Devjyot Ghoshal: Looking East, but not doing enough

Although the FTA in goods was signed in 2009, and has been operational since Jan 2010, Singh's words have been ineffectual

It was on a pleasant November day last year, during that Association of South East Asian Nations (ASEAN) and East Asia Summits in Bali, Indonesia, that Prime Minister Manmohan Singh somewhat unexpectedly put forth a deadline for the conclusion of negotiations on the India-ASEAN Free Trade Agreement (FTA) in services and investment.  

"I seek your support for the early conclusion of a commercially meaningful services and investment agreement," Singh had said. "We should endorse the decision taken at the last round of negotiations in October to conclude the pact by March 2012."

It has been nearly 11 months since that announcement and more than half-a-year since the declared deadline but the agreement is still being negotiated, although the FTA in goods was signed in 2009 and has been operational since January 2010. Singh's words have been ultimately ineffectual.

The India-ASEAN services agreement by itself may be an unusually difficult deal to crack, but is symptomatic of how New Delhi's much-vaunted 'Look East' policy has struggled to fully utilise the opportunities that the region presents, even as China makes deep inroads into the 10-member bloc.

Consider another example: India's flagship foreign direct investment (FDI) project in Vietnam, a proposed $5 billion Tata Steel plant, hasn't even got off the ground owing to regulatory clearances and land-related hurdles, despite a Memorandum of Understanding being in place since 2007.

On the sidelines of last year's Asian Development Bank annual meetings, former finance minister Pranab Mukherjee met the Vietnamese brass, asking for a "level-playing field" for the Indian steel-maker. Before him, the Indian Prime Minister and Foreign Minister SM Krishna, too, had raised the issue during their respective visits to Vietnam. But the project remains stalled.

Number Game

The India-ASEAN relationship, however, isn't merely about halting negotiations and stonewalled projects. New Delhi has always projected its thrust into the region as one of immense commercial value, particularly the FTA and the standalone trade pacts it has signed with ASEAN members such as Singapore and Malaysia.

Total trade between India and ASEAN, according to commerce ministry figures, has grown from $43 billion in 2009-2010 to $57 billion in 2010-2011. In 2011-2012, this number reached $79 billion. But there are two things that these numbers, representing significant growth in trade, don't reveal.

First, that in spite of absolute growth, the percentage share of ASEAN countries in India’s total trade has remained mostly constantly. In 2009-2010 and 2010-2011, this share stood at 9.34 and 8.69 per cent respectively and moved to a 12 per cent share in exports and 8.6 per cent share in imports during 2011-2012. The trade basket, too, has remained constant through this period. The major commodities of export and import, listed on the Commerce Ministry's website, are nearly identical over these three years.

But India's exports have fallen for the fourth consecutive month in August, as per figures released yesterday, with imports slowing, too, thereby increasing the likelihood of further fluctuation in these shares.

Dealing with the Dragon

Second, is that these trade numbers tell nothing about the Chinese commercial incursion into ASEAN: the North Asian powerhouse is today the largest trading partner of the 10-member grouping, while India is a distant sixth.

"China-ASEAN trade reached a new high of USD 363 billion in 2011, four times larger than India-ASEAN trade. This reflects a number of factors, including China's strong strategic policy focus on building economic relations with ASEAN during the last decade," says Rajiv Biswas, Asia-Pacific Chief Economist at IHS Global Insight.

"It also reflects deeply integrated export manufacturing supply chains between China and ASEAN, an area where India has been lacking in competitiveness until the last decade, and is still hamstrung by weak infrastructure, such as inadequate power generating capacity," he adds.

Although the region's gross domestic product is forecast to grow to $10 trillion by 2030, Indian economic policymakers have been traditionally "entranced by a post-colonial focus on Europe", feels Biswas. In contrast, China has been able to leverage its ability to provide "large-scale trade finance and foreign direct investment into ASEAN".

What makes matters worse, a ministry of coal report from November 2011 describes, is that the "Chinese government also extends its diplomatic umbrella to sensitize G2G (government-to-government) initiatives to bring favours for Chinese companies in case of acquisition of mineral assets on nomination basis." The government's ability to provide sovereign funds for development of infrastructure also helps

Chinese companies leverage the relationship to acquire mineral assets.

"In the face of such government backed Chinese M&A (merger and acquisition) model it would become difficult for the Indian companies to acquire coal assets or any other mining assets for that matter, in emerging economies like Mozambique, Indonesia and South Africa," the report adds.

Indonesia, incidentally, is India's largest supplier of coal, providing about 36 million tonnes (MT) — enough to fire about 7,200 Mw of power generating capacity annually — of the total 70 MT of imports during 2010-2011.

It is also where Singh declared an imperfect deadline that may well become symbolic of India's blinkered approach towards 'Looking East'.