Professional Documents
Culture Documents
Abbreviations .......................................................................................................... 1
Federation of Indian Chambers of Commerce and Industry (FICCI) ..................... 4
About Deloitte ......................................................................................................... 5
1. Executive Summary ........................................................................................... 6
2. Introduction ......................................................................................................... 9
2.1 Background and Scope ............................................................................. 9
2.2 Roadmap ................................................................................................. 10
3. Decoding FTA‟s ............................................................................................. 12
3.1 Economics of Free Trade ........................................................................ 12
3.1.1 Benefits of Free Trade .................................................................. 12
3.1.2 Historical Background ................................................................... 12
3.1.3 Impediments to Free Trade .......................................................... 13
3.1.4 Trade Liberalization and FTA‟s..................................................... 13
3.2 Trade Patterns in Asia ............................................................................. 15
3.3 FTAs in Asia............................................................................................. 16
3.4 Challenges Posed by FTAs in Asia ......................................................... 19
4. Benefits from FTA‟s and the Empirical Evidence .......................................... 22
4.1 Economic Growth .................................................................................... 22
4.2 Price Reductions ...................................................................................... 24
4.3 Gains from product variety....................................................................... 25
4.4 The Survival of More Productive Firms ................................................... 25
4.5 Trade and Employment ........................................................................... 26
4.6 Attracting Foreign Investments: ............................................................... 27
5. Economic Impact of India-ASEAN FTA ......................................................... 29
5.1 India ASEAN Trade and Impact of FTA on the Economy ....................... 29
5.1.1 Export Intensity & Trade Intensity Indices .................................... 31
5.1.2 Sectorial Hirschman ..................................................................... 33
5.1.3 Complementarity index ................................................................. 35
5.2 Impact of FTA on Indian Industries Based on Revealed Comparative
Advantage ...................................................................................................... 36
5.2.1 Overview of the Sectors ............................................................... 38
5.2.2 Textiles, Apparels and Accessories ............................................. 38
5.2.3 Competitiveness analysis ............................................................ 44
5.3 Impact of FTA on Services Sector .......................................................... 51
5.3.1 Telecommunication ...................................................................... 53
5.3.2 Computer and Information Services ............................................ 54
5.3.3 Financial Service sector ............................................................... 55
5.3.4 Insurance services ....................................................................... 56
5.3.5 Construction Services .................................................................. 57
5.4 Impact on Industry – Supplementary Evidence ...................................... 57
6. Business Opportunities in ASEAN Countries ................................................ 63
6.1 Findings based on current open project tenders ..................................... 64
6.1.1 Malaysia ....................................................................................... 64
6.1.2 Singapore ..................................................................................... 71
6.1.3 Indonesia ...................................................................................... 76
6.1.4 Thailand ....................................................................................... 82
6.1.5 Philippines .................................................................................... 83
6.1.6 Vietnam ........................................................................................ 85
7. India-ASEAN FTA and Vision for India‟s Growth .......................................... 87
8. Appendix ....................................................................................................... 89
Appendix 1 .................................................................................................... 89
Appendix 2 .................................................................................................... 92
Appendix 3 .................................................................................................... 93
Contacts ............................................................................................................... 94
Abbreviations
BO Business Opportunities
CP Complaining Party
EU European Union
IP Intellectual Property
IT Information Technology
KLIA
Kuala Lumpur International Airport Expressway
Expressway
2
OECD Organization for Economic Cooperation and Development
RM Ringgit Malaysia
UK United Kingdom
Established in 1927, FICCI is the largest and oldest apex business organisation
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FICCI serves as the first port of call for Indian industry and the international
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4
About Deloitte
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The India ASEAN Free Trade Agreement (FTA) was signed in Bangkok on
August 13, 2009, and came into effect from January 1, 2010 with Malaysia,
Thailand and Singapore. It is expected to be in place with all member countries
by 2016. The FTA collectively covers a market of nearly 1.8 billion people and
proposes to gradually slash tariffs for over 4,000 product lines. Currently the FTA
is restricted to trade in goods while negotiations for a similar agreement for
services are currently under way.
Drawing upon the mixed findings of the impact of other FTAs on the member
countries, it is therefore not surprising that the impact of the India-ASEAN FTA
on the Indian economy is also likely to benefit some constituents while it will
negatively impact certain sectors in the short run. Drawing upon existing
research, we find strong reason to advocate that the success of the FTA is
critically dependent on the existence of good institutions in the country and an
efficient regulatory environment such that they act as true enablers for the
benefits to flow through and disperse throughout the economy. Benefits from the
FTA can possibly have a positive impact on India‟s growth rate, help improve
productivity in Indian manufacturing and usher in an environment (driven by
healthy competition) that can promote greater business ties leading to
employment creation and greater trade within India and ASEAN.
We find evidence that the implementation of the FTA can only result in
intensifying the trade dependence amongst India and ASEAN. Seen in light of
the fact that currently ASEAN region exports more to India than what India
exports to ASEAN, a greater trade dependence will possibly allow India‟s exports
to ASEAN to increase in the years ahead. Moreover, we also find that India has
increasingly been concentrating its exports to ASEAN towards mineral fuels and
6
mineral oils. It is therefore plausible that post the implementation of the FTA,
these sectors will benefit more as they will be best poised to avail of their greater
presence within ASEAN. Other sectors/industries can also be expected to benefit
through greater efficiencies achieved through specialization although a more in-
depth analysis will need to be conducted to arrive at any affirmative conclusion in
this regard. We also find evidence that suggests that the trading profile between
India and ASEAN is such that ASEAN exports to India when matched against
India‟s import profile is more compatible in contrast with India‟s exports to
ASEAN and its import profile. This implies that ASEAN trade will benefit more
post implementation of the FTA compared to the perceived gains from trade that
India is likely to experience.
Chemicals
Medical and pharmaceutical
Textiles, apparels and accessories
Handicrafts & carpets
On the other hand, the following industries in ASEAN enjoy a larger competitive
advantage than the counterparts in India:
The automobile industry (including auto parts and ancillaries) is on the borderline
with no clear trend that may allow us to conclude whether India or ASEAN has a
clear advantage over the other.
Although the current FTA is restricted to that in goods alone, we extrapolate the
possible implications of the FTA on the services sector through secondary
multiplier effects on the economy. We also find evidence that a FTA with services
(that is currently being discussed) will certainly be a boost to the services sector
in the Indian economy and will help in sustaining the growth momentum in the
medium to long term.
