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India-ASEAN FTA: Ironing out the flaws

• India’s free trade agreement with ASEAN – Indonesia, Thailand, Singapore, Malaysia, Philippines, Vietnam, Myanmar, Brunei, Cambodia and Laos – for goods came into force in 2010 and for services, in 2015.
• The FTA has been a matter of distress for Indian goods producers due to surge of imports of various products under the preferential treatment so much that industries are apprehensive about the RCEP agreement also.
• The proposed review of the FTA should focus on addressing industry concerns but without taking protectionist measures.
• The attention should be on finding ways to enable the industries in ASEAN region and India engage in a win-win manner rather than competing at each other’s’ loss.

The ASEAN-India FTA that came into effect in 2010 for goods and 2014 for services, is now expected to be reviewed by both sides to “make it more user-friendly, simple and trade facilitative for businesses”. India’s FTA with ASEAN was an important pillar in India’s “Look East” Policy now rechristened as “Act East Policy”, as the group of 10 nations has a population of 642.1 million people with a GDP of US$ 2765.8 billion (2017). 

The agreement has not been fruitful for Indian industry, as its trade deficit with ASEAN nations has more than doubled from US$ 5 billion in 2011 to US$ 10 billion in 2017.

Expectations from AIFTA – As is for any trade agreement, the motivation behind this FTA was also increased bilateral trade arising from preferential treatment in tariff and non-tariff barriers to trade, enhanced flow of investment from technologically advanced countries like Singapore and Thailand to skilled labor of India and a significant export of services from India into the region. India’s intention behind entering into this FTA was also to engage with the giant group of nations so as to provide a market in the neighborhood for domestic goods and services. Even after considering that ASEAN countries are more competitive in merchandise products, the FTA was expected to yield benefits from India’s competitiveness in services exports, which could also outweigh the possible losses in merchandise trade.

Trade scenario

India’s exports to ASEAN have increased by 57% between 2010 and 2018 while imports have increased by 93%.

Bilateral trade 2009 (before FTA) 2010 FTA came into force 2011 (after FTA) 2018 (current trend)
India’s exports to ASEAN 17.899 22.958 34.498 36.074
 % share of India’s total exports 13.56% 13.45% 13.38% 17.71%
India’s imports from ASEAN 23.968 29.640 40.332 57.210
 % share of India’s total imports 9.00% 8.47% 8.72% 11.27%

Source: ITC Trade Map; Values in US$ billion

Between 2010 and 2018, among ASEAN countries, India’s exports have increased most in case of Myanmar – US$ 0.27 bn to US$ 1.23 bn, Vietnam – US$ 2.47 bn to US$ 6.7 bn, Malaysia – US$ 3.5 bn to US$ 6.5 bn, Thailand – US$ 2.1 bn to US$ 4.3 bn.

In case of India’s imports from ASEAN, the growth has outpaced the growth in exports. Between 2010 and 2018, imports from Vietnam increased from US$ 0.99 bn to US$ 7.21 bn, Indonesia – US$ 9.69 bn to US$ 16.02 bn, Malaysia – US$ 5.99 bn to 10.41 bn, Thailand – US$ 3.94 bn to US$ 7.66 bn, Singapore – US$ 7.26 bn to US$ 14.32 bn. However, it is to be noted that India has Bilateral engagements with Singapore, Malaysia and Thailand and that increase in trade, especially imports, is a result of dual preferences.

What demands more concern is that nations these three countries along with others have been able to increase their exports to India utilizing the free trade agreements – AIFTA and bilateral – but Indian industries have not been able to penetrate these markets under the same preferences.

Top products of exports to ASEAN are petroleum oil, bovine meat, p-xylene, shrimps, diamonds (worked), medicaments, aluminum, cotton etc. while top products of imports include coal, palm oil, copper wires, crude petroleum, rubber, parts of telephone sets etc. Major beneficiaries in India’s exports to ASEAN are shrimps, light oils and preparations of petroleum, cuttle fish and squid, cumin seeds, compression-ignition internal combustion piston engine, medium oils and preparations of petroleum, meat of bovine animals and many others.

