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India ASEAN Free Trade Agreement
Implications for India’s Economy
A Deloitte-FICCI White Paper
March 2011
www.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
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 , NewZealand, 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
1 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
2
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
3 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
4
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 worldclass 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.
5 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
6
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 indepth 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
7 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
8
2. Introduction
2.1 Background and Scope
1
The India ASEAN Free Trade Agreement (FTA) 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.
9 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
10
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.
11 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
12
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
13 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
14
 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
15 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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 transregional (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
Country
Proposed
Framework
Agreement
Signed/Under
Negotiation
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
16
TOTAL
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 USSingapore 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,
17 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
18
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
Japan
India
2008
Philippines
Vietnam
Indonesia
Thailand
Korea
Cambodia
Hong Kong, China
Myanmar
Malaysia
Singapore
Lao PDR
Brunei Darussalam
2000
China
80
70
60
50
40
30
20
10
0
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
2
ADB 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.
19 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
3
utilization rates (estimated by shares of export value enjoying preferences ) 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
4
countries . 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
20
 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.
21 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
5
FTA, Chile-Mexico FTA, European Economic Integration and others
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
6
developed and developing countries . 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"
22
over the last few years that trade opening works best for growth, employment
and incomes when it is successfully combined with other structural reform
7
measures .
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
8
increased imports during the period . Productivity growth aid economic growth as
well as consumer welfare and therefore gains in productivity have second rung
effects of increasing economic growth.
9
Another study 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
10
extent to which this expansion is a direct result of the deal . 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)
23 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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 pricediscrimination is eliminated, average prices are expected to fall, providing
benefits to consumers.
11
In practice the results look mixed for the EU. A paper by Badinger (2006) 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
12
usually imperfect. The paper 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.
24
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
14
the elasticity of substitution for each, Broda and Weinstein (2006) 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
15
lower prices .
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.
16
A study by Trefler (2004) 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.
25 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
17
and Kee, (2006) 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.
18
Steven Zahniser and John Link (2002) , 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
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.
17
18
Steven Zahniser and John Link (editors) “Effects of North American Free
Trade Agreement on Agriculture and the Rural Economy” (July 2002)
26
19
OECD study 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
20
over time . Another recent study finds that technological change and
21
globalization are associated with wage increases in nine EU Member States .
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
22
jobs . This phenomenon is not unique to EU and also has been observed
23
in US.
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.
27 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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)
28
5. Economic Impact of IndiaASEAN 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
th
3% of total ASEAN exports) and the 10 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,
29 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
and the Complementarity index - India-ASEAN trade relations in the context of
25
India‟s trade patterns with other major economies such as US and China .
Graph 5.1: Patterns observed for Export Growth and
Export Share
40
30
20
10
0
-10
-20
-30
-40
Export Growth (%)
Export Share (%)
Linear (Export Growth (%))
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
30
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
80
60
40
20
0
-20
-40
-60
Import Growth (%)
Import Share (%)
Linear (Import Growth (%))
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:
http://aric.adb.org/index.php
Please refer to Appendix 2 for definition
31 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
2.50
2.00
1.50
1.00
0.50
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.00
India's Export Intensity Index with ASEAN
ASEAN's Export Intensity Index with India
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.
32
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
2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
India's Trade Intensity Index with ASEAN
ASEAN's Trade Intensity Index with India
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.
33 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
Sectoral Hirschmann Index
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0.6
0.5
0.4
0.3
0.2
0.1
0
India ASEAN
India World (other countries)
India China
India USA
The index is defined as the square root of the squared shares of each industry in
30
the total exports of a country to a particular region/country. 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
31
oils . 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%.
34
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
80
70
60
50
40
30
20
10
0
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)
.
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,
33
divided by two. The index is converted in to percentage form . 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.
35 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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

