India-ASEAN’s elusive services FTA

India’s resolve to get closer to ASEAN countries is faltering at the altar. After signing a free trade agreement (FTA) on goods with in 2009, a similar pact with ASEAN on trade in services and investment – unarguably India’s strong suit – still eludes the country. This is unfortunate, because despite its advantage in services, India’s trade balance with ASEAN is negative.

At $145.678 billion during 2012-13, India’s service exports contributed to only 32.64% of the total export revenue. Predictably, software exports contributed the largest chunk of this amount – $65.867 billion.

Negotiations for the FTA on services and investment are on for some time. However, the process has been marked by public squabbling between ministries, and it is likely that the final agreement will be signed only much after the elections. Once the new government takes over, it will be at least six months before it can start working on bilateral trade deals.

The unsigned FTA is to be formalised under the umbrella framework of a Comprehensive Economic Cooperation Agreement (CECA), which India and ASEAN inked in 2003. CECA is similar to most FTAs, but in addition to goods and services, it also includes investment. India has signed CECAs with Japan and Australia, and with Singapore, which is a member of ASEAN. The other ASEAN countries are Brunei, Malaysia, Indonesia, Thailand, Cambodia, Laos, Vietnam, Philippines and Myanmar.

The Agreement on Trade in Goods was signed in 2009 under a CECA with ASEAN. India-ASEAN trade has grown from $30 billion in 2008 (before the FTA on goods) to $76 billion in 2012. However, given the pace of progress, it seems the 2015 target of $100 billion will be missed.

As of now, there is no clarity on the benefits of an FTA in services, since the agreement is not yet in the public domain. But it can be safely said that such an agreement will allow India to leverage its competitive offerings in finance, education, health, information technology, telecommunications, transport and the movement of professionals. Consequently, Indian service providers will be able to offer services to ASEAN customers with greater ease than what is available currently.

A formal conclusion to negotiations was signalled through an ASEAN secretariat statement in New Delhi on 20 December 2012. At this session, Prime Minister Manmohan Singh also endorsed the end of negotiations.

This led to speculations about probable dates, with August 2013 emerging as the consensus deadline. On 10 October, 2013, at another ASEAN summit, Manmohan Singh provided another deadline when he said: “India stands ready for the signature of the IndiaASEAN Free Trade Agreement on Services and Investment by the end of this year and its early implementation.” Then, on 19 December 2013, the Cabinet approved a services and investment treaty with ASEAN, raising hopes that the deal will soon be sealed.

Sadly, that cut-off date too has lapsed and the agreement seems to have fallen into the cracks between promises and approvals. The delay is being blamed on shadow-boxing between the Ministry of Commerce and Industry, which wants India to push ahead with the agreement, and the Ministry of Finance, which wants a detailed study of the performance of all FTAs signed so far. While the Cabinet has overruled all opposition, a delay is now inevitable.

India’s economic strength lies in services, given that over 50% of its GDP comes from services. It is, therefore, counter-intuitive that bickering and delay should bog down an advantageous trade pact.

The source of inter-ministerial conflict lies in the disaggregated numbers. The finance ministry contends that the performance of all FTAs must be properly studied. Specifically, it feels that ASEAN countries have gained more than India – in other words, India has imported more from ASEAN than it has exported to them. For example, India’s trade deficit with Thailand has grown by 111.55% between 2008-09 and 2012-13.

Finance minister P. Chidambaram found vocal support from three sources. First, Reserve Bank Governor Raghuram Rajan alluded to misaligned FTAs in a November 2013 speech: “I am worried because we seem to be reverting to a dialogue of protection and subsidies that we left behind long ago…While we should not enter into free-trade agreements that give foreign manufacturers an undue advantage, that is no reason for us to now respond by giving domestic manufacturers protection.”

Then, a FICCI survey of its members showed that many respondents felt that trade in goods with ASEAN either had no impact on exports or had an adverse impact, but minimal beneficial effect. An ASSOCHAM report was more hard-hitting and cautioned the government to incorporate lessons from the ASEAN goods FTA into the India-European Union trade negotiations.

Interestingly, besides the delays by India, ASEAN members have been also holding up the talks, even as tariffs on a number of items keep coming down every year. For instance, some ASEAN members are opposed to the free movement of professionals, given rising unemployment in their own countries.

Some of them are insisting that Indian professionals should obtain local qualifications; for example, a doctor wanting to practice in Thailand must obtain a licence from the Medical Council of Thailand. India, on the other hand, wants to sign an agreement with ASEAN for mutual recognition of professional qualifications; if there is no such agreement at the ASEAN level, India will have to separately sign such an accord with each country.

Meanwhile, the clock is ticking. Every wasted moment results in India importing more goods (which eventually affects domestic manufacturing) while being unable to effectively use its competitive advantage in the export of services.

Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House: Indian Council on Global Relations.

This feature was written by Gateway House exclusively for The Hindu Business Line, and can be read here. You can find more exclusive features here.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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