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India replacing China as new trade attraction

India Replacing China as New Trade Attraction

India, with its sound institutional framework and its rapidly growing services sector, will soon emerge as the new regional economic attraction.

Christopher C Seeley

Asia Times Online
June 22 2005

With all the attention on developing and securing trade relationships with China, there has been little room left for anyone else lately. With China-ASEAN (Association of Southeast Asian Nations) free trade already under way, other free-trade agreements (FTA) that are in the works include China-Australia, China-New Zealand, China-India, China-Pakistan and China-Chile as well as recent initiatives with Iceland, Japan, Korea and Thailand. However, this focus is likely to change, shifting slowly but steadily toward India.

India’s economic growth has been the only one to come close and even surpass (the beginning of 2004) that of China’s. Since then, there has been steady growth, with the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) predicting that growth rates will be in the range of 7-7.5% in the remaining two years of the 10th five-year plan (2005-07), supported by a growth rate of 4% in agricultural value added, 8% in industry and 8.5% in services.

India is on track to become a very desirable trade partner for the future. With a market of over 1 billion people, the world’s largest democracy is developing into an economy built on sound macroeconomic foundations. India boasts a highly educated and skilled work force, superior levels of technological advancement and information technology, scientific and medical expertise, and improving levels of managerial proficiency.

The pace at which bilateral agreements have recently proliferated suggests that it is just a matter of time before the attention shifts to India. In the past, India has been rather reserved in terms of participating in bilateral negotiations, especially considering its market potential. But it now appears that this is fading rapidly. India has already signed FTAs with Sri Lanka and Thailand, and is a leading party to the establishment of the South Asian Free Trade Area (SAFTA). India has signed a framework agreement with ASEAN to create a free-trade area in the next 10 years and a Comprehensive Economic Cooperation Agreement (CECA) with Singapore that will specifically address issues relevant to trade, investment, technology, education and tourism development. And, perhaps most significantly, studies are under way to analyze the potential of an India-China FTA, with both parties set to sign a Bilateral Investment Promotion and Protection Agreement (BIPA).

India, however, should not just jump blindly onto the FTA bandwagon as many other countries may already be guilty of doing. India must realize that FTAs are not always the next best alternative to multilateralism, especially if the negotiation process is not carefully carried out. India’s comparative advantages, especially in services, suggest that any trade agreement must include services, particularly with developed nations.

India not only presents benefits specific to trade for its new partners, with recent tension mounting concerning the growing regional domination of China, a strong Indian economy could certainly help bring both stability and balance to the region. At the same time, this would present itself very positively in the eyes of ASEAN and the United States, among others.

India is a full-fledged democracy built on sound macroeconomic fundamentals and has created an economy characterized by high growth rates, low inflation and a stable domestic currency. This, along with increasingly liberalized investment policies, has attracted substantial inflows of foreign investment in recent years comprising both portfolio investments as well as foreign direct investment, both of which are generating consistently high returns.

All this, coupled with a high proportion of university-educated and English-speaking graduates is creating the ultimate economic partner for the next century. And, as manufacturing-sector profits eventually decline with growing commoditization, eroding the value of China’s industrial dominance, India, with its sound institutional framework and its rapidly growing services sector, will soon emerge as the new regional economic attraction.

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