VIEWPOINT :: ECONOMICS

Much ink has been spent in popular media on the recent H-1B/L-1 visa tax bill. While the Indian government and industry associations such as NASSCOM have made public announcements that this measure is WTO incompatible and that they will be raising it at the WTO, the ultimate response may be much more muted than the initial noise that has been generated. Part of this is due to the lack of clarity on whether this measure is indeed discriminatory and non-compliant with the WTO. But the other reason may be that the Indian government is taking a much more strategic approach to its trade and investment relations by diversifying its trade markets and balancing its interests across goods, services, investment flows , and geo-political considerations.

One of the most important developments in this regard has been India’s active pursuit of Regional Trade Agreements (RTA) which include Free Trade Agreements (FTA) and Preferential Trade Agreements (PTA) with Asian nations in the past decade as part of its Look East Policy. What is driving India's appetite for RTAs, particularly when many economists consider them to be harmful to the world trading system? Professor Rupa Chanda of Indian IIMB and Sasidaran Gopalan, doctoral student at the George Mason School of Public Policy, have analyzed the factors underlying this trend and its implications.

India's interest in Asian nations

The change in Indian mindset might have been set in motion a few years ago. India's Look East Policy (LEP) emphasizes relationship and trade with East and South East Asia. India's trade volume with Asia doubled between 1987 and 2004, while that with the European Union declined by 33%. India's interest in Asia is driven by a number of imperatives - some tactical, others strategic.

Growing market Asia's share in world trade has been growing for many years now. Growth projections indicate that Asia will grow at a rate nearly 40% higher than the global rate between 2006 and 2020. At a time when US and Europe have been straddled with negative or near zero growth rates, Asia has largely remained unaffected or bounced back to high growth rates. It is not surprising, then that Asia has become a key part of India's growth strategy. In fact, Asia today is the largest trading partner for India.

India's continued emphasis on bilateral trade agreements with Asian nations is part of this strategy. India wants to participate in the lucrative trade within Asian nations that has grown at a rate of 15 percent annually. In the long run, bilateral trade agreements also provide access to markets not directly accessible to India.

Regional stalemate Part of the larger interest in East Asian nations has been driven by the failure of South Asian nations to foster a regional market under the auspices of the South Asian Association for Regional Cooperation (SAARC). Indian policy makers recognize the relatively limited scope for intraregional trade within South Asia, which remains as low as 4 percent, hardly changing over the last two decades. Although there is an FTA within South Asia (SAFTA) there has been very little progress due to problems of competing trade baskets, small markets, poor infrastructure, national security, and lack of political will. Unless SAFTA expands its ambit to include areas such as services, investment, transport, and trade facilitation, there is unlikely to be much gain from such an arrangement. Hence, from India’s perspective greater integration with Asian economies requires it to look beyond South Asia and towards East and South East Asia, the main growth drivers within the continent. These economies can be a source of growth for the Indian economy.

Countering China As Jo-Ann Crawford and Sam Laird of the Word Trade Organization put it, "PTAs are like street gangs. You may not like them, but if they are in your neighbourhood, it is safer to be in one." China, since joining the WTO in 2001, has been entering into bilateral PTAs with other Asian nations. As it is, India's relative location has been a handicap in as much as its participation in ASEAN. With China's aggressive PTA strategy, India could not afford to sit on the sides and cede control. It explains, to some extent, India's urge to negotiate bilateral PTAs in the region and to a large extent with similar countries and country groupings.

Domestic imperatives India's internal political issues have also shaped its bilateral strategy, particularly with regard to countries with which it shares a border. For instance, India has been pursuing a bilateral agreement with Myanmar in a bid to manage the insurgency in the North East through development. India's plan to build connectivity with Mekong countries (Myanmar, Thailand, Laos, Cambodia and Vietnam) as part of the Mekong-Ganga Cooperation (MGC) Forum, is an attempt to develop the North Eastern states.