Finally, we find ample evidence to suggest that the FTA will open up
opportunities for Indian businesses in Malaysia, Singapore, Indonesia, Thailand
and Philippines. We have highlighted important initiatives announced by the
respective governments in these countries as well as projects with open tenders
that will become accessible to Indian businesses to further their business
8
2. Introduction
The FTA, considered the world's largest, covers a market of nearly 1.8 billion
people and proposes to gradually slash tariffs for over 4,000 product lines over a
staggered period, by 2016. However, certain specified products on both sides will
be shielded to some degree. This FTA aims at opening a 1.8 billion consumer
market to the member countries with a combined GDP of $ 2.3 trillion. In
addition, ASEAN-India bilateral trade has been growing steadily from 1993 and
stood at US$ 43.9 billion as of 2009-10 with ASEAN‟s export to India at US$
25.79 billion and imports from India at US$ 18.1 billion as of the same year. As
for foreign direct investment (FDI), the inflow from India to ASEAN member
States was US$ 476.8 million in 2008, accounting for 0.8 per cent of total FDI in
the region. Total Indian FDI into ASEAN from 2000 to 2008 was US$ 1.3 billion.
Just like any other FTA, the India-ASEAN FTA has also been mired in political
controversy despite the economic principle that advocates free trade as a
desirable trading form benefiting all partners through mutual access to greater
markets, free flow of labour and capital, reduced transaction costs of doing
business across geographies and an efficient allocation of resources to the
various production forms. Driven by the theoretical underpinnings of free trade
and the empirical evidence from FTA‟s implemented in various regions of the
world, this white paper takes a closer look at the India-ASEAN FTA and explores
its impact on the Indian economy. It provides a balanced view of the pros and
cons associated with the FTA and evaluates its impact on key industries in India
– both from the standpoint of opportunities that are likely to be created as well as
the challenges posed on them from greater competition that the FTA is likely to
1
A complete summary of the Indo-ASEAN FTA along with its salient features is provided
in Appendix 1.
2.2 Roadmap
Our white paper starts by summarizing the theory governing free trade. Several
assumptions have been made by economists to conclude on the benefits of free
trade. Notable among them is the notion of “free markets” i.e. markets that are
not constrained by the existing regulatory environment. It is important to
understand this framework as any meaningful discussion on the benefits of free
trade will necessarily have to be evaluated in a larger environment where other
existing policy parameters (and their impact on the specific industries) may act as
a deterrent to the realization of the full benefits from trade.
Several large scale projects initiated and announced in the ASEAN region in the
recent past may open up opportunities for Indian businesses once the FTA is
operationalized. We provide a summary of such initiatives as a part of the
opportunities from the FTA section B in this paper. We also discuss the possible
short term impact of the FTA on some Indian industries arising from trade
diversion and specialization that are associated with any FTA of this kind.
Specific sectors and the impact of the FTA on them are also discussed. The
feedback from the industries is summarized based on anecdotal evidence and
our analysis from them. We also provide a theoretical analysis of the impact of
the FTA on the focus industries based on the principles of trade theory.
10
Finally, we juxtapose the FTA on the growth path of the Indian economy and
conclude on how this will play out over the next decade in terms of India‟s growth
rate as well as some other social sector priorities. A large part of this discussion
is subjective and we recognize the limitations of our conclusions based on other
contingencies that are not explored or taken up in detail. Nonetheless, our
observations are interesting in their own right and may pave the way for greater
analysis and fine-tuning in the future.
The economic case for an open trading system based on multilaterally agreed
rules rests largely on commercial common sense. But, it is also supported by
evidence as captured by world trade and economic growth trends since the
Second World War. The first 25 years after the war witnessed steep reductions
in tariffs. This was accompanied by significant increases in world trade that
averaged approximately 8 percent per annum over the same period. More
significantly, world economic growth accelerated and averaged approximately 5
percent per annum during this period. While an increase in growth may be
driven by a number of factors (e.g. technological advances), empirical research
indicates a definite statistical link between freer trade and economic growth.
Economic theory points to strong reasons for the link. All countries, including the
poorest, have resources – human, industrial, natural, financial – which they can
employ to produce goods and services for their domestic markets or to compete
overseas. Economics tells us that we can benefit when these goods and
services are traded. Simply put, the principle of “comparative advantage” says
that countries prosper by concentrating their resources in on what they can
produce best, and then trading these products for products that other countries
produce best. In other words, liberal trade policies – policies that allow the
unrestricted flow of goods and services – sharpen competition, motivate
innovation and breed success. The importance of global free trade can be
grasped by the fact that there are currently 153 countries that are members of
the World Trade Organization (“WTO”) – the international organization whose
main function is to ensure that trade flows as smoothly, predictably and freely
as possible.
The desirability of free trade, originally put forth by Adam Smith in “The Wealth of
Nations” in 1776, was first demonstrated theoretically by 19th century English
economist David Ricardo. Ricardo showed that in a world where labor is the only
factor of production, if each country specializes in the good in which it has a
comparative advantage, then all countries can gain from trade. The intuition is
that this kind of specialization maximizes global production of goods and enables
countries to enjoy greater levels of consumption through international trade.
Ricardo‟s seminal work has spawned a rich literature in international trade theory
12
showing that even under more general conditions, Ricardo‟s conclusion that free
trade is mutually beneficial continues to hold good.
Given the existence of trade barriers (regardless of origin) at any point in time,
the question often arises as to what countries can do to lower or eliminate trade
barriers among themselves. Efforts to do so are broadly referred to as “trade
liberalization” and can take several forms. Markusen et al. state that trade
liberalization often occurs in the form of a multilateral agreement such as the
various trade negotiation rounds of the General Agreement on Tariffs and Trade
(“GATT”), or an agreement among a smaller set of countries, typically with some
geographical proximity. This latter type of agreement is called a “preferential
Free trade area: A “free trade area” is the least restrictive of PTAs and
consists of a number of countries that agree to eliminate all trade barriers
among themselves while keeping intact their existing tariffs with non-member
countries. The North American Free Trade Agreement (“NAFTA”) signed by
the United States, Canada and Mexico is an example in this regard.
Customs Union: A higher level of economic integration takes the form of a
“customs union” in which member countries, in addition to eliminating all trade
barriers among themselves, also adopt a common tariff against non-member
countries.
Common Market: When the cooperation among member states is extended to
allow free movement of factors of production (e.g., labor and capital) across
national boundaries, a “common market” is formed.
Economic Union: Greater levels of economic integration may take place in the
case of an “economic union”, i.e., a common market in which members
coordinate monetary, fiscal policies and other policies. The European Union
is the classic example of an economic union.
14
Dumping: Dumping refers to the practice of a foreign country selling its
product in the home market at a price that is lower than its “fair value”. While
this can occur even in the presence of trade barriers, the elimination of tariffs
in the home country increases the probability of this occurrence and can
cause considerable harm to domestic industries that can be driven out of
business altogether.
