india asean fta

India ASEAN Free Trade AgreementImplications for India’s Economy

A Deloitte-FICCI White PaperMarch 2011www.deloitte.com/in

Table of Contents

Abbreviations .......................................................................................................... 1

Federation of Indian Chambers of Commerce and Industry (FICCI) ..................... 4

About Deloitte ......................................................................................................... 5

1. Executive Summary ........................................................................................... 6

2. Introduction ......................................................................................................... 9

2.1 Background and Scope ............................................................................. 9

2.2 Roadmap ................................................................................................. 10

3. Decoding FTA‟s ............................................................................................. 12

3.1 Economics of Free Trade ........................................................................ 12

3.1.1 Benefits of Free Trade .................................................................. 12

3.1.2 Historical Background ................................................................... 12

3.1.3 Impediments to Free Trade .......................................................... 13

3.1.4 Trade Liberalization and FTA‟s..................................................... 13

3.2 Trade Patterns in Asia ............................................................................. 15

3.3 FTAs in Asia............................................................................................. 16

3.4 Challenges Posed by FTAs in Asia ......................................................... 19

4. Benefits from FTA‟s and the Empirical Evidence .......................................... 22

4.1 Economic Growth .................................................................................... 22

4.2 Price Reductions ...................................................................................... 24

4.3 Gains from product variety ....................................................................... 25

4.4 The Survival of More Productive Firms ................................................... 25

4.5 Trade and Employment ........................................................................... 26

4.6 Attracting Foreign Investments: ............................................................... 27

5. Economic Impact of India-ASEAN FTA ......................................................... 29

5.1 India ASEAN Trade and Impact of FTA on the Economy ....................... 29

5.1.1 Export Intensity & Trade Intensity Indices .................................... 31

5.1.2 Sectorial Hirschman ..................................................................... 33

5.1.3 Complementarity index ................................................................. 35

5.2 Impact of FTA on Indian Industries Based on Revealed Comparative Advantage ...................................................................................................... 36

5.2.1 Overview of the Sectors ............................................................... 38

5.2.2 Textiles, Apparels and Accessories ............................................. 38

5.2.3 Competitiveness analysis ............................................................ 44

5.3 Impact of FTA on Services Sector .......................................................... 51

5.3.1 Telecommunication ...................................................................... 53

5.3.2 Computer and Information Services ............................................ 54

5.3.3 Financial Service sector ............................................................... 55

5.3.4 Insurance services ....................................................................... 56

5.3.5 Construction Services .................................................................. 57

5.4 Impact on Industry – Supplementary Evidence ...................................... 57

6. Business Opportunities in ASEAN Countries ................................................ 63

6.1 Findings based on current open project tenders ..................................... 64

6.1.1 Malaysia ....................................................................................... 64

6.1.2 Singapore ..................................................................................... 71

6.1.3 Indonesia ...................................................................................... 76

6.1.4 Thailand ....................................................................................... 82

6.1.5 Philippines .................................................................................... 83

6.1.6 Vietnam ........................................................................................ 85

7. India-ASEAN FTA and Vision for India‟s Growth .......................................... 87

8. Appendix ....................................................................................................... 89

Appendix 1 .................................................................................................... 89

Appendix 2 .................................................................................................... 92

Appendix 3 .................................................................................................... 93

Contacts ............................................................................................................... 94

1 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper

Abbreviations

1MDB 1Malaysia Development Berhad

ACE ASEAN Centre for Energy

ADB Asian Development Bank

AIFTA ASEAN India Free Trade Area

APEC Asia Pacific Economic Co-operation

ARIC Asia Regional Integration Centre

ASEAN Association of South-East Asian Nations

ASEAN+3 The 10 ASEAN countries plus People's Republic of China, Republic of Korea and State of Japan

ASEAN+6 The 10 ASEAN countries along with India, Australia , New- Zealand, People's Republic of China, Republic of Korea and State of Japan

ASEAN 5 The five countries of Singapore , Malaysia , Indonesia, Brunei Darussalam &Thailand

ASSOCHAM Associated Chambers of Commerce of India

BIMSTEC Bengal Initiative for Multisectoral Technical and Economic Cooperation

BO Business Opportunities

CCI Communications Content & Infrastructure, Malaysia

CEPC Carpet Export Promotion Council, India

CFTA Canada-U.S. Free Trade Agreement

CITI Confederation of Indian Textile Industries, India

CMLV Acronym for Cambodia, Myanmar, Lao's People Democratic Republic

CP Complaining Party

CPI Consumer Price Index

DIPP Department of Industrial Policy and Promotion

DSM (ASEAN-India) Dispute Settlement Mechanism Agreement

2

E&E Electrical and Electronics

EPP Entry Point Projects

ESC Economic Strategies Committee ,Singapore

ETP Economic Transformation Programme

EU European Union

FDI Foreign Direct Investment

FICCI Federation of Indian Chambers of Commerce and Industry

FTAA Free Trade Area of the Americas

FTA Free Trade Agreement

GATT General Agreement on Tariff and Trade

GDP Gross Domestic Product

GERD Gross Expenditure on R&D

GLC Government-linked company

GNI Gross National Income

ICT Information and communication technology

IP Intellectual Property

IT Information Technology

KG D 6 Krishna Godavari-D6 Gas project, India

KLIA Expressway

Kuala Lumpur International Airport Expressway

KLIFD Kuala Lumpur International Financial District

LAO PDR Lao People‟s Democratic Republic

LNG Liquefied Natural Gas

MDG Millennium Goal

MFN Most Favored Nation

MNC Multi- national Corporation

MRO Maintenance, Repair and Overhaul

MRT Mass Rapid Transit

MTDC Malaysian Technology Development Corporation

NAFTA North American Free Trade Agreement

NKEA National Key Economic Areas


OECD Organization for Economic Cooperation and Development

PCA Party Complained Against

PRC- People‟s Republic of China

PTA Preferential Trade Agreement

R&D Research and Development

R&D&C Research, Development and Commercialization

RCA Revealed Comparative Advantage

RIL Reliance Industries Limited

RFP Request for Proposal

RM Ringgit Malaysia

ROO Rules of Origin

SAARC South Asian Association for Regional Cooperation

SCORE Sarawak Corridor of Renewable Energy, Malaysia

SITC Standard International Trade Classification

SME Small and Medium Enterprise

UAE United Arab Emirates

UK United Kingdom

US/ USA United States of America

USTR U.S. Trade Representative

WTO World Trade Organization

4

Federation of Indian

Chambers of Commerce and

Industry (FICCI)

Established in 1927, FICCI is the largest and oldest apex business organisation

in India. Its history is closely interwoven with India's struggle for independence

and its subsequent emergence as one of the most rapidly growing economies

globally. FICCI plays a leading role in policy debates that are at the forefront of

social, economic and political change. Through its 400 professionals, FICCI is

active in 44 sectors of the economy. FICCI's stand on policy issues is sought out

by think tanks, governments and academia. Its publications are widely read for

their in-depth research and policy prescriptions. FICCI has joint business

councils with 75 countries around the world.

A non-government, not-for-profit organisation, FICCI is the voice of India's

business and industry. FICCI has direct membership from the private as well as

public sectors, including SMEs and MNCs, and an indirect membership of over

2,50,000 companies from regional chambers of commerce.

FICCI works closely with the government on policy issues, enhancing efficiency,

competitiveness and expanding business opportunities for industry through a

range of specialised services and global linkages. It also provides a platform for

sector specific consensus building and networking. Partnerships with countries

across the world carry forward our initiatives in inclusive development, which

encompass health, education, livelihood, governance, skill development, etc.

FICCI serves as the first port of call for Indian industry and the international

business community.


About Deloitte

Deloitte Touche Tohmatsu Limited is a UK private company whose member firms

around the world provide integrated professional services in Audit, Tax,

Enterprise Risk Services, Consulting and Financial Advisory. We provide

services to public and private clients spanning multiple industries. With a globally

connected network of member firms in more than 150 countries, we bring world-

class capabilities and deep local expertise to help clients succeed wherever they

operate. Our more than 170,000 professionals are committed to becoming the

standard of excellence.

In India, we are spread across 13 locations and our 15,000 professionals take

pride in their ability to deliver to clients the right combination of local insight and

international expertise. Our professionals are unified by a collaborative culture

that fosters integrity, outstanding value to markets and clients, commitment to

each other, and strength from cultural diversity. We enjoy an environment of

continuous learning, challenging experiences, and enriching career opportunities.

Our professionals are dedicated to strengthening corporate responsibility,

building public trust, and making a positive impact in their communities.

6

1. Executive Summary

The India ASEAN Free Trade Agreement (FTA) was signed in Bangkok on

August 13, 2009, and came into effect from January 1, 2010 with Malaysia,

Thailand and Singapore. It is expected to be in place with all member countries

by 2016. The FTA collectively covers a market of nearly 1.8 billion people and

proposes to gradually slash tariffs for over 4,000 product lines. Currently the FTA

is restricted to trade in goods while negotiations for a similar agreement for

services are currently under way.

The theoretical underpinnings leading to an advocacy for free trade agreements

is unequivocal as free trade is expected to increase production, improve

specialization and lead to other welfare improvements in the long run for

consumers and producers alike. However the practical experience and lessons

from the FTA‟s that have been in place in other regions of the world does not

provide the necessary backing to the conclusions that emerge from the theory of

free trade. What is therefore the likely impact of the India-ASEAN FTA on the

Indian economy? What industries will benefit from the implementation of the FTA

and what industries will be hurt? Is this likely to create a significant impact on the

wages, employment and trading patterns in India in the years to come? What

opportunities and threats should Indian businesses be aware of? These are

some of the issues that we address in this white paper.

Drawing upon the mixed findings of the impact of other FTAs on the member

countries, it is therefore not surprising that the impact of the India-ASEAN FTA

on the Indian economy is also likely to benefit some constituents while it will

negatively impact certain sectors in the short run. Drawing upon existing

research, we find strong reason to advocate that the success of the FTA is

critically dependent on the existence of good institutions in the country and an

efficient regulatory environment such that they act as true enablers for the

benefits to flow through and disperse throughout the economy. Benefits from the

FTA can possibly have a positive impact on India‟s growth rate, help improve

productivity in Indian manufacturing and usher in an environment (driven by

healthy competition) that can promote greater business ties leading to

employment creation and greater trade within India and ASEAN.

We find evidence that the implementation of the FTA can only result in

intensifying the trade dependence amongst India and ASEAN. Seen in light of

the fact that currently ASEAN region exports more to India than what India

exports to ASEAN, a greater trade dependence will possibly allow India‟s exports

to ASEAN to increase in the years ahead. Moreover, we also find that India has

increasingly been concentrating its exports to ASEAN towards mineral fuels and


mineral oils. It is therefore plausible that post the implementation of the FTA,

these sectors will benefit more as they will be best poised to avail of their greater

presence within ASEAN. Other sectors/industries can also be expected to benefit

through greater efficiencies achieved through specialization although a more in-

depth analysis will need to be conducted to arrive at any affirmative conclusion in

this regard. We also find evidence that suggests that the trading profile between

India and ASEAN is such that ASEAN exports to India when matched against

India‟s import profile is more compatible in contrast with India‟s exports to

ASEAN and its import profile. This implies that ASEAN trade will benefit more

post implementation of the FTA compared to the perceived gains from trade that

India is likely to experience.

Our industry specific analysis focuses on determining the relative comparative

advantage enjoyed by India‟s industry vis-a-vis that of the ASEAN trading

partners. The basis for this analysis stems from the fundamentals of trade theory

that concludes that free trade will result in specialization in certain

products/industries in which a country enjoys a comparative advantage and will

end up producing and exporting more products from these industries. Based on

our analysis, we find that the following Indian industries enjoy a greater

competitive advantage relative to their counterparts in the ASEAN countries:

Chemicals

Medical and pharmaceutical

Textiles, apparels and accessories

Handicrafts & carpets

On the other hand, the following industries in ASEAN enjoy a larger competitive

advantage than the counterparts in India:

Machinery and appliances

Electrical equipment

The automobile industry (including auto parts and ancillaries) is on the borderline

with no clear trend that may allow us to conclude whether India or ASEAN has a

clear advantage over the other.

Although the current FTA is restricted to that in goods alone, we extrapolate the

possible implications of the FTA on the services sector through secondary

multiplier effects on the economy. We also find evidence that a FTA with services

(that is currently being discussed) will certainly be a boost to the services sector

in the Indian economy and will help in sustaining the growth momentum in the

medium to long term.

Finally, we find ample evidence to suggest that the FTA will open up

opportunities for Indian businesses in Malaysia, Singapore, Indonesia, Thailand

and Philippines. We have highlighted important initiatives announced by the

respective governments in these countries as well as projects with open tenders

that will become accessible to Indian businesses to further their business

8

interests in these countries. These opportunities will result in enhancing the

growth of key businesses in these sectors with the benefits of income and

employment generation in India that will add to the India growth momentum.

We duly emphasize the importance of an enabling policy environment that can

enhance or pull down the chances of the FTA becoming a catalyst in India‟s

growth story. No free trade agreement can result in the intended outcome in

fostering trade, growth and employment creation in a country if the FTA is

juxtaposed against a myriad set of conflicting subsidies and taxes in the domestic

front that can destroy the very competitiveness that the FTA can usher in.

This is critical to the success of the India ASEAN FTA and cannot be

emphasized enough.


2. Introduction

2.1 Background and Scope

The India ASEAN Free Trade Agreement (FTA)1 was signed in Bangkok on

August 13, 2009, and came into effect from January 1, 2010 amidst mounting

scepticism from the business community in India regarding the asymmetric

impact of this agreement on certain sectors of the Indian economy. The FTA,

drafted after almost six years of tough negotiations, is expected to be

implemented in phases with Malaysia, Thailand and Singapore implementing the

agreement from January 1, 2010 in the first phase.

The FTA, considered the world's largest, covers a market of nearly 1.8 billion

people and proposes to gradually slash tariffs for over 4,000 product lines over a

staggered period, by 2016. However, certain specified products on both sides will

be shielded to some degree. This FTA aims at opening a 1.8 billion consumer

market to the member countries with a combined GDP of $ 2.3 trillion. In

addition, ASEAN-India bilateral trade has been growing steadily from 1993 and

stood at US$ 43.9 billion as of 2009-10 with ASEAN‟s export to India at US$

25.79 billion and imports from India at US$ 18.1 billion as of the same year. As

for foreign direct investment (FDI), the inflow from India to ASEAN member

States was US$ 476.8 million in 2008, accounting for 0.8 per cent of total FDI in

the region. Total Indian FDI into ASEAN from 2000 to 2008 was US$ 1.3 billion.

Just like any other FTA, the India-ASEAN FTA has also been mired in political

controversy despite the economic principle that advocates free trade as a

desirable trading form benefiting all partners through mutual access to greater

markets, free flow of labour and capital, reduced transaction costs of doing

business across geographies and an efficient allocation of resources to the

various production forms. Driven by the theoretical underpinnings of free trade

and the empirical evidence from FTA‟s implemented in various regions of the

world, this white paper takes a closer look at the India-ASEAN FTA and explores

its impact on the Indian economy. It provides a balanced view of the pros and

cons associated with the FTA and evaluates its impact on key industries in India

– both from the standpoint of opportunities that are likely to be created as well as

the challenges posed on them from greater competition that the FTA is likely to

1 A complete summary of the Indo-ASEAN FTA along with its salient features is provided

in Appendix 1.

10

usher in. An important analysis presented in this paper is the possible impact of

the FTA on some key industries using the relative production advantages or

disadvantages that Indian industry reflects in the region.

2.2 Roadmap

Our white paper starts by summarizing the theory governing free trade. Several

assumptions have been made by economists to conclude on the benefits of free

trade. Notable among them is the notion of “free markets” i.e. markets that are

not constrained by the existing regulatory environment. It is important to

understand this framework as any meaningful discussion on the benefits of free

trade will necessarily have to be evaluated in a larger environment where other

existing policy parameters (and their impact on the specific industries) may act as

a deterrent to the realization of the full benefits from trade.

Before moving on to an analysis of the impact of the FTA on India, we

summarize the impact of other existing FTA‟s on the participating nations. The

evidence on the benefits of such trade pacts in other regions is mixed and the

success, if any, can best be described as limited. However, trade relations and

the impact of trade liberalization is a dynamic phenomenon and we recognize the

limited tenure of some of these agreements to be able to draw meaningful

conclusions; hence, it is possible that a longer term analysis on the impact of

other FTA‟s is required before one draws a conclusion about their success.

We then provide a snapshot of the characteristics of India-ASEAN trade. This

allows us to delve into a before and after comparison of the impact of the FTA on

the Indian economy. We focus on some of the key member countries that are a

party to the FTA and draw inferences on the impact of the agreement on the

Indian economy based on the economic policies and priorities that have been

announced by the respective countries. As the current India-ASEAN FTA

pertains to goods only, we restrict our analysis to the impact on those sectors

that are directly impacted by the FTA. However, inter-industry linkages and

multiplier effects in the economy are important determinants that will ensure

that the impact from the FTA will flow through to the other sectors as well.

We make some observations on the impact of the FTA on the services sector

in this context.

Several large scale projects initiated and announced in the ASEAN region in the

recent past may open up opportunities for Indian businesses once the FTA is

operationalized. We provide a summary of such initiatives as a part of the

opportunities from the FTA section B in this paper. We also discuss the possible

short term impact of the FTA on some Indian industries arising from trade

diversion and specialization that are associated with any FTA of this kind.

Specific sectors and the impact of the FTA on them are also discussed. The

feedback from the industries is summarized based on anecdotal evidence and

our analysis from them. We also provide a theoretical analysis of the impact of

the FTA on the focus industries based on the principles of trade theory.


Finally, we juxtapose the FTA on the growth path of the Indian economy and

conclude on how this will play out over the next decade in terms of India‟s growth

rate as well as some other social sector priorities. A large part of this discussion

is subjective and we recognize the limitations of our conclusions based on other

contingencies that are not explored or taken up in detail. Nonetheless, our

observations are interesting in their own right and may pave the way for greater

analysis and fine-tuning in the future.

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3. Decoding FTA’s

3.1 Economics of Free Trade

3.1.1 Benefits of Free Trade

The economic case for an open trading system based on multilaterally agreed

rules rests largely on commercial common sense. But, it is also supported by

evidence as captured by world trade and economic growth trends since the

Second World War. The first 25 years after the war witnessed steep reductions

in tariffs. This was accompanied by significant increases in world trade that

averaged approximately 8 percent per annum over the same period. More

significantly, world economic growth accelerated and averaged approximately 5

percent per annum during this period. While an increase in growth may be

driven by a number of factors (e.g. technological advances), empirical research

indicates a definite statistical link between freer trade and economic growth.

Economic theory points to strong reasons for the link. All countries, including the

poorest, have resources – human, industrial, natural, financial – which they can

employ to produce goods and services for their domestic markets or to compete

overseas. Economics tells us that we can benefit when these goods and

services are traded. Simply put, the principle of “comparative advantage” says

that countries prosper by concentrating their resources in on what they can

produce best, and then trading these products for products that other countries

produce best. In other words, liberal trade policies – policies that allow the

unrestricted flow of goods and services – sharpen competition, motivate

innovation and breed success. The importance of global free trade can be

grasped by the fact that there are currently 153 countries that are members of

the World Trade Organization (“WTO”) – the international organization whose

main function is to ensure that trade flows as smoothly, predictably and freely

as possible.

