Millennium Post

India-Asean FTA in services, a reality

After a long tug-of-war, India-ASEAN Free Trade Agreement (FTA) in services has become a reality. It symbolises one more step forward to accelerate India’s Look East policy. India signed FTA in goods in 2009. In fact, from the beginning India has always been insisting on comprehensive FTA for goods and services, in contrary to ASEAN thrust on FTA in goods at the first stage. The advantage for India is more in service trade than in goods. But, since trade in goods is conventionally the first stage of FTA, India had to bow to ASEAN pressure for trade in goods as the precursor to FTA in services.

FTA in services will open up India’s opportunities in exporting IT services, professional services such as lawyers, accountancy, medical doctors etc and banking services to ASEAN countries. Specially, IT services are expected to make a dent in ASEAN market with the relaxation in employment visa rules.

Further, FTA agreement in services will give equal treatment to Indian professionals in ASEAN member countries. According to FICCI-Deloitte study, India has greater competitive advantages in service sector than ASEAN. Sectors such as IT services, telecommunications, e-commerce and engineering services showed greater advantages for India.

FTA in goods could not make much headway in export to ASEAN. In fact, the windfall of FTA in trade in goods went more in favour of ASEAN than to India. During 2010-2011 to 2013-2014, India’s export to ASEAN increased by 29.3 per cent against ASEAN’s spurt in export to India by 34.9 per cent. India accounts for only 2.4 per cent share of ASEAN global imports.  

Against this, ASEAN’s share in India’s global imports is 17 per cent. The factors causing riders on India to utilise FTA in goods and gear up export to ASEAN are the low price competitiveness of products and the lower manufacturing capacities. Price competitiveness is nailed by inverted duty structure in the country.

FTA grants duty free entry for final products only. The multiple duties on inputs, such as high excise duties, custom duties and state level duties fuel up the prices of Indian final products and stymied Indian exporters to offer competitive prices to the ASEAN importers.

Against this, ASEAN exporters enjoy lower duties on inputs in their homeland and are in a better position to offer competitive prices to Indian importers.

While the west is wobbling and USA is reeling under uncertainty for a stable growth, ASEAN is gung-ho on economic growth. Next to China, ASEAN achieved highest GDP growth by 5.7 per cent in 2012.

Only five member countries out of ten ASEAN are the main drivers of trade with India. They are Singapore, Indonesia, Vietnam, Thailand and Malaysia. During 2013-2014, they accounted for 92.7 per cent of India’s export to ASEAN.

India-ASEAN FTA in services will open up a bigger opportunities for India to enter into the vast service market of ASEAN. Service sector has been languishing in ASEAN because of its thrust on manufacturing sector to make export based economies.

In early 2000s, except Singapore, the average share of service sector in GDP of ASEAN member countries was 25-30 per cent. The trend changed with the growth in GDP in tandem. In 2012, average share of service sector in GDP, except in Singapore, increased to 45 per cent. Service sector exceeded the industry share in GDP in major member countries such as Singapore, Malaysia, Philippines and Indonesia.

Surge in the economic growth, catalysed by service sector growth, increased the appetite for IT services in ASEAN.

The size of IT service market in major ASEAN member countries is expected to make a big leap by 2017. According to Gartner estimate, the IT service market in Singapore, Malaysia, Thailand and Indonesia will jump by more than 25 per cent in the next five year period between 2013 to 2017 – from $15.5 billion to $20.8 billion.   

There are three broad trends associated with ASEAN’s rapid growth in the economy, which will gear up IT service market in ASEAN.

First, it is globalisation and MNCs increasing appetite for outsourcing from these countries for their internal functioning. This was pushed by the pressure mounting on cost reduction to compete in the world.

The practice of outsourcing spurred the growth of IT service industries. Second, the demand for IT services from Asian companies increased with the spur in their growth, in tandem with the economic growth. As these companies grew, they have increased their demand for IT services. Third, the rapid growth in PCs and mobile phones accelerated the demand for IT services in these countries.      

Growth in India-ASEAN economic relation did not confine to bilateral basis only. It has created a new platform for the super-economies to vie for major stakes in East Asia. RCEP (Regional Cooperation of Economic Partnership) of ASEAN+6 (China, Japan, South Korea, India, New Zealand, and Australia) will emerge a third force to escalate India - ASEAN role in balancing the powers of super-economies in East Asia.

RCEP will be the reality by 2015. It will be the strategic example for the super powers to shift their stakes from west to east.

It will be the largest trade block in the world. It is viewed as a counter to TPP (Trans Pacific Partnership), which is dominated by USA. India prefers RCEP than TPP since India will have more say in it than in TPP, which will be dominated by USA.  

Therefore, FTA in services will prove a progressive road for India-ASEAN economic buoyancy. It will help India to wrest more benefits from FTA in services than in FTA in trade in goods. IPA 
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