The Hindu Business Line : Enhancing trade ties with Asean

Policymakers have set a target of $30 billion for bilateral merchandise trade with Asean countries by the end of the decade. Achieving this target will require major acceleration in all aspects of economic interaction, including two-way investment flows, enhancing intra-industry and intra-firm trade, diversifying the trade basket, and exploring ways to create long-term economic partnerships.

SINCE the initiation of India's Look-East policy in the 1990s, economic and security relations between India and the 10-nation Association of Southeast Asian Nations (Asean) have grown steadily. Total merchandise trade, at present worth nearly $10-billion, is more than four times its value in the early 1990s.

Service transactions, investments, project executions, and manpower flows have also added significantly to the economic interactions between the two sides. India's relations with the Asean nations are also more balanced, with the shares of Indonesia, Thailand and Myanmar in total trade increasing significantly, and the pre-dominance of Singapore's share waning.

The trade basket has also diversified, with manufacturing goods playing an increasing role. India's role as a dialogue partner of Asean, its membership in the Asean Regional Forum (ARF), sub-regional cooperation involving Asean members, and on-going bilateral negotiations for closer economic partnership with Thailand and Singapore respectively are providing an institutional basis for closer interactions.

India and Asean have also agreed on a framework for operationalising a free trade agreement by the first half of the next decade.

There are several reasons why India is interested in closer relations with Asean. The region's per capita income is twice that of India's, providing increasing market opportunities. Asean has a rich natural resource base which could lead to mutually beneficial partnerships.

India also perceives opportunities through integrating into the value chain of MNCs located in Asean. Finally, some Asean countries such as Singapore and Malaysia could become important sources of investment, particularly in infrastructure projects and venture capital.

India's 1,600-km long border with Myanmar and maritime security involving the Indian Ocean and Malacca Straits provide additional impetus for India's engagement with Asean.

Since the East Asian crisis in 1997, India has been growing at a somewhat faster rate than Asean (during the 1996-2000 period, Asean as a whole grew at an annual rate of 1.4 per cent while India's rate of growth was 5.7 per cent). India is set to become a trillion dollar economy before the end of this decade.

It is increasingly acquiring the necessary financial and technological capacities to sustain fairly high levels of economic growth over a long period. Thus, it is likely to be one of the major rising economies in the world over the next several decades.

Research suggests that India's economy is on the whole complementary rather than competitive to Asean's. In particular, India does not compete with Asean in seeking FDI in labour-intensive manufacturing. Indeed, Indian firms are increasingly finding Asean as a competitive location for manufacturing drugs, motor vehicles and parts, and chemicals, and for tourism related activities.

This attractiveness will be enhanced if Asean makes more rapid progress in economic integration designed to transform it into a unified market.

Asean also needs to diversify its markets, and sources of technology and investments. India's emerging mega-economy can potentially provide such a balance, while simultaneously providing mutual benefits in areas of food and energy security, lowering health costs, addressing the digital divide, and progressing towards the goal of a knowledge economy.

India, in short, represents a healthy insurance policy against Asean's over-dependence on any one country, economic entity or region. Accommodating India's core interests is, therefore, in Asean's self-interest.

Policymakers have set a target of $30 billion for bilateral merchandise trade before the end of the decade, which is three times the current volume of trade.

Achieving this target will require major acceleration in all aspects of economic interaction.

These include two-way investment flows in enhancing intra-industry and intra-firm trade; fully utilising each other's strengths to enhance business competitiveness; further diversifying the trade basket for goods and services; and exploring ways to create long-term economic partnerships.

A pre-condition for achieving the above ambitious target however is the creation of a mind-set among policymakers, businesses, middle-level bureaucrats, academics, media and other opinion-makers on both sides, which is genuinely disposed towards benefiting from the existing and potential complementarities.

India's Look-East policy and eagerness of its businesses and global Indian professionals to locate in the Asean region indicate substantial progress in meeting the above pre-condition. In particular, India's elites have played a constructive role in emphasising Asean's achievements and opportunities.

There are, however, still information and perception gaps about Asean in India. More emphasis on encouraging rigorous scholarship and exposure to the Asean institutions and elites may help address these gaps. South-East Asian languages also need to be promoted in India.

Unfortunately,however, progress in achieving the above pre-condition has been extremely limited on the Asean side, representing an intangible but crucial constraint in realising the potential of India-Asean complementarities.

In Asean, due to the mono-centric power structure, the role of government signalling and therefore mind-set is much more pronounced than in India where both economic and political power are multi-centric. There are numerous examples where the mindset constraint has prevented the creation of an enabling environment as well as led to lost economic opportunities. Let me, however, cite just three.

First, the Western countries (and to a lesser extent Japan, Australia, and South Korea) have used India's research and design capacities, and business processes' outsourcing competitiveness to make their firms and economies more competitive. Asean companies have not, however, undertaken such activities in India.

Thus, there are practically no commercial firms from Singapore located in the Bangalore IT park which is a flagship project of Singapore in India. Outsourcing activities by large Asean firms to India have been minimal. The limited presence of Asean banks, investment promotion agencies, venture capital outfits, and private equity funds in India is also striking.

Second, Malaysia's irksome visa rules, and its generally unhelpful attitude in the recent past have meant that it receives a much smaller number of Indian visitors than its rivals.

In 2001, Malaysia received only 144 thousand visitors, only two-fifths of those visiting its neighbour Singapore. Its multi-media super-corridor could also receive a boost if an appropriate mind-set is displayed to leverage on the strengths of the two countries.

It should be stressed that Singapore and Malaysia are among the two major countries where socio-economic status of their citizens of Indian origin is lower than that of their population as a whole.

The Indian elite in these countries have not sufficiently acted upon the self-evident proposition that if they assist India in successfully addressing its economic and other challenges, then it would not only help preserve their own gains, but also provide opportunities for them and their countries.

The low socio-economic status of Indians in Asean is not a result of some inherent genetic inferiority or class make-up, as is often argued in these countries, but due to public policies, and the mind-set of the NRIs, who have accepted their status.

Third, a change in Asean's mind-set will be needed to take advantage of a recent decision by four major players in global funding and healthcare (the Global Fund, World Bank, Unicef, and Clinton Foundation) to source and distribute generic drugs and diagnostics at the "lowest prices" in developing countries.

India's international competitiveness in these areas represents an opportunity for some Asean countries to partner India (and others) to obtain a share of these funds. Indeed, India-Asean cooperation has the potential to lower health-care costs for Asean's rapidly ageing population.

India must continue to make persistent efforts to favourably change Asean's mind-set.

It needs to become adept at soft-power skills, and be more strategic in its relations with Asean. India also must monitor the extent to which the predominantly state-guided media in Asean is reflecting India as being a positive factor in the region; and the manner and extent to which economic, commercial, and political news about India is covered.

India must continue to be perceived as successfully addressing its economic, social, and governance challenges. This will require sustained focus on not just on economic reforms, but also in improving governance and quality of life of ordinary Indians by using the knowledge economy.

Aligning the mindsets of the Indians and the people of Asean is thus essential if opportunities for mutual gain and the goal of improving the lives of more than 1.5 billion people are to be realised.

(The author is Professor, Public Policy Programme, National University of Singapore. He can be contacted at mppasher@nus.edu.sg)