Downturn may force India to postpone trade pact with ASEAN

The deal between ASEAN and India, which was under negotiations for the last six years, was expected to be signed between the two sides on 27 February in Thailand.

New Delhi: The unexpected setback to exports and the associated problem of domestic unemployment may yet spike the government’s plans to sign a free trade agreement (FTA) with the Association of Southeast Asian Nations (ASEAN), a powerful trade block of 10 countries.

With general election due in the next two months, the Congress-led United Progressive Alliance government may find it difficult to justify a freer trade regime at a time when industry is reeling under the impact of a global recession and contracting domestic demand.

Two senior government officials, in separate interviews, confirmed on the condition of anonymity that FTA with ASEAN along with similar agreements with Thailand and South Korea had been readied and put up to the cabinet for approval. “It is now a political decision,” one of the officials said.

Indian exports contracted for the third consecutive month, declining by 1.1% in December, even as a survey by the labour ministry found that 500,000 people had lost their jobs in export-oriented sectors such as gems and jewellery, back-office services, textiles and handicraft.

Talks were on for the last six years and the deal was expected to be signed on 27 Feb in Thailand. The ASEAN FTA was due to be inked in December, but was put off following political instability in Thailand. However, since then, the global economy has contracted even more sharply, forcing India to scale down estimates of its growth to 7.1% in 2008-09, from at least 9% in the previous three years.

In addition, the agreement has run into a procedural problem. According to the original schedule, the first round of tariff cuts was to come into effect on 1 January. If the deal is signed now, then this will come into effect on 1 June. According to the existing schedule, the second round of tariff cuts is due on 1 January 2010 and India has reservations with this, as it would mean effecting two rounds of tariff cuts in six months.

One of the officials disclosed that some kind of “compromise” would be worked out if the cabinet did indeed clear the agreement. ASEAN’s secretariat could not be immediately reached for comment, and a spokesperson for the Thai embassy could not be reached because he was travelling. According to the agreement between ASEAN and India arrived at after negotiations concluded in August, both sides have agreed to reduce or eliminate tariffs on 95% of the commodities in the trade basket over the next nine years. India had agreed to do this in three phases starting from 1 June 2009 and ending between 2012 and 2018.

For the so-called sensitive items for which tariffs need to reduced to 5%, the agreed time line is 2018, while for other items the tariff elimination was to happen in two phases, by 2012 and 2015. Now, ASEAN has demanded the whole process be completed in two phases.

A commerce ministry official, who, too, declined to be identified, confirmed the development. “There is some talk. We have a viewpoint. They have a viewpoint. However, we are firm on our standpoint.” However, he tried to play down the issue and said it was a “minor” one that would “be resolved”. The deal between ASEAN and India, which was under negotiations for the last six years, was expected to be signed between the two sides on 27 February in Thailand.

Both sides had agreed to reduce tariffs to zero for nearly 4,000 of the 5,000 items that are traded. A negative list of 489 items (where import tariffs would not be cut) across sectors such as agriculture, textiles, machinery and automobiles was also agreed upon. According to the terms finalized, India will also maintain a so-called highly sensitive list for five products: crude palm oil, refined palm oil, black tea, pepper and coffee. By 2018, tariffs for refined palm oil will be reduced by 60%, while those for the remaining four items will be halved.

India remains the seventh largest trading partner of ASEAN, with trade between the two being worth $38.37 billion (Rs1.9 trillion today) in 2007-08. Trade between India and ASEAN has been growing at a compounded annual growth rate of 27% since 2000; it is projected to touch $48 billion in 2008-09. India’s main trading partners in ASEAN are Singapore, Malaysia, Indonesia and Thailand, which account for 90% of the trade. India and ASEAN together have a population of 1.7 billion and a combined GDP (gross domestic product) of $2.4 trillion.

The two sides had also agreed to commence negotiations on trade in services and investment and to work towards the conclusion of substantive discussions on these two agreements by 2009, to bring about a complete ASEAN-India Comprehensive Economic Cooperation Agreement. Asked whether India should open up at a faster rate at a time when the industry is reeling under the impact of a severe slowdown, Nagesh Kumar, director general at think tank Research and Information System for Developing Countries, said, “The current slowdown is a shorter phenomenon whereas such trade agreements looks for long-term gains. By the time the impact of the ASEAN FTA is felt on Indian industry, the current downturn would be over.”

Arguing similarly, Manav Majumdar, who heads the international trade desk at industry lobby Federation of Indian Chambers of Commerce and Industry, said: “Because of the zero duty, if there is a surge in imports, there are safeguard measures available to check that from happening.”