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Since India's Look East policy was initiated in 1991, following the collapse of the Soviet Union, the country's relations with South-East Asian nations have been evolving, both on economic and socio-cultural fronts.
However, the growth has been slower than expected. Establishing trade relations with the member countries of the Association of South East Asian Nations has been of strategic and economic significance to India. Asean countries together recorded an average GDP growth rate of 5.5 per cent between 2008 and 2011, when the West was still reeling under the impact of the global financial crisis. During those years, the rest of the world economy grew only at 2.8 per cent.
In the past, India has signed several bilateral trade agreements with South-East Asian countries. Between 1993 and 2003, bilateral trade between India and Asean grew at a high rate of 11 per cent per annum. India's Comprehensive Economic Cooperation Agreement with Asean laid the ground for a Free Trade Agreement in goods, services and investments. After various rounds of negotiations, the FTA in goods was signed in 2010 and the services and investments agreement was inked recently in September. Against the backdrop of near failure of the World Trade Organisation's Doha Round, the FTAs with Asean in goods as well as in services and investment is expected to further help the integration of the Indian economy into the global economy. Moreover, the pact with Asean presents Indian with an opportunity to revive its own GDP growth, amidst the recent slowdown of the global economy, by leveraging its partnership with this fast-growing Asian bloc.
According to the Federation of Indian Chambers of Commerce and Industry, Asean import of services has been witnessing an upward trend. The share of Asean in global trade for services rose from five per cent in 2000 to eight per cent in 2012. The total imports of services for Asean was pegged at $306billion. Indian service providers, thus, have an opportunity to cater to the growing demand for services in Asean and, in turn, contribute more to not only economic income but also the development of a broader regional perspective.
India has witnessed rising growth rates in services since the beginning of the 21st century. The service sector has the driver of GDP growth for the high growth period of 2004-2005 to 2007-2008. Nearly 58 per cent of India's GDP comes from the service sector. This sector includes trading, transportation, communication, real estate, financial, social as well as personal services. In the backdrop of such occupational structure, an FTA in services has reinvigorated the hopes of the economy for another service-driven period of growth, after the slump in GDP that has been observed since 2010.
A combined study by Deloitte, one of the largest professional service firms, and FICCI in 2011 pointed towards the comparative advantage that India enjoys over Asean in several services areas. For example, India has greater advantage in the computer and information service sector, while there is much potential in the telecommunication sector as well. On the other hand Asean to be more efficient in the construction service sector. In insurance and financial services, both parties appear to be equally efficient. Also, the member countries of Asean reportedly offer markets in consultancy services, software services, maintenance and installation services, education services, health and social work services.
Therefore, the service sector FTA with Asean comes with an opportunity for India to access these markets.Trade in services is also important for being able to realise gains from trade in goods. For example, a well established transportation and communication network is necessary for easy delivery of merchandise to consumers. Also, the current account surplus that can be generated from exporting Indian services to Asean member countries could provide a cushion against the deficit generated from trade in merchandise.
However, there are some reasons to be sceptical about the recently signed FTA with regard to how much India will actually gain from the trade in the service sector. The materialisation of the expected benefits is contingent upon the extent of liberalisation of the service sector to which the Asean members have agreed. Vietnam and the Philippines, for instance, have agreed to lower levels of liberalisation. India has pledged three sets of commitments: One to Indonesia, one to the Philippines and one to the rest of Asean bloc. However, all 10 Asean member countries have made separate commitments to India.
Though the agreement seeks to provide for increased movement of professional and skilled manpower across borders, by including an annexure on the supply of services, the actual level of trade in services will depend on the mutual recognition of academic and professional qualifications of the workers. Critics have also argued that India needs to be cautious of the free flow of professionals and skilled manpower to other countries for it might hinder the development process of the Indian economy, particularly in the health and education sectors.
Much of scepticism generated can be attributed to low level of gains from trade in merchandise with Asean. It is important to understand that merchandise trade has below expectation because the FTA in services and investments, that tends to boost goods trade, was still being negotiated. Also, India is relatively stronger in service sector while Asean countries are better in the the manufacturing sector. Hence a comprehensive assessment of the levels of gain can only be made after the FTA in services and investments becomes operational.
Amidst the challenges in doing business with Asean, there exists undoubtedly an opportunity for India to harness the gains from trade in services given the comparative advantage it enjoys in certain sub-sectors. Ultimately, a comparison between the benefits that will accrue to India from the FTA in services, and the challenges before the Indian economy to realise these benefits, shows that there is much scope for further developing the country's service sector.
By Special Arrangement with : Observer Research Foundation (www.orfonline.org)