3.1.2 Historical Background

The desirability of free trade, originally put forth by Adam Smith in “The Wealth of

Nations” in 1776, was first demonstrated theoretically by 19th century English

economist David Ricardo. Ricardo showed that in a world where labor is the only

factor of production, if each country specializes in the good in which it has a

comparative advantage, then all countries can gain from trade. The intuition is

that this kind of specialization maximizes global production of goods and enables

countries to enjoy greater levels of consumption through international trade.

Ricardo‟s seminal work has spawned a rich literature in international trade theory


showing that even under more general conditions, Ricardo‟s conclusion that free

trade is mutually beneficial continues to hold good.

Of particular interest is the Heckscher-Ohlin theory that introduced a second

factor of production, capital, and showed that a country will export the commodity

that intensively uses the factor that is relatively more abundant in that country

(and will import the good that intensively uses the scarce factor). In other words,

as observed by Markusen et al., the Heckscher-Ohlin theory may be used to

support certain empirical observations including evidence that labor-abundant

developing nations such as India tend to export labor-intensive goods such as

clothing, footwear etc.

3.1.3 Impediments to Free Trade

Given the overwhelming theoretical basis favouring free trade, it is somewhat

surprising to find that free trade is almost never observed in practice. Free trade,

in its purest form, refers to the unfettered export and import of goods and

services between one country and another with no government intervention on

either country‟s side. However, barriers to free trade are an observed

phenomenon and manifest themselves as:

I. Tariff barriers: A “tax” on imports that are invoked by countries mainly to

protect the domestic industries from the possible consequences of

greater competition.

II. Non-tariff barriers: These can be in form of quantitative restrictions on

imports/exports (“quotas”) or existing government regulations governing

technical and safety standards for products that can have the effect of

restricting imports. Another form of non-tariff barrier to free trade is

found in “Domestic Content Requirements” that are regulations wherein

importers are forced to import goods that contain minimum prescribed

amounts of domestically produced components. Such restrictions are

commonly imposed on the domestic operations of foreign firms that

engage in foreign direct investment in production facilities in the

regulating country.

It should be noted that there can be a number of other regulatory/administrative

measures that can be put in place to indirectly restrict import quantities.

3.1.4 Trade Liberalization and FTA’s

Given the existence of trade barriers (regardless of origin) at any point in time,

the question often arises as to what countries can do to lower or eliminate trade

barriers among themselves. Efforts to do so are broadly referred to as “trade

liberalization” and can take several forms. Markusen et al. state that trade

liberalization often occurs in the form of a multilateral agreement such as the

various trade negotiation rounds of the General Agreement on Tariffs and Trade

(“GATT”), or an agreement among a smaller set of countries, typically with some

geographical proximity. This latter type of agreement is called a “preferential

14

trade agreement” (“PTA”) and forms the starting point for our analysis of the

ASEAN-India Free Trade Area (“AIFTA”) under consideration.

Free trade area: A “free trade area” is the least restrictive of PTAs and

consists of a number of countries that agree to eliminate all trade barriers

among themselves while keeping intact their existing tariffs with non-member

countries. The North American Free Trade Agreement (“NAFTA”) signed by

the United States, Canada and Mexico is an example in this regard.

Customs Union: A higher level of economic integration takes the form of a

“customs union” in which member countries, in addition to eliminating all trade

barriers among themselves, also adopt a common tariff against non-member

countries.

Common Market: When the cooperation among member states is extended to

allow free movement of factors of production (e.g., labor and capital) across

national boundaries, a “common market” is formed.

Economic Union: Greater levels of economic integration may take place in the

case of an “economic union”, i.e., a common market in which members

coordinate monetary, fiscal policies and other policies. The European Union

is the classic example of an economic union.

Beneficial Effects of FTAs

The beneficial effects of FTAs are several as listed below.

Increase in Incomes/Growth: An FTA expands trade volumes among member

countries and tends to increase incomes/growth of the members. Intuitively,

starting from a situation of tariff-distorted trade, the elimination of tariffs allows

each member to specialize in the production of the goods in which it has a

comparative advantage and trade those goods in exchange for imports of

other goods from fellow members.

Achievement of Economies of Scale: An FTA, by eliminating tariffs, expands a

member country‟s export market thereby allowing it to expand its scale of

operations and lower its average cost of production.

Reduction of Monopoly Inefficiencies: If inefficient monopolies exist in the

domestic market, then increased competition from foreign products dampen

domestic monopoly inefficiencies, if not eliminate them altogether.

Availability of Greater Product Variety: The opening up of free trade increases

trade flows and expands the variety of products available to consumers in the

home country.

Potential Negative Effects of FTAs

There can also be potential drawbacks associated with FTAs.

Trade Diversion: Trade diversion refers to the possibility of an FTA member

country switching its import supplier from a more efficient (low cost) country to

a less efficient member country resulting in an inefficient allocation of

resources.


Dumping: Dumping refers to the practice of a foreign country selling its

product in the home market at a price that is lower than its “fair value”. While

this can occur even in the presence of trade barriers, the elimination of tariffs

in the home country increases the probability of this occurrence and can

cause considerable harm to domestic industries that can be driven out of

business altogether.

Unemployment: The reduction of tariff barriers leads to greater competition in

the domestic market for the imported product leading to loss of market share

and laying off of workers in that sector. In the short run, this kind of

dislocation can cause considerable hardship to the affected workers.

Excessive Dependence: Free trade can result in the shutting down of a

number of industries that are unable to compete with cheaper imports. This

may lead to excessive dependence on foreign supplies for a number of

commodities – a situation that could have adverse effects if there were a

disruption in any of the foreign supplies.

The net effect of an FTA will therefore be driven by the benefits and the possible

negative impacts arising from them. What makes this assessment difficult for an

FTA such as the India-ASEAN one is the fact that the “market” in which such an

FTA is being implemented is fraught with policy guidelines, regulatory restrictions

and competitive trade policy that directly hinders the interpretation of a truly “free”

trade agreement.

3.2 Trade Patterns in Asia

Asia‟s rise in the 1960s from a poor underdeveloped agro based economy to a

„global factory‟ has been spectacular. Though the continent lacked large reserves

of natural resources and was steeped in high levels of poverty, it had abundant

supply of cheap and productive manpower. Geographical proximity to the

expanding, high-income economy of Japan with MNCs in the lookout for low cost

production locations proved to be a boon for Asia. A thriving world economy

hungry for labor-intensive imports from Asia, declining tariffs in developed

country markets, inflows of trade-related FDI, and generous foreign aid flows

acted as the key driver of outward-oriented growth in Asia.

Market driven expansion of trade and FDI along with innovation and learning by

Asian firms have enabled them to acquire requisite technological capabilities to

either compete internationally or become suppliers to MNCs over time. As firms

underwent systematic innovation and learning, imports from the region witnessed

a gradual shift. From exporters of labor intensive products like textiles, garments,

and footwear, Asia started to export more of technology-intensive exports like

chemicals, ships, electronics, and automobiles. Asian firms through their

constant innovation and investment in research and development emerged as

leaders in production networks and supply chains.

Intra-regional trade also flourished as regional trade barriers and logistics costs

fell and production found way to more cost-effective locations. As per ADB

estimates, trade within Asia increased significantly from 37% of total trade to

54% between 1980 and 2007. The end of the 20th century witnessed the Asian

16

crisis (1997) and this significantly changed the outlook of outward orientation in

the region.

The Asian Financial Crisis of 1997-98 wrecked havoc among the economies of

Thailand, Indonesia, Malaysia, and the Republic of Korea (hereafter Korea) and

adversely affected the economies of Philippines, Hong Kong and China. The

crisis led to the emergence of sentiments of „economic regionalism‟ in East Asia

and a number of economies have come together in the post crisis era to

undertake initiatives for regional economic surveillance and close economic

collaboration. Several groups have been to set up to facilitate the process.

3.3 FTAs in Asia

Market driven forces of cross border trade, FDI flows and finance as a result of

multilateral and unilateral trade liberalization processes has deepened the

economic ties in the Asian region. The last twenty years have witnessed an

upsurge of bilateral and multilateral trade agreements being convened in this part

of the world.

For several decades the Asian economies had structured their approach to

international trade on the multilateralism and most favored nations (MFN)

principles through the General Agreement on Tariffs and Trade (GATT)/WTO

framework and open regionalism and unilateral liberalization centered on APEC.

But this long standing policy stance of pursuing trade through the frameworks of

APEC and WTO has witnessed a change over the past decade. The region is

pursuing a three-track approach based on global (WTO-based) cum trans-

regional (APEC-based), regional (ASEAN+3 or ASEAN+6), and bilateral

liberalization of trade.

Asia is at the forefront of FTA activity. At present there are a total of 506 FTAs in

various stages of negotiation in the region of Asia, of which 119 are ones that

have been proposed, 110 are under negotiation, and 277 that have been already

concluded. Out of the 277 concluded FTAs 231 are already under effect.

Table 3.1: No of FTAs in in various Asian countries (as of 2010)

UNDER NEGOTIATION CONCLUDED

TOTAL Country Proposed

Framework Agreement Signed/UnderNegotiation

Under Negotiation

Signed In Effect

Singapore 4 1 9 3 18 35

India 11 4 7 0 11 33

Korea, Republic of

10 2 8 1 6 27

Pakistan 10 5 3 2 6 26

China, People's Republic of

8 3 3 1 10 25

Thailand 6 4 3 0 11 24


Japan 6 0 5 0 11 22

Australia 6 2 5 0 8 21

Malaysia 3 1 5 2 8 19

Indonesia 7 1 1 1 7 17

New Zealand

4 1 3 2 7 17

Brunei Darussalam

4 1 1 0 8 14

Viet Nam 3 1 2 0 7 13

Philippines 4 0 1 0 7 12

Lao PDR 2 0 1 0 8 11

Kazakhstan 2 1 0 3 5 11

Myanmar 2 1 1 0 6 10

Cambodia 2 0 1 0 6 9

Source: Asian Regional Integration Centre website

The table exhibits the status of FTAs signed by the top 15 countries (in respect of

maximum number of total FTAs) and all the ASEAN countries.

Singapore leads the region with a total of 35 FTAs followed by India and Korea.

Singapore with its strategic location, world class infrastructure and logistics is the

regional head quarter for a number of top MNCs in the world. One of the

founding members of ASEAN, Singapore has trade agreements with all the major

Asian economies like PRC, India, Japan, and Korea as well as economies

outside the region, including the United States (US) and Australia. The US-

Singapore FTA which has been effective since 2004 was the first such

agreement made by US in Asia and is supposed to be a model agreement in

terms of scope.

India and China too have been active in the FTA scenario in a bid to ensure

market access for their goods and services. China has separate agreements with

ASEAN for goods and services and is in the process of negotiating a third one for

investments. India has a goods FTA with ASEAN (which is the focus for this

paper), and is trying to negotiate a service agreement. Japan and Korea – the

two major Asian economies have also been active in forging trade treaties with

other Asian economies with a total of 22 and 27 treaties respectively under their

belts. The relatively poorer economies such as Cambodia, Lao People‟s

Democratic Republic (Lao PDR), Viet Nam, Philippines, and Indonesia have by

and large relied on the ASEAN to convene trade agreements with the larger

economies . All of these countries are members of ASEAN. Weak infrastructural

capacity and low resources could be a reason why these countries have not

been able to conduct negotiations on their own.

The four major factors that have played a driving force behind the emergence of

FTAs in East Asia have been:

The deepening of market-driven economic integration - Asian

policymakers have realized the potential of FTAs in reducing trade barriers,

18

harmonizing rules, standards and regulations and the long term economic

benefits that these can bring in and have embarked on a mission to foster

greater economic integration in the region through trade pacts.

The success of European and North American economic integration

initiatives - The successes of initiatives for economic integration in Europe

and the Americas have proved to be a strong motivation for the region to

move towards regional economic cooperation and integration. The successful

launch of an economic and monetary union by the euro area countries and the

expansion of EU to further east as well as the success of NAFTA and the Free

Trade Area of the Americas (FTAA) in North Central, and South America have

proven beneficial to the participating economies. The fear that the two

trading giants, the EU and the US, might become more dominant and

influential in rule-setting in the global trading arena and thus marginalizing

Asian economies has been a major impetus for the regional leaders to come

forward to step up initiatives of regional cooperation and integration. Also, the

slow progress in the WTO/Doha round and the APEC process has prompted

the regional economies to come together themselves and form trade

agreements that are mutually beneficial to their circumstances.

The Asian financial crisis - The financial crisis of 1997-98 that rocked the

economies of East Asia has been an eye-opener to the fact that the region

needs to strengthen regional economic cooperation in order to sustain

economic growth along with stability. Though it adversely affected the east

Asian Economies only, the crisis became a lesson for all emerging Asian

economies and triggered a need among the east Asian economies to

strengthen their regional economic cooperation to ensure sustainable growth

and stability in the region. Fear of exclusion has also prompted many nations

to join the FTA bandwagon.

Slow progress of the WTO DOHA negotiations - The WTO Doha

Development Round commenced on November 2001 as an initiative to

promote trade-led growth in developing countries. The negotiations were

primarily centered on two key areas: agriculture and non-agricultural market

access. After seven years of negotiations, talks were suspended over the

growing concerns that there weren‟t appropriate safeguard measures to

protect poor farmers in the developing nations from the rising food and oil

prices. With the dim prospect of a finalized trade agreement, pro-business

Asian economies started to initiate bilateral and multilateral trade treaties

among themselves to further talks on liberalization of trade in goods

and services.

The number of FTAs is easy to track, but the numbers in themselves fail to

indicate how important FTA s are to trade and economy at the national level.

How much of a country‟s trade is covered by the FTA is difficult to calculate

owing to the exceptions and exclusions contained in many trade agreements.

Official statistics on utilization rates of FTA preferences for Asia are not easily

available and published data on the direction of services trade do not exist. A

paper by ADB attempts to form an indicative estimate of this, by making a

simplistic, yet bold assumption that that all goods trade is covered by concluded


FTAs and computes the share of an economy‟s bilateral trade with its FTA

partners in its total trade with the world for 2000 and 2008.

Graph 3.1: Share of an economy’s bilateral trade with its FTA partners

Source : ‘Asian FTAs: Trends and Challenges’ by Masahiro Kawai and

Ganeshan Wignaraja

The larger economies of the region like India, Korea, China, Japan have a

smaller share compared to the ASEAN member states. Korea has 44% of its

total trade with bilateral FTA partners, China 25%, India 23% and Japan 11%.

This implies that ASEAN members rely more on FTAs for their trade

compared to other nations.

Another point to note is that for all the nations, the share of trade with bilateral

FTA partners out of its total trade has increased over the eight year period

considered. This is an indication of the increasing number of FTAs and their

importance in total trade in the economies of the region.

3.4 Challenges Posed by FTAs in Asia

ADB2 has pinpointed some challenges confronting FTAs in Asia. They have

made their own study and surveys to come to the conclusions that are

summarized below.

Low utilization of rates of FTA: A free trade agreement bestows numerous

benefits like preferential tariffs, market access, and new business

opportunities for partner economies. To automatically assume that such

benefits are exploited or enjoyed by the individual industries and firms would

be grossly inaccurate. In fact studies have shown that FTA preference

2 This section has been compiled mainly from the working paper by Asian Development

bank on FTAs in Asia.

80

70

60

50

40

30

20

10

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runei D

aru

ssala

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Lao P

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Sin

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Mala

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Myanm

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Hong K

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Chin

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Cam

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Vie

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India

Phili

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2000 2008

20

utilization rates (estimated by shares of export value enjoying preferences 3) is

low in Asia. This implies that although a number of FTAs have been

concluded in the region, in reality they are underutilized. The direct implication

is that the full benefit of free trade is not being actualized and it is ultimately a

waste of scarce resources used in negotiating trade treaties in developing

countries4. Lack of awareness by the firms in member countries were found to

be one of the major reasons behind this low utilization of FTA‟s.

Thus an important policy implication arising out of the above problem is to

raise awareness about FTAs and their various benefits and clauses to firms

and industries at a micro level. Government and Industry bodies could play an

important role in making FTAs more transparent to industries - especially

small and medium scale industries - which might not have the relevant

information or the capacity to decode the scope of FTAs.

Coverage of Agricultural Goods in FTA: Another potential problem with

Asian FTAs is the suboptimal level of liberalization in agricultural products.

The coverage of the goods in the Asian FTAs differs from agreement to

agreement. Agricultural goods have been largely excluded in coverage owing

to the pressures from the farm lobbies and social concerns in the rural

sectors, where poverty looms large. According to the ADB report, it is

important for FTAs in the region to ensure coverage of at least 85% of all

agricultural product lines in a given agreement and minimize exclusions to not

more than 150 product lines. This can be achieved by adopting a negative list

approach to agricultural products with a few sensitive items. A realistic tariff

elimination schedule, a transparent regime, and reform of subsidies are issues

that need to be further addressed under FTAs.

Rules of Origin (ROO): Rules of origin are used to determine the country of

origin of a product for purposes of international trade. They are used to

determine which goods will enjoy preferential tariffs to prevent trade deflection

among FTA members. For manufactured goods, ROOs comprise three types:

(i) a change in tariff classification rule defined at a detailed harmonized

system level; (ii) a local (or regional) value content rule, which requires a

product to satisfy a minimum local (or regional) value in the country (or region)

of an FTA; and (iii) a specific process rule, which requires a specific

production process for an item. It has been argued that Asian FTAs have

complicated ROOs and this deters the use of FTA preferences and raises

transaction costs for firms. Multiple ROOs in overlapping FTAs could pose a

severe burden on SMEs, which have less ability to meet such costs. This

problem was originally termed a “spaghetti bowl” of trade deals (Bhagwati

1995), and has now come to be known as the “noodle bowl” effect in Asia.

Another group of analysts have argued that the Asian FTAs could be actually

creating a new order by building the foundation for a stronger regional trading

system (Petri 2008).

3 Baldwin 2006; World Bank 2007

4 Bhagwati 2008

http://en.wikipedia.org/wiki/Country_of_origin

http://en.wikipedia.org/wiki/Country_of_origin

http://en.wikipedia.org/wiki/International_trade


ADB conducted a firm level survey to find enterprise perceptions of whether

FTAs would increase cost of conducting business when dealing with multiple

ROOs in the region. Evidence suggested that multiple ROOs impose limited

burden on firms in East Asia. Of the 465 firms that responded to the question

on this issue, only 27% said that multiple ROOs significantly add to business

costs. But there were country-level variations in perceptions - Singaporean

firms had the most negative perceptions regarding multiple ROOs (38%),

while Korean firms had the least negative perceptions (15%). Negative

responses for Japanese, Philippine, and Thai firms were 31%, 28%, and 26%,

respectively. National FTA strategies, industrial structures, and the quality of

institutional support could explain the differences in perceptions of ROOs

across Asian countries.

The survey also revealed, rather unexpectedly, that larger firms in Asia had

more negative perceptions of multiple ROOs than SMEs. A possible reason

for this was large established firms tend to export to multiple markets and

change their business plans in response to FTAs and are thus more likely to

complain about issues of multiple ROOs. Smaller firms usually export to a

single market and thus probably are not that affected by the complex ROOs.

