as "anti-poor" and called it part of a "neo-liberal" agenda. The left has said Indian farmers would suffer, which would at least have some merit if that sector were included in the pact. Given its treatment of sharecroppers in recent years, the left's sudden sympathy for the poor is touching. It is important for the Manmohan Singh administration to stay focused and ignore the left's tantrums. Dr Singh was the finance minister when India turned eastward. He knows how hard it was to make a credible case for India in those days. During his first term as prime minister, the left held his government to ransom by blocking virtually every move that liberalised trade, privatised industry, introduced competitiveness or attracted foreign investment. But this year's elections showed voters rejecting the left firmly and swiftly, not only in large parts of India, but on its traditional home turf of West Bengal and Kerala states. Listening to the left now will keep India weak and isolated. Instead of calling its bluff, the government may opt for the easier option, acting as if it is unsure about the benefits of a freer economy. That would be counterproductive. "India has important economic and strategic interests in the rest of Asia; this agreement is of immense significance in Asia's economic integration," Prof Asher says. Given that, it is all the more important for India to ignore the left and embrace the opportunities the pact offers. Salil Tripathi, a writer based in London, was the regional economics correspondent for the Far Eastern Economic Review in Singapore in the 1990s