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India and free trade in Asia

The Pioneer, Delhi

India and free trade in Asia

G Parthasarathy

14 June 2006

The joke in South Block nowadays is that Prime Minister Manmohan Singh is ever so keen to visit Pakistan because he finds it easier to deal with General Pervez Musharraf than to deal with his Cabinet colleagues. If Mr Arjun Singh ambushed him and sent the entire country into a caste driven frenzy, one of his other Ministerial colleagues leaked the contents of a letter to the Prime Minister from Congress president Sonia Gandhi expressing concern over the free trade agreement that India had signed with its ASEAN partners.

It was only natural for Ms Gandhi to privately allude to the concern of farmers in India to duty free imports from ASEAN countries. The Prime Minister is said to have replied assuaging Ms Gandhi’s concerns, pointing out that the freeing of imports with ASEAN countries was to be effected over a period of time.

Why is free trade with our neighbours in Asia important? The Asian region today accounts for 60 per cent of the world’s population, two-thirds of the world’s hydrocarbon reserves and around 40 per cent of the world’s GDP. In the next half-century as the population of the West ages, a younger and better educated work force in Asia will fill the void. Asia accounted for 60 per cent of global output at the dawn of the industrial age in 1820. Asia’s share of global output fell to 20 per cent by 1940. Asia will account for 60 per cent of the world’s output by 2025 - the same level as in 1820.

The 21st century is set to become Asia’s century, with the centre of global industrial production and services shifting from North America and Europe to Asia. India’s prosperity and influence in this dynamic neighbourhood is going to depend on how it leverages these developments to its advantage.

With the ASEAN countries concluding free trade agreements with other major Asian powers like China, India’s role and influence in Asia will decline unless it secures duty free access to ASEAN markets. If it desires such access, then it should be prepared, like China, to grant products from ASEAN countries similar access to Indian markets. Our share in the booming intra-Asian trade will otherwise, further decline. It needs to be remembered that India today is a marginal player in ASEAN markets when compared to China, Japan or South Korea. While our trade with ASEAN is just over $15 billion China’s trade with these dynamic economies is around $120 billion. Japan also has a similar amount of trade with the ASEAN countries, coupled with huge investments in ASEAN economies. While our trade with Japan has hovered between $4 billion and $5 billion, trade between China and Japan reached $167.88 billion in 2004. Our policies towards ASEAN and its Asian dialogue partners have thus to envisage how we can expand trade and co-operate to meet the growing energy demands of the region.

Successive Prime Ministers since PV Narasimha Rao have realised the importance of trade and economic relations with the ASEAN countries as part of a new "Look East Policy". It was because of these imperatives that India has concluded free trade agreements with its South Asian neighbours in SAARC, the countries of the Bay of Bengal Basin (Myanmar, Bangladesh, Thailand, Sri Lanka, Nepal and Bhutan) and a framework agreement for Free Trade with ASEAN. All these agreements will come fully into force between 2016 and 2019, unless Pakistan chooses to stall free trade in South Asia under SAFTA. It was this approach, which conforms with the trade and investment policies of virtually all other Asian countries that led to India being invited to participate in the East Asian Summit in Kuala Lumpur in December 2005.

Mr Manmohan Singh eloquently proclaimed in Kuala Lumpur: "I believe that the objective basis for the economies of our region to come together exists. The subjective desire to create an East Asian community bringing together ASEAN, China, Japan, Korea and also Australia and New Zealand is manifest. Like the North American Free Trade Area and the expanding European Union, a Pan Asian Free Trade Area will be a dynamic, open and inclusive association of countries of our region."

Despite Mr Singh’s assertion, India is today seen in Asia as a country with an inefficient and not competitive economy protecting the inefficient sectors of its economy with massive tariff and non-tariff barriers. Despite a free trade agreement with Sri Lanka we have imposed all kinds of trade barriers on the imports of tea, spices and rubber from a friendly neighbour. A logical question one could ask is: Why should consumers across India have to pay higher prices for tea, spices and rubber merely to protect inefficient and populist agricultural practices and policies in Kerala and Tamil Nadu? Similarly, why should Indian consumers have to pay higher prices for cooking oil while palm oil from Indonesia and Malaysia is available at cheaper rates?

Over the past 15 years we have steadily lowered tariff barriers on industrial products and forced Indian industry to become globally competitive. Is it not time to treat the agricultural sector similarly? It is true that there may be some temporary dislocation in our agriculture sector as we move in this direction. But, in the long term, our farmers can and should compete with their counterparts in Asia who do not enjoy agricultural subsidies like farmers in the European Union.

These challenges can be met only if we recognise the infirmities in our agriculture sector where wheat output peaked in 1999-2000, and then stagnated. The output of pulses has also stagnated with Myanmar emerging as an important supplier of pulses for meeting the growing demand. We had a buffer stock of 63 million tons of foodgrains in 2002. We are now heading for a situation wherein wheat imports (hopefully without kickbacks) are likely to become a regular feature. While the yield per acre of wheat in India has been around 2.5 to three tons the yield in China is reported to be around five tons per acre.

India can thus be an emerging power of some consequence in Asia only if it seriously undertakes a process of agricultural reform similar to the industrial and service sector reforms of the 1990s. This cannot happen if individual Ministers in the Government try to snipe at and undermine a larger national vision articulated by the Prime Minister.