Communications

Electrical Equipments

Financial Services

Textiles, Apparels & Accessories

Insurance Services

Leather & Leather Accessories

Construction

Handicrafts & Carpets

Gems & Jewellery

Machinery and Appliances

Automotive sector

Renewable & Non-Renewable Energy

Power

Petroleum & Natural Gas
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
34
Trade Classification, Rev.3 (SITC) .
34
SITC Rev 3 – http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=14
36
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
3479.91
17.78
Electrical
Equipments
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
Machinery and
Appliances
0.51
308.84
2.89
8.87
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
37 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
5.2.1 Overview of the Sectors
Pharmaceutical Sector
36
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;
38
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
39 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
exports to the US, the European Union and Japan as a result of improvement in
their retail markets.
Handicrafts and Carpets
38
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;
40
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
200910(AprilDec.)
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 accessories
39
The Leather industry, with an annual turnover of US$5 million, holds a strong
position in the Indian economy. The leather and leather products industry has
been one among the oldest manufacturing industries in India. This massive
industry provides employment to about 2.5 million people.
The leather industry has changed significantly from being just an exporter of raw
materials around early 60s and 70s to becoming an exporter of finished leather
goods. Government of India has played a major role in this transformation by
taking several policy initiatives. As a result of these initiatives the India leather
industry is one among the top 7 industries that earns foreign exchange for
the country.
Though the industry has transformed and developed over time, there is still
scope for more growth and investment. Indian leather industry can be an
attractive industry for investment because of its growth and its ability to capture
major share in the global trading market.
Investments can be made in various sub-sector of the industry:
 Tanning and finishing of leather products
 Manufacturing of leather garments
 Manufacturing of leather footwear and footwear parts,
 Manufacturing of leather goods, such as harness and saddler
39
Indian Leather Industry, Leather and Allied Product Manufacturing – ISI
Emerging Markets, Indian Leather Industry: Perspective and Export Potential
41 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Table 5.4: Export targets from 2007-08 to 2010-11
(In Million US$)
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.
42
Automotive Sector
40
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 AprilSeptember 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 Industry
41
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
41
IBEF
Indian Oil and Gas – Prabhudas Lilladher; Natural Gas: A Base Sector
Report – Anagram;
43 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
44
Graph 5.7: RCA Comparison of Chemical and Pharmaceuticals
sector over the period 1995 – 2009
RCA for Chemical and Pharmaceutical Sector
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
ASEAN
India
China
USA
EU(27)
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
RCA for Medicinal & Pharmaceutical products
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
ASEAN
India
China
USA
EU(27)
Source: Author’s Calculations based on United Nations Conference on Trade &
Development
45 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Graph 5.9: RCA Comparison of Textile, Apparels and
Accessories; Handicrafts and Carpets; and Leather and
Leather Accessories over the period 1995 – 2009
RCA for Textiles,Apparels & Accessories ;
Handicrafts and Crafts ; Leather & Leather
Accessories
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
ASEAN
India
China
USA
EU(27)
EU(27)
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
Graph 5.10: RCA Comparison of Textile, Apparels and
Accessories over the period 1995 – 2009
RCA for Textile, Apparels & Accessories
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
ASEAN
India
China
USA
EU(27)
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
46
Graph 5.11: RCA Comparison of Handicrafts and Carpets over
the period 1995 – 2009
RCA for the Handicrafts and Carpets Sector
14
12
10
8
6
4
2
0
ASEAN
India
China
USA
EU(27)
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
Graph 5.12: RCA Comparison of Machinery and Appliances
sector over the period 1995 - 2009
RCA for the Machinery and Appliances Sector
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ASEAN
UK
India
Germany
China
UAE
USA
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
47 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Graph 5.13: RCA Comparison of Electrical Equipments sector
over the period 1995 - 2009
RCA for Electrical Equipment Sector
3.00
2.50
2.00
1.50
1.00
0.50
0.00
ASEAN
India
China
USA
EU(27)
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
Graph 5.14: RCA Comparison of The Automotive sector over
the period 1995 – 2009
