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Wednesday, Oct 16, 2002

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India and Asean: Towards enhancing economic partnership

S. D. Naik

THE "Look East" policy of the Narasimha Rao Government in 1992 to strengthen the country's economic ties with the Association of South East Asian Nations (Asean) has helped India improve its trade and investment relations with the region significantly during the 1990s. Similarly, Asean investments in India also picked up considerably over this period.

In a globalising world, it is important for India to increase its share in world trade from the present low level of 0.7 per cent. Experts believe that enhancing the level of the economic partnership with Asean, a growing regional economic bloc, should form an important part of the strategy to increase our share in world trade.

Asean was founded in 1967 by five South-East Asian countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand). They were joined Brunei (1984), Vietnam (1995), Laos and Myanmar (1997) and Cambodia (1999). The Asean region now encompasses about 500 million people with $737 billion in income and $720 billion of external trade.

In what is being seen as a major new initiative, India will host an Indo-Asean business summit tomorrow in New Delhi and on Friday in Hyderabad. The Prime Minister, Mr Atal Bihari Vajpayee, will open the New Delhi conference at which the Malaysian Prime Minister, Mr Mahathir Mohamed, is to deliver the keynote address.

The potential for a flourishing trade and investment partnership between India and Asean is, no doubt, huge given the interconnected, geographically contiguous market of 1.5 billion people. The process will be further helped by the road, under construction, that will connect Kanchanbari in Thailand with Kolkata.

However, to realise the true potential of trade and investment partnership between India and Asean, it would be necessary to make the policy environment more conducive and hassle free. In this context, the Indian policy-makers would find the recent pioneering study by Messrs Atul Sarma and Pradeep Kumar Mehta, Exploring Indo ASEAN Economic Partnership in Globalising World (Bookwell, New Delhi), quite useful.

Elaborating on the rationale behind India's "Look East" policy, the 600-page volume dwells on the following favourable factors:

* The economic dynamism that the South and East Asian economies have displayed since the 1970s thanks to their outward oriented development Strategies;

* Lower transport costs and shorter delivery schedules for Indian exporters because of the geographical proximity of the region;

* Sizeable population of Indian origin — about three million — in ten South-East Asian countries, which played an important role in industrialisation and trade-promotion of these countries, can act as a vital link in developing mutually beneficial ties;

* The new breed of Indian migrants that include software engineers, financial analysts, management professionals, are likely to play an even more important role in promoting Indo-Asean economic relations.

The authors review the trade and development policies of Asean-5, collectively as well as individually, and India, particularly since the 1970s, to highlight similarities and dissimilarities in their policy framework and changes introduced therein over the years. Though Asean-5 States had also started with a moderate import substitution policy, they shifted to export-led growth strategy much earlier than most inward oriented developing countries, including India, with large-scale deregulation and privatisation, a regime of low tax rates and freer trade.

For instance, Indonesia began moving towards deregulation and free trade regime since the mid-1960s and also denationalised foreign firms, which were nationalised earlier and returned them to their original owners. It also made the Indonesian currency convertible in 1971.

In Malaysia, liberalisation and privatisation started since the mid-1980s. A number of PSUs, including natural monopolies in telecommunication, electricity generation, ports, air transport and highways, were privatised to improve the financial health of the government and to impart market orientation.

The Philippines also introduced industrial and trade reforms in the 1980s. It liberalised imports through tariff reduction and relaxed import licensing. Foreign investment was encouraged through the Foreign Investment Act, 1971.

Singapore, the most advanced Asean state, is unique in terms of its being a city-state with an area of only 641.4 and just three million people. In the face of several constraints, it introduced development policies based on free market and open economy and took initiatives to improve competitive business environment through transparent and corruption-free regulatory framework. Over 3,000 multinationals operate in Singapore to take advantage of its strategic location and the availability of sophisticated and efficient commercial, financial and physical infrastructure.

Thailand began its outward orientation and privatisation from the late 1970s. It also targeted larger inflow of FDI by offering various incentives and concessions.

According to the study, India started its development process far ahead of any of the Asean states and was at a much higher scale in terms of income in 1951. However, between 1960 and 1999, the GDP grew 121.4 times in Singapore, 48.6 times in Thailand, 34.5 times in Malaysia and 16.7 times in Indonesia but only 15.6 times in India. The per capita income in terms of purchasing power parity (PPP) in 1999 was US $1720 in India while it was $2830 in Indonesia, $10,300 in Malaysia, $3,500 in the Philippines, $26,300 in Singapore, and $6,100 in Thailand.

The study finds that India's exports to the Asean-5 expanded at a faster pace than that to the rest of the world during 1985-1995 period but its imports from the latter, though generally increased, widely fluctuated during the same period. It follows that India's "Look East" policy pursued in the recent past impacted exports more than imports. Another important observation is that Singapore among the Asean-5 has emerged as the most significant trade partner of India while the trade with the Philippines has been the least.

The period of post-financial crisis in the region (1997-98) brought about a drastic change in Indo-Asean trade pattern: India's imports from the Asean states expanded much faster than its exports to them leading to a growing trade deficit. This could be attributed to the heavy depreciation in the currencies of these states following the financial crisis. There was, however, no major change in the relative position of its trade partners.

The study has addressed another area of co-operation: that is, the rising Indo-Asean partnership in invisibles — services and investments in particular — in the recent past. India and Asean states have set up quite a few wholly owned subsidiaries in each other's territories apart from the growing number of joint ventures. The nature and direction of such collaborative ventures are clearly reflective of both competitive strength as well as complementary needs.

The number of financial and technical collaborations signed between India and Asean states received a major boost from 1991 onwards. More than nine-tenths (92.2 per cent) of the 733 collaborations since 1985 were approved between 1991 and 1998. Asean states investment (approved) in India rose sharply from just Rs 1.55 crore in 1991 to Rs 3,010 crore by 1997. Singapore and Malaysia were the only Asean states that had invested in India in 1991; the other three joined them subsequently.

Some idea about what needs to be done to enhance the level of economic partnership between India and Asean can be had from the feedback from the field surveys both in India and Singapore incorporated in this study. Almost all respondents viewed poor infrastructure facilities in India as a serious handicap to any business activities.

They were by and large not impressed by the financial sector reforms in India. They were of the view that the quality of financial services in India was far below the international standards. Almost every one of the respondents complained about ambiguity and opaqueness in laws and rules and cumbrous procedures resulting in bureaucratic hassles in India. While there is no official data on actual implementation of approved proposals, the field level surveys have clearly brought out that the number of casualties of such proposals is disproportionately high. Even withdrawal after setting up joint ventures in the face of difficulties is not rare.

In this context, the study arrives at two interesting hypotheses:

(1) Collaborations have much better chances of success in the areas where the requirement of government involvement is minimal after obtaining the initial approval; and

(2) Collaboration with a professional Indian partner rather than a traditional family-owned business house has a better chance of success.

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