Unemployment: The reduction of tariff barriers leads to greater competition in
the domestic market for the imported product leading to loss of market share
and laying off of workers in that sector. In the short run, this kind of
dislocation can cause considerable hardship to the affected workers.
Excessive Dependence: Free trade can result in the shutting down of a
number of industries that are unable to compete with cheaper imports. This
may lead to excessive dependence on foreign supplies for a number of
commodities – a situation that could have adverse effects if there were a
disruption in any of the foreign supplies.
The net effect of an FTA will therefore be driven by the benefits and the possible
negative impacts arising from them. What makes this assessment difficult for an
FTA such as the India-ASEAN one is the fact that the “market” in which such an
FTA is being implemented is fraught with policy guidelines, regulatory restrictions
and competitive trade policy that directly hinders the interpretation of a truly “free”
trade agreement.
Asia‟s rise in the 1960s from a poor underdeveloped agro based economy to a
„global factory‟ has been spectacular. Though the continent lacked large reserves
of natural resources and was steeped in high levels of poverty, it had abundant
supply of cheap and productive manpower. Geographical proximity to the
expanding, high-income economy of Japan with MNCs in the lookout for low cost
production locations proved to be a boon for Asia. A thriving world economy
hungry for labor-intensive imports from Asia, declining tariffs in developed
country markets, inflows of trade-related FDI, and generous foreign aid flows
acted as the key driver of outward-oriented growth in Asia.
Market driven expansion of trade and FDI along with innovation and learning by
Asian firms have enabled them to acquire requisite technological capabilities to
either compete internationally or become suppliers to MNCs over time. As firms
underwent systematic innovation and learning, imports from the region witnessed
a gradual shift. From exporters of labor intensive products like textiles, garments,
and footwear, Asia started to export more of technology-intensive exports like
chemicals, ships, electronics, and automobiles. Asian firms through their
constant innovation and investment in research and development emerged as
leaders in production networks and supply chains.
Intra-regional trade also flourished as regional trade barriers and logistics costs
fell and production found way to more cost-effective locations. As per ADB
estimates, trade within Asia increased significantly from 37% of total trade to
54% between 1980 and 2007. The end of the 20th century witnessed the Asian
The Asian Financial Crisis of 1997-98 wrecked havoc among the economies of
Thailand, Indonesia, Malaysia, and the Republic of Korea (hereafter Korea) and
adversely affected the economies of Philippines, Hong Kong and China. The
crisis led to the emergence of sentiments of „economic regionalism‟ in East Asia
and a number of economies have come together in the post crisis era to
undertake initiatives for regional economic surveillance and close economic
collaboration. Several groups have been to set up to facilitate the process.
Market driven forces of cross border trade, FDI flows and finance as a result of
multilateral and unilateral trade liberalization processes has deepened the
economic ties in the Asian region. The last twenty years have witnessed an
upsurge of bilateral and multilateral trade agreements being convened in this part
of the world.
For several decades the Asian economies had structured their approach to
international trade on the multilateralism and most favored nations (MFN)
principles through the General Agreement on Tariffs and Trade (GATT)/WTO
framework and open regionalism and unilateral liberalization centered on APEC.
But this long standing policy stance of pursuing trade through the frameworks of
APEC and WTO has witnessed a change over the past decade. The region is
pursuing a three-track approach based on global (WTO-based) cum trans-
regional (APEC-based), regional (ASEAN+3 or ASEAN+6), and bilateral
liberalization of trade.
Asia is at the forefront of FTA activity. At present there are a total of 506 FTAs in
various stages of negotiation in the region of Asia, of which 119 are ones that
have been proposed, 110 are under negotiation, and 277 that have been already
concluded. Out of the 277 concluded FTAs 231 are already under effect.
Framework
Agreement Under In TOTAL
Country Proposed Signed
Signed/Under Negotiation Effect
Negotiation
Singapore 4 1 9 3 18 35
India 11 4 7 0 11 33
Korea,
10 2 8 1 6 27
Republic of
Pakistan 10 5 3 2 6 26
China,
People's 8 3 3 1 10 25
Republic of
Thailand 6 4 3 0 11 24
16
Japan 6 0 5 0 11 22
Australia 6 2 5 0 8 21
Malaysia 3 1 5 2 8 19
Indonesia 7 1 1 1 7 17
New
4 1 3 2 7 17
Zealand
Brunei
4 1 1 0 8 14
Darussalam
Viet Nam 3 1 2 0 7 13
Philippines 4 0 1 0 7 12
Lao PDR 2 0 1 0 8 11
Kazakhstan 2 1 0 3 5 11
Myanmar 2 1 1 0 6 10
Cambodia 2 0 1 0 6 9
The table exhibits the status of FTAs signed by the top 15 countries (in respect of
maximum number of total FTAs) and all the ASEAN countries.
Singapore leads the region with a total of 35 FTAs followed by India and Korea.
Singapore with its strategic location, world class infrastructure and logistics is the
regional head quarter for a number of top MNCs in the world. One of the
founding members of ASEAN, Singapore has trade agreements with all the major
Asian economies like PRC, India, Japan, and Korea as well as economies
outside the region, including the United States (US) and Australia. The US-
Singapore FTA which has been effective since 2004 was the first such
agreement made by US in Asia and is supposed to be a model agreement in
terms of scope.
India and China too have been active in the FTA scenario in a bid to ensure
market access for their goods and services. China has separate agreements with
ASEAN for goods and services and is in the process of negotiating a third one for
investments. India has a goods FTA with ASEAN (which is the focus for this
paper), and is trying to negotiate a service agreement. Japan and Korea – the
two major Asian economies have also been active in forging trade treaties with
other Asian economies with a total of 22 and 27 treaties respectively under their
belts. The relatively poorer economies such as Cambodia, Lao People‟s
Democratic Republic (Lao PDR), Viet Nam, Philippines, and Indonesia have by
and large relied on the ASEAN to convene trade agreements with the larger
economies . All of these countries are members of ASEAN. Weak infrastructural
capacity and low resources could be a reason why these countries have not
been able to conduct negotiations on their own.
The four major factors that have played a driving force behind the emergence of
FTAs in East Asia have been:
The number of FTAs is easy to track, but the numbers in themselves fail to
indicate how important FTA s are to trade and economy at the national level.
How much of a country‟s trade is covered by the FTA is difficult to calculate
owing to the exceptions and exclusions contained in many trade agreements.
Official statistics on utilization rates of FTA preferences for Asia are not easily
available and published data on the direction of services trade do not exist. A
paper by ADB attempts to form an indicative estimate of this, by making a
simplistic, yet bold assumption that that all goods trade is covered by concluded
18
FTAs and computes the share of an economy‟s bilateral trade with its FTA
partners in its total trade with the world for 2000 and 2008.