RCA for Automotive Sector
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ASEAN
India
China
USA
UK
Germany
Source: Author’s Calculations based on United Nations Conference on Trade &
Development Data
48
Graph 5.15: RCA Comparison of Power Sector over the period
1995 - 2009
RCA for Power Sector
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
ASEAN
India
China
USA
EU(27)
UAE
Source: Author’s Calculations based on United Nations Conference on Trade &
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.
49 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
50
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
51 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
RCA for the Service Sector
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
ASEAN
USA
UK
China
Germany
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.
52
5.3.1 Telecommunication
Graph 5.17: RCA Comparison for the Communication43 service
sector over the period 2000 – 2009
RCA for Communications Sector
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
ASEAN
USA
UK
China
Germany
Source: Author’s Calculations based on United Nations Statistics Division
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
53 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
5.3.2 Computer and Information Services
Graph 5.18: RCA Comparison for the Computer and
Information service sector over the period 2000 – 2009
RCA for Computer and Information Services
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
ASEAN
USA
USA
UK
Germany
Source: Author’s Calculations based on United Nations Statistics Division
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.
54
5.3.3 Financial Service sector
Graph 5.19: RCA Comparison for the Financial service sector
over the period 2000 – 2009
RCA for Financial Services Sector
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
ASEAN
USA
UK
China
Germany
Source: Author’s Calculations based on United Nations Statistics Division
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.
55 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
5.3.4 Insurance services
Graph 5.20: RCA Comparison for the Insurance sector over the
period 2000 – 2009
RCA for Insurance Services Sector
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
ASEAN
USA
UK
China
Germany
Source: Author’s Calculations based on United Nations Statistics Division
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.
56
5.3.5 Construction Services
Graph 5.21: RCA Comparison for the Construction sector over
the period 2000 – 2009
RCA for Construction Services Sector
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India
India
ASEAN
USA
UK
China
China
Germany
UK
Source: Author’s Calculations based on United Nations Statistics Division
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.
57 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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 $6.5 billion bilateral trade next year. Thailand and
India are converging on regional cooperation frameworks such as the AseanSaarc, Bimstec, Asean-India and the Mekong-Ganga agreement to grow
44.
relationships also in the energy and resources sector
 For this sector, a country of notable importance for India is Indonesia. Indian
companies have considerable investments in the mining sector in Indonesia.
In recent acquisition deals, a number of Indian outbound companies have
acquired Indonesian mines for supply of coal.
 The Indonesian Trade Minister, Dr Mari Elka Pangestu in late 2010
commented that there is continuing interest from India to invest in coal mining
in Indonesia than there is supply. However, large concessions on mining
activities are owned by Indonesian companies. Therefore Indian companies
have overcome this by taking a share in some of the Indonesian concessions.
Cooperation is also required in other areas such as processing of coal and
45.
iron particularly technology to gasify coal for energy needs
 Singapore continues to be one of the largest trading partners of India. The
growing bilateral economic relationship is reflected in the rapidly rising trade
between Singapore and India. Singapore continues to be the single largest
44
Economic Times, 22 Dec 2010
45
Business Line, 19 Dec, 2010
58
investor in India amongst the ASEAN countries and the second largest
amongst all countries with foreign direct investment (FDI) inflows into India,
totalling US$ 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.
59 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
46
details are missing in the India-ASEAN FTA .
Graph 5.22 – ASEAN energy demand in million tons of oil
600
Vietnam
500
Thailand
400
Singapore
300
Philippines
200
Malaysia
100
Indonesia
0
1990
1999
2010
2020
Brunei
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
47
economic growth .
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
60
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 subcountry 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
61 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
62
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.
63 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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
64
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 –
EPPs
National Key
Economic
Areas
Expected EPP GNI
contribution in
2020
US$ b
RM b
No. of
BOs