Though ROOS are not perceived as a burden by firms at the moment, in

future, as the number of FTAs increase, it is possible that multiple ROOs

could pose as a problem and thus policymakers need to take precautionary

steps towards that.

22

4. Benefits from FTA’s and

the Empirical Evidence

The following gains from trade are predicted by economic theory:

Economic growth;

Fall in prices after tariff reductions due to increased economies of scale as

well as greater competition between firms;

An increase in the variety of products available to consumers;

Self-selection of firms with only the efficient firms surviving after trade

liberalization;

Employment and wage effects associated with greater trade; and

Attracting Foreign Investments.

Given below is the empirical evidence about the aforementioned gains that has

been analyzed with respect to trade liberalization programs such as Canada-US

FTA, Chile-Mexico FTA, European Economic Integration and others5

4.1 Economic Growth

Global Trade (merchandise trade) has grown at a rapid pace of 73% in the last

decade from 1999 to 2009. Growths of income and demand in the emerging

markets, improvement in economic policies and investment climate in these

markets have been a major driver of trade besides trade policy and tariff

reduction.

Empirical research supports the fact that opening trade increases growth in both

developed and developing countries6. However, it is also true that the existence

of good institutions and efficient regulatory systems are a prerequisite to attract

FDI and trade-led growth. A general consensus seems to have been emerging

5 Excerpted from Robert C. Feenstra, “New Evidence On The Gains From Trade”, Review

of World Economics/Weltwirtschaftliches Archive, December 2006; and „Trade as a driver

of Prosperity‟ – Commission staff working document, European Commission, 2010

6 A. Winters "Trade liberalization and economic performance: an overview", Economic

Journal, 114, 2004, and R. Wooster, S. Dube and T.M. Banda (2006) "The contribution of

intra-regional and extra-regional trade to growth: evidence from the EU"


over the last few years that trade opening works best for growth, employment

and incomes when it is successfully combined with other structural reform

measures7.

With respect to the European Union, existing FTA‟s are argued to have an impact

on increasing EU GDP by 2%. Further increased cooperation with existing trade

partners, particularly lowering of non tariff barriers could double this growth

effect. Moreover, empirical estimates also reveal that opening of trade increases

productivity and increases competiveness of the EU industries with estimates

suggesting that between 1988 to 2000, productivity in manufacturing sector in the

EU region increased by 11% while mark-ups came down by 1.6% in the face of

increased imports during the period8. Productivity growth aid economic growth as

well as consumer welfare and therefore gains in productivity have second rung

effects of increasing economic growth.

Another study9 suggests that since North American Free Trade Agreement

(NAFTA)‟s implementation in January 1994, U.S. agricultural trade with its

partners in the agreement has increased in both size and relative importance.

Between 1993 and 2000, U.S. agricultural exports to Canada and Mexico

expanded by 59 percent, while corresponding exports to the rest of the world

grew only 10 percent. Similarly, U.S. agricultural imports from Canada and

Mexico increased 86 percent between 1993 and 2000, compared with 42 percent

for U.S. agricultural imports from the rest of the world. However, other factors -

such as population growth, changes in macroeconomic performance and

exchange rates, and unusual weather patterns - generally have had a much

stronger effect on U.S agricultural trade with Canada and Mexico than NAFTA.

However, a commodity-by-commodity analysis provides that for a handful of

commodities, NAFTA has had a much larger impact, with an increase in trade

volume of 15 percent or more that is directly attributable to the agreement. This is

particularly true for products whose trade was severely restricted prior to CFTA

and NAFTA.

Trade relations among Canada, Mexico, and the United States have broadened

substantially since NAFTA's implementation, though experts disagree over the

extent to which this expansion is a direct result of the deal10

. According to data

from the office of the U.S. Trade Representative (USTR), the United States' chief

7 R. Chang, L. Kaltani, N. V. Loayza (2009) "Openness can be good for growth: The role

of policy complementarities", Journal of Development Economics 90 (2009) 33–49.

8 N. Chen, J. Imbs and A. Scott, “Competition, Globalization and the Decline of Inflation”,

CEPR Discussion Paper Series No. 4695, 2004.

9 Steven Zahniser and John Link (editors) “Effects of North American Free Trade

Agreement on Agriculture and the Rural Economy” (July 2002)

10 Lee Hudson Teslik “NAFTA's Economic Impact” Backgrounder, Council on Foreign

Relations (July 2009)

24

negotiator in foreign trade and a major booster of NAFTA and other free trade

accords, the overall value of intra-North American trade has more than tripled

since the agreement's inception. The USTR adds that regional business

investment in the United States rose 117 percent between 1993 and 2007, as

compared to a 45 percent rise in the fourteen years prior. Trade with NAFTA

partners now accounts for more than 80 percent of Canadian and Mexican trade,

and more than a third of U.S. trade.

4.2 Price Reductions

Gains through increase in economies of scale

There is inadequate empirical support that trade liberalization resulted in

expanded scale of operations for domestic firms/industries (in FTA member

countries) resulting in economies of scale and subsequent price reductions.

Gains through reduction of barriers and increased competition

Another mechanism through which free trade areas can lead to a reduction in

prices, aside from economies of scale, is through the elimination of rules and

regulations governing the flow of goods between FTA member countries. For the

European Union, as these non-tariff barriers were eliminated, it was expected

that firms would be forced to equalize their selling prices across markets. In other

words, rather than treating Europe as a collection of segmented markets, where

firms could choose their prices in each country separately, Europe would instead

become a unified market where firms could not price-discriminate. As price-

discrimination is eliminated, average prices are expected to fall, providing

benefits to consumers.

In practice the results look mixed for the EU. A paper by Badinger (2006)11

uses

sectoral data from 1981 to 1999 and finds evidence of markup reductions in

manufacturing and construction, but not in services.

The European Commission Report argues that tariff cut leads to lower consumer

prices although the pass-through effect of this price transmission channel is

usually imperfect. The paper12

cites the example of how import prices for textiles

and clothing fell by 27.5 and 38.4 percent respectively in real terms (i.e. relative

to the general CPI) during the period 1996-2006. Import prices for consumer

electronics too exhibited a 50% reduction. The paper further explains the

macroeconomic spill-over effects of reduction in import prices that led to overall

reduction in inflation as a result of trade openness and increased international

11 Badinger, H. (2006) “Has the EU‟s Single Market Programme fostered competition?

Testing for a decrease in markup ratios in EU industries,” Oxford Bulletin of Economics

and Statistics, forthcoming.

12 J. Francois, M. Manchin, and H. Norberg, "Passing on of the benefits of trade openness

to consumers", European Commission, Directorate General for Trade, 2007, p.7.


competition. There exists theoretical literature on the negative relationship

between inflation and trade openness13. The inflation-trade openness correlation

has become even more strengthened during the 1990s and has become more

robust than earlier research suggested extending even to OECD countries.

4.3 Gains from product variety

In addition to reduction in prices, trade liberalization generates gains for the

customers also through an increase in the variety of goods available through

trade. Economists have estimated that in a typical country, new import varieties

account for 15 percent of productivity growth. For the developing countries, they

estimate the median impact of new imported varieties to be as high as 25 percent

of national productivity growth.

By combining the data on imports from new supplying countries with estimates of

the elasticity of substitution for each, Broda and Weinstein (2006)14

come away

with an estimate of the gains from trade for the US due to the expansion of

import varieties, which amount to 2.6 percent of GDP in 2001. Translating these

"variety gains" into an EU context suggests that the average European consumer

benefits are in the range of 600 € per year, in addition to the gains due to

lower prices15

.

4.4 The Survival of More Productive Firms

Economic models predict that opening of trade in a sector will bid up the wage

and other factor prices, which forces the least efficient firms to exit the market

leading to an increase in the average productivity of the firms in that sector.

A study by Trefler (2004)16

analysed the impact of the Canada-US free trade

agreement on the selection and productivity of firms using firm-level data. He

found that Canadian industries that had relied on tariffs to survive saw their

employment fall by 12 percent due to the elimination of tariffs. In manufacturing

overall, the trade agreement reduced employment by 5 percent. However, these

job losses were a short-term effect, and over a 10 year period, employment in

Canadian manufacturing did not drop. While low-productivity plants shut down,

13 W.C. Gruben. and D. McLeod, “The Openness- Inflation Puzzle Revisited”, Applied

Economics Letters, 11,2004, pp.465-468.

14 Broda, C. and D. E. Weinstein (2006) “Globalization and the Gains from Variety,”

Quarterly Journal of Economics, May, 121(2), 541-585.

15 "The gains from variety in the European Union" - Munich Discussion Paper No. 2010-

24) and Langenfeld and Nieberding - "The Benefits of Free Trade to U.S.Consumers",

Business Economics, 40 (3), 2005, p. 41-51.

16 Trefler, D. (2004) “The Long and Short of the Canada-U.S. Free Trade Agreement,”

American Economic Review, 94(4), September, 870-895.

26

high-productivity Canadian manufacturers expanded into the United States.

Third, the trade agreement set off a productivity boom. Formerly sheltered

Canadian companies began to compete with, and compare themselves to, more

efficient American businesses. In the formerly sheltered industries most affected

by the tariff cuts, labor productivity jumped 15 percent, at least half from closing

inefficient plants. That corresponds to a compound annual growth rate of 1.9

percent in productivity.

To summarize, Trefler finds overwhelming evidence that the Canada-US free

trade agreement resulted in the self-selection of Canadian firms, with only the

more productive firms surviving. Productivity in Canadian manufacturing overall

rose 6 percent. This productivity gain translates directly into higher wages or

lower prices, and is a gain from trade for consumers.

The gains for developing countries are also shown to be substantial. Feenstra

and Kee, (2006)17

completed a study of 44 countries over two decades, 1980 –

2000. Over this period, export variety of these countries to the United States

increases by 4.6 percent per year, thus more than doubling over these two

decades. Furthermore, that increase in export variety is associated with a 4.5

percent productivity improvement for exporters over the two decades. These

gains for the exporters are actually larger than the gains to the United States (of

2.6 percent) from the increase in its import variety over the past several decades.

4.5 Trade and Employment

At a theoretical level, trade openness creates new jobs while protectionism

reduces competitiveness of industries and thus destroys jobs. A report by

European commission finds a negative correlation between openness in trade

and unemployment. There persists a general misconception that trade opening

destroys jobs, and only exports create jobs. While this might hold true for certain

individual firms the reverse is true at the level of the entire economy. Trade

openness facilitates the integration of local companies in global production

chains. It makes them more productive and competitive, and creates more

employment.

Steven Zahniser and John Link (2002)18

, while discussing about NAFTA and

Agricultural Employment, state that by increasing opportunities for U.S. exports

and encouraging the more efficient allocation of economic resources, NAFTA has

had a small, positive influence on U.S. agricultural employment. Moreover, an

17 Feenstra, R. C. and H. L. Kee (2006) “Export Variety and Country Productivity:

Estimating the Monopolistic Competition Model with Endogenous Productivity,”

University of California, Davis and World Bank Policy Research Group.

18 Steven Zahniser and John Link (editors) “Effects of North American Free

Trade Agreement on Agriculture and the Rural Economy” (July 2002)


OECD study19

finds that while there has been no decline in overall employment,

there has definitely been a shift of employment from industries to service sector.

Trade with low-wage countries can potentially also have a major beneficial

impact on technical change. For instance, a study drawing on a panel of over

200,000 European firms shows that import competition led to both within-firm

technology upgrading and between-firm reallocation of employment towards

technologically more advanced firms or subsidiaries. These effects account for

about 15-20% of technology upgrading between 2000 and 2007 and are growing

over time20

. Another recent study finds that technological change and

globalization are associated with wage increases in nine EU Member States21

.

Trade may also have created a "polarization" of employment in recent years.

Employment has been growing both in the high-skilled (professional and

managerial) jobs and in the lowest-skilled (personal services) jobs, whereas

there was a decline in medium-skilled jobs in manufacturing and routine office

jobs22

. This phenomenon is not unique to EU and also has been observed

in US.23

In summary, with increased trade and openness, the developed countries have

experienced a noticeable decline in manufacturing employment mostly due to

rapid technological progress but the decline has been more than compensated

by an increase in services employment. Wages increased for those remaining in

manufacturing, despite a considerable degree of labor churning and declining

job security.

4.6 Attracting Foreign Investments:

With an inclusion of certain favourable rules for the foreign investors, FTAs may

attract further foreign investments in a country. According to Steven Zahniser and

19 OECD (2007) "Trade and labor market adjustments", document TAD-TC-WP (2007)7,

May 2007.

20 Nicholas Bloom, Mirko Draca, John Van Reenen (2009): "Trade induced technical

change? The impact of Chinese imports on innovation, diffusion and productivity",

Stanford university working paper.

21 R. Christopoulou, J. F. Jimeno, A. Lamo (2010) "Changes in the Wage Structure in EU

Countries", ECB Working Paper No. 1199, April 2010.

22 M. Goos, A. Manning, A. Salomons (2009) "Job polarization in Europe", American

Economic Review, 2009 vol 99(2) pp 58-63.

23 "The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market",

David Autor and David Dorn, MIT Working Paper, August 2010. Paul Krugman (2008)

"Trade and wages reconsidered", Brookings Papers.

28

John Link (2002)24, such rules generally strengthen the rights of foreign

investors to retain profits and returns from their initial investments. They also

guarantee equal treatment to foreign and domestic investors alike under the laws

of each NAFTA country and prohibit new laws that would change the status of

foreign investments, once they are established. It is further stated that

econometric studies demonstrate that NAFTA has fostered a positive synergy

between trade and FDI in the North American processed food industry. As a

result, U.S. exports and U.S. FDI have grown together which is one of NAFTA's

success stories. Also, U.S. direct investment in the Mexican food processing

industry has more than doubled since NAFTA's implementation, reaching $5.3

billion in 1999. Similarly, under Canada-U.S. Free Trade Agreement (CFTA) and

NAFTA, U.S. FDI in the Canadian food processing industry expanded from $1.8

billion in 1989 to $5.0 billion in 1999.

24 Steven Zahniser and John Link (editors) “Effects of North American Free Trade

Agreement on Agriculture and the Rural Economy” (July 2002)


5. Economic Impact of India-

ASEAN FTA

This section provides an analysis of the impact of the India-ASEAN FTA on the

Indian economy in general and certain select industries in particular. The

summary of the key terms and conditions of the India-ASEAN FTA is provided in

Appendix 1 of this report.

The economies of ASEAN and India together comprise a $ 2,809.58 million

economy with a total population of approximately 1.8 billion. India is one of the

largest economies of the Asian region and the ASEAN countries together have

become both prominent and influential in Asia owing to their increased

importance in trade and commerce. India already has an effective bilateral FTA

with Singapore, negotiation for two FTAs with Japan and Malaysia were recently

concluded and another FTA with Thailand is being discussed.

Total trade (exports and imports) as a percentage of GDP for India stands at

45.84%, while for ASEAN the figure stands at 102.5 %. For certain individual

economies of ASEAN this figure goes up to as high as 282.2% (Singapore), 145

% (Malaysia) 130% (Vietnam) and 108.3%(Thailand). On an aggregate level,

intra-ASEAN trade comprises of 24.5% of the total trade of the region. Moreover,

the ASEAN region is highly involved in intra-industry trade. An inspection of its

top trading partners reveal that ASEAN is the biggest trading partner for the

ASEAN region both in export and import categories. EU(27),USA and China are

the biggest export destination for ASEAN and China, Japan and EU(27) are the

top import sources. India is ASEAN‟s ninth largest export destination (comprising

3% of total ASEAN exports) and the 10th largest import source (comprising 3% of

total ASEAN exports).

The numbers above indicate that there is substantial opportunity for Indian

businesses to improve and expand its trading relations within the ASEAN.

5.1 India ASEAN Trade and Impact of FTA on the Economy

In this section, we provide an outline of the current profile of the international

trade between India and ASEAN at an aggregate level. We first outline the trends

in the bilateral export and import growth rates as well as the import and export

shares from India‟s perspective. We then present - through the calculation of

various indices such as the Trade Intensity index, the Regional Hirschman index,

30

and the Complementarity index - India-ASEAN trade relations in the context of

India‟s trade patterns with other major economies such as US and China25

.

Graph 5.1: Patterns observed for Export Growth and Export Share

Graph 5.1 plots the observed patterns of the two variables namely, Export

Growth (%), and Export share (%) over a period of eighteen years from 1991

to 2008.

The export growth variable plots the year-on-year growth of India‟s exports to

ASEAN over the period of the analysis. The graph exhibits a steep fall in exports

during the years 1997 and 1998, when growth rates became negative. This could

be due to the Asian Economic crisis of 1997-1999, when a number of East Asian

economies, including Thailand, Indonesia, Malaysia and Philippines faced a

severe financial crisis. However, once the adverse effects of the East Asian crisis

subsided, India‟s exports to the region recovered to pre-crisis levels. There has

also been a gradual increase in the share of ASEAN region in India‟s total

exports as depicted by a gradual rise in the export share variable. The share of

the ASEAN market in India‟s total exports has risen from 5.68% in 1991 to

10.28% in 2008.

25 The data for this analysis has been considered from the United Nations Economic and

Social Commission for Asia and the Pacific (UNESCAP)‟s website. URL:

http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration

Center‟s (ARIC: an affiliate of the Asian Development Bank) website. URL:

http://aric.adb.org/index.php

Please refer to Appendix 2 for definition

-40

-30

-20

-10

0

10

20

30

40

Export Growth (%) Export Share (%)

Linear (Export Growth (%))



With respect to imports, over the period 1991 to 2008, though the growth of

ASEAN‟s exports to India has been more volatile than the growth of India‟s

exports to ASEAN, there has been no erosion in the share of imports from

ASEAN in India‟s total imports. ASEAN‟s import share out of India‟s total imports

has increased from 4.82% in 1991 to 8.88% in 2008.

Graph 5.2:26 Patterns observed for Import Growth and Import Share

On the whole, the share of India‟s total trade with ASEAN has shown a steady

increase over the period of the analysis. ASEAN‟s share in India‟s total trade has

increased to 9.42% in 2009 growing by 80% since 1991.

5.1.1 Export Intensity & Trade Intensity Indices

The export and trade intensity indices provide us with an indication of the

intensity of the trade relationship between two countries/regions. The export

intensity index indicates whether or not a country exports more (as a percentage)

to a destination than the world does on an average. It is defined as the ratio of

two export shares. The numerator is the share of the destination of interest in the

26 The data for this analysis has been considered from the United Nations Economic and

Social Commission for Asia and the Pacific (UNESCAP)‟s website. URL:

http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration

Center‟s (ARIC: an affiliate of the Asian Development Bank) website. URL:


Please refer to Appendix 2 for definition

-60

-40

-20

0

20

40

60

80

Import Growth (%) Import Share (%)

Linear (Import Growth (%))


32

exports of the region under study (the source country) while the denominator is

the share of the destination of interest in the exports of the world as a whole.

The trade intensity index is the ratio of the total trade share of a country/region to

the share of world trade with a partner. An index of more than one indicates that

trade flow between countries/regions is larger than expected given their

importance in world trade. Thus, as opposed to export intensity index, this index

also accounts for the import flows between the trade partners.

