Business Times, India

Indo-Asean ties key to region’s growth

Their trade and investment flows have increased but the full potential of their cooperation is yet to be unlocked

By Roopa Kudva

11 May 2010

Close economic cooperation between India and Asean can prove to be a potent force in shaping the economic fortunes of South and South-east Asia over the next decade. Standard & Poor’s believes, however, that recent Indo-Asean increases in trade and investment flows still fall well short of their full potential.

Economic resilience during the recent downturn, and projected growth in these economies in the years ahead, bode well for the continued performance of these economies and the expansion of their markets, and the potential for stepping up trade and investment.

All this implies a greater need for capital flows, and further integration of regional capital markets can also be expected. However, it is imperative that Asian policymakers and market players look for ways to capture the latent value in this extremely significant relationship.

The idea of Indo-Asean collaboration is not new. India became a sectoral dialogue partner with Asean in 1992, a full dialogue partner in 1995, and the two have held annual summits since 2002. Between 2003 and 2008, trade volume between India and Asean grew four-fold to US$47 billion, from US$12 billion. And yet, this is only a promising start: We believe the full potential of Indo-Asean cooperation is yet to be unlocked.

India’s signing of a free trade agreement (FTA) with Asean in October 2009 is potentially the most important step so far: Under the FTA, which came into effect on Jan 1, 2010, Asean and India will reduce import tariffs on 90 per cent of traded products, and tariffs on 4,000 goods will disappear altogether by 2016. This could be the missing piece to step up India-Asean trade to a level that is closer to its potential.

At a macroeconomic level, the conditions for accelerated activity are ripe. For a start, India and large parts of Asean weathered the global crisis well and head into 2010 with India expecting 7.5-8 per cent GDP (gross domestic product) growth (6.4 per cent in 2009) and Asean expecting 4 per cent after 1.3 per cent in 2009 - the latter a figure dragged down by negative growth in Singapore, Thailand and Malaysia.

Significant per capita income growth has also been projected for the few years of about 7 per cent annually for India and 5-6 per cent for Asean, while per capita income in the United States and Europe will likely be lower than in 2007. Population levels in the Indo-Asean region will also increase faster than anywhere else in the world over the next decade to create a dramatically growing market for goods and services. And as incomes increase, consumer demand levels will only be met by a significant step-up in intra-regional trade and capital flows.

Generally, the benefits of greater Indo-Asean trade are compelling. India and Asean are large, evenly matched regions - India is a US$1.2 trillion economy, Asean is at US$1.5 trillion - that together represent a huge market in which suppliers can build scale and efficiency and investors can allocate capital most productively. Trade relations between the two have grown rapidly over the past two decades and Asean is now India’s fourth-largest trading partner after the European Union (EU), the US and China. Asean’s trade with India is actually now growing faster than its trade with China, albeit from a much lower base. India’s share in Asean’s trade has risen consistently over the years, to more than 2.5 per cent in 2009, but there is clearly considerable scope for this figure to grow further.

The potential for increased Indo-Asean investment is as compelling. Consider the uneven nature of Asean involvement in the partnership at this time: Among the Asean countries, Singapore continues to be the single largest investor in India. Between April 2000 and October 2009, Singapore accounted for about 95 per cent of the US$9.5 billion that flowed into India from Asean (about 10 per cent of the total foreign direct investment into India).

Great untapped potential resides in other Asean countries. Malaysia, for example, is already the second-largest Asean investor in India with much more scope to grow this commitment; there is a lot of potential for the two countries to collaborate in sectors such as automotive industries, pharmaceutical and biotechnology, and engineering.

There has also been a revival of risk appetite globally, which has the potential to lead to increased bond issuance and equities trading. About 30 per cent of subscriptions to the recent bond issues of India’s ICICI Bank and Axis Bank were from Asia and in 2009 the Singapore Exchange saw an average of 600,000 derivative contracts traded every month on the S&P CNX Nifty. There are also two exchange-traded funds based on the S&P CNX Nifty in the Singapore market.

To better enable capital flows and to provide investors with greater information transparency, good indicators of relative creditworthiness are needed. Standard & Poor’s Asean rating scale was established with this in mind; we saw the need for a ratings scale that facilitates investments within the region and today we have assigned 44 of these ratings. The scale allows issuers to access a larger base of investors across Asean, while investors within the region can distinguish credit quality at a finer, more granular level, access a wider and deeper pool of investible securities, and access investment options in regional currencies.

With the FTA now in place, policymakers are calling 2010 a year of transformation for the Indo-Asean partnership. We reiterate our view that the full potential of this relationship is a long way from being realised but we acknowledge that the foundations are in place.

In our opinion, the drift of economic power towards Asia - particularly China, India and Asean - makes it paramount that Asia’s leaders forge partnerships and create synergies between various regional markets. For India and Asean, stronger trade linkages and more closely integrated capital markets will enable the sustainable growth momentum urgently required to meet the needs of their growing populations.

Indo-Asean cooperation will continue to be a mutually beneficial relationship that improves the efficiency of capital markets, facilitates investment and creates new growth opportunities for both. It will enable India to diversify from its services trade and emerge as a manufacturing hub, while Asean will benefit from access to a market as large as itself.

The possibilities for employment generation alone have far-reaching implications for the region’s prosperity. When India and Asean commemorate 20 years as dialogue partners in 2012, we expect the data will reveal an even more encouraging growth trajectory than at present. In Asia, potential doesn’t tend to go unrealised for long.

The writer is managing director and region head, South Asia, Standard & Poor’s