Asia's growing interest in India

Interest in trade between India and Asian countries is reciprocal. China has long been considered the local economic superpower second only to Japan for years. However, India's economic performance post the 1991 liberalization has not gone unnoticed by the rest of the Asian economies. India accounted for nearly 11% of incremental global GDP in purchasing power parity terms. China and India together accounted for more than 50% of total GDP in developing economies in 2007. The reasons for Asia's interest in India are not difficult to comprehend.

1.Diversification - The 1997 East Asian financial crisis forced countries in the region to look beyond their traditional markets - primarily the US and Europe. China and India with their rapid economic growth, large domestic markets and reasonable political stability provide a good alternative.

2.India's growth in commercial services - India's share in commercial services has grown significantly. It was the 11th largest exporter of commercial services in 2006 according to the World Trade Organization (WTO), and the 13th largest importer of such services. The rest of Asia sees India's emergence in this sector as a potential for both provider and consumer of such services.

3.India's demography - At a time when large major Asian nations - Japan, Korea and to some extent China - are suffering from a declining workforce, India is poised to witness a growing workforce for many decades. This makes it not only a lucrative market but a potential future partner for labour-intensive manufacturing.

4.Financial investments - India has been consistently ranked as the second most favorable destination, not surprisingly after China. It makes sense for other Asian economies, therefore, to consider India as a destination for financial investments. At the same time, Indian companies have started to foray outside and are making substantial investments elsewhere in the continent.

5.Counterbalancing China's influence - Despite overall trade growing between China and ASEAN nations, China continues to have a favourable trade balance with ASEAN, as it does with most other nations, including the US. ASEAN nations also feel threatened by Chinese manufacturers. In the past, China was considered for intermediate input production, with the final value addition taking place in ASEAN nations. This may not be valid any longer. India as a PTA partner could complement manufacturing production in these countries.

India's RTAs: Current status and implications

India is pushing ahead with PTAs on multiple fronts, regional, bilateral, and sub-regional. In the past few years, it has concluded the India-Korea Comprehensive Economic Partnership Agreement (CEPA), the Indo-Thai Free Trade Agreement, the India-Singapore Comprehensive Economic Cooperation Agreement (CECA), the India-ASEAN FTA, and is at present pursuing negotiations with Japan, Australia, Malaysia, New Zealand, among others. It is also working to expand some of its earlier agreements to include services and investment issues. These agreements have the potential to bolster India's growth by helping to diversify India’s export markets and its sourcing of imports, by attracting more investment flows from Asian countries in Indian manufacturing and services, by encouraging the development of India as a sourcing hub for leading Asian companies, and by easing regulations for movement of Indian service providers and India’s exports of IT and other professional services to the Asian market. These agreements also provide an external impetus to improve competitiveness and accelerate much needed regulatory reforms within India in order to take advantage of the new markets created and to face competition from partner countries.

Conclusion

India has adopted a positive and strategic approach in its relationship with Asia. It is pursuing bilateral RTA negotiations with many countries - a far cry from its inward looking approach of the 1980s. This augurs well for India in the changing world order. The strategy has been sound, though the process has often been slow due to domestic sensitivities and protectionist interests. But this is to be expected in a responsive democracy such as India. Looking ahead, however, India may need to demonstrate a more accommodating approach in future RTA negotiations. Agreements such as the CECA and the CEPA provide useful benchmarks. India must also recognize that it is unlikely to benefit from narrow agreements which cover only goods. Its real interest would like in trading off concessions it makes in goods with benefits it can reap in the areas of services, investments, and movement of persons. The perspective needs to be comprehensive and wide-ranging if these RTAs are to benefit India.

The original article Understanding India's Regional Initiatives with East and Southeast Asia, by Professor Rupa Chanda of Indian Institute of Management Bangalore and Sasidaran Gopalan, Research Associate of Institute of South Asian Studies, National University of Singapore, appeared in the Asian Pacific Economic Literature, Blackwell Publishers, Vol. 23, No. 1, 2009, pp. 66-78.