Both the indices take values between 0 and +∞ and a value greater than 1 for

both implies that the source country exports/trades more (as a percentage)

to/with a particular destination than the world does on an average.

Graph 5.3: Export Intensity Indices 27

Graph 5.3 plots the export intensity indices from both India‟s as well as ASEAN‟s

perspective from 1990 to 2008. The plot, „India‟s Export Intensity with ASEAN‟

indicates whether India exports more (as a percentage) to ASEAN than the world

does while „ASEAN‟s Export Intensity with India‟ indicates whether ASEAN

exports more to India (as a percent) than the world does. As we can observe, for

both the regions, the index value was greater than 1 indicating that both the

economies export more to each other than the world does to each of them on an

average. Moreover, for a majority of the period under consideration, ASEAN

27 Data has been considered from the ARIC website where in the source has been given

as „IMF Directions of Trade Statistics‟.

Please refer to the Appendix 2-Technical Appendix for a detailed description of the index

along with an illustration.

0.00

0.50

1.00

1.50

2.00

2.50

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

India's Export Intensity Index with ASEAN

ASEAN's Export Intensity Index with India


seems to be exporting more to India (as a percent) than vice-versa although the

gap has reduced in the later years.

India and ASEAN have also enjoyed an intense overall trade relationship with

each other throughout the period. This can be seen from the figure below where

the plot of the overall trade intensity for both the economies indicates that the

index value for the overall trade intensity also never fell below 1. We can also

infer from this plot that in the total bilateral trade, throughout the period under

consideration, ASEAN‟s trade relationship with India has been more intense than

the other way round; although as in the case of the export intensity, the gap

seems to be reducing in the recent period. Thus the implementation of the

FTA between the two economies can only be expected to intensify the

trade dependence amongst each other.

Graph 5.4:28 Trade Intensity Indices

5.1.2 Sectorial Hirschman

The Sectorial Hirschmann index is a measure of the sectorial concentration of a

region/country‟s exports. It tells us the degree to which a region or country‟s

exports are dispersed across different economic activities. High concentration

levels can be interpreted as an indication of vulnerability to economic changes in

a small number of product markets. An increase in the value of the index over

time implies that the country‟s exports to another region/country are becoming

28 Data has been considered from the ARIC website where in the source has

been given as „IMF Directions of Trade Statistics‟

Please refer to the Appendix 2-technical appendix for a detailed description of

the index along with an illustration.

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

India's Trade Intensity Index with ASEAN

ASEAN's Trade Intensity Index with India

34

concentrated in a few product products rather than spreading across a broad

range of product profile.

Graph 5.5: Sectorial Hirschmann index for India’s exports29

The index is defined as the square root of the squared shares of each industry in

the total exports of a country to a particular region/country.30

The index takes a

value between 0 and 1 with higher values indicating that exports are

concentrated in fewer sectors.

Graph 5.5 plots the Sectorial Hirschmann index for India‟s exports to major

economies such as China and the USA. As we can see from the plot, the fact

that India‟s exports to China are more concentrated in mineral ores such as iron

ore is borne out by a higher Sectorial Hirschmann index than the other regions.

The index with respect to exports to ASEAN has also witnessed a sharp increase

after 2003 at around the same time as the one with respect to China has risen.

The rise with respect to ASEAN‟s index can be explained by an increase in the

concentration of India‟s exports to the region towards mineral fuels and mineral

oils31

. India‟s exports to the USA have become broader based over the past

few years.

29 „World (other countries)‟ is as per UNESCAP‟s classification and apart from India,

ASEAN, China and USA, it does not include other major Asia Pacific economies such as

Japan, South Korea, Australia in addition to other small economies. Trade data for the

European Union is not separately available with the UNESCAP.

30 Please refer to the Appendix 2-technical appendix for a detailed description of the index

along with an illustration.

31 According data available with the Ministry of Commerce and Industry, Government of

India, the share of the HS Code 26, “ORES, SLAG AND ASH” in India‟s total exports to

China was around 19% in 2000-01; by 2007-08, this share increased to around 57%.

0

0.1

0.2

0.3

0.4

0.5

0.6

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Sectoral Hirschmann Index

India ASEAN India World (other countries)

India China India USA


5.1.3 Complementarity index

The complementarity index measures the degree to which the export pattern of

one country matches the import pattern of another. A high degree of

complementarity is assumed to indicate more favorable prospects for a

successful trade arrangement. Changes over time may tell us whether the trade

profiles are becoming more or less compatible.

Graph 5.632: Complementarity Index

.

It is defined as the sum of the absolute value of the difference between the

import category shares and the export shares of the countries under study,

divided by two. The index is converted in to percentage form33

. Complementarity

of Indian exports to ASEAN is lower than complementarity of ASEAN‟s exports to

India, though both of them show an increasing trend. Complementarity of Indian

Similarly, the share of the HS Code 27, “MINERAL FUELS, MINERAL OILS AND

PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL

WAXES” in India‟s total exports to ASEAN was around 0.15% in 2000-01; by 2007-08, this

share increased to around 29%.

32 The data has been considered from the UNESCAP. The figures on the vertical axis are

in percentage terms.

33 Please refer to the Appendix2 -Technical Appendix for a detailed description of the

index.

0

10

20

30

40

50

60

70

80

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Complementarity of ASEAN's exports to India

Complementarity of Indian exports to ASEAN

Linear (Complementarity of ASEAN's exports to India)

Linear (Complementarity of Indian exports to ASEAN)

36

exports stood at 52.95% for 2007, whereas the complementarity of ASEAN‟s

exports to India was 69.1%. Complementarity for ASEAN‟s exports has

increased at a much higher pace (116.04%) compared to that of the

complementarity of Indian exports to the ASEAN market (38%).

5.2 Impact of FTA on Indian Industries Based on Revealed Comparative Advantage

As discussed earlier, one outcome of a free trade arrangement is that the sector

in which a country has a comparative advantage in production will benefit from

free trade. In other words, if India has a comparative advantage in manufacturing

pharmaceutical products (say) relative to the other ASEAN countries, and the

FTA member country has a comparative advantage in manufacturing electronic

products, under the FTA India will specialize in producing and exporting

pharmaceutical products whereas the FTA member country will specialize and

produce electronic products and export those to India. Therefore, identifying the

comparative advantage by sector will shed some light on the sector specific

impact of the India ASEAN FTA.

We now analyse the competitiveness of the exports of some of the key sectors of

the Indian and ASEAN economies vis-à-vis other major exporters of the world

using the RCA index. The sectors that have considered for the analysis include

the following:

Table 5.1: List of Commodities and Services

Merchandise Services

Chemicals and Pharmaceuticals

Electrical Equipments

Textiles, Apparels & Accessories

Leather & Leather Accessories

Handicrafts & Carpets

Gems & Jewellery

Machinery and Appliances

Automotive sector

Renewable & Non-Renewable Energy

Power

Petroleum & Natural Gas

Communications

Financial Services

Insurance Services

Construction

These sectors have been selected in consultation with FICCI and the Ministry of

Commerce and Industry, Government of India. In our analysis certain sectors

have been clubbed together under a single head, owing to the format in which

international trade statistics is organized in the website of Standard International

Trade Classification, Rev.3 (SITC)34

.

34 SITC Rev 3 – http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=14

http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=14


The following table outlines the export of India and ASEAN in the sectors.

Table 5.2: India and ASEAN’s export and percentage share of world export (2009)

Commodity

World's Commodity Export, 2009 ( Billlion $)

India's Commodity Export, 2009 (Billlion $)

India’s share of world exports %

ASEAN's Commodity Export, 2009 (Billlion $)

ASEAN’s share of world exports %

Chemical and Pharmaceuticals

1433.31 18.52 1.29 60.17 4.20

Medicinal and pharmaceutical products

425.06 5.92 1.39 6.59 1.55

Handicrafts and Carpets Textiles, Apparels and Accessories Leather and Leather accessories

682.19 37.13 5.44 46.50 6.82

Handicrafts and Carpets

80.77 13.83 17.13 6.73 8.33

Textiles, Apparels and Accessories

580.82 22.62 3.90 38.99 6.71

Automotive Sector

1133.04 10.29

0.91

32.74

2.89


3479.91

17.78

0.51

308.84

8.87


982.61 4.10 0.42 144.64 14.72

Energy and 35

resources:

Power Renewable and Non-renewable Petroleum and natural gas

2032.03 26.30 1.29 134.78 6.63

Appendix 3 gives the details of subsectors considered under each sector

35 There is no trade in generated energy for India, only fuels are traded. This is why this

sector has been considered under the head of Merchandise

38

5.2.1 Overview of the Sectors

Pharmaceutical Sector36

India‟s pharmaceutical sector is now the third largest in the world in terms of the

volume with a share of 10% in the world production and is the fourteenth largest

in terms of value accounting for a share of 1.5% in the world. The country‟s

pharmaceutical industry had a turnover of Rs 1,500 crores in 1980 to

approximately Rs 1,00,611 crores in 2009-10 (up to September 2009). The

sector has witnessed a sharp increase in exports- from Rs 6,526 crores in

1998-99 to Rs 39821 crores in 2008-09. According to Centre of Monitoring Indian

economy, in 2009 the country exported pharmaceuticals and chemicals exports

from the country has represented a 12.6% increase on the previous year and

accounted for 4.7% of the total exports. Most exports are of generics and bulk

drugs directed to more than 200 countries including US, Japan, Australia and

members of the European Union. The domestic pharma sector on the other

hand, has grown from Rs 32,000 crores in 2003-04 to Rs 55,000 crores in

2008-09.

Generic drug production is critical to India‟s pharmaceutical sector‟s success.

India currently tops in the export of generic medicines with export of drugs worth

about US$ 11 billion. About 40% of the domestic pharmaceutical market in India

is comprised of 74 bulk drugs and their formulations. Domestic pharmaceutical

companies have thrived by using their low labour and research costs to export

generic drugs to developed countries. India is also considered to be having the

second largest number of US Food and Drug Administration approved

manufacturing facilities after the USA.

According to data published by Department of Industrial Policy and Promotion

(DIPP), the drugs and pharmaceuticals sector has attracted FDI worth US$

1,825.43 million between April 2000 and September 2010.

Sector for Textiles, Apparels and Accessories; Handicrafts and carpets; and

Leather and leather Accessories

5.2.2 Textiles, Apparels and Accessories37

Indian textile industry, apart from providing one of the basic necessities of life,

has a strong presence in the Indian economy. It works independently right from

36 Sources: Annual report 2009-10, Department of Pharmaceuticals, Ministry of Chemicals

and Fertilizers; India Brand Equity Foundation; Economist Intelligence Unit; ICRA rating

feature: Indian Pharmaceutical Industry; and http://nppaindia.nic.in

37 Industry Monitor: Textile and Garments – Cygnus; Annual Report 2009-10 – Ministry of

Textiles, Govt. of India;


procurement of raw materials to production of the actual textile. Presently the

Indian textile and apparel market is worth US$85 billion, of which US$30 billion is

exports and the remaining US$55 billion is domestic sales.

ASSOCHAM noted a decline of 1.71% in textile exports during April 2009 -

March 2010 which fell from US$ 22.13 billion in 2008-09 to US$ 21.75 billion in

2009-10. In addition, garments exports also from fell by 2.64% - from US$ 10.93

billion in the previous fiscal year to US$ 10.64 billion, on account of lower

demand from the major markets like the US and the Europe.

Indian textile industry is complexly structured with hand-spinning and hand

weaving sector on one hand and modern, sophisticated and highly mechanized

mill sector in on the other hand, between whom the small-scale power loom

sector is sandwiched.

The textile industry comprises of the following sub-sectors:

Organized Cotton / Man-Made Fibre Textiles Mill Industry,

Man-made Fibre / Filament Yarn Industry

Wool and Woolen Textiles Industry

Sericulture and Silk Textiles Industry

Handlooms

Jute and Jute Textiles Industry

Textiles Exports

The textile industry wasn‟t spared by the global meltdown. The decline in

demand from the US and European market hurt this sector the most. To add to

the existing woes, increase in input cost and persistent long power cuts led to the

downfall of revenues of the industry. Even though the industry had to go through

a major pitfall, it started to recover due to increase in demands on occasion of

Christmas and New Year. The trend is expected to continue with precautionary

measure taken by the leading companies in the industry and with the aid of

Government. In the domestic market, the demand has remained strong, but

mainly driven by value, which has added pressure on the margins. This recovery

from the meltdown can be attributed to Government stimulus, improved liquidity

and stable growth in export and domestic demand for textile products.

Exports of textile can be broadly classified into:

Fabrics

Apparels

Man-made textiles

Yarn

Exports have started to show improvement since November 2009, and the

Confederation of Indian Textile Industries (CITI) anticipates a rise in garment

40

exports to the US, the European Union and Japan as a result of improvement in

their retail markets.

Handicrafts and Carpets38

The Handicrafts and Carpets sector is one of the significant industries and plays

a vital in the country‟s economy. Like textile industry, the handicrafts and carpets

industry provides employment to craftsmen both in the rural and urban areas. It

also helps the economy in earning substantial foreign exchange. The handicrafts

and carpets industry not only provides present set of millions of artisans but also

encourage new entrants in the crafts activity.

The unorganized Handicraft had constraints such as lack of education, low

capital, poor exposure to new technologies, absence of market intelligence, and

a poor institutional framework. Despite all these short comings, the sector has

grown significantly by 3% annually. The export decreased to Rs.10,891.85 crores

at the end of the year 2008-09 from Rs.12,434.38 crores in the year 2002-03,

accounting for a cumulative decline of 12.40%. The budget outlay for the year

2010-11 was anticipated to be Rs 285 Crore.

Types Of carpets

Woven

Needle felt

Knotted pile

Tufted

The export target for 2009-2010 had been fixed at Rs 32,960 crores including the

carpet industry. A decrease had been observed in the Dec, 2009 due to

appreciation of rupee and economic meltdown.

The following table shows the detail of both handicrafts and carpet industry.

38 Gems and Jewellery sector is included under this sector.

Industry Monitor: Textile and Garments – Cygnus; Annual Report 2009-10 – Ministry of

Textiles, Govt. of India;


Table 5.3: Export of Handicrafts over the period 2003 - 2009

(Rs in Crores)

Item 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(April- Dec.)

Carpet and other Floor Covering

2779.79 2583.62 3082.06 3674.86 3524.73 2708.73 1737.47

Other Handicrafts

13555.8 16984.14 16185.59 17288.14 14012.05 8183.12 5536.28

Grand Total (A+B)

16335.27 18567.76 19267.65 20963.00 17536.78 10891.85 7273.75

Source: Ministry of Textiles: Annual Report 2009-10

On the other hand the carpet industry grew over 6% to US$53 million, due to the

demand from new markets such as Russia and Dubai. In 2009, according to the

Carpet Export Promotion Council (CEPC), the carpet industry was worth

US$49 million.

Leather and Leather accessories39

The Leather industry, with an annual turnover of US$5 million, holds a strong

position in the Indian economy. The leather and leather products industry has

been one among the oldest manufacturing industries in India. This massive

industry provides employment to about 2.5 million people.

The leather industry has changed significantly from being just an exporter of raw

materials around early 60s and 70s to becoming an exporter of finished leather

goods. Government of India has played a major role in this transformation by

taking several policy initiatives. As a result of these initiatives the India leather

industry is one among the top 7 industries that earns foreign exchange for

the country.

Though the industry has transformed and developed over time, there is still

scope for more growth and investment. Indian leather industry can be an

attractive industry for investment because of its growth and its ability to capture

major share in the global trading market.

Investments can be made in various sub-sector of the industry:

Tanning and finishing of leather products

Manufacturing of leather garments

Manufacturing of leather footwear and footwear parts,

Manufacturing of leather goods, such as harness and saddler

39 Indian Leather Industry, Leather and Allied Product Manufacturing – ISI

Emerging Markets, Indian Leather Industry: Perspective and Export Potential

42

Table 5.4: Export targets from 2007-08 to 2010-11 (In Million US$)

Product 2006-07 2007-08 2008-09 2009-10 2010-11

Actual Export

Leather 688.05 726.85 785.00 847.80 915.63

Footwear 1212.25 1967.88 2597.60 3428.83 915.63

Garments 308.98 358.53 372.87 387.78 403.30

Leather Goods 690.66 733.34 798.69 870.06 948.04

Saddlery & Harness

81.85 105.66 127.85 154.70 187.19

Total 2981.79 3892.26 4682.01 5689.17 6980.21

Source: Indian Leather Industry: Perspective and Export Potential

From the above table, it is evident that Indian foot wear industry holds a major

share in the leather industry. India, after China, is the second largest global

manufacturer of footwear.

The leather industry is expected to double its current manufacturing value to

US$8 billion and exports to about US$4 billion. By achieving this, the leather

industry would be able increase to 4% in world leather trade from its current 3%.

The industry is also known for its scientific and technological leadership through

which it has made qualitative improvements. The growth of the leather industry

can be attributed to special economic zones, government‟ permission to 100 per

cent foreign equity, forming strategic alliances for the development of a

component industry through joint ventures, establishing leather complexes in five

states and modern tanneries abiding by all environmental laws.

Among the other industries in India, the leather and leather industry has been

among the oldest. Looking at the significant potential for growth, the Government

has been taking significant measure to promote rapid growth and qualitative

advancements. India‟s vast resource of raw hides and skins would form the basis

for the growth of this industry. As mentioned above, India is would be one of the

best destinations for investing in leather and leather product industry. Currently

major players are exploring India for opportunities of global expansion.

Machinery and Appliances Sector

In considering the sector Machinery and Appliances a number of sub sectors has

been considered like Power generating machinery ,Specialized machinery ,

Metal working machinery , industrial machinery Office machines , automatic data

processing machines, telecommunication and sound recording apparatus,

Electrical machinery, Photo apparatus, optical goods, watches ,clocks ,

Professional and scientific instruments etc.


Automotive Sector40

In studying the Automotive Sector we have taken into consideration two

subsectors namely: Road vehicles and other transport equipment.

Between 2004–05 and 2009–2010, automobile production in India increased

from 9.7 to 14 million units. Exports more than doubled in five years to 1.8 million

units in 2009–2010 from 0.8 million units in 2004–05.India is emerging as a as a

manufacturing and R&D hub, especially for small cars. The sector witnessed the

launch of the world„s first sub-US$ 2,500 PV, Tata Nano(an innovation in the

ultra-low cost segment).The passenger vehicles segment during April-September

2010 grew at 32.91 per cent over same period last year. The two wheelers

segment of the industry registered a growth of 25.86 per cent during April-

September 2010. Currently India is the World„s second-largest two-wheeler

market and Asia„s third-largest passenger vehicle market. Exports from the auto

component industry are estimated to be worth US$ 5 billion in 2010-11.

Tata Motors, Mahindra & Mahindra, BajajAuto, Ashok Leyland, MarutiSuzuki,

TVS Motor Company, Hindustan Motors, Eicher are some of the Key Indian

players in the market .India also has a strong presence of international

companies like ToyotaMotors, Volkswagen AG, General Motors, Ford Motors,

Honda Motors, Daimler AG, Fiat, Hyundai Motors, Renault, PiaggioVehicles.

