Moving forward with Asean

Reform, to take advantage of freer trade

India has finally signed an agreement on investment and freer trade in services with the Association of Southeast Asian Nations, or Asean. This agreement has been much delayed - the negotiations were not easy, and it was postponed again recently when Commerce Minister Nirmala Sitharaman chose to duck out, at the last minute, of the meeting in Myanmar where she was supposed to sign it on behalf of the government. Ms Sitharaman has previously expressed her doubts about the benefits of freer trade - one of her first steps after becoming minister was to announce a review of existing free-trade agreements, or FTAs, to determine if they "benefited" India. Even on this occasion, her statement was notably unenthusiastic: India, she said, "signed the deal because it had to". Hopefully, that lack of enthusiasm does not mean that India, although it has signed this deal, will try to hobble trade through some other form of restrictions.

The services FTA is important for several reasons. First, it will help integrate India more closely into the booming economies of Southeast Asia. This is both an economic and a strategic imperative. Secondly, it will open up markets for Indian professionals and for its services exports. Much misguided criticism of India's existing FTA with Asean, in goods trade, focused on India's inability to expand exports to Southeast Asia. This is because of domestic incapacity, which needs to be remedied; blaming trade is not the answer. After all, the FTA has helped consumers and producers by reducing prices, whether of final goods or of inputs. Unlike the goods FTA, however, the services FTA will play to India's strengths - India has become a services powerhouse, including in information technology-enabled services. That may be why one of India's principal competitors in that realm, the Philippines, has been a little hesitant about this FTA. That government is yet to ratify the agreement, but it has been reported that the process is underway. In fact, the FTA is yet to be ratified by India's Parliament.

Just as the goods FTA should be a spur to improve the quality of Indian manufacturing, and enhance its access to inputs and ports, the services FTA should also be a spur to reform. For one, financial-services centres in Asean - Singapore, in particular - are likely to be a little concerned about Indian financial services. Southeast Asia suffered through a financial crisis 15 years ago brought on by improper regulation of lending. The non-performing assets, particularly of public-sector banks, have grown to unsustainably high levels. This has raised some concerns in the Asean countries, which recognise the symptoms, and now fear the costs of excessively cronyist lending. India must make the needed domestic adjustments to its regulations in order to satisfy these concerns.