Top products of import by India from ASEAN

Product code Product label India’s imports from Association of South-East Asian Nations (ASEAN)
    2010 2018
270119 Coal, whether or not pulverised, non-agglomerated (excluding anthracite and bituminous coal) 2897.523 6788.521
151110 Crude palm oil 3639.11 3986.733
270900 Petroleum oils and oils obtained from bituminous minerals, crude 1557.191 2868.275
851762 Machines for reception, conversion and transmission or regeneration of voice 115.778 2162.086
151190 Palm oil and its fractions, whether or not refined (excluding chemically modified and crude) 838.701 1471.391
740819 Wire of refined copper, with a maximum cross-sectional dimension of <= 6 mm 9.377 1029.441
851770 Parts of telephone sets, telephones for cellular networks or for other wireless networks 288.268 854.618
271019 Medium oils and preparations, of petroleum or bituminous minerals, not containing biodiesel 1795.763 800.348
847150 Processing units for automatic data-processing machines 210.929 678.61
400122 Technically specified natural rubber “TSNR” 263.715 672.145

Top products of export by India to ASEAN

Product code Product label India’s exports to Association of South-East Asian Nations (ASEAN)
    2010 2018
271019 Medium oils and preparations, of petroleum or bituminous minerals 3147.869 7647.449
20230 Frozen, boneless meat of bovine animals 638.315 2481.203
271012 Light oils and preparations, of petroleum or bituminous minerals which >= 90% by volume 0 1642.329
760110 Aluminium, not alloyed, unwrought 305.884 983.165
290243 P-Xylene 292.837 951.968
30617 Frozen shrimps and prawns, even smoked, whether in shell or not, incl. shrimps and prawns 0 856.289
710239 Diamonds, worked, but not mounted or set (excluding industrial diamonds) 518.636 663.749
300490 Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic purposes 176.859 562.448
520100 Cotton, neither carded nor combed 313.878 534.741
711319 Articles of jewellery and parts thereof, of precious metal other than silver 281.854 423.923

Source:  ITC Trade Map, values in US$ million

 

Source: Trade Map ITC

Concerns from the AIFTA have been expressed right from the time the agreement was signed. For instance, Kerala had expressed concerns at the time of negotiation of the FTA (goods chapter) that cheap imports from the ASEAN region would hurt domestic growers of tea, coffee, cashew, coconut, oil palm, rubber, spices and other plantation items because many of the ASEAN countries enjoy cost and quality advantages over India. Many plantation items were included in the Highly Sensitive List while a few others, such as rubber, were given protection under the Negative List.

Some of the recent concerns in Indian industry relates to metals and other products. For example, the stainless steel industry has been hurt in India because of the widespread mis-declarations by exporters ASEAN to avail preferential tariff under the FTA. Raw agarbatti imports from China and Vietnam rose by a massive 1641% after India reduced its imports duty to 5% under AIFTA in 2018. India has seen a surge in imports of copper wires (less than 6mm) from 4,000 MT in 2009 to 1.5 lakh MT in FY19 from ASEAN countries like Indonesia, Malaysia, Thailand, and Vietnam after India reduced import duty from 5% to 0% in 2017. Also, between FY 2017 AND FY 2018, value of import of televisions from Vietnam saw a 37-fold increase on account of zero custom duty.

Some of the key reasons behind India’s increasing trade deficit with ASEAN have been higher import duties on essential goods like coal, petrol, edible oils, inadequate quality norms for processed foods in ASEAN nations, imposition safeguards and Non-Tariff Barriers on textiles and pharmaceuticals, administrative complexities etc.

As a report by NITI Aayog has analysed, the ASEAN FTA witnessed “the greatest reduction in Indian import tariffs”. India offered around 9,000 products (at the HS 8-digit level) for tariff elimination (NT-1, NT-2) out of 12,000 tariff lines, 1,800 lines in sensitive track and almost 1,300 lines in exclusion. Whereas India kept around 10% of its tariff lines in exclusion, Thailand, Philippines, Myanmar, Brunei and Vietnam kept more number of tariff lines under exclusion.

Additionally, India was the late comer in the markets of ASEAN countries. The AIFTA came into effect in 2010 which was late compared to China (2005), South Korea (2007), and Japan (2008).

The proposed review of ASEAN-India FTA is much needed in the view of difficulties that Indian industries have been facing since the FTA came into force. In fact, the domestic industry has been reluctant towards the ongoing RCEP negotiations as they fear the imports flooding the markets and impacting their competitiveness. 

A report by NITI Aayog affirms that the India-ASEAN FTA had the greatest impact on India’s trade and also saw the largest reduction in its import tariffs. While India offered around 9,000 products (at the HS 8-digit level) for tariff elimination (NT-1, NT-2) out of around 12,000 tariff lines, it kept 10% of tariff lines in exclusion. However Thailand, Philippines, Myanmar, Brunei and Vietnam kept more number of tariff lines under exclusion in comparison to India. Also, India offered higher margin of preference under the FTAs, leading to a much greater increase in the imports as compared to exports. 

The proposed review of the FTA should focus on addressing industry concerns but without taking protectionist measures. The attention should be on finding ways to enable the industries in ASEAN and India trade in a win-win manner rather than competing at each other’s’ loss. However, India should look to address the issues like administrative delays, margin of preference, circumvention of rules of origin and value addition norms, etc when it reviews this agreement.

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