Power Sector : Energy & Resources Industry41

For the purpose of our analysis, we have combined the three major sectors of

Power; Renewable and Non-renewable; and Petroleum and natural gas and

have calculated the cumulative RCA.

Production of gas in India has seen a steep growth in March 2010 to about 72%

YoY. The gas availability is mainly driven by several domestic gas discoveries in

KG D 6 block and increase in capacity of LNG. However it worth noting that the

average consumption of gas per capita is low when compared to the average

global consumption.

Crude oil price leaped almost two times from the US$40/bbl to US$80/bbl in

2009. Dollar appreciation and bullish reports on the demands from international

agencies attributed to such a huge jump. The demand, however, started to

deteriorate in the end. But the demand from India and China seem to

remain robust.

40 IBEF

41 Indian Oil and Gas – Prabhudas Lilladher; Natural Gas: A Base Sector

Report – Anagram;

44

The demand supply gap is gradually narrowing due to the commencement of

production from KG D 6. There has been continuous rise in crude oil price, which

has resulted in natural gas emerging as a cheap alternative source of energy. In

the power and fertilizer sector, natural gas has been used as a fuel as well as

feedstock. However, despite India‟s production capability, the supply for natural

gas does not match the demand adequately. The tightness in the supply of

natural gas is set to be eased by commencing peak production at RIL‟s GS-D6

gas field.

5.2.3 Competitiveness analysis

In our study, we have used the Revealed Comparative Advantage (RCA) index to

arrive at the competitiveness of each sector for a chosen set of countries. The

RCA index of a country for a particular sector is defined as the ratio of two export

shares. The numerator is the share of the exports of a particular sector in the

total exports of the country while the denominator is the share of the particular

sector‟s exports in the total world exports. RCA indices use the trade pattern to

identify the sectors in which an economy has a comparative advantage, by

comparing the country of interest‟s trade profile with the world average.

The Index can take a value between 0 and +∞. A country is said to have a

revealed comparative advantage if the value exceeds unity. If RCA is less than

unity, the country is said to have a comparative disadvantage in the commodity/

industry. Thus in sectors where a country has an RCA of greater than 1 and it is

higher than other countries, it can be concluded that the particular country has a

comparative advantage in the particular sector and an opening of the trade in the

sector would be beneficial for the country. Decreasing RCA can be interpreted as

a sector losing its comparative advantage.

Graphs for RCA Computation

Given below are the plots of the trend of the RCA index for the various sectors

over a period of the past fifteen years.


Graph 5.7: RCA Comparison of Chemical and Pharmaceuticals sector over the period 1995 – 2009

Source: Author’s Calculations based on United Nations Conference on Trade &

Development Data

Graph 5.8: RCA Comparison of Medical and Pharmaceuticals products sector over the period 1995 - 2009


Development

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

RCA for Chemical and Pharmaceutical Sector

ASEAN India China USA EU(27)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

RCA for Medicinal & Pharmaceutical products


46

Graph 5.9: RCA Comparison of Textile, Apparels and Accessories; Handicrafts and Carpets; and Leather and Leather Accessories over the period 1995 – 2009


Development Data

Graph 5.10: RCA Comparison of Textile, Apparels and Accessories over the period 1995 – 2009


Development Data

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

RCA for Textiles,Apparels & Accessories ; Handicrafts and Crafts ; Leather & Leather

Accessories

ASEAN India China USA EU(27) EU(27)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

RCA for Textile, Apparels & Accessories



Graph 5.11: RCA Comparison of Handicrafts and Carpets over the period 1995 – 2009


Development Data

Graph 5.12: RCA Comparison of Machinery and Appliances sector over the period 1995 - 2009


Development Data

0

2

4

6

8

10

12

14

RCA for the Handicrafts and Carpets Sector


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

RCA for the Machinery and Appliances Sector

ASEAN India China USA

UK Germany UAE

48

Graph 5.13: RCA Comparison of Electrical Equipments sector over the period 1995 - 2009


Development Data

Graph 5.14: RCA Comparison of The Automotive sector over the period 1995 – 2009


Development Data

0.00

0.50

1.00

1.50

2.00

2.50

3.00

RCA for Electrical Equipment Sector


00.20.40.60.8

11.21.41.61.8

2RCA for Automotive Sector

ASEAN India China USA UK Germany


Graph 5.15: RCA Comparison of Power Sector over the period 1995 - 2009


Development data

Analysis of Comparative Advantage

From the graphs above it is evident that India has comparative advantage in the

sectors of Textiles Apparels & Accessories; Handicrafts and Carpets and

Chemical and Pharmaceutical sector. ASEAN on the other hand has comparative

advantage in Machinery and Appliances Sector.

In our study we have clubbed the sectors of Textiles Apparels and accessories,

Gems and Jewellery, Leather goods, and Handicrafts under one sector and done

the RCA Analysis. Calculation of RCA shows that India enjoys very high

Comparative advantage in this sector, not only in comparison to the Asean

economies, but also globally. ASEAN economies have RCA value greater than 1,

throughout the period of study implying them having some comparative

advantage, but the value of their index is lower than India. India stands to gain

from trade with the ASEAN countries in this cumulative sector.

Owing to the importance of the textile industry in the Indian economy we have

computed the RCA index for Textile, Apparels and Accessories sector separately

to see where India stands globally. Our analysis shows that India has higher

RCA values in this sector compared to the ASEAN countries. Although the

ASEAN bloc has had RCA greater than one over the last eleven years, the value

of RCA has been much lower compared to India. Globally China and India have

higher comparative advantage in comparison with the rest of the economies

under study. India had higher comparative advantage than China, but it has been

overtaken by China in recent years.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

RCA for Power Sector

ASEAN India China USA EU(27) UAE

50

Next we have taken the sectors of Handicrafts & Carpet and Gems & Jewellery 42

together and calculated RCA index for the sector. It is seen that India is a

global leader in this sector. RCA has been increasing in this sector, implying that

India has gained comparative advantage in this sector over the time. ASEAN

economies have had RCA greater than one over the last seven years (with the

exception in 2006) but RCA index for the ASEAN counties has been much lower

than India. Unlike India, the index has remained stable and does not exhibit an

increasing trend. This means that although ASEAN has some comparative

advantage in this sector, it is much lower than that of India.

In the Chemical and Pharmaceutical industry India has had RCA values greater

than 1 since 1998, but the index has fallen for the year 2009. This can be

interpreted as India having some comparative advantage in this sector in

general, and the decline in 2009 appears to be a one-off event. In this particular

sector ASEAN countries have had RCA Values lower than one throughout he

period of study. Thus India is in general in more competitive than ASEAN in this

sector.. Further, given the importance of the medical and pharmaceutical sector

to the Indian economy, we have also analysed India‟s competitiveness in this sub

sector separately. RCA for India in this sector has been greater than one,

throughout the period of study, although it exhibits a falling trend over the years.

RCA value fell steeply in 2009( falling below 1 to .97) over 2008 values. This can

be treated as an one-off event or a repercussion of the recession. As for the

ASEAN countries RCA values have been consistently at values below 1

throughout the period of study. Globally the economies of EU(27) together enjoy

comparative advantages in Chemical and Pharmaceutical sector in comparison

to the rest of the world. India definitely stands to gain in this sector if trade is

opened up between the two trade partners.

The ASEAN countries have comparative advantage in the machinery and

appliances sector. They had a globally higher RCA value till 2005, after which

they were overtaken by China. In contrast India has the lowest RCA values

among all the economies considered in the study. We also considered the

subsector of Electrical Equipments and did computation for RCA for this sector

separately. The ASEAN countries exhibit a very high RCA in this sector and thus

have high comparative advantage in this sector. They have globally higher RCA

compared to all the other economies considered in the study. Their share in the

total world exports in Electrical Equipments stands at 14.72%. Economies of

Malaysia and Thailand are global leaders in manufacturing of electrical

equipments. India on the other hand has very low RCA (less than1) and thus no

comparative advantage (or comparative disadvantage) in this sector.

In the Automotive Sector and Energy sector neither India nor ASEAN has any

comparative advantage globally.

42 Leather Goods form a very insignificant part of India‟s export (0.378% of export

in 2009) and thus has not been considered in this part of the analysis


In the Automotive sector both India and the ASEAN countries taken together

have RCA values lower than that of 1 .Thus neither of the trading partners have

any comparative advantage in this sector. Globally Germany leads the world

among the countries considered in the study followed by USA, through USA has

seen a decline in comparative advantage in the year 2009 (A probable effect of

the recession).

RCA values for India in the Energy sector has been low throughout, though it has

been increasing over the period of study implying that India has had comparative

disadvantage for most of the time period in this sector. RCA figures were greater

than one for the two FY of 2008 and 2007, but the index has again slipped at

value less than 1 in 2009. The ASEAN countries exhibited some amount of

comparative advantage in the initial 4 years of the study, but the index fell

thereafter (though remaining in the range of 0.91 to 0.98) implying revealed

comparative disadvantage. For the FY 2009 ASEAN recorded RCA greater than

1. Comparing India and the ASEAN economies, the ASEAN economies have

fared better than the Indian economy in this sector, with higher RCA figures

implying more competitiveness compared to that of India. India‟s export share in

this sector is at 1.29% compared to 6.63% of ASEAN‟s.

To conclude the section India stands to gain in sectors of Textiles,

Handicrafts, Chemicals and sub sector the medical and pharmaceutical

sector from its trade with the ASEAN Economies. In the sector of

Machinery and Appliances and subsector Electrical Equipments ASEAN

economies stand to gain in comparison to India.

5.3 Impact of FTA on Services Sector

Service has been one of the thrust areas of the Indian economy. A key generator

of employment, the service sector contributes approximately 58% of India‟s GDP.

It covers a wide range of activities, such as trading, transportation and

communication, financial, real estate and business services, as well as

community, social and personal services. Exports in services stood at US$ 90.6

billion in 2009. Currently India‟s share in world service exports stands at 2.64%

for the year 2008 vis-a-vis 1.14% for merchandise trade. On the other hand,

ASEAN countries together comprised 5.13% of total world exports in services in

the year 2008.

Currently negotiations between the ASEAN nations and India has been facing

some serious road blocks over the issue of including services as a part of the

FTA along with the free trade in goods. Concerns have emerged over the issue

of movement of natural persons, or Mode IV, as referred in trade terminology.

India has been demanding more liberalization in the Mode IV category so as to

enable more Indian professionals like doctors, nurses, chefs and accountants to

find greater job opportunities in countries like Brunei, Cambodia, Indonesia,

Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Countries like Indonesia and Philippines have raised objection to such further

liberalization, owing to their specific economic scenarios like unemployment or

unskilled workers. Many of these ASEAN countries are yet to recover fully from

52

the financial strain that overtook the entire world till recently. Unemployment

rates in Indonesia were around 8 per cent last year and poverty rate had reached

14.15 per cent in March 2009.

Below, we have analysed the competitiveness of India and ASEAN with respect

to other major economies in the world in each of the major sub sectors within the

services sector.

Graph 5.16: RCA Comparison for the service sector over the period 2000 – 2009

Source: Author’s Calculations based on United Nations Statistics Division

statistics

India has a RCA greater than one in the service sector, indicating that it enjoys

comparative advantage in this sector .The ASEAN countries have RCA value

lesser than one implying that they have no comparative advantage, rather

comparative disadvantage in this sector. So opening up service trade will prove

beneficial for the Indian service sector as it enjoys a comparative advantage in

this sector.

Graphs plotting RCAs for India, ASEAN and major economies for some of the

sub sectors within the service sectors have been given below.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for the Service Sector

India ASEAN USA UK China Germany


5.3.1 Telecommunication

Graph 5.17: RCA Comparison for the Communication43 service sector over the period 2000 – 2009


statistics

India has had RCA values greater than one in this sector though the period of

study with the exception of, in the year of 2008, where the value has dipped to

0.99. But the RCA value for the sector has been declining over the years. RCA

values for ASEAN has been greater than 1 for the period of 2003 to 2007, where

after the value has again fallen to less than one. But overall India has always had

greater value of RCA than ASEAN throughout the period of study, indicating that

communication sector in India has been more competitive than that of ASEAN

economies put together.

Globally India had comparative advantage over other nations earlier, but its

position has slipped.

43 Due to unavailability of data for the telecommunication industry separately, we have

taken the entire communication industry together ( communication includes postal and

courier services) in computing the Revealed Comparative Advantage

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for Communications Sector


54

5.3.2 Computer and Information Services

Graph 5.18: RCA Comparison for the Computer and Information service sector over the period 2000 – 2009


statistics

RCA value for India has not only been greater than 1, it has been higher than all

the major economies. India has a very clear comparative advantage in this sector

in comparison to not only the ASEAN trading bloc, but also in respect to the other

major economies of the world. ASEAN countries have RCA greater than one, but

it is much lower compared to that of India. Opening up this sector for trade would

immensely benefit the IT sector of the country which is already a global leader in

the sector.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for Computer and Information Services

India ASEAN USA USA UK Germany


5.3.3 Financial Service sector

Graph 5.19: RCA Comparison for the Financial service sector over the period 2000 – 2009


statistics

The ASEAN countries and India have similar RCA in the financial service sector.

Both the partners have had RCA below 1, depicting no comparative advantage or

comparative disadvantage in this sector. For the year 2008 the ASEAN countries

had a higher comparative advantage over India in this sector. UK leads the world

in the comparative advantage in this sector.

If we study in detail the two plots depicting the RCAs for the two trading partners,

we can see that the two graphs have intersected thrice over the period of last

nine years implying that two partners have been at a similar position in this sector

with the rest of the world. If trading was allowed the two economies could

compete on a similar footing. As far as the global scenario is concerned UK has

the highest RCA followed by USA. Another reason for the low RCA‟s of India and

ASEAN in this sector could be due to the regulatory environment in each of these

economies where the Indian and ASEAN (especially after the 1998 financial

crisis) financial sector regulators have restricted the exposure of these

economies to the global financial markets.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for Financial Services Sector


56

5.3.4 Insurance services

Graph 5.20: RCA Comparison for the Insurance sector over the period 2000 – 2009


statistics

The ASEAN trading bloc and India exhibit very similar revealed comparative

advantage in insurance services. Both have RCA lesser than one, which can be

interpreted as that neither has any comparative advantage in this sector. The

graph plotting the RCAs for the two countries have intersected four times over

the period of last nine years. One conclusion that can be drawn from the graph is

that if trade is opened up in this sector the two trading partners would be able to

compete on an equal footing as depicted by their RCAs. The low RCAs of both

the countries could be due to strict regulatory norms in the sector for both India

and ASEAN.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for Insurance Services Sector



5.3.5 Construction Services

Graph 5.21: RCA Comparison for the Construction sector over the period 2000 – 2009


statistics

At present ASEAN countries have a higher RCA in this sector in comparison to

India, though both have RCA lesser than one meaning that neither has any

revealed comparative advantage in this sector. Germany leads the world in

comparative advantage in this sector.

5.4 Impact on Industry – Supplementary Evidence

This section presents the impact of the FTA on Indian industry based on

anecdotal evidence compiled from published press reports and web

based research.

The likely beneficiaries in India from the FTA are the exporters of machinery,

steel, oilcake, wheat, buffalo meat, auto components, synthetic textiles, refined

petroleum products, organic chemicals, pharmaceuticals and gems &

jewellery. India‟s trade with ASEAN is mainly concentrated in Singapore,

Malaysia and Thailand. Singapore continues to remain the largest market in

ASEAN for India‟s merchandise exports.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RCA for Construction Services Sector

India India ASEAN USA UK

UK China China Germany

58

Energy & Resources

The energy and resources sector is an important area which has received

considerable attention in the Indo-ASEAN FTA. Several rounds of discussion

have focused on this sector. From India‟s perspective the bilateral discussions

have mostly focused on using the Indo-ASEAN FTA as a base to grow trade with

member countries.

An overview of some of these exchanges is highlighted below.

In the joint statement on the Framework for India-Malaysia strategic

partnership, Cabinet Ministry level exchange has been planned to identify

collaborative projects in the new and renewable energy sector. Setting up of a

Joint Working Group between the Ministry of Energy, Green Technology &

Water of Malaysia and the Ministry of New & Renewable Energy of India has

also been announced. Focus has also been given to the possibility of

enhancing the scope and level of joint collaboration in the hydrocarbons

sector between PETRONAS of Malaysia and ONGC Videsh Limited of India.

During April-December 2009-10, India‟s exports to Malaysia totalled US$ 2.14

billion, comprising ships, boats and floating structures, mineral oils and fuels,

and organic chemicals, according to data released by the Ministry of

Commerce and Industry.

Thailand‟s Deputy Minister of Commerce has recently stated that in the first

10 months of 2010, there has been a 30% rise in Indo-Thai trade value

leading to expectations of $6.5 billion bilateral trade next year. Thailand and

India are converging on regional cooperation frameworks such as the Asean-

Saarc, Bimstec, Asean-India and the Mekong-Ganga agreement to grow

relationships also in the energy and resources sector44.

For this sector, a country of notable importance for India is Indonesia. Indian

companies have considerable investments in the mining sector in Indonesia.

In recent acquisition deals, a number of Indian outbound companies have

acquired Indonesian mines for supply of coal.

The Indonesian Trade Minister, Dr Mari Elka Pangestu in late 2010

commented that there is continuing interest from India to invest in coal mining

in Indonesia than there is supply. However, large concessions on mining

activities are owned by Indonesian companies. Therefore Indian companies

have overcome this by taking a share in some of the Indonesian concessions.

Cooperation is also required in other areas such as processing of coal and

iron particularly technology to gasify coal for energy needs45.

Singapore continues to be one of the largest trading partners of India. The

growing bilateral economic relationship is reflected in the rapidly rising trade

between Singapore and India. Singapore continues to be the single largest

44 Economic Times, 22 Dec 2010

45 Business Line, 19 Dec, 2010


investor in India amongst the ASEAN countries and the second largest

amongst all countries with foreign direct investment (FDI) inflows into India,

totalling US$ 2.4 billion in 2009-10. The cumulative FDI inflows from

Singapore during April 2000 and March 2010 were US$ 10.2 billion, according

to data released by the Department of Industrial Policy and Promotion (DIPP).

During 2008-09, India exported goods worth US$ 8.45 billion to Singapore.

During April-December 2009-10, Indian merchandise exports to Singapore

totalled US$ 5.12 billion, comprising mainly of mineral fuels and oils, ships,

boats and floating structures amongst others.

Overall, this bears well for India and the prospects of multilateral growth in the

energy and resources sector is promising. However, a lot still remains to be

done to provide India with a competitive advantage for trade in this sector.

In the Plan of Action to implement the ASEAN-India Partnership for Peace,

Progress and Shared Prosperity, the following extract addresses the

cooperation plan on Energy.

Table 5.5 – Excerpt from the India ASEAN Plan of Action tabled on October 2010

2.6. Energy

2.6.1 Promote and develop trade and investment interest in gas-related projects;

2.6.2

Promote and develop trade and investment interest in the electricity sector, and pursue an integrated and coordinated development programme to establish compatibility of electricity grids, and work towards liberalisation of power trade among ASEAN Member Countries and India;

2.6.3 Develop and strengthen institutional linkages between ASEAN Centre for Energy (ACE) and India to cooperate on R&D into energy efficiency and renewable energy, and to establish programmes of cooperation; and

2.6.4

Promote sustainable and optimal utilisation of renewable energy, coal and new hydrocarbon projects, and cooperate in energy policy and planning, energy efficiency and conservation, as well as in the establishment of institutional linkages for developing other programmes of cooperation.