80
70
60 2000 2008
50
40
30
20
10
0
China
Lao PDR
Myanmar
Singapore
Korea
Malaysia
Thailand
Cambodia
India
Japan
Hong Kong, China
Indonesia
Philippines
Vietnam
Brunei Darussalam
The larger economies of the region like India, Korea, China, Japan have a
smaller share compared to the ASEAN member states. Korea has 44% of its
total trade with bilateral FTA partners, China 25%, India 23% and Japan 11%.
This implies that ASEAN members rely more on FTAs for their trade
compared to other nations.
Another point to note is that for all the nations, the share of trade with bilateral
FTA partners out of its total trade has increased over the eight year period
considered. This is an indication of the increasing number of FTAs and their
importance in total trade in the economies of the region.
2
This section has been compiled mainly from the working paper by Asian Development
bank on FTAs in Asia.
3
Baldwin 2006; World Bank 2007
4
Bhagwati 2008
20
ADB conducted a firm level survey to find enterprise perceptions of whether
FTAs would increase cost of conducting business when dealing with multiple
ROOs in the region. Evidence suggested that multiple ROOs impose limited
burden on firms in East Asia. Of the 465 firms that responded to the question
on this issue, only 27% said that multiple ROOs significantly add to business
costs. But there were country-level variations in perceptions - Singaporean
firms had the most negative perceptions regarding multiple ROOs (38%),
while Korean firms had the least negative perceptions (15%). Negative
responses for Japanese, Philippine, and Thai firms were 31%, 28%, and 26%,
respectively. National FTA strategies, industrial structures, and the quality of
institutional support could explain the differences in perceptions of ROOs
across Asian countries.
The survey also revealed, rather unexpectedly, that larger firms in Asia had
more negative perceptions of multiple ROOs than SMEs. A possible reason
for this was large established firms tend to export to multiple markets and
change their business plans in response to FTAs and are thus more likely to
complain about issues of multiple ROOs. Smaller firms usually export to a
single market and thus probably are not that affected by the complex ROOs.
Though ROOS are not perceived as a burden by firms at the moment, in
future, as the number of FTAs increase, it is possible that multiple ROOs
could pose as a problem and thus policymakers need to take precautionary
steps towards that.
Economic growth;
Fall in prices after tariff reductions due to increased economies of scale as
well as greater competition between firms;
An increase in the variety of products available to consumers;
Self-selection of firms with only the efficient firms surviving after trade
liberalization;
Employment and wage effects associated with greater trade; and
Attracting Foreign Investments.
Given below is the empirical evidence about the aforementioned gains that has
been analyzed with respect to trade liberalization programs such as Canada-US
5
FTA, Chile-Mexico FTA, European Economic Integration and others
Global Trade (merchandise trade) has grown at a rapid pace of 73% in the last
decade from 1999 to 2009. Growths of income and demand in the emerging
markets, improvement in economic policies and investment climate in these
markets have been a major driver of trade besides trade policy and tariff
reduction.
Empirical research supports the fact that opening trade increases growth in both
6
developed and developing countries . However, it is also true that the existence
of good institutions and efficient regulatory systems are a prerequisite to attract
FDI and trade-led growth. A general consensus seems to have been emerging
5
Excerpted from Robert C. Feenstra, “New Evidence On The Gains From Trade”, Review
of World Economics/Weltwirtschaftliches Archive, December 2006; and „Trade as a driver
of Prosperity‟ – Commission staff working document, European Commission, 2010
6
A. Winters "Trade liberalization and economic performance: an overview", Economic
Journal, 114, 2004, and R. Wooster, S. Dube and T.M. Banda (2006) "The contribution of
intra-regional and extra-regional trade to growth: evidence from the EU"
22
over the last few years that trade opening works best for growth, employment
and incomes when it is successfully combined with other structural reform
7
measures .
With respect to the European Union, existing FTA‟s are argued to have an impact
on increasing EU GDP by 2%. Further increased cooperation with existing trade
partners, particularly lowering of non tariff barriers could double this growth
effect. Moreover, empirical estimates also reveal that opening of trade increases
productivity and increases competiveness of the EU industries with estimates
suggesting that between 1988 to 2000, productivity in manufacturing sector in the
EU region increased by 11% while mark-ups came down by 1.6% in the face of
8
increased imports during the period . Productivity growth aid economic growth as
well as consumer welfare and therefore gains in productivity have second rung
effects of increasing economic growth.
9
Another study suggests that since North American Free Trade Agreement
(NAFTA)‟s implementation in January 1994, U.S. agricultural trade with its
partners in the agreement has increased in both size and relative importance.
Between 1993 and 2000, U.S. agricultural exports to Canada and Mexico
expanded by 59 percent, while corresponding exports to the rest of the world
grew only 10 percent. Similarly, U.S. agricultural imports from Canada and
Mexico increased 86 percent between 1993 and 2000, compared with 42 percent
for U.S. agricultural imports from the rest of the world. However, other factors -
such as population growth, changes in macroeconomic performance and
exchange rates, and unusual weather patterns - generally have had a much
stronger effect on U.S agricultural trade with Canada and Mexico than NAFTA.
However, a commodity-by-commodity analysis provides that for a handful of
commodities, NAFTA has had a much larger impact, with an increase in trade
volume of 15 percent or more that is directly attributable to the agreement. This is
particularly true for products whose trade was severely restricted prior to CFTA
and NAFTA.
Trade relations among Canada, Mexico, and the United States have broadened
substantially since NAFTA's implementation, though experts disagree over the
10
extent to which this expansion is a direct result of the deal . According to data
from the office of the U.S. Trade Representative (USTR), the United States' chief
7
R. Chang, L. Kaltani, N. V. Loayza (2009) "Openness can be good for growth: The role
of policy complementarities", Journal of Development Economics 90 (2009) 33–49.
8
N. Chen, J. Imbs and A. Scott, “Competition, Globalization and the Decline of Inflation”,
CEPR Discussion Paper Series No. 4695, 2004.
9
Steven Zahniser and John Link (editors) “Effects of North American Free Trade
Agreement on Agriculture and the Rural Economy” (July 2002)
10
Lee Hudson Teslik “NAFTA's Economic Impact” Backgrounder, Council on Foreign
Relations (July 2009)
Another mechanism through which free trade areas can lead to a reduction in
prices, aside from economies of scale, is through the elimination of rules and
regulations governing the flow of goods between FTA member countries. For the
European Union, as these non-tariff barriers were eliminated, it was expected
that firms would be forced to equalize their selling prices across markets. In other
words, rather than treating Europe as a collection of segmented markets, where
firms could choose their prices in each country separately, Europe would instead
become a unified market where firms could not price-discriminate. As price-
discrimination is eliminated, average prices are expected to fall, providing
benefits to consumers.