Expected BO
GNI
Contribution in
2020
US$ b
RM b
Jobs
created
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
Communication
s 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
3,300,00
0
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 –
65 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 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. Quickwins 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
66
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.
67 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Smart and effective partnerships between the public and private sectors will be
established to drive the economic transformation agenda. To date, 52 highimpact 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 largescale integrated Aquaculture Zones, Upgrade the drainage and irrigation system
68
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 fasttrack 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)
69 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 Machinery, equipment, appliances, apparatus and associated products (69)
 Manufactured goods, furniture, handicrafts, special-purpose products and
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)
 Telecommunication, Radio, Television and communication equipment and
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)
 Consultancy Services: Architectural, Construction, Legal, Accounting and
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)
70
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;
71 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 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
72
Investment Allowance scheme which grants an additional 50% allowance for
48
aircraft rotables for another five years, will be renewed.
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 manufacturingrelated 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
73 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 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 resourceefficient 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
74
 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.
Other product / services categories where number of opportunities available are
given below:
Opportunities by Product categories
 Chemicals, chemical products and man-made fibres (8)
 Clothing and footwear (9)
 Construction work (146)
 Electrical machinery, apparatus, equipment and consumables (40)
 Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (4)
 Fabricated products and materials (33)
 Food products and beverages (11)
 Forestry and Logging industry (3)
 Instruments and appliances, Industrial process control equipment, Optical
instruments, Horological instruments. (62)
 Machinery, equipment, appliances, apparatus and associated products (76)
 Manufactured goods, furniture, handicrafts, special-purpose products and
associated consumables (24)
 Metals and associated products (2)
 Mining, quarrying and other associated products (1)
 Motor vehicles, trailers and vehicle parts (6)
 Non-metallic mineral products (2)
 Office equipment Computers and Supplies (39)
 Paper and Pulp products (2)
 Petroleum products and fuels (1)
 Pharmaceuticals and Medical Supplies (56)
 Printed matter and articles for printing (21)
 Rubber, Plastic and Film products (4)
75 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 Telecommunication, Radio, Television and communication equipment and
related apparatus (47)
 Textiles and textile articles (5)
 Transport equipment (15)
 Wood, wood products, cork products, basketware and wickerwork (1)
Opportunities by Service categories
 Administration, defence and social security services (1)
 Agricultural, forestry, horticultural and other related services (3)
 Air transport services (2)
 Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (139)
 Education services (93)
 Health and social work services (4)
 Hire services of machinery and equipment and of personal and household
goods (5)
 Hotel and restaurant services (21)
 Insurance and pension funding services, except compulsory social security
services and insurance-related services (8)
 Land transport services and transport via pipeline services (6)
 Manpower Supply Services (3)
 Membership organization services (1)
 Miscellaneous services (2)
 Postal and Telecommunications services (11)
 Printing, publishing and related services (58)
 Real estate services (3)
 Recreational, cultural and sporting services (62)
 Repair, maintenance and installation services (28)
 Research and development services (1)
 Retail trade services (3)
 Services auxiliary to financial intermediation (2)
 Sewage- and refuse-disposal services, sanitation and environmental
services (7)
 Software Services (90)
 Supporting and auxiliary transport services; travel agencies services (21)
 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
76
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 20042009, 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.
77 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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 20102014 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
78
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 810% 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.
1
Development
Targets
Economic
Average of 6.3 – 6.8% per year