India is well-endowed with both exhaustible and renewable energy resources.

Coal, oil, and natural gas are the three primary commercial energy sources.

India‟s energy policy, till the end of the 1980s, was mainly based on availability of

indigenous resources. Coal was by far the largest source of energy. Trade in

commodities is quite prevalent in the region and India is an important part of it.

However, as an importer there are tariffs and trade barriers that India face. If

tariffs related to imports from the region come down, this will substantially help

India benefit in the long run from the India ASEAN FTA.

Secondly, if there are secondary effects arising out of the India ASEAN FTA such

as regional preference for an Indian consortium on a bidding process, entry into

rural rectification projects, collaboration advantages on oil and gas projects etc,

this will help boost India‟s trade in this sector.

60

A final thrust area under the India ASEAN FTA with an eye towards the future

would be areas such as efficient technology and renewable resources. Focus on

non-grid sectors have traditionally been low though there is a huge potential this

area has not been addressed. While bilateral agreements (e.g. with Malaysia)

take up the issue of collaboration in hydrocarbons and renewable sources, the

details are missing in the India-ASEAN FTA46

.

Graph 5.22 – ASEAN energy demand in million tons of oil

Source: Asia Pacific Energy Research Centre, Tokyo

A regional energy market could be formed through sustained dialogue. Asian

countries, especially rapidly-growing economies of the region, need long-term

energy supply security. Energy producing countries are concerned about

demand security. This is where regional interdependence may best serve the

interests of all parties. Regional countries need to strive to establish a structure in

which regional producers would charge less from regional consumers on the

basis of reciprocity in the region. Asia is one of the fastest-growth markets for oil

in the world where half of the total incremental oil demand is forecast to take

place during the next few years. Gas is increasingly taking the place of oil as a

comparatively cheaper and cleaner source of energy. It is therefore quite logical

that the development of partnerships between producers and consumers should

go a long way in addressing mutual concerns. The surge in international

energy prices leads to higher costs of production and to some extent slows

economic growth47

.

Regional energy cooperation is in the interest of entire Asia. South Asia‟s

growing energy demands, its skilled and hardworking manpower and together

with regional strengths in industrial and managerial know-how and science and

technology make ideal space for long-term economic complementarities and

regional partnership. With the economic agenda of the ASEAN countries gaining

46 IEA-MoEN Joint Workshop on „OIL SECURITY AND NATIONAL EMERGENCY

PREPAREDNESS‟ by Zainal Matassan, ASEAN Council on Petroleum, 2007

47 Energy Resources and Regional Economic Cooperation in SAARC Countries –

Ramzan Ali

Vietnam

Thailand

Singapore

Philippines

Malaysia

Indonesia

Brunei

600

500

400

300

200

100

0

1990 1999 2010 2020


importance, the idea of setting up an energy grid in the region is very

encouraging. Discussions have taken place in the past, thought much remains to

happen on the ASEAN Power Grid.

It is important that India becomes a trading partner with ASEAN in relation to

such large projects amongst Member countries. There would be significant

areas of synergy through which both parties will benefit. With limitless

possibilities, the idea of cooperating in supply and availability of energy

resources should be taken up on a priority basis under the India ASEAN FTA.

Manufacturing

The manufacturing sector is where India is expected to be impacted the most

under the FTA framework. As indicated earlier, the India ASEAN FTA is

expected to eliminate tariffs for about 4000 products (which include electronics,

chemicals, machinery and textiles) out of which duties for 3200 products will

reduce by December 2013, while duties on the remaining 800 products will be

brought down to zero or near zero levels by December 2016.

There is also a sensitive list comprising of items for which a timeline has been

agreed upon. 489 items are excluded from the list of tariff concessions. The

items excluded are farm products, automobiles, some auto parts, machinery,

chemicals and textile products. In respect of the sensitive items like crude and

refined palm oil, tea, coffee and pepper, tariff concessions will be graduated over

a period of ten years.

There are also certain technical issues arising from the text of the agreement.

India's schedule of tariff concessions is heterogeneous in its product-wise

composition and orientation of the implementation period for some of the sub-

country groups Asean5 and CMLV comprising of Cambodia, Laos, Myanmar and

Viet Nam. This may be seen as being disadvantageous. For example, the CLMV

group are required to fulfill their commitments only at a later stage for products

covered under the Normal Track(1&2) and the Sensitive Track(1). In addition,

other salient features of India's tariff concessions are the non-reciprocal nature of

the implementation period with the less developed Members and inverted duty

structure in the case of selected products.

In spite of this, the likely beneficiaries in India are the exporters of steel,

machinery, auto components synthetic textiles, refined petroleum products,

organic chemicals, pharmaceuticals, gems and jewelry.

Another important factor in this arrangement is the China element. It is well

known that China is one of the leaders in the global manufacturing sector. China

has experienced growth in its manufacturing skills, output pattern and

consequently export structure. China‟s manufacturing sector accounts for 41 per

cent of its GDP. Exports from the manufacturing sector constitute over 93 per

cent of its exports.

India‟s manufacturing sector on the other hand is approximately 17 per cent of its

GDP and comprises a much smaller fraction of its exports. After specializing in

62

unskilled labour intensive sectors like toys, footwear, apparel, manufactures in

the earlier part of the decade, China has since advanced to office machinery,

electrical and electronic equipment and appliances. Today China is the

manufacturing hub of the world. India on the other hand has continued to

specialize in lower levels of manufacturing and does not have the prowess

currently to compete with China in the global or regional market. However, there

are sectors where for some commodities India does have a comparative

advantage like organic chemicals, rubber and articles thereof and articles of iron

or steel.

Another question relates to the effect this India ASEAN FTA is going to have on

the small and medium scale industries.

The Trade in Goods agreement focuses on tariff liberalization on mutually agreed

tariff lines from both the sides and is targeted to eliminate tariffs on 80% of the

tariff lines accounting for 75% of the trade in a gradual manner starting from 1st

January, 2010. As customs duties are withdrawn, will there be an inflow of cheap

products flooding the India market and putting the small and medium scale

industry at risk? Tariff lines which come to mind include food processing, paper

products, pharmaceutical products, electronics, textiles and auto equipment

amongst others.

While this may well be the case in the short run, it is quite imperative that India

does not follow a protectionist regime and evaluates this from a long run

perspective. As the Union Minster of Commerce has earlier commented, Indian

manufacturers would be able to source products and inputs at competitive prices

from the ASEAN countries. Further, it is for Indian manufacturers to realize this

change as an opportunity and align their businesses accordingly. This will allow

the small and medium size industries to be globally competitive.

The exchange of tariff concessions between India and the ASEAN Member

Countries would lead to growth in bilateral trade and investment resulting in

economic benefits to India and the ASEAN Member Countries.

The Agreement also provides for bilateral safeguard mechanisms to address

sudden surge in imports after the Agreement comes into force. In such an

eventuality if it hurts a domestic industry, safeguard measures including

imposition of safeguard duties may be put in place for a period up to 4 years.

The flexibility to invoke the safeguard measures will remain available for both the

sides for a period of 7 years to 15 years from the date, the Agreement comes

into force.

The details show that in the manufacturing sector, the India ASEAN FTA is a

challenge as well as an opportunity. While there are definite benefits in terms of

trade for India, there are also areas of concerns and challenges. It is

important that well before 2013, steps are taken to provide a level playing field

to the industry.


6. Business Opportunities in

ASEAN Countries

The main economies in the Association of South-East Asian Nations (ASEAN)

like Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, have all

benefited from the strong recovery in global trade and the strength of demand

from China. Most of these countries have introduced massive stimulus

programmes that are still supporting GDP growth. They have also been boosted

by capital inflows. Thailand is growing strongly this year but its medium-term

performance will be constrained by political instability, which will undermine

investor and consumer confidence. Vietnam's economy is strong (7% growth is

forecast in 2011), a trend that we expect will continue despite policy weaknesses

and concerns about the banking sector following excessive credit growth in

recent years. With a view to exploring opportunities for Indian industry and

entrepreneurs in ASEAN countries with respect to international trade and FDI

(Foreign Direct Investment), this Chapter provides an analysis based on

information on published tenders. This provides an indication of business

opportunities and projects that Indian industry may capitalize on as a part of their

advent into the ASEAN region once the FTA is in place.

64

6.1 Findings based on current open project tenders

In terms projects announced, as gathered from various sources, we find that

there are ample business opportunities in “construction work” related activities in

all the ASEAN countries. This segment includes construction of agricultural

buildings, bridges, canal construction, concrete work, roads & highways, school

buildings, sports facilities, water-treatment plants, etc.

ASEAN countries also provided considerable number of opportunities in following

industry/services categories:

Machinery, equipment, appliances apparatus and associated products

Office equipment, Computers and Supplies

Instruments and appliances, Industrial process control equipment, Optical

instruments, Horological instruments

Electrical machinery, apparatus, equipment and consumables

Pharmaceuticals and Medical Supplies

Telecommunication, Radio, Television and communication equipment and

related apparatus

Manufactured goods, furniture, handicrafts, special-purpose products and

associated consumables

Fabricated products and materials

Motor vehicles, trailers and vehicle parts

Consultancy Services: Architectural, Construction, Legal, Accounting and

Business

Software Services

Repair, maintenance and installation services

Sewage- and refuse-disposal services, sanitation and environmental services.

Education Services

Health and social work services

Following is the country-wise snapshot of number of opportunities available.

(Figures given in bracket show number of tenders available in that particular

category.)

6.1.1 Malaysia

Malaysia has recovered from the global economic recession resulting from

proactive measures undertaken by the Government and the successful

implementation of two Economic Stimulus Packages amounting to RM67 billion.

The effectiveness of these measures is reflected by the 9.5% expansion in gross

domestic product (GDP) in the first half of 2010 compared with -5% during the

same period the previous year. The Economic Transformation Program which

was unveiled recently set forth an ambitious 10-year economic roadmap to power

the country towards becoming a high income nation by 2020. It involves

http://www.tenderszeal.com/tenders.php?browseby=country&country=ID&code=38000000&service=n&level=2

http://www.tenderszeal.com/tenders.php?browseby=country&country=TH&code=32000000&service=n&level=2


http://www.tenderszeal.com/tenders.php?browseby=country&country=PH&code=36000000&service=n&level=2




http://www.tenderszeal.com/tenders.php?browseby=country&country=ID&code=74000000&service=y&level=2




http://www.tenderszeal.com/tenders.php?browseby=country&country=VN&code=90000000&service=y&level=2


investments worth approximately RM 1.4 trillion (US$ 523 billion) with an

objective to grow the Gross National Income (GNI) at six percent annually to hit

RM 1.7 trillion by 2020, from RM 660 billion in 2009. As an initial catalyst towards

economic transformation, 131 Entry Point Projects (EPPs) would be carried out

across 12 National Key Economic Areas (NKEAs), with 60 Business

Opportunities (BOs) being made available as a result of it, as summarized in the

table below –

Notably, the ETP would be private sector driven – expected to fund 92% of the

NKEA projects while the remaining funds would come from the government

which would also act as an enabler and catalyst. As a result of this, Gross

National Income per capita is expected to increase by 103% to reach RM 48,000

(US$ 15,000) within 10 years from RM 23,700 (US$ 6,700) in 2009.

The main approach in transforming to a high income economy will be to adopt

strategies based on specialisation, given that strong and sustainable

competitiveness is difficult to achieve without specialisation. This Plan will focus

on 12 national key economic areas or NKEAs which have potential to generate

high income, which are as follows –

National Key Economic Areas

EPPs Expected EPP GNI contribution in 2020

No. of BOs

Expected BO GNI Contribution in 2020

Jobs created

US$ b RM b US$ b RM b

Oil, Gas & Energy 12 45.8 141.4 7 19.1 58.9 52,300

Palm Oil 8 39.2 121 4 23.3 71.9 123,400

Financial Services 8 41.8 129 6 24.8 76.6 275,000

Tourism 12 20.9 64.5 4 8.9 27.5 497,200

Business Services 8 17.8 54.9 9 6.1 18.8 245,500

Improving Electronics & Electrical 15 16.8 51.9 4 4.3 13.3 157,000

Wholesale & Retail 13 34.1 105.2 1 14.1 43.5 595,000

Education 13 10.4 32.1 4 4.5 13.9 536,000

Healthcare 6 11.1 34.2 5 4.6 14.2 181,000

Communications Content & Infrastructure 10 11.9 36.7 4 3.7 11.4 43,162

Agriculture 16 9.1 28.1 11 1.1 3.4 74,000

Greater KualaLumpur 10 121.8 376 1 62.1 191.7 520,438

Total 131 381 1,175 60 177 545 3,300,000

66

Oil and gas;

Palm oil and related products;

Financial services;

Wholesale and retail;

Tourism;

Information and communications technology (ICT);

Education services;

Electrical and electronic;

Business services;

Private healthcare;

Agriculture; and

Greater Kuala Lumpur.

Out of the above NKEAs, the Oil, Gas and Energy industry is one of the main

contributors to the economy. In 2009, it contributed 10.2% to GDP with export

revenue amounting to RM56 billion. This industry has the potential to expand,

particularly in downstream activities. This NKEA is aimed at raising the sector‟s

output and meet energy demand over the 10-year period. It is also aimed at

enhancing downstream growth, making Malaysia the number one hub for oil field

services and building a sustainable energy platform for growth, requiring an

investment of RM 217 billion from the private sector. To achieve this objective,

the Government will allocate RM146 million to support the sector. Among the

projects to be implemented include the establishment of the Oil Field Services

and Equipment Centre in Johor with private investment of RM6 billion over a

period of 10 years.

The Business Services sector encompasses a vast array of industries and

professions, covering 41 sub-segments – healthcare, IT services, Consulting,

Engineering, Accounting, Law, Construction, Advertising, Events Management

and Fashion to name a few, that is fast growing and is driven by a series of

powerful global trends which include globalization and outsourcing, climate

change, rise of social media and IT enabled services. Thus, in order to increase

skilled workforce to meet the service sector growth, the ETP also aspires to grow

the pool of skilled labor to 46% of Malaysia‟s workforce to support the skills

demand from the sector.

With total healthcare expenditure representing 4.8% of GDP, the ETP aims to

grow three sub-sectors within the healthcare industry; namely, the

pharmaceutical, health travel and medical technology products segment. Quick-

wins include to mandate health insurance for foreign workers and to create an

eco-system to support clinical trials. In addition, the Healthcare NKEA intends to

develop and pursue exports in generic drugs and reinvigorating our health travel

segment with an investment of RM 23.2 billion within 10 years.

The Communications Content & Infrastructure (CCI) sector spans a wide

ecosystem, from content generation to networks, services and devices. In order


to achieve a high-income economy, the continued development of the

communications content and infrastructure sector is therefore fundamental. It

would be critical to ensure smart deployment of next generation infrastructure

throughout the country and capitalize on opportunity to develop

Telecommunications as an enabler to other sectors. Capital expenditure is

estimated to amount to RM 51.5 billion over the 10 year period.

The Tourism industry, which generated revenue of RM53 billion in 2009, has the

potential to provide more business and employment opportunities as well as

further increase the nation‟s income. For this, the Government will implement the

initiatives such as providing infrastructure facilities to facilitate construction of

hotels and resorts in remote areas, Construct several shaded walkways, Nexus

Karambunai, a renowned resort in Sabah is committed to develop an integrated

eco-nature resort, the first in the world, by leveraging on the natural beauty and

uniqueness of Karambunai. The RM3 billion project will commence next year.

The 10th Malaysian Plan will continue to focus on the provision of infrastructure

to support national growth, while ensuring that it benefits all segments, as well as

continue its efforts to encourage the private sector to invest in physical

infrastructure and provide services such as skills training. The implementation of

the high-speed broadband project will cover major towns, priority economic

growth areas and industrial areas. This will be complemented with the roll out of

the Broadband for General Population which will provide coverage for sub-urban

and rural areas. For the rural population, last mile broadband services

will be provided through wireless infrastructure, offering a variety of

affordable packages.

Private investment is increasing through various strategic high-impact projects.

Recently, the 1Malaysia Development Berhad (1MDB) in collaboration with

Mubadala Development Company, an investment arm of the Government of Abu

Dhabi, agreed to develop the Kuala Lumpur International Financial District

(KLIFD) valued at RM26 billion, commencing in 2011. The Mass Rapid Transit

(MRT) in Greater KL (Klang Valley) will be implemented beginning 2011. This

project, with an estimated private investment of RM40 billion, is expected to be

fully completed by 2020. Another landmark to be developed by Permodalan

Nasional Berhad is Warisan Merdeka, expected to be completed by 2020. This is

an integrated development project comprising a 100-storey tower, the tallest in

Malaysia. The project will retain Stadium Merdeka and Stadium Negara as

national heritage. The total project cost is RM5 billion, with the tower expected to

be completed by 2015.

Major international banks and professional financial services firms, including

syariah experts will be located in the KLIFD. More importantly, such strategic

development will further strengthen Malaysia‟s position as the premier

international Islamic financial hub. The Government is prepared to consider

special incentive packages to attract investors to the KLIFD. Another major

project is the development of the Malaysian Rubber Board land in Sungai Buloh

covering an area of 2,680 acres. The entire development is estimated at RM10

billion and is expected to be completed by 2025.

68

Smart and effective partnerships between the public and private sectors will be

established to drive the economic transformation agenda. To date, 52 high-

impact projects worth RM 63 billion have been identified for implementation.

These include:

Seven highway projects at an estimated cost of RM 19 billion. Among the

projects are the West Coast Expressway, Guthrie-Damansara Expressway,

Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway;

Two coal electricity generation plants at an estimated cost of RM 7 billion; and

Development of the Malaysian Rubber Board‟s land in Sungai Buloh,

Selangor covering an area of 3,300 acres at an estimated cost of

RM 10 billion.

The private sector will also have the opportunity to participate in the development

of several projects led by government-linked companies (GLCs). These include

projects such as the Kuala Lumpur Strategic Development by 1Malaysia

Development Berhad (1MDB) covering the Sungai Besi Airport area, the KL

International Financial District in Kuala Lumpur, construction of the liquefied

natural gas regasification plant by PETRONAS in Melaka at an estimated cost of

3 billion ringgit as well as two aluminium smelters in SCORE Sarawak with an

estimated cost of 18 billion ringgit.

The Venture Capital industry plays an important role in contributing towards

economic growth, particularly in high technology sectors such as information and

communication technology (ICT), biotechnology and the creative industry. For

this, the Government will provide Entrepreneurship Enhancement Training

Programme to train 500 new technopreneurs and attract more angel investors.

MTDC will also host an International Venture Capital Symposium in 2011 to

enable networking and partnering of foreign and local venture capitalists to boost

high technology industries.