11
In practice the results look mixed for the EU. A paper by Badinger (2006) uses
sectoral data from 1981 to 1999 and finds evidence of markup reductions in
manufacturing and construction, but not in services.
The European Commission Report argues that tariff cut leads to lower consumer
prices although the pass-through effect of this price transmission channel is
12
usually imperfect. The paper cites the example of how import prices for textiles
and clothing fell by 27.5 and 38.4 percent respectively in real terms (i.e. relative
to the general CPI) during the period 1996-2006. Import prices for consumer
electronics too exhibited a 50% reduction. The paper further explains the
macroeconomic spill-over effects of reduction in import prices that led to overall
reduction in inflation as a result of trade openness and increased international
11
Badinger, H. (2006) “Has the EU‟s Single Market Programme fostered competition?
Testing for a decrease in markup ratios in EU industries,” Oxford Bulletin of Economics
and Statistics, forthcoming.
12
J. Francois, M. Manchin, and H. Norberg, "Passing on of the benefits of trade openness
to consumers", European Commission, Directorate General for Trade, 2007, p.7.
24
competition. There exists theoretical literature on the negative relationship
between inflation and trade openness13. The inflation-trade openness correlation
has become even more strengthened during the 1990s and has become more
robust than earlier research suggested extending even to OECD countries.
By combining the data on imports from new supplying countries with estimates of
14
the elasticity of substitution for each, Broda and Weinstein (2006) come away
with an estimate of the gains from trade for the US due to the expansion of
import varieties, which amount to 2.6 percent of GDP in 2001. Translating these
"variety gains" into an EU context suggests that the average European consumer
benefits are in the range of 600 € per year, in addition to the gains due to
15
lower prices .
Economic models predict that opening of trade in a sector will bid up the wage
and other factor prices, which forces the least efficient firms to exit the market
leading to an increase in the average productivity of the firms in that sector.
16
A study by Trefler (2004) analysed the impact of the Canada-US free trade
agreement on the selection and productivity of firms using firm-level data. He
found that Canadian industries that had relied on tariffs to survive saw their
employment fall by 12 percent due to the elimination of tariffs. In manufacturing
overall, the trade agreement reduced employment by 5 percent. However, these
job losses were a short-term effect, and over a 10 year period, employment in
Canadian manufacturing did not drop. While low-productivity plants shut down,
13
W.C. Gruben. and D. McLeod, “The Openness- Inflation Puzzle Revisited”, Applied
Economics Letters, 11,2004, pp.465-468.
14
Broda, C. and D. E. Weinstein (2006) “Globalization and the Gains from Variety,”
Quarterly Journal of Economics, May, 121(2), 541-585.
15
"The gains from variety in the European Union" - Munich Discussion Paper No. 2010-
24) and Langenfeld and Nieberding - "The Benefits of Free Trade to U.S.Consumers",
Business Economics, 40 (3), 2005, p. 41-51.
16
Trefler, D. (2004) “The Long and Short of the Canada-U.S. Free Trade Agreement,”
American Economic Review, 94(4), September, 870-895.
The gains for developing countries are also shown to be substantial. Feenstra
17
and Kee, (2006) completed a study of 44 countries over two decades, 1980 –
2000. Over this period, export variety of these countries to the United States
increases by 4.6 percent per year, thus more than doubling over these two
decades. Furthermore, that increase in export variety is associated with a 4.5
percent productivity improvement for exporters over the two decades. These
gains for the exporters are actually larger than the gains to the United States (of
2.6 percent) from the increase in its import variety over the past several decades.
18
Steven Zahniser and John Link (2002) , while discussing about NAFTA and
Agricultural Employment, state that by increasing opportunities for U.S. exports
and encouraging the more efficient allocation of economic resources, NAFTA has
had a small, positive influence on U.S. agricultural employment. Moreover, an
17
Feenstra, R. C. and H. L. Kee (2006) “Export Variety and Country Productivity:
Estimating the Monopolistic Competition Model with Endogenous Productivity,”
University of California, Davis and World Bank Policy Research Group.
18
Steven Zahniser and John Link (editors) “Effects of North American Free
Trade Agreement on Agriculture and the Rural Economy” (July 2002)
26
19
OECD study finds that while there has been no decline in overall employment,
there has definitely been a shift of employment from industries to service sector.
Trade with low-wage countries can potentially also have a major beneficial
impact on technical change. For instance, a study drawing on a panel of over
200,000 European firms shows that import competition led to both within-firm
technology upgrading and between-firm reallocation of employment towards
technologically more advanced firms or subsidiaries. These effects account for
about 15-20% of technology upgrading between 2000 and 2007 and are growing
20
over time . Another recent study finds that technological change and
21
globalization are associated with wage increases in nine EU Member States .
In summary, with increased trade and openness, the developed countries have
experienced a noticeable decline in manufacturing employment mostly due to
rapid technological progress but the decline has been more than compensated
by an increase in services employment. Wages increased for those remaining in
manufacturing, despite a considerable degree of labor churning and declining
job security.
With an inclusion of certain favourable rules for the foreign investors, FTAs may
attract further foreign investments in a country. According to Steven Zahniser and
19
OECD (2007) "Trade and labor market adjustments", document TAD-TC-WP (2007)7,
May 2007.
20
Nicholas Bloom, Mirko Draca, John Van Reenen (2009): "Trade induced technical
change? The impact of Chinese imports on innovation, diffusion and productivity",
Stanford university working paper.
21
R. Christopoulou, J. F. Jimeno, A. Lamo (2010) "Changes in the Wage Structure in EU
Countries", ECB Working Paper No. 1199, April 2010.
22
M. Goos, A. Manning, A. Salomons (2009) "Job polarization in Europe", American
Economic Review, 2009 vol 99(2) pp 58-63.
23
"The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market",
David Autor and David Dorn, MIT Working Paper, August 2010. Paul Krugman (2008)
"Trade and wages reconsidered", Brookings Papers.
24
Steven Zahniser and John Link (editors) “Effects of North American Free Trade
Agreement on Agriculture and the Rural Economy” (July 2002)
28
5. Economic Impact of India-
ASEAN FTA
This section provides an analysis of the impact of the India-ASEAN FTA on the
Indian economy in general and certain select industries in particular. The
summary of the key terms and conditions of the India-ASEAN FTA is provided in
Appendix 1 of this report.
