The prime minister, Atal Bihari Vajpayee, made quite a big splash at the first summit of India and the Association of Southeast Asian Nations in Phnom Penh when he offered to set up a free trade area with the 10-member Asean bloc. However, more significant from the Asean perspective were the two agreements almost simultaneously signed by China and Japan to set up a free trade zone and an “economic partnership” respectively, in the next 10 years. This no doubt means that New Delhi has to better its offer to Asean businessmen than China and Japan if it wants to be competitive in a free trade area proposal.
Indian trade and industry, stand to benefit tremendously from the Asean partnership. The most important gain will be the establishment of a free trading bloc to command a good market within and outside the region. Indian performance in trading has been weak so far. The huge trade and business potential offered by the Asean should encourage Indian industry and its service sector to boost their exports.
But China has taken the initiative earlier than India to be a leader in Asean business. China’s growing weight in the world economy, its increasing openness in accordance with World Trade Organization regulations, and export dynamism as a low-cost producer, pose a big challenge to all Asian developing countries including India. Already commanding a high share in richer markets for its textiles and garments, China would become a real competitor for all developing textile-producing countries when the quota regime under the multi-fibre arrangement is phased out in January 1, 2005. It could outprice the products of a large number of Asian exporters dependent on American, European Union and other developed markets.
Japan, another full dialogue partner of Asean, also signed an agreement during the summit to work on a framework to develop a free trade area with an expanded market of at least $ 4.9 trillion.
With the Chinese and Japanese free trade proposals, the prospects of Indian investors taking advantage of Vajpayee’s proposal have become even more remote. On the other hand, a free trade area, which will almost certainly entail reduction of tariff and non-tariff barriers to cheap imports across the board could mean Asean products pushing more easily into Indian market, unsettling domestic manufacturers.
An additional complication is that Asean free trade concessions will have to be consistent with WTO guidelines. As for setting up Asean manufacturing units, it is almost certain that investors will be put off by the various hurdles that are already scaring away foreign investors from India. But India could take this opportunity to upgrade its infrastructure with the help of Malaysian expertise and investment.
The proposed Asean free trade arrangement should not be seen in isolation, but together with India’s obligations to the south Asian association for regional cooperation. Vajpayee’s Phnom Penh visit has sent a strong message to the partners in the SAARC who have now got the message that India is more interested in aligning with the more robust economies of the continent. Vajpayee’s free trade area offer to Asean may prove to be a death-knell for SAARC.
The large numbers of Indian software engineers, financial analysts and management professionals, who are the new migrants to Asean countries, are likely to play a more important role in promoting a strong economic relationship between India and Asean.
India’s new agreement also means that Asean countries will now have to compete among themselves for getting a finger in the pie of Indian market. Those with better transparency and skilled workers, higher productivity, managerial and organizational talent, legal safeguards, and so on will beat the others. India too has to improve on the same indices to have a fruitful partnership with the Asean, and strong economic ties with individual countries.