To help the private sector finance these projects, a Facilitation Fund of 20 billion

ringgit will be provided under the 10MP. This fund aims to help bridge the private

sector viability gap with respect to projects that have a strategic impact and those

with huge economic spill over. The fund is expected to attract private sector

investments worth at least 200 billion ringgit during the Plan period. Projects that

are being considered for financing under this fund include Land Reclamation in

Westport in Port Klang, Malaysia Truly Asia Centre in Kuala Lumpur and Senai

High Technology Park in Iskandar Malaysia, Johor.

The Electrical and Electronics (E&E) industry remained the largest contributor to

exports with 41% or RM228 billion in 2009. However, the E&E industry is still

focused on assembling activities. A sum of RM857 million is allocated for local

companies to invest in high value-added activities, particularly in Penang and the

Kulim High-Tech Park in Kedah.

The Government allocates RM3.8 billion in 2011 to increase productivity and

generate higher returns in the Agriculture sector. This will include Develop large-

scale integrated Aquaculture Zones, Upgrade the drainage and irrigation system


as well as use high quality paddy seeds to enhance productivity, Foster

partnership between small-scale fruit and vegetable farmers with anchor

companies, Build an International Centre for Crops of the Future.

To accelerate the economy towards a high-income nation, Research,

Development and Commercialisation (R&D&C) activity will be the platform for

enhancing value-added activities across economic sectors. The creative industry

has great potential for further development to generate national income. This

industry encompasses animation, advertising, films, fashion design, crafts and

cultural heritage. To fully tap the potential of this industry, the Government will

develop a creative industry policy in an integrated manner. Several programmes

and activities will be designed to enhance innovation, creation and

commercialisation of new products.

The NKEAs will have dedicated focus from the Prime Minister and will have fast-

track mechanisms to resolve disputes or bottlenecks. The Malaysian

Government is committed to the ongoing support of growth in the non-NKEA

sectors. However, it will focus its efforts on the NKEAs because of the

significance of the GNI contribution that these parts of the economy can drive.

Based on the focus areas / NKEAs of the Malaysian Economy for the coming

years, as discussed above and the flourishing competencies & strengths of the

Indian entrepreneurs in the fields of Infrastructure, Energy, Information

Technology, Pharmaceuticals sectors, there seem to be a genuine scope for the

Indian business groups to help Malaysia in achieving their top priorities in these

sectors.

Malaysia tenders and RFP's from electrical machinery, equipment and

consumables are invited and in great demand in Malaysia. There are as many as

203 business opportunities in construction work related activities.

Other product / services categories where number of opportunities available are

given below:

Opportunities by Product categories

Agricultural, horticultural, hunting and related products (1)

Chemicals, chemical products and man-made fibres (4)

Clothing and footwear (4)

Coal, lignite, peat and other coal-related products (2)

Construction work (203)

Electrical machinery, apparatus, equipment and consumables (62)

Fabricated products and materials (31)

Food products and beverages (4)

Forestry and Logging industry (1)

Instruments and appliances, Industrial process control equipments, Optical

instruments, Horological instruments. (19)

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70

Machinery, equipment, appliances, apparatus and associated products (69)


associated consumables (12)

Metals and associated products (5)

Mining, quarrying and other associated products (2)

Motor vehicles, trailers and vehicle parts (4)

Office equipment Computers and Supplies (15)

Paper and Pulp products (2)

Printed matter and articles for printing (5)

Rubber, Plastic and Film products (2)


related apparatus (13)

Textiles and textile articles (4)

Transport equipment (3)

Opportunities by Service categories

Administration, defence and social security services (1)

Agricultural, forestry, horticultural and other related services (9)

Air transport services (2)


Business (51)

Hire services of machinery and equipment and of personal and household

goods (1)

Hotel and restaurant services (3)

Land transport services and transport via pipeline services (2)

Membership organization services (1)

Miscellaneous services (3)

Postal and Telecommunications services (1)

Printing, publishing and related services (3)

Real estate services (1)

Recreational, cultural and sporting services (1)

Repair, maintenance and installation services (34)

Sewage- and refuse-disposal services, sanitation and environmental

services (12)

Software Services (7)

Supporting and auxiliary transport services; travel agencies services (3)

Water transport services (2)















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6.1.2 Singapore

As the world suffered its worst and most wide-spread recession in over 60 years,

the Resilience Package kept confidence up and helped Singapore avoid the

worst of the global crisis. Taking both the recession and the recovery together,

the Singapore economy contracted less than most other highly globalised

economies. Singapore could not avoid this global contraction as a small

economy which lives by exporting to Asia and the world as from the peak to the

trough of this cycle, its GDP contracted by 10%. Resident unemployment

reached 5% in the third quarter of 2009, but has since fallen back to 3%. Barring

further major problems in global finance, Singapore‟s growth for 2010 is expected

to be around 4.5% to 6.5%.

The Singapore Government has accepted the key thrusts of the Economic

Strategies Committee (ESC) report. Budget 2010 sets out the main actions the

Government will take to help Singapore succeed in these new directions.

Singapore‟s key goal is to grow productivity by 2% to 3% per year over the next

decade (more than double the 1% achieved over the last decade), which will also

allow maintaining a healthy rate of economic growth of 3% to 5% a year, even

with slower growth of work force.

Budget 2010 provides a major investment for the future. First, the Singapore

Government will launch a sustained initiative to help enterprises and workers

raise productivity – by deepening skills and expertise, and innovating to create

more value. Second, it will further support the growth of more globally

competitive Singapore companies, by helping companies which are seeking to

commercialise R&D, and those which are expanding abroad. Third, it will help

include everyone in growth. It will continue to build a society where everyone has

the best opportunity to reach further and stretch their potential, and every family

can progress and enjoy a better quality of life.

The Singapore Government‟s one of the major areas of investment is aimed at

catalysing improvements in enterprises themselves. The Government will support

businesses that are re-engineering their work processes and re-designing jobs

so as to help their employees create more value their efforts to innovate – to gain

competitiveness, come up with new products and services and generate

additional revenue streams. It will provide tax incentives for businesses in all

sectors to invest in upgrading their operations and creating new value. The

Singapore Government will also extend substantial grants to specific industries,

clusters and even enterprises. Specifically, it would cover spending on the

following activities within this innovation value chain –

Research & Development;

Registration of intellectual property – including patents, trademarks, and

designs;

Acquisition of intellectual property – for example, when a company buys a

patent or copyright for use in its business;

Design activities;

72

Automation through technology or software; and finally

Training of employees.

The Singapore Government will complement this broad-based tax reduction for

all companies which invest in innovation, with funding for initiatives customised to

specific industries, clusters, and enterprises, for which a new National

Productivity Fund of $2 billion will be created. The National Productivity Fund will

provide grants to help enterprises in all sectors, with special emphasis initially on

sectors where there is potential for large gains in productivity. The Fund can also

be used to develop centres of expertise for a range of industries, which will grow

a knowledge base for enterprises to tap on to develop productivity solutions.

Construction is a key sector which needs to improve. Its productivity levels are

estimated to be about half of that in Australia and one-third of that in Japan.

Around $250 million out of the first $1 billion of funding for the National

Productivity Fund will be dedicated to raising productivity in the construction

sector. This will include initiatives to help our local contractors develop

capabilities in areas such as complex civil engineering and building projects, to

invest in new technologies, and upgrade to a higher quality workforce.

The Government wants to encourage more angel investments, and it will be done

by incentivising private individuals with appropriate investment and business

expertise to provide financing to start-ups. Angel investing is at the higher end of

the risk spectrum, with less assurance of returns. Successful angel investors

nurture start-ups not just by contributing funds, but also by providing mentorship,

and access to business networks and markets. Therefore the Government will

introduce a new incentive for angel investors. Under this incentive, an eligible

angel investor who commits a minimum of $100,000 of equity investment in a

qualifying start-up in a given year can claim 50% tax deduction on his investment

at the end of a two-year holding period. This deduction is subject to a cap of

$500,000 of investments in each Year of Assessment.

The Government will also introduce additional incentives to encourage the

expansion of specific economic activities with high growth potential. First of these

incentives will be to extend the Development and Expansion Incentive scheme to

law practices providing international legal services so as to enhance position as

an arbitration hub. Under this incentive, approved law practices will enjoy a 10%

concessionary tax rate on incremental income derived from performing

international legal services.

It will further continue to update tax incentives for the financial services sector to

ensure that they remain relevant, and encourage institutions to build up high

value activities and expand their professional teams in Singapore and will also

introduce a tax incentive to grow shipbroking and extend that for maritime

financing activities. The Maintenance, Repair and Overhaul (MRO) business is a

growing opportunity for Singapore. To further enhance the competitiveness, the


Investment Allowance scheme which grants an additional 50% allowance for

aircraft rotables for another five years, will be renewed.48

In line with the three broad priorities set out in the ESC Report, the ESC

recommends seven strategies over the next 10 years to sustain economic growth

and enable broad-based improvement in Singaporeans‟ living standards, relevant

of which are discussed below -

Growing Through Skills and Innovation

With an aim to achieve higher productivity growth of 2 to 3 percent per year,

enabling GDP to grow on average by 3 to 5 percent per year over the next

decade, the Singapore Government will encourage enterprise innovation and

investments in technology and training, both through broad-based and

targeted sectoral approaches in addition to other initiatives.

Anchor Singapore as a Global-Asia Hub

The Singapore Government aims to be the key base for global players

seeking to tap into opportunities offered by a rising Asia by building on

physical and cultural connectivity to Asia and the world and also to grow

opportunities in ASEAN, working together with our regional partners to realise

the vision of a single market under the ASEAN Economic Community by

2015. For this, the Government plans to retain a globally competitive

manufacturing sector at between 20 to 25 percent of the economy, with

continued shift into complex manufacturing – areas where know-how and

intellectual property are crucial such as nutriceuticals; the design and

production of “mission-critical” components such as those in medical devices;

and cross-disciplinary areas like bioelectronics and growing manufacturing-

related services such as headquarter-related activities, R&D, Intellectual

Property (IP) management and product lifecycle management by capitalising

on the convergence of manufacturing with services.

Make Innovation Pervasive, and Strengthen Commercialisation of R&D

To strengthen emphasis on business innovation and commercialisation of

R&D and to establish Singapore as Asia‟s Innovation Capital – a hub for

innovation and enterprise, and a location of choice for commercialization, it

plans to raise Gross Expenditure on R&D (GERD) to 3.5 percent of GDP by

2015 through increased private sector R&D expenditure.

Become a Smart Energy Economy

To become resilient, sustainable, and innovative in the energy use, the

Singapore Government plans to explore coal and electricity imports in the

medium term to diversify both the fuel types and fuel source countries in

energy portfolio and continue supporting innovation and investing in the

infrastructure necessary to develop renewable energy in the long term.

Make Singapore a distinctive global city and an endearing home

48 Budget Speech 2010 Towards An Advanced Economy

74

To realise the potential as a global city, Singapore plans to focus more in two

main areas: First, to grow the software that will make Singapore a distinctive

global city - develop thriving creative and arts clusters – distinguished for both

their development of Asian content and appeal to an international audience.

Also aim to host more pinnacle global events, building on the new vibrancy of

the city and Marina Bay and to provide the best opportunities in Singapore for

diverse talents to grow and develop.

Second, to develop the infrastructure necessary to provide the highest quality

of life in Asia - This will call for bold and imaginative urban planning and

redevelopment such as to develop a masterplan for the progressive

development of a new waterfront city at Tanjong Pagar once the port‟s lease

expires in 2027, to expand „land bank‟ by investing in the creation of

underground space, especially around our transport nodes, to develop distinct

eco-towns and residential precincts, as well as new models for resource-

efficient industrial clusters, e.g. on Jurong Island – where desalination and

recycling of energy can be part of an integrated and cost efficient system.49

In May 2005, a high-level steering committee convened to spearhead the

development of Singapore‟s 10-year masterplan; to grow the infocomm sector

and to use infocomm technologies to enhance the competitiveness of key

economic sectors and build a well-connected society.

Singapore’s Strategy with iN2015

To establish an ultra-high speed, pervasive, intelligent and trusted infocomm

infrastructure

To develop a globally competitive infocomm industry

To develop an infocomm-savvy workforce and globally competitive infocomm

manpower

To spearhead the transformation of key economic sectors, government and

society through more sophisticated and innovative use of infocomm

Desired Outcomes

Enriched lives through infocomm

Enhanced economic competitiveness and innovation through infocomm

Increased growth and competitiveness of the infocomm industry

Goals with iN2015

To be #1 in the world in harnessing infocomm to add value to the economy

and society

To realise a 2-fold increase in the value-add of the infocomm industry to S$26

billion

To realise a 3-fold increase in infocomm export revenue to S$60 billion

49 Report of the Economic Strategies Committee


To create 80,000 additional jobs

To achieve 90 per cent broadband usage in all homes

To achieve 100 per cent computer ownership in homes with

school-going children

Considering the focus of the Singapore Government on the technology driven

manufacturing, research & development activities, keenness on innovation and

infrastructure for the growth in the coming years, these sectors will definitely

open up the gates for the Indian entrepreneurs willing to invest abroad in

these sectors.

There are as many as 146 business opportunities in construction work

related activities.


given below:






Electricity, gas, nuclear energy and fuels, steam, hot water and other sources

of energy (4)




Instruments and appliances, Industrial process control equipment, Optical








Non-metallic mineral products (2)

Office equipment Computers and Supplies (39)


Petroleum products and fuels (1)

Pharmaceuticals and Medical Supplies (56)



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76





Wood, wood products, cork products, basketware and wickerwork (1)




Air transport services (2)


Business (139)

Education services (93)

Health and social work services (4)


goods (5)


Insurance and pension funding services, except compulsory social security

services and insurance-related services (8)


Manpower Supply Services (3)








Research and development services (1)

Retail trade services (3)

Services auxiliary to financial intermediation (2)


services (7)



Water transport services (3)

6.1.3 Indonesia

As the first decade of the 21st century draws to a close, Indonesia has emerged

as a middle-income economy, economically strong, politically stable, and with






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increasing confidence and global standing. This was unexpected a decade ago,

when Indonesia experienced a severe economic crisis that resulted in the

economic dislocation of millions of households, a sharp rise in poverty, a 13

percent decline in GDP, and near bankruptcy of the financial sector.

Generally, the 2009 macroeconomic condition is as follows. First, while economic

growth declined slightly, there was reasonable growth during the impact of the

global financial crisis in 2008. Since the beginning of 2009, domestic expenditure

has become the main contributor to economic growth and most of the domestic

economic indicators, such as consumers‟ confidence, retail and automobiles

sales, and industrial activities, have increased since the beginning of 2009, after

declining at the end of 2008. In order to accelerate the process of economic

recovery, attempts to reduce the decline in export and the slow growth of

investment have been intensified.

The Indonesian economic condition in 2010-2014 is related to the state of the

world economy. On the basis of various policy measures pursued in various

fields, Indonesian economy is expected to gradually grow from 5.5-5.6% in 2010

to 7.0-7.7% in 2014, at the average growth rate of 6.3-6.8% per year over the

next five years.

On the production side, after experiencing low growth rates in the period 2004-

2009, growth of the non-oil and gas processing industry will be increased to

reach an average growth rate of 6.1-6.7%. The measures to stimulate growth of

the industrial sector will be through policies to expand the total number of the

industrial business units, to strengthen the industrial sector, and by increasing

industrial activities productivity. Meanwhile, agriculture, fisheries, and forestry

sectors are estimated to grow at an average rate of 3.5-3.6% per year. Also, the

Electricity, Gas and Water (13.8-13.9%), Transportation and

Telecommunications (14.7-15.4%) and the Construction (8.4-9.2%) sectors are

projected to grow at high rates during the next 5 years.

Regarding expenditure, economic growth originates from private expenditure, as

the main component of domestic demand, and from investment and the export of

goods and services. Private consumption is projected to increase by 5.3-5.4%

per year, while investment and exports are expected to gradually grow starting

from 2010. Investment is estimated to grow at an average of 9.1-10.8%

and exports of goods and services will grow at an average rate of 10.7-11.6%

per year.

Even though competition in the international market is getting tighter, the

prediction of improving world economy in 2010, after experiencing the global

financial crisis since the middle of 2008, and also induced by the utilization of the

increased competitiveness and efforts to create a conducive business climate for

export activities, means that the value of non-oil and gas export in the 2010-2014

period is estimated to gradually increase. After experiencing negative growth in

2009, non-oil and gas exports in 2010 are estimated to grow at 7-8%, reaching

14.5-16.5% in 2014.

78

On the import side, the increase in domestic demand will stimulate the growth of

non-oil/gas import from 8-9% in 2010 to 18-19% in 2014. With the deficit in

services that remains high in 2010 to 2014, it is estimated that the surplus in the

current account will decline down to 2014.

Foreign direct investment (net) is estimated to continue to increase in the 2010-

2014 period, while foreign portfolio capital flow is estimated to remain stable.

With such developments, it is estimated that foreign exchange reserves will

increase to around USD 100 billion in 2014.

The 2010-2014 National Medium Term Development Plan (RPJMN 2010-2014)

is the elaboration of the Vision, Mission, and Program of the President, the

formulation of which is guided by 2005-2025 National Long Term Development

Plan (RPJPN 2005-2025) of Singapore.

The National Development Vision and Mission of RPJPN 2005-2025 is to be

“INDONESIA THAT IS SELFRELIANT, ADVANCED, JUST, AND

PROSPEROUS”. To meet the above Vision, Indonesia has defined “the eight

National Development Missions” such as – “Realizing an Indonesia as an

archipelago nation that is self reliant, advanced, strong, and that is based on the

national interest”, “Realizing a nation that is competitive”, “Realizing an Indonesia

that is balanced and sustainable” and “Realizing an Indonesia that has an

important role in the international community” etc.

The strategy to implement the Vision and Mission is specified in five year stages

into the Medium Term Development Plans (RPJMs). Each of the stages has a

scale of priorities and development strategy that constitute a continuity of scale of

priorities and development strategies of preceding periods. The basic scale of

priorities and strategies of the respective RPJMNs are summarized in the

following:

The First RPJM (2005-2009) is directed at reforming and developing

Indonesia in all fields that are aimed at creating an Indonesia that is safe and

peaceful, just and democratic, and that has an increasingly prosperous

population.

The Second RPJM (2010-2014) aims at the greater consolidation of the

reform of Indonesia in all fields by emphasizing endeavors for increasing the

quality of human resources, including the promotion of capacity building in

science and technology and the strengthening of economic competitiveness.

The Third RPJM (2015-2019) is aiming for the greater consolidation of

development in a comprehensive manner in all fields by emphasizing

attainment of economic competitiveness on the basis of competitiveness of

natural resources and the quality of human resources and by the increasing

capability to master science and technology.

The Fourth RPJM (2020-2025) aims to realize an Indonesian society that is

self reliant, advanced, just, and prosperous through the acceleration of

development in various fields by emphasizing the realized economic structure


that is more solid on the basis of competitive advantage in various regions,

and is supported by quality and competitive human resources.

The Second Medium-Term Development Plan is currently being implemented on

the basis of the implementation, achievements, and as the continuation of the

First Medium Term Development Plan.

In accordance with the main problems faced by the Indonesian nation, the

government is determined to continue the process of accelerating economic

development in the next five years. Within 1-2 years, the global economy should

be recovered. The highest economic growth rate that Indonesia ever attained

before the crisis was around 7%, this can be reached again before the end of the

period 2010-2014.