Total trade (exports and imports) as a percentage of GDP for India stands at
45.84%, while for ASEAN the figure stands at 102.5 %. For certain individual
economies of ASEAN this figure goes up to as high as 282.2% (Singapore), 145
% (Malaysia) 130% (Vietnam) and 108.3%(Thailand). On an aggregate level,
intra-ASEAN trade comprises of 24.5% of the total trade of the region. Moreover,
the ASEAN region is highly involved in intra-industry trade. An inspection of its
top trading partners reveal that ASEAN is the biggest trading partner for the
ASEAN region both in export and import categories. EU(27),USA and China are
the biggest export destination for ASEAN and China, Japan and EU(27) are the
top import sources. India is ASEAN‟s ninth largest export destination (comprising
th
3% of total ASEAN exports) and the 10 largest import source (comprising 3% of
total ASEAN exports).
The numbers above indicate that there is substantial opportunity for Indian
businesses to improve and expand its trading relations within the ASEAN.
40
30
20
10
-10
-20
-30
-40
Export Growth (%) Export Share (%)
Linear (Export Growth (%))
Graph 5.1 plots the observed patterns of the two variables namely, Export
Growth (%), and Export share (%) over a period of eighteen years from 1991
to 2008.
The export growth variable plots the year-on-year growth of India‟s exports to
ASEAN over the period of the analysis. The graph exhibits a steep fall in exports
during the years 1997 and 1998, when growth rates became negative. This could
be due to the Asian Economic crisis of 1997-1999, when a number of East Asian
economies, including Thailand, Indonesia, Malaysia and Philippines faced a
severe financial crisis. However, once the adverse effects of the East Asian crisis
subsided, India‟s exports to the region recovered to pre-crisis levels. There has
also been a gradual increase in the share of ASEAN region in India‟s total
exports as depicted by a gradual rise in the export share variable. The share of
the ASEAN market in India‟s total exports has risen from 5.68% in 1991 to
10.28% in 2008.
25
The data for this analysis has been considered from the United Nations Economic and
Social Commission for Asia and the Pacific (UNESCAP)‟s website. URL:
http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration
Center‟s (ARIC: an affiliate of the Asian Development Bank) website. URL:
http://aric.adb.org/index.php
30
With respect to imports, over the period 1991 to 2008, though the growth of
ASEAN‟s exports to India has been more volatile than the growth of India‟s
exports to ASEAN, there has been no erosion in the share of imports from
ASEAN in India‟s total imports. ASEAN‟s import share out of India‟s total imports
has increased from 4.82% in 1991 to 8.88% in 2008.
80
60
40
20
-20
-40
-60
Import Growth (%) Import Share (%)
On the whole, the share of India‟s total trade with ASEAN has shown a steady
increase over the period of the analysis. ASEAN‟s share in India‟s total trade has
increased to 9.42% in 2009 growing by 80% since 1991.
The export and trade intensity indices provide us with an indication of the
intensity of the trade relationship between two countries/regions. The export
intensity index indicates whether or not a country exports more (as a percentage)
to a destination than the world does on an average. It is defined as the ratio of
two export shares. The numerator is the share of the destination of interest in the
26
The data for this analysis has been considered from the United Nations Economic and
Social Commission for Asia and the Pacific (UNESCAP)‟s website. URL:
http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration
Center‟s (ARIC: an affiliate of the Asian Development Bank) website. URL:
http://aric.adb.org/index.php
The trade intensity index is the ratio of the total trade share of a country/region to
the share of world trade with a partner. An index of more than one indicates that
trade flow between countries/regions is larger than expected given their
importance in world trade. Thus, as opposed to export intensity index, this index
also accounts for the import flows between the trade partners.
Both the indices take values between 0 and +∞ and a value greater than 1 for
both implies that the source country exports/trades more (as a percentage)
to/with a particular destination than the world does on an average.
2.50
2.00
1.50
1.00
0.50
0.00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Graph 5.3 plots the export intensity indices from both India‟s as well as ASEAN‟s
perspective from 1990 to 2008. The plot, „India‟s Export Intensity with ASEAN‟
indicates whether India exports more (as a percentage) to ASEAN than the world
does while „ASEAN‟s Export Intensity with India‟ indicates whether ASEAN
exports more to India (as a percent) than the world does. As we can observe, for
both the regions, the index value was greater than 1 indicating that both the
economies export more to each other than the world does to each of them on an
average. Moreover, for a majority of the period under consideration, ASEAN
27
Data has been considered from the ARIC website where in the source has been given
as „IMF Directions of Trade Statistics‟.
Please refer to the Appendix 2-Technical Appendix for a detailed description of the index
along with an illustration.
32
seems to be exporting more to India (as a percent) than vice-versa although the
gap has reduced in the later years.
India and ASEAN have also enjoyed an intense overall trade relationship with
each other throughout the period. This can be seen from the figure below where
the plot of the overall trade intensity for both the economies indicates that the
index value for the overall trade intensity also never fell below 1. We can also
infer from this plot that in the total bilateral trade, throughout the period under
consideration, ASEAN‟s trade relationship with India has been more intense than
the other way round; although as in the case of the export intensity, the gap
seems to be reducing in the recent period. Thus the implementation of the
FTA between the two economies can only be expected to intensify the
trade dependence amongst each other.
2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
28
Data has been considered from the ARIC website where in the source has
been given as „IMF Directions of Trade Statistics‟
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
India ASEAN India World (other countries)
India China India USA
The index is defined as the square root of the squared shares of each industry in
30
the total exports of a country to a particular region/country. The index takes a
value between 0 and 1 with higher values indicating that exports are
concentrated in fewer sectors.
Graph 5.5 plots the Sectorial Hirschmann index for India‟s exports to major
economies such as China and the USA. As we can see from the plot, the fact
that India‟s exports to China are more concentrated in mineral ores such as iron
ore is borne out by a higher Sectorial Hirschmann index than the other regions.
The index with respect to exports to ASEAN has also witnessed a sharp increase
after 2003 at around the same time as the one with respect to China has risen.
The rise with respect to ASEAN‟s index can be explained by an increase in the
concentration of India‟s exports to the region towards mineral fuels and mineral
31
oils . India‟s exports to the USA have become broader based over the past
few years.
29
„World (other countries)‟ is as per UNESCAP‟s classification and apart from India,
ASEAN, China and USA, it does not include other major Asia Pacific economies such as
Japan, South Korea, Australia in addition to other small economies. Trade data for the
European Union is not separately available with the UNESCAP.
30
Please refer to the Appendix 2-technical appendix for a detailed description of the index
along with an illustration.
31
According data available with the Ministry of Commerce and Industry, Government of
India, the share of the HS Code 26, “ORES, SLAG AND ASH” in India‟s total exports to
China was around 19% in 2000-01; by 2007-08, this share increased to around 57%.
