Garima Sahdev & Geethanjali Nataraj
New Delhi gets busy next week to host the 10th ASEAN leaders as the chief guests of the Republic Day celebrations, a day after the mega India-ASEAN commemorative summit is organised, marking 25 years of bilateral relations. With this, the ASEAN—the central pillar of India’s Act East Policy—is back in the limelight. Ever since the launch of the Look East Policy in 1991, the bilateral relations have travelled a long distance, crossing several milestones. The two sides established a Sectoral Dialogue Partnership in 1992, which was elevated to full-fledged dialogue partnership in 1996, and to a strategic partnership in 2012—culminating in the establishment of an ASEAN-India Centre and ASEAN-India Vision Statement. In the same year (1996), India became a member of ASEAN Regional Forum, sharing the high table with US, Russia, Australia and Japan, among others. ASEAN and India have about 30 platforms for engagement, including an annual leaders’ summit and ministerial dialogues. Later this year, Prime Minister Narendra Modi will address the security dialogue, Shangri-La—the first for an Indian PM. After 15 years of summit-level meetings, five years of strategic partnership, and with the Narendra Modi government upgrading the Look East to Act East policy, the India-ASEAN bonhomie has broadened to accommodate political, strategic, security and defence ties, in addition to the economic realm. The primary focus of the engagement, however, continues to be the furtherance of economic and commercial ties.
The ASEAN-India economic integration process gathered impetus after the creation of the ASEAN-India free trade area in 2010, followed by the implementation of the India-ASEAN agreement on services and investment in 2015. ASEAN is India’s fourth largest trading partner, and India is the seventh largest trading partner of the bloc. However, the bilateral trade and investment ties are still way below their true potential. The bilateral trade stood at $70 billion—only 2.6% of ASEAN’s total trade in 2016. This is a long way off the trade target of $200 billion with ASEAN countries by 2022. Besides, the balance of trade has always been in favour of ASEAN member countries. Total exports to ASEAN in 2016-17 stood at $31.07 billion compared to the imports at $40.63 billion, creating an adverse trade balance of $9.56 billion.
In terms of investment, while the Indian FDI into ASEAN nations, standing at over $31 billion, accounts for 22% of its total outbound FDI, it is far less in comparison to the US, the EU and Japan. Over the same time, FDI inflows in India from ASEAN crossed $25 billion. India receives nearly 99% of the total FDI inflows from the region from Singapore alone—with the Comprehensive Economic Cooperation Agreement driving the economic partnership—while the other major Southeast Asian economies being Malaysia, Indonesia, and Thailand accounting for less than 1%.
Factors obstructing FDI inflows and SMEs collaboration in the region
Several obstacles exist against the bilateral trade and investment today. Challenges in establishing a supply chain, poor infrastructure and bad maritime and air connectivity between India and ASEAN countries have served as obstacles to the trade and investment relations. Besides, all the countries of the region have differing levels of socio-economic development—posing as a complex challenge, especially to the SMEs since they have to adjust with a new set of supply-chain strategies to the varying regulatory requirements in every country. Technological upgrading is pivotal to enabling the SMEs to be more competitive in the global market. That requires big investments in the form of physical equipment and human resources to compete with foreign companies and meeting the requirements of the new customers in foreign markets. The SME sector in India is dependent on foreign technologies in a huge way because they lack an in-house R&D, owing to their smaller setup. Here again, ineffective physical connectivity, communication infrastructure and bureaucratic costs involved in complex tax and duty structures, licensing, and other business activities impeded the flow of FDI into the SME sector until last year. Initiatives like the ‘Make in India’ and 100% FDI in retail are facilitating foreign investment in the SME sector, which will also help improve the supply-chain efficiencies of this sector.
Moreover, the CLVT countries—Cambodia, Laos, Vietnam and Thailand—are emerging as the manufacturing hotspots, with China increasingly outsourcing its production to these countries. Last year, Chinese companies signed outsourcing deals on construction, engineering and telecommunications projects worth $ 415 million with countries along the Belt and Road project, mainly ASEAN members. The CLVT countries, in particular, stand to gain from this industrial capacity cooperation as their manufacturing remains at a low-level. Further, Chinese e-commerce retailers like Sunning have committed to promoting ASEAN SMEs. Thus, the dominant Chinese footprint in the region makes the competition tougher for Indian SMEs.
The upcoming commemorative summit in New Delhi will provide India another chance to not only voice its concerns to the bloc but also project India as a lucrative investment destination for the ASEAN countries. Recent major developments on the infrastructure front—improving road and rail connectivity, building international airports and seaports, while earmarking another $377 billion for infrastructure developments in the next three years— are an encouraging sign for foreign companies and investors to do business in India. Seamless transport links are key to India-ASEAN trade relations. To allow smooth movement of goods and services, the Indian government is currently undertaking some big-ticket projects. India has recently proposed a credit line of $1 billion to promote physical and digital connectivity with ASEAN through road, air and sea projects, apart from setting up development fund of $77 million for the development of manufacturing hubs in Cambodia, Laos, Myanmar and Vietnam.
The India-Myanmar-Thailand Trilateral Highway is already under construction, and the Indian government plans to extend it to Laos and Vietnam under the Dawei project. Additionally, the action plan for implementation of the BBIN Motor Vehicles Agreement, 2016, has been initiated. Myanmar is a member of both the BBIN as well as the ASEAN. The Kaladan Multimodal Transit Transport Project is another initiative linking the Kolkata with Myanmar’s Sittwe port, facilitating the movement of cargo across the India-Myanmar border through the sea route—and later extending to other ASEAN countries like Laos, Cambodia, and Vietnam.
With its largely skilled-yet-unexplored demographic dividend, the logistics sector and the supply-chain environment can be developed to a world-class level. Since regional value chains are a great pathway to connect to the global value chain, there’s huge potential to create value chains between the manufacturers of SMEs in India and those in the less developed countries of ASEAN bloc, like Laos, Vietnam, Cambodia and Myanmar, considering that these countries are the beneficiaries of generalised system of preferences in the US and the EU. So, if the Indian manufacturers set up business units in these countries, they are bound to get the same benefits while exporting to the US and EU markets. There is huge potential in creating value chains in textiles and fibres between India and these economies.
SMEs are a vital aspect of both Indian as well as the ASEAN economy, contributing nearly 45% to the Indian manufacturing. The sector contributes even more significantly to the collective GDP of the ASEAN bloc, with the numbers ranging between 30-58%. So, while the jury is still out on the overall impact of the India ASEAN FTA, increasing SME cross-border activities across India and ASEAN by building a regional network, greater integration in the areas of regional trade agreements and digital solutions will, thus, help in boosting mutual economic growth and development. The upcoming India-ASEAN Summit is further expected to facilitate the process to bring about faster economic development in the region.
Sahdev is a researcher with International Trade and Investment Law, Nataraj is professor of Economics at IIPA