The New Trade Relations Between India, ASEAN, and the UK: What Comes Next?

By Rohit Kapur, Dezan Shira & Associates Delhi

India has been busy at the start of 2021, with trade agreements being upgraded with ASEAN and the UK, and many more under negotiation. In this article, I look at recent developments with ASEAN and the United Kingdom.

India and ASEAN 

AIFTA is a free trade area between 10 member states of ASEAN and India. The initial framework agreement was signed up in October 2003 and the final agreement was in August 2009. The free trade area came into effect on January 1, 2010.

Today, India is the sixth-largest trading partner of the Southeast Asian economies. Two-way trade in goods between ASEAN nations and India reached US$80.8 billion in 2018, a 9.8 percent increase on 2017 figures. Up to 37 percent of foreign direct investment (FDI) inflows into India come from ASEAN countries. In 2018, this amounted to US$16.41 billion. Among ASEAN Dialogue Partners, India is also ASEAN’s sixth most significant source of FDI.

However, for India, imports have risen at a much higher pace than exports. While Indian exports to the 10 ASEAN member states grew by nine percent year on year, hitting US$37.4 billion in 2018-19, Indian imports grew at 25 percent to reach US$59.31 billion. Policymakers believe that existing FTAs are detrimental to India’s manufacturing sector, which is the target of New Delhi’s ‘Make in India’ initiative, designed to boost manufacturing growth and job opportunities.

In its trade with ASEAN, India has moved to eliminate tariffs on up to 75 percent of 12,000 tariff lines. A report from the National Institution for Transforming India (NITI Aayog) found that this had led to the trade balance worsening in 13 out of 21 sectors, including textiles, leather, and minerals. Currently, India’s trade deficit with ASEAN countries stands at US$24 billion.

Procedural issues in ASEAN countries and lax implementation of rules of origin (ROO) norms have allowed the routing of cheap goods through ASEAN countries into India. This is among the primary causes of the rising trade imbalance with ASEAN nations, as non-FTA partners (including China) route cheap products into India through the ASEAN-India FTA.

In light of this situation, India has wanted to urgently review the ASEAN-India FTA but other countries have been slow to play ball. Most ASEAN countries were keen to first complete the Regional Comprehensive Economic Partnership (RCEP), Asia’s first mega FTA deal, which New Delhi walked out of last year, over concerns related to cheap Chinese imports.

It is expected, now that the RCEP is signed up, the ASEAN member countries will heed India’s request to review the AIFTA, since India is too large a market for them to ignore. However, the negotiations are expected to be arduous, painful, and protracted.

The India-UK Trade Agreement 

A landmark post-Brexit trade deal between the EU and the UK brightens the prospects of a free trade agreement (FTA) between India and the UK.

The recent visit of Elizabeth Truss, UK Secretary of State for International Trade, between February 5 to 9, 2021, lends credence to the view that both countries are now keen to accelerate the process of giving shape to a comprehensive and deep economic relationship, in line with the size and potential of both the economies. Truss had packed in a series of meetings with senior ministers in the Indian Union Cabinet, to chart out a roadmap towards the Enhanced Trade Partnership (ETP), as an interim step in the process of negotiating the terms of an FTA. In fact, it is believed that the ETP could be signed up by the Prime Ministers of both countries during Boris Johnson’s visit to India later this year.

The bilateral trade between India and UK was at US$15.5 billion in 2019-20. Given the size of the two economies, there is potential to scale this up considerably.

Post-Brexit, India and UK may finalize trade agreements in areas like pharmaceuticals, fintech, defense manufacturing, chemicals, petroleum, and food products in 2021 as both countries are keen on “early harvest deals” while continuing negotiations for a comprehensive FTA.

Truss believes India and the UK have complementary economies, with both being strong in the areas of technology. India is in third position globally in the number of technology start-ups while the UK is third in the world in the number of billion-dollar tech companies. The UK is looking for a comprehensive FTA that includes data, digital, and services – segments in which both the nations have deep interests. A deal with India could help the UK in realizing its ambition of becoming a services and data trade hub. Common business language would add to further advantage.

What does the trade deal mean for the UK? 

The trade deal would provide the UK with greater access to India’s 1.3 billion population. India’s middle class is expected to cross 550 million by 2025, with growth across all major consumption categories. Several large companies from the UK are already present in India’s fast-moving consumer and durable segments.

India is also the fourth-largest automotive market in the world and is expected to displace Japan to become the third-largest automotive market in the world in coming years. Luxury car makers registered high growth numbers in India in 2018 and the segment is expected to expand further in the coming years.

With growing ease of doing business, low labor costs, rationalization of tax laws, and replacement of archaic labor laws with contemporary labor codes, India can be an outsourcing hub for the UK manufacturing companies.

What does the trade deal mean for India? 

Significant opportunities exist in services sectors like IT, architecture, research and development, and engineering as the EU-UK pact does not cover services. In terms of goods, apart from garments, India ships out gem and jewlry, pharma products, footwear and organic chemicals, among others, to the UK in large volumes.

In order to reduce their dependence on China as the sole supplier for intermediate goods which go into the manufacture of finished products like chemicals, pharmaceuticals, computers, electronics, automobiles etc., developed economies are looking to diversify their supply chains. India is looking to reach a mutually beneficial FTA with the UK in order to take advantage of this huge emerging opportunity in the post-COVID-19 world.

Rohit Kapur is the Managing Director for Dezan Shira & Associates in India, overseeing offices in Delhi, Mumbai and Bangalore. A Chartered Accountant by qualification, Rohit has through his career spanning over 29 years worked in multinational engineering companies in various capacities and positions of responsibility. Rohit has a diverse and rich experience with Indian start ups and managing foreign invested companies in the country. He is also experienced in restructuring companies to align them with changing and evolving economic and market conditions in India. 

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