34
5.1.3 Complementarity index
The complementarity index measures the degree to which the export pattern of
one country matches the import pattern of another. A high degree of
complementarity is assumed to indicate more favorable prospects for a
successful trade arrangement. Changes over time may tell us whether the trade
profiles are becoming more or less compatible.
80
70
60
50
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
It is defined as the sum of the absolute value of the difference between the
import category shares and the export shares of the countries under study,
33
divided by two. The index is converted in to percentage form . Complementarity
of Indian exports to ASEAN is lower than complementarity of ASEAN‟s exports to
India, though both of them show an increasing trend. Complementarity of Indian
Similarly, the share of the HS Code 27, “MINERAL FUELS, MINERAL OILS AND
PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL
WAXES” in India‟s total exports to ASEAN was around 0.15% in 2000-01; by 2007-08, this
share increased to around 29%.
32
The data has been considered from the UNESCAP. The figures on the vertical axis are
in percentage terms.
33
Please refer to the Appendix2 -Technical Appendix for a detailed description of the
index.
As discussed earlier, one outcome of a free trade arrangement is that the sector
in which a country has a comparative advantage in production will benefit from
free trade. In other words, if India has a comparative advantage in manufacturing
pharmaceutical products (say) relative to the other ASEAN countries, and the
FTA member country has a comparative advantage in manufacturing electronic
products, under the FTA India will specialize in producing and exporting
pharmaceutical products whereas the FTA member country will specialize and
produce electronic products and export those to India. Therefore, identifying the
comparative advantage by sector will shed some light on the sector specific
impact of the India ASEAN FTA.
We now analyse the competitiveness of the exports of some of the key sectors of
the Indian and ASEAN economies vis-à-vis other major exporters of the world
using the RCA index. The sectors that have considered for the analysis include
the following:
Merchandise Services
Chemicals and Pharmaceuticals Communications
Electrical Equipments Financial Services
Textiles, Apparels & Accessories Insurance Services
Leather & Leather Accessories Construction
Handicrafts & Carpets
Gems & Jewellery
Machinery and Appliances
Automotive sector
Renewable & Non-Renewable Energy
Power
Petroleum & Natural Gas
These sectors have been selected in consultation with FICCI and the Ministry of
Commerce and Industry, Government of India. In our analysis certain sectors
have been clubbed together under a single head, owing to the format in which
international trade statistics is organized in the website of Standard International
34
Trade Classification, Rev.3 (SITC) .
34
SITC Rev 3 – http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=14
36
The following table outlines the export of India and ASEAN in the sectors.
Handicrafts and
80.77 13.83 17.13 6.73 8.33
Carpets
Textiles,
Apparels and 580.82 22.62 3.90 38.99 6.71
Accessories
Electrical
982.61 4.10 0.42 144.64 14.72
Equipments
Energy and
35
resources:
Power
Renewable and 2032.03 26.30 1.29 134.78 6.63
Non-renewable
Petroleum and
natural gas
35
There is no trade in generated energy for India, only fuels are traded. This is why this
sector has been considered under the head of Merchandise
India‟s pharmaceutical sector is now the third largest in the world in terms of the
volume with a share of 10% in the world production and is the fourteenth largest
in terms of value accounting for a share of 1.5% in the world. The country‟s
pharmaceutical industry had a turnover of Rs 1,500 crores in 1980 to
approximately Rs 1,00,611 crores in 2009-10 (up to September 2009). The
sector has witnessed a sharp increase in exports- from Rs 6,526 crores in
1998-99 to Rs 39821 crores in 2008-09. According to Centre of Monitoring Indian
economy, in 2009 the country exported pharmaceuticals and chemicals exports
from the country has represented a 12.6% increase on the previous year and
accounted for 4.7% of the total exports. Most exports are of generics and bulk
drugs directed to more than 200 countries including US, Japan, Australia and
members of the European Union. The domestic pharma sector on the other
hand, has grown from Rs 32,000 crores in 2003-04 to Rs 55,000 crores in
2008-09.
Sector for Textiles, Apparels and Accessories; Handicrafts and carpets; and
Leather and leather Accessories
Indian textile industry, apart from providing one of the basic necessities of life,
has a strong presence in the Indian economy. It works independently right from
36
Sources: Annual report 2009-10, Department of Pharmaceuticals, Ministry of Chemicals
and Fertilizers; India Brand Equity Foundation; Economist Intelligence Unit; ICRA rating
feature: Indian Pharmaceutical Industry; and http://nppaindia.nic.in
37
Industry Monitor: Textile and Garments – Cygnus; Annual Report 2009-10 – Ministry of
Textiles, Govt. of India;
38
procurement of raw materials to production of the actual textile. Presently the
Indian textile and apparel market is worth US$85 billion, of which US$30 billion is
exports and the remaining US$55 billion is domestic sales.
The textile industry wasn‟t spared by the global meltdown. The decline in
demand from the US and European market hurt this sector the most. To add to
the existing woes, increase in input cost and persistent long power cuts led to the
downfall of revenues of the industry. Even though the industry had to go through
a major pitfall, it started to recover due to increase in demands on occasion of
Christmas and New Year. The trend is expected to continue with precautionary
measure taken by the leading companies in the industry and with the aid of
Government. In the domestic market, the demand has remained strong, but
mainly driven by value, which has added pressure on the margins. This recovery
from the meltdown can be attributed to Government stimulus, improved liquidity
and stable growth in export and domestic demand for textile products.
Fabrics
Apparels
Man-made textiles
Yarn
Exports have started to show improvement since November 2009, and the
Confederation of Indian Textile Industries (CITI) anticipates a rise in garment
38
Handicrafts and Carpets
The Handicrafts and Carpets sector is one of the significant industries and plays
a vital in the country‟s economy. Like textile industry, the handicrafts and carpets
industry provides employment to craftsmen both in the rural and urban areas. It
also helps the economy in earning substantial foreign exchange. The handicrafts
and carpets industry not only provides present set of millions of artisans but also
encourage new entrants in the crafts activity.
Types Of carpets
Woven
Needle felt
Knotted pile
Tufted
The export target for 2009-2010 had been fixed at Rs 32,960 crores including the
carpet industry. A decrease had been observed in the Dec, 2009 due to
appreciation of rupee and economic meltdown.
The following table shows the detail of both handicrafts and carpet industry.
38
Gems and Jewellery sector is included under this sector.
Industry Monitor: Textile and Garments – Cygnus; Annual Report 2009-10 – Ministry of
Textiles, Govt. of India;
40
Table 5.3: Export of Handicrafts over the period 2003 - 2009
(Rs in Crores)
2009-
Item 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 10(April-
Dec.)