a) Economic growth rate
Growth of 7% before 2014
2
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
Education
Initial
(2008)
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
79 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Status
Target
2014
in
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
4
5
6
Health
Initial
(2008)
Status
Target
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
15
in
than
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
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
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
80
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.
Other product / services categories where number of opportunities available are
given below:
Opportunities by Product categories
 Chemicals, chemical products and man-made fibres (3)
 Coal, lignite, peat and other coal-related products (1)
 Construction work (116)
 Electrical machinery, apparatus, equipment and consumables (8)
 Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (4)
 Fabricated products and materials (2)
 Food products and beverages (6)
 Instruments and appliances, Industrial process control equipments, Optical
instruments, Horological instruments. (17)
 Machinery, equipment, appliances, apparatus and associated products (16)
 Manufactured goods, furniture, handicrafts, special-purpose products and
associated consumables (3)
 Motor vehicles, trailers and vehicle parts (1)
 Office equipments Computers and Supplies (23)
 Petroleum products and fuels (1)
 Petroleum(Crude), Natural Gas, Oil and associated products (1)
 Pharmaceuticals and Medical Supplies (3)
 Telecommunication, Radio, Television and communication equipments and
related apparatus (18)
Opportunities by Service categories
 Administration, defence and social security services (5)
 Agricultural, forestry, horticultural and other related services (4)
81 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (234)
 Education services (11)
 Health and social work services (2)
 Hire services of machinery and equipment and of personal and household
goods (2)
 Hotel and restaurant services (2)
 Insurance and pension funding services, except compulsory social security
services and insurance-related services (2)
 Land transport services and transport via pipeline services (3)
 Membership organization services (4)
 Miscellaneous services (4)
 Oil and Gas Related Services (4)
 Postal and Telecommunications services (12)
 Public utilities (3)
 Real estate services (6)
 Recreational, cultural and sporting services (2)
 Repair, maintenance and installation services (7)
 Research and development services (1)
 Services auxiliary to financial intermediation (2)
 Sewage- and refuse-disposal services, sanitation and environmental
services (13)
 Software Services (34)
 Supporting and auxiliary transport services; travel agencies services (5)
6.1.4 Thailand
The economy of Thailand is an emerging economy which is heavily exportdependent, 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.
Other product / services categories where number of opportunities available are
given below:
Opportunities by Product categories
 Chemicals, chemical products and man-made fibres (1)
 Construction work (15)
 Electrical machinery, apparatus, equipment and consumables (20)
82
 Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (1)
 Instruments and appliances, Industrial process control equipment‟s, Optical
instruments, Horological instruments. (2)
 Machinery, equipment, appliances, apparatus and associated products (10)
 Metals and associated products (3)
 Office equipments Computers and Supplies (10)
 Petroleum products and fuels (1)
 Petroleum(Crude), Natural Gas, Oil and associated products (1)
 Pharmaceuticals and Medical Supplies (3)
 Printed matter and articles for printing (2)
 Telecommunication, Radio, Television and communication equipments and
related apparatus (7)
 Textiles and textile articles (1)
 Transport equipment (3)
Opportunities by Service categories
 Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (17)
 Manpower Supply Services (2)
 Oil and Gas Related Services (1)
 Repair, maintenance and installation services (3)
 Research and development services (1)
 Sewage- and refuse-disposal services, sanitation and environmental
services (2)
 Software Services (6)
 Supporting and auxiliary transport services; travel agencies 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.
Other product / services categories where number of opportunities available are
given below:
83 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Opportunities by Product categories
 Agricultural, horticultural, hunting and related products (2)
 Chemicals, chemical products and man-made fibres (30)
 Clothing and footwear (25)
 Coal, lignite, peat and other coal-related products (2)
 Construction work (1014)
 Electrical machinery, apparatus, equipment and consumables (72)
 Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (3)
 Fabricated products and materials (213)
 Fish, fishing products and other by-products of the fishing industry (2)
 Food products and beverages (19)
 Forestry and Logging industry (2)
 Instruments and appliances, Industrial process control equipments, Optical
instruments, Horological instruments. (49)
 Leather and leather products (6)
 Machinery, equipment, appliances, apparatus and associated products (128)