Economic growth is expected to be able to reduce the open unemployment rate

by around 5-6% by the end of 2014, and the total created employment

opportunities rise from 9.6 million to 10.7 million units in the 2010-2014. The

combination of economic growth and various government interventions are

expected to be able to accelerate the reduction of the poverty rate to around 8-

10% by the end of 2014.

In order to achieve accelerated economic growth, the government needs to

continue with measurable and prudent macroeconomic policies in order to

stabilize the inflation rate of 4-6% a year, which is at a lower level and is in

proportion with nations that are equivalent to Indonesia. A stabilized inflation rate

will enable the attainment of the exchange rates and interest rates that are

competitive, which lead to the inducement of healthy growth in the sector.

Following are Development priorities of Indonesia during next 5 years (till 2014)–

The main national development targets of the National Mediumterm Developemt Plan (RPJMN) OF 2010-2014

No. Development Targets

1 Economic

a) Economic growth rate

Average of 6.3 – 6.8% per year

Growth of 7% before 2014

b) Inflation rate Average of 4 ‐ 6% per year

c) Open unemployment rate 5 ‐ 6% at end of 2014

d) Poverty rate 8 ‐ 10% at end of 2014

2 Education Initial Status (2008)

Target in 2014

a) Increased average school stay of ppeople of 15 years and older (yrs)

7.5 8.25

b) Decline in illiteracy rate of population aged 15 and over (%)

5.97 4.18

c) Increased net enrolment rate of elementary schools (%) 95.14 96

d) Increased net enrolment rate of junior high school (%) 72.28 76

80

No. Development Targets

e) Increased gross enrolment rate of senior high schools (%)

64.28 85

f) Increased gross enrolment rate at universities of those in

19‐23 years age bracket (%) 21.26 30

g) Reduced disparity in participation and quality of education services among regions, gender, social‐economic groups, and between education units that are implemented by the government and private institutions

3 Health Initial Status (2008)

Target in 2014

a) Increased life expectancy (years) 70.7 72

b) Decreased maternal mortality rate per 100,000 live births 228 118

c) Decreased infant mortality rate per 1,000 live births 34 24

d) Decreased prevalence of nutrition deficiency (deficient nutrition and malnutrition) by infants (%)

18.4 Less than 15

4 Food

a) Production of paddy Growth rate of 3.22% per year

b) Production of maize Growth rate of 10.02% per year

c) Production of soybean Growth rate of 20.05% per year

d) Production of sugar Growth rate of 12.55% per year

e) Production of cow meat Growth rate of 7.3% per year

5 Energy

a) Increased capacity of electricity generating stations 3,000 MW per year

b) Increased electrification ratio Reaching 80% in 2014

c) Increased production of crude oil Reaching 1.01 million barrel per day in 2014

d) Increased utilization of geothermal power stations Reaching 5,000 MW in 2014

6 Infrastructure

a) Construction of the Trans Sumatra, Java, Kalimantan, Sulawesi, West Nusa Tenggara, East Nusa Tenggara, and Papua infrastructure

Reaching a length of 19,370 km by 2014

b) Construction of an integrated inter‐mode and inter‐island transportation network, in accordance with the National

Transportation System and Multi‐mode Transportation Blueprint

Completed in 2014

c) Completing the construction of the Optic Fiber Network in Eastern Part of Indonesia

Completed before 2013

d) Repairing the transportation system and network in 4 big cities (Jakarta, Bandung, Surabaya, and Medan)

Completed in 2014

Therefore, similar to the Malaysian and Singapore Governments, the Indonesian

Governments has targeted few sectors as immediate priority sectors such as

Energy, Infrastructure, Education, Health & Agriculture etc. The burgeoning

capabilities of the India Inc. in various industries including the above mentioned

industries, creates a lots of opportunities for India to explore business


opportunities in Indonesia, particularly those industries and sectors, being given

special importance by the Indonesian Government itself.

Indonesia has a market-based economy in which the government plays a

significant role. It is one of the world's major rubber producers and has a wide

range of mineral deposits and production, including bauxite, silver, and tin,

copper, nickel, gold, and coal. However, agriculture employs majority of the

workforce. Petroleum and natural gas, textiles, apparel, and mining forms the

backbone of the economy. In India, business tenders from Indonesia are invited

from diverse industries with majority from construction, machinery and fabricated

products.

There are as many as 116 business opportunities in construction work related

activities and 234 opportunities in Consultancy Services: Architectural,

Construction, Legal, Accounting and Business.


given below:







of energy (4)









Office equipments Computers and Supplies (23)


Petroleum(Crude), Natural Gas, Oil and associated products (1)


Telecommunication, Radio, Television and communication equipments and





























82


Business (234)




goods (2)







Oil and Gas Related Services (4)


Public utilities (3)







services (13)



6.1.4 Thailand

The economy of Thailand is an emerging economy which is heavily export-

dependent, with exports accounting for more than two thirds of gross domestic

product (GDP). The main trading partners are Japan, the United States, China,

Malaysia, and Singapore. A large number of Thailand tenders are invited from

Consultancy Services in Architectural, Construction, Legal, Accounting and

Business. There are as many as 15 business opportunities in construction work

related activities.


given below:


































of energy (1)

Instruments and appliances, Industrial process control equipment‟s, Optical






Petroleum(Crude), Natural Gas, Oil and associated products (1)









Business (17)


Oil and Gas Related Services (1)




services (2)



6.1.5 Philippines

Philippines is an economically stable country. The economy partially depends on

its agriculture and on its export business. The flourishing industries are garment

industry, footwear industry, pharmaceuticals industry, chemicals, electronics

assembly, food processing industry, wood industry, petroleum refining industry

etc. The government is putting its best foot forward to streamline the economy

that includes increasing trade regulations, improvement of infrastructure and

privatization of the economy. In Philippines, a large number of procurement

notices are from construction sector.

There are as many as 1014 business opportunities in construction related

activities.


given below:
















http://www.tenderszeal.com/tenders.php?browseby=country&country=TH&code=74000000&service=y&level=2










84









of energy (3)


Fish, fishing products and other by-products of the fishing industry (2)





Leather and leather products (6)







Non-metallic mineral products (2)











Wood, wood products, cork products, basketware and wickerwork (12)





































http://www.tenderszeal.com/tenders.php?browseby=country&country=PH&code=75000000&service=y&level=2




Business (455)




goods (6)
















services (78)



6.1.6 Vietnam

Vietnam is a highly industrialized country that depends on tourism and exports

for the economic development. The per capita has been growing owing to the

foreign exchange earned from tourism, and exports from manufacturing sector. A

wide range of tenders are floated from consultancy services:


given below:



Chemicals, chemical products and man-made fibre (2)


Collected and purified water and water distribution (4)



























http://www.tenderszeal.com/tenders.php?browseby=country&country=VN&code=1000000&service=n&level=2






86


of energy (5)


Instruments and appliances, Industrial process control equipments ,Optical


















Business (233)





Public utilities (5)







services (25)





































7. India-ASEAN FTA and

Vision for India’s Growth

Shared and sustained economic growth is the most powerful driver of poverty

reduction and is critical to achieving development outcomes, including the

Millennium Development Goals (MDGs). There has been a continuous and

sustained reduction in the number of poor people in the world (despite the

definitional confusion on “poverty”) and the fact that continued growth has been

instrumental in achieving this outcome is hardly contested by any economist or

policy maker.

Economic growth improves livelihoods, creates job opportunities and raises

household and government incomes. Higher household incomes directly reduce

poverty and help people afford the basic necessities of life. Growth also

increases government revenues that can be invested into schools, roads, and

hospitals. These are critical investments for growth and development - a healthy,

well educated workforce is a more productive workforce. And a prosperous

society is more peaceful and stable. Growth and human development are

therefore mutually reinforcing. One cannot be sustained without the other.

Evidence supports the idea nations more open to trade tend to be richer than

those that are less open. Columbia University economist Arvind Panagariya

wrote in a paper 'Miracles and Debacles: Do Free-Trade Skeptics Have a

Case?': “On the poverty front, there is overwhelming evidence that trade

openness is a more trustworthy friend of the poor than protectionism.

Few countries have grown rapidly without a simultaneous rapid expansion of

trade. In turn, rapid growth has almost always led to reduction in poverty.”

88

Seen in this light, it is therefore amply clear that any policies to liberalize trade

and remove protectionist government policies will help the Indian economy in the

long run by making Indian industries more efficient and productive, by providing

the Indian consumers access to cheaper and larger variety of products and

generate employment for the rapidly expanding labor force. However, there are

possible downsides to FTA‟s as well. Evidence from across the globe suggests

that there is a very real chance that FTA will result in domestic job losses as

industries tend to resort to layoffs in an attempt to cut costs and compete

effectively with the industries in other FTA countries. Moreover, FTA‟s can adopt

create significant diversions from important issues such as environmental

concerns, human rights conditions for workers and workplaces as well as other

social issues like child labor and decline in overall levels of education.

India‟s growth story in the last decade has been nothing short of remarkable. Yet,

India has been lagging in terms of social sector priorities such as health,

education, basic infrastructural constraints like safe drinking water and hygiene,

and a vast majority of its population living under extreme poverty. It is in

this context that India laid out its Millennium Development Goals which are

as follows:

Eradicate extreme poverty and hunger.

Achieve universal primary education.

Promote gender equality and empower women.

Reduce child mortality.

Improve maternal health.

Combat HIV/ AIDS, malaria and other diseases.

Ensure environmental sustainability

Develop a global partnership for development

Whether the trade liberalization and other multilateral agreements being pursued

by the nation with its trading partners across the globe will help in achieving the

stated MDG‟s is an open question at this stage. A lot will depend on the

seriousness and will of the policy makers in the years ahead to foster an enabling

government infrastructure that works on well defined priorities and a vision that

will help India achieve growth with development and progress. The track record

of the country in balancing these objectives have been dismal so far; but perhaps

the future will evolve in a more optimistic way riding on the success of the

ongoing trade and other policies that are pursued by the government.


8. Appendix

Appendix 1

Summary of the India ASEAN FTA

Introduction

Pursuant to the Framework Agreement on Comprehensive Economic

Cooperation signed by India and the ASEAN member states (“the Parties”) on

October 8, 2003, the ASEAN-India agreement on trade in goods (“the

Agreement”), effective January 1, 2010, envisages establishing a free trade area

(“FTA”) to increase economic integration and cooperation activities between India

and the ASEAN. To this end, the principles governing the conduct of trade in the

FTA have been embodied in Articles 1 through Article 24 of the Agreement. The

following sections present a brief summary of the salient features of the

Agreement.

National Treatment

The Agreement stipulates that each Party shall accord national treatment to the

goods of the other Parties in accordance with GATT principles, i.e., domestic

taxes and regulations cannot be biased against imports from other Parties.

Tariff Reduction and Elimination

The Agreement envisages a gradual reduction in tariffs imposed by each Party

on the other Parties‟ goods as per the timelines set out in the Schedule of Tariff

Commitments. The schedule groups goods into 5 different categories and sets

out separate tariff liberalization rules for each of these categories.

Normal Track: In general, for goods classified under this category, complete

elimination of tariffs (i.e., tariffs of 0 percent) is scheduled to be achieved

among all Parties by December 31, 2019, at the latest. Once achieved, the 0

percent tariff rate must be maintained by all Parties.

Sensitive Track: For goods under this track, tariffs must be reduced by all

Parties to 5 percent by December 31, 2019, at the latest. This 5 percent tariff

can be maintained for only 50 product lines under this category and the

remaining tariff lines must be reduced to 4.5 percent.

Special Products: These products refer to India‟s crude and refined palm oil,

coffee, black tea and pepper, and, tariffs on these products are slated to be

reduced from current base rates by approximately 50 percent, on average, by

December 31, 2019.

90

Highly Sensitive List: This list consists of goods further classified into

Category 1, 2 and 3 with tariffs reduction schedules as given below.

Category 1: Tariffs on goods under this category must be reduced to

50 percent by the stipulated deadlines;

Category 2: Tariffs on goods under this category must be reduced by

50 percent by the stipulated deadlines; and

Category 3: Tariffs on goods under this category must be reduced by

25 percent by the stipulated deadlines.

Excluded List: Goods under this category do not fall under the purview of the

tariff reduction schedule but are subject to annual tariff reviews for purposes

of improving market access.

Each Party can unilaterally accelerate its tariff reduction ahead of the stipulated

schedules if it so desires.

Rules of Origin

The Agreement lays out detailed rules to be applied for determining the origin of

products eligible for preferential tariff treatment under the FTA. In general, in

addition to goods wholly obtained or produced in the exporting Party‟s territory,

products with at least 35 percent of AIFTA content are eligible for preferential

tariff treatment. The Agreement provides very specific formulas for determining

the AIFTA content including guidance on the calculation of ex-factory price (along

with the specific costs to be taken into consideration). The Agreement also

contains a product-specific list of textiles and textile products that are eligible for

preferential tariff treatment.

Non-Tariff Measures

Each Party is prohibited from instituting any non-tariff measure on imports of

goods from the other Parties or on exports of goods to the other Parties‟

territories. In other words, all Parties are required to avoid the use of quantitative

trade barriers, such as import quotas, and to forgo the payment of export

subsidies.

Safeguard Measures

The Agreement provides for certain conditions under which a Party can initiate a

“safeguard measure” and suspend its tariff reduction obligations in accordance

with GATT and WTO standards. A safeguard measure may be taken by an

importing Party if it can demonstrate that its tariff reduction on a good has

resulted in such increased imports of that good so as to cause (or threaten to

cause) serious injury to its domestic import-competing industry. In such cases,

the following provisions would apply:

the importing Party has the right to suspend further tariff reduction and

increase the tariff to its pre-FTA level;


the safeguard measure may be maintained for a period of up to 3 years and

may be extended for a period up to 1 year if continuing serious domestic injury

can be demonstrated;

the safeguard measure will not be applied on exports of a Party whose share

of imports of the good concerned is less than 3 percent of the total imports

from the other Parties;

the exporting Parties affected by the safeguard measure have the right to

seek compensation from the importing Party as per the standards specified by

GATT and WTO principles. If no agreement on compensation is reached

within 90 days, the affected exporting Parties have the right to suspend tariff

concessions that are substantially equivalent on goods originating from the

importing Party‟s territory; and

upon termination of a safeguard measure, the tariff rate for the good

shall be the rate that would have prevailed as per the original tariff

reduction schedule.

Balance of Payments Safeguard Measures

The Agreement allows a Party to impose import quotas consistent with GATT

and WTO provisions in order to safeguard its balance of payments.

Customs Procedures

Each Party is required to apply its customs procedures in a predictable and

transparent manner. In order to achieve prompt customs clearance of goods

traded among the Parties, each Party will endeavour to simplify its customs

procedures and harmonize them with relevant international standards such as

those recommended by the World Customs Organization.

Dispute Settlement

The Agreement provides for resolution of any dispute among Parties through

procedures and mechanisms as set out in the ASEAN-India Dispute Settlement

Mechanism Agreement (“DSM”). In general, the DSM envisages establishment

of a three-member arbitral panel to settle disputes if mutual consultations fail.

The arbitral panel consists of one arbitrator each appointed by the Complaining

Party (“CP”) and the Party Complained Against (“PCA”), respectively, and a third

arbitrator jointly appointed to serve as the chair of the panel. The arbitral panel

must, within 90 days of its establishment, present its “interim report” containing

its findings and determinations on whether the PCA has failed to meet its AIFTA

obligations. The parties to the dispute may submit written comments on the

interim report after which a “final report” is prepared. The final report of the

arbitral panel is final and binding on the Parties to the dispute.

92

Appendix 2

Technical Appendix

Export growth is the percentage change in the value of exports relative to the

previous year.

Export intensity index is the ratio of export share of a country (or region) to the

share of world exports going to a partner. It is calculated as:

XIIij= Xij/Xiw

Xwj/Xww

where xij is the dollar value of exports of country(or region) i to country(or region)

j, Xiw is the dollar value of the exports of country(or region) i to the world, xwj is

the dollar value of world exports to country(or region) j, and Xww is the dollar

value of world exports. An index of more than one indicates that trade flow

between countries/regions is larger than expected given their importance in

world trade.

Export share is the percentage of exports going to a partner to total exports of a

country (or region). It is computed as the dollar value of exports of country (or

region) i to country(or region) j expressed as a percentage share of the dollar

value of exports of country(or region) i to the world. A higher share indicates a

higher degree of integration between partner countries/regions.

Import growth is the percentage change in the value of imports relative to the

previous year.

Import share is the percentage of imports from a partner to total imports of a

country/region. It is computed as dollar value of imports of country/region i from

country/region j expressed as a percentage share of the dollar value of imports of

country/region i from the world. A higher share indicates a higher degree of

integration between partner countries/regions.

Total trade is the sum of the value of exports and imports.

Trade growth is the percentage change in the value of total trade relative to the

previous year.

Trade intensity index is the ratio of trade share of a country/region to the share

of world trade with a partner. It is calculated as:

TIIij= tij/Tiw

twj/Tww


where tij is the dollar value of total trade of country/region i with country/region j,

Tiw is the dollar value of the total trade of country/region i with the world, twj is the

dollar value of world trade with country/region j, and Tww is the dollar value of

world trade. An index of more than one indicates that trade flow between

countries/regions is larger than expected given their importance in world trade.

Trade share is the percentage of trade with a partner to total trade of a

country/region. It is computed as the dollar value of total trade of country/region i

with country/region j expressed as a percentage share of the dollar value of total

trade of country/region i with the world. A higher share indicates a higher degree

of integration between partner countries/regions.

Appendix 3

Classification of Sectors

Sector Subsectors along with codes

Chemicals and Pharmaceuticals

Chemical products (SITC 5)

Medicinal and pharmaceutical products

Medicinal and pharmaceutical products (SITC54)


Electrical machinery, apparatus and appliances, n.e.s (SITC 77)

Textiles, Apparels & Accessories

Leather & Leather Accessories

Handicrafts & Carpets

Gems & Jewellery

Textile yarn, fabrics, made-up articles, n.e.s., and related Products (SITC 65)

Textile fibres (other than wool tops and other combed wool) and

their wastes (not manufactured into yarn or fabric) (SITC 26)

Articles of apparel and clothing accessories (SITC 84)

Leather, leather manufactures and dressed furskins (SITC 61)

Works of art, collectors' pieces & antiques

Jewellery & articles of precious material., n.e.s.


Power generating machinery and equipment(SITC 71)

Specialized machinery (SITC 72)

Metal working machinery (SITC 73)

Other industrial machinery and parts (SITC 74)

Office machines and automatic data processing machines (SITC 75)

Telecommunication and sound recording apparatus (SITC 76)

Electrical machinery, apparatus and appliances, n.e.s. (SITC 77)

Professional and scientific instruments, n.e.s. (SITC 87)

Photo apparatus, optical goods, watches and clocks (SITC 88)

Automotive Sector Road vehicles (SITC 78)

Other transport equipment (SITC 79)

Renewable & Non-Renewable Energy

Fuels (SITC 3)

Power generating machinery and equipment (SITC 71)

94

Contacts

Dr. Shanto Ghosh

Senior Director and Principal Economist – Transfer Pricing

Dr. Suddhasatwa Roy

Senior Manager - Global Transfer Pricing

[email protected]

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