Pacific Money | Economy | South Asia
The early results of the AI-ECTA have been positive, and could remind Indian officials of the merits of free trade agreements and tariff elimination.
The Australia-India Economic Cooperation and Trade Agreement (AI-ECTA) entered into force on December 29, 2022, another step in a deepening partnership between two fellow Quad members. However, the deal may have significance beyond bringing Australia and India closer together economically. The AI-ECTA could also have potential as a stepping stone for bringing India closer together to the world at large – and aid in pulling India away from the recent resurgence of protectionism.
India has not historically been a state which favored economic liberalism. The 1991 trade liberalization budget was a significant shift for the trajectory of the Indian economy. Following this, India’s peak customs duty – the highest of the normal tariff rates – on non-agriculture products came down steeply from 150 percent in 1991-92 to 10 percent in 2007-08. The opening of India’s economy came off the back of China’s own successes in opening its borders in 1978 as part of the “reform and opening” policy that has seen China lift 800 million people out of poverty. While India has not matched China’s economic growth rate, the Indian economy is still five times the size that it was in 1991. India has gone from being seen as a backward nation to an emerging power. It has become the fifth largest economy in the world with aspirations to become the third largest by 2027.
However, in the past few years, protectionism has re-emerged. The central government has sought to use protectionist measures to ward off inflation, prevent China from grabbing a further hold of the Indian market, and promote the growth of its own local industry. In the 2020-21 Union Budget, the Indian Ministry of Finance announced custom duty increases on over 60 product groups. Recently, the Indian government decided to ban certain types of electronic devices, with some even heralding the move as proof of the end of India’s liberalization era.
The World Trade Organization in 2021 noted the trend of India’s increasing tariff rates, observing that “the simple average applied MFN (most favored nation) tariff increased from 13 percent in 2014-15 to 14.3 percent in 2020-21.” A 1.3 percentage point increase may not sound like much, but the trajectory makes India less conducive to doing business.
That would be problematic for India’s ambitions to become a manufacturing hub, as it faces stiff competition from Southeast Asia in attracting companies moving out of China. Vietnam has been able to convince Apple, Samsung, LG, and Microsoft to set up shop due to the number of free-trade agreements it has signed, leading to favorable custom duty conditions. India’s protectionist measures go against the common economic growth wisdom and lessons gleaned from China’s growth case study.
When it comes to trade liberalization, one of the biggest hurdles for contemporary Indian policymakers has been trade deficits with other nations. Indian policymakers remain concerned that free trade deals facilitate an unequal trade relationship that allows signatories to capitalize on India’s large market and inefficient local industries. Since signing the Comprehensive Economic Partnership Agreement (CEPA) with Japan, India’s trade with Japan almost doubled, growing from $5.2 billion in fiscal year 2012 to $8.2 billion in fiscal year 2022. Similarly, India has raised concerns over the growing trade deficit with South Korea after signing a CEPA agreement with Seoul.
Concerns over growing trade deficits following free trade deals saw India withdraw from the Regional Comprehensive Economic Partnership (RCEP) despite having taken part in negotiations. RCEP was an issue for India as it has a trade deficit with 11 of the 15 members – and most notably with China. Already, half of India’s overall trade deficit is tied to China. Indian policymakers thus feared that joining RCEP would only increase the trade disparity between India and China, making India more reliant on China economically in a time of greater geopolitical tensions between the two.
These trade deficit fears have led India to take a more cautious approach by negotiating interim free– trade agreements. The first of these latest free trade negotiations to be signed and enter into force are the UAE-India CEPA and the AI-ECTA with Australia.
Notably, in the first six months of the AI-ECTA coming into force, the trade gap between Australia and India has shrunk by 15 percent. This has come on the back of increased Indian exports of pharmaceutical goods, electrical machinery, and iron and steel products.
While Australian exports to Indian have declined by 25 percent from last year, this is due to abnormally high coal exports from Australia to India in 2022, the result of heatwaves that caused the hottest March in the Indian subcontinent since recordkeeping began in 1901, increasing the South Asian nation’s energy demand. Those export numbers are thus unlikely be met again save for another historic heatwave.
What the trade deal has done for Australia is diversify Australia’s trade markets – a major focus of Australian foreign policy of late in efforts to de-risk from China. Australia has ramped up exports to India such as salmon and wine, with many other industries preparing to scale up their exports to India.
The early results of the AI-ECTA have been positive and could show Indian officials the merits of global trade through free trade agreements and tariff elimination. Doing so will lead to positive outcomes in encouraging multinational corporations to set up bases in India as many move away from China. A more open economy and market will help India’s aspiration to become a major manufacturing hub by facilitating ease of movement across global value chains and competitive pricing across a range of markets. All this will lead to higher economic growth that can raise living standards in India and increase India’s share of global trade.