 Manufactured goods, furniture, handicrafts, special-purpose products and
associated consumables (61)
 Metals and associated products (16)
 Mining, quarrying and other associated products (23)
 Motor vehicles, trailers and vehicle parts (73)
 Non-metallic mineral products (2)
 Office equipments Computers and Supplies (167)
 Paper and Pulp products (17)
 Petroleum products and fuels (13)
 Pharmaceuticals and Medical Supplies (199)
 Printed matter and articles for printing (24)
 Rubber, Plastic and Film products (30)
 Telecommunication, Radio, Television and communication equipments and
related apparatus (60)
 Textiles and textile articles (17)
 Transport equipment (9)
 Wood, wood products, cork products, basketware and wickerwork (12)
Opportunities by Service categories
 Administration, defence and social security services (17)
 Agricultural, forestry, horticultural and other related services (11)
84
 Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (455)
 Education services (70)
 Health and social work services (40)
 Hire services of machinery and equipment and of personal and household
goods (6)
 Hotel and restaurant services (12)
 Insurance and pension funding services, except compulsory social security
services and insurance-related services (6)
 Land transport services and transport via pipeline services (3)
 Manpower Supply Services (9)
 Membership organization services (9)
 Miscellaneous services (25)
 Postal and Telecommunications services (6)
 Printing, publishing and related services (34)
 Real estate services (11)
 Recreational, cultural and sporting services (28)
 Repair, maintenance and installation services (54)
 Research and development services (1)
 Services auxiliary to financial intermediation (20)
 Sewage- and refuse-disposal services, sanitation and environmental
services (78)
 Software Services (93)
 Supporting and auxiliary transport services; travel agencies services (16)
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:
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 fibre (2)
 Clothing and footwear (1)
 Collected and purified water and water distribution (4)
 Construction work (110)
 Electrical machinery, apparatus, equipment and consumables (52)
85 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (5)
 Fabricated products and materials (23)
 Instruments and appliances, Industrial process control equipments ,Optical
instruments, Horological instruments. (18)
 Machinery, equipment, appliances, apparatus and associated products (29)
 Manufactured goods, furniture, handicrafts, special-purpose products and
associated consumables (7)
 Metals and associated products (3)
 Motor vehicles, trailers and vehicle parts (5)
 Office equipments Computers and Supplies (54)
 Petroleum products and fuels (1)
 Pharmaceuticals and Medical Supplies (24)
 Printed matter and articles for printing (2)
 Telecommunication, Radio, Television and communication equipments and
related apparatus (44)
 Transport equipment (2)
Opportunities by Service categories
 Administration, defence and social security services (10)
 Agricultural, forestry, horticultural and other related services (20)
 Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (233)
 Education services (27)
 Health and social work services (25)
 Membership organization services (2)
 Postal and Telecommunications services (2)
 Public utilities (5)
 Real estate services (3)
 Recreational, cultural and sporting services (6)
 Repair, maintenance and installation services (7)
 Research and development services (1)
 Services auxiliary to financial intermediation (4)
 Sewage- and refuse-disposal services, sanitation and environmental
services (25)
 Software Services (61)
86
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.”
87 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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.
88
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.
89 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
 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;
90
 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.
91 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
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=
92
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 Equipments

Electrical machinery, apparatus and appliances, n.e.s (SITC 77)
Textiles, Apparels &
Accessories

Textile yarn, fabrics, made-up articles, n.e.s., and related Products
(SITC 65)
Leather & Leather
Accessories

Textile fibres (other than wool tops and other combed wool) and
Handicrafts & Carpets

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)
Gems & Jewellery
Machinery and
Appliances
Automotive Sector
Renewable & NonRenewable Energy
their wastes (not manufactured into yarn or fabric) (SITC 26)

Professional and scientific instruments, n.e.s. (SITC 87)

Photo apparatus, optical goods, watches and clocks (SITC 88)

Road vehicles (SITC 78)

Other transport equipment (SITC 79)

Fuels (SITC 3)

Power generating machinery and equipment (SITC 71)
93 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper
Contacts
Dr. Shanto Ghosh
Senior Director and Principal Economist – Transfer Pricing
Dr. Suddhasatwa Roy
Senior Manager - Global Transfer Pricing
sudroy@deloitte.com
94
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