Carpet and 2779.79 2583.62 3082.06 3674.86 3524.73 2708.73 1737.47
other Floor
Covering
Other 13555.8 16984.14 16185.59 17288.14 14012.05 8183.12 5536.28
Handicrafts
Grand 16335.27 18567.76 19267.65 20963.00 17536.78 10891.85 7273.75
Total (A+B)
On the other hand the carpet industry grew over 6% to US$53 million, due to the
demand from new markets such as Russia and Dubai. In 2009, according to the
Carpet Export Promotion Council (CEPC), the carpet industry was worth
US$49 million.
39
Leather and Leather accessories
The Leather industry, with an annual turnover of US$5 million, holds a strong
position in the Indian economy. The leather and leather products industry has
been one among the oldest manufacturing industries in India. This massive
industry provides employment to about 2.5 million people.
The leather industry has changed significantly from being just an exporter of raw
materials around early 60s and 70s to becoming an exporter of finished leather
goods. Government of India has played a major role in this transformation by
taking several policy initiatives. As a result of these initiatives the India leather
industry is one among the top 7 industries that earns foreign exchange for
the country.
Though the industry has transformed and developed over time, there is still
scope for more growth and investment. Indian leather industry can be an
attractive industry for investment because of its growth and its ability to capture
major share in the global trading market.
39
Indian Leather Industry, Leather and Allied Product Manufacturing – ISI
Emerging Markets, Indian Leather Industry: Perspective and Export Potential
Actual Export
Leather 688.05 726.85 785.00 847.80 915.63
Footwear 1212.25 1967.88 2597.60 3428.83 915.63
Garments 308.98 358.53 372.87 387.78 403.30
Leather Goods 690.66 733.34 798.69 870.06 948.04
Saddlery & 81.85 105.66 127.85 154.70 187.19
Harness
Total 2981.79 3892.26 4682.01 5689.17 6980.21
From the above table, it is evident that Indian foot wear industry holds a major
share in the leather industry. India, after China, is the second largest global
manufacturer of footwear.
The industry is also known for its scientific and technological leadership through
which it has made qualitative improvements. The growth of the leather industry
can be attributed to special economic zones, government‟ permission to 100 per
cent foreign equity, forming strategic alliances for the development of a
component industry through joint ventures, establishing leather complexes in five
states and modern tanneries abiding by all environmental laws.
Among the other industries in India, the leather and leather industry has been
among the oldest. Looking at the significant potential for growth, the Government
has been taking significant measure to promote rapid growth and qualitative
advancements. India‟s vast resource of raw hides and skins would form the basis
for the growth of this industry. As mentioned above, India is would be one of the
best destinations for investing in leather and leather product industry. Currently
major players are exploring India for opportunities of global expansion.
In considering the sector Machinery and Appliances a number of sub sectors has
been considered like Power generating machinery ,Specialized machinery ,
Metal working machinery , industrial machinery Office machines , automatic data
processing machines, telecommunication and sound recording apparatus,
Electrical machinery, Photo apparatus, optical goods, watches ,clocks ,
Professional and scientific instruments etc.
42
40
Automotive Sector
41
Power Sector : Energy & Resources Industry
For the purpose of our analysis, we have combined the three major sectors of
Power; Renewable and Non-renewable; and Petroleum and natural gas and
have calculated the cumulative RCA.
Production of gas in India has seen a steep growth in March 2010 to about 72%
YoY. The gas availability is mainly driven by several domestic gas discoveries in
KG D 6 block and increase in capacity of LNG. However it worth noting that the
average consumption of gas per capita is low when compared to the average
global consumption.
Crude oil price leaped almost two times from the US$40/bbl to US$80/bbl in
2009. Dollar appreciation and bullish reports on the demands from international
agencies attributed to such a huge jump. The demand, however, started to
deteriorate in the end. But the demand from India and China seem to
remain robust.
40
IBEF
41
Indian Oil and Gas – Prabhudas Lilladher; Natural Gas: A Base Sector
Report – Anagram;
In our study, we have used the Revealed Comparative Advantage (RCA) index to
arrive at the competitiveness of each sector for a chosen set of countries. The
RCA index of a country for a particular sector is defined as the ratio of two export
shares. The numerator is the share of the exports of a particular sector in the
total exports of the country while the denominator is the share of the particular
sector‟s exports in the total world exports. RCA indices use the trade pattern to
identify the sectors in which an economy has a comparative advantage, by
comparing the country of interest‟s trade profile with the world average.
The Index can take a value between 0 and +∞. A country is said to have a
revealed comparative advantage if the value exceeds unity. If RCA is less than
unity, the country is said to have a comparative disadvantage in the commodity/
industry. Thus in sectors where a country has an RCA of greater than 1 and it is
higher than other countries, it can be concluded that the particular country has a
comparative advantage in the particular sector and an opening of the trade in the
sector would be beneficial for the country. Decreasing RCA can be interpreted as
a sector losing its comparative advantage.
Given below are the plots of the trend of the RCA index for the various sectors
over a period of the past fifteen years.
44
Graph 5.7: RCA Comparison of Chemical and Pharmaceuticals
sector over the period 1995 – 2009
46
Graph 5.11: RCA Comparison of Handicrafts and Carpets over
the period 1995 – 2009
14
12
10
3.00
2.50
2.00
1.50
1.00
0.50
0.00
48
Graph 5.15: RCA Comparison of Power Sector over the period
1995 - 2009
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
From the graphs above it is evident that India has comparative advantage in the
sectors of Textiles Apparels & Accessories; Handicrafts and Carpets and
Chemical and Pharmaceutical sector. ASEAN on the other hand has comparative
advantage in Machinery and Appliances Sector.
In our study we have clubbed the sectors of Textiles Apparels and accessories,
Gems and Jewellery, Leather goods, and Handicrafts under one sector and done
the RCA Analysis. Calculation of RCA shows that India enjoys very high
Comparative advantage in this sector, not only in comparison to the Asean
economies, but also globally. ASEAN economies have RCA value greater than 1,
throughout the period of study implying them having some comparative
advantage, but the value of their index is lower than India. India stands to gain
from trade with the ASEAN countries in this cumulative sector.
Owing to the importance of the textile industry in the Indian economy we have
computed the RCA index for Textile, Apparels and Accessories sector separately
to see where India stands globally. Our analysis shows that India has higher
RCA values in this sector compared to the ASEAN countries. Although the
ASEAN bloc has had RCA greater than one over the last eleven years, the value
of RCA has been much lower compared to India. Globally China and India have
higher comparative advantage in comparison with the rest of the economies
under study. India had higher comparative advantage than China, but it has been
overtaken by China in recent years.
In the Chemical and Pharmaceutical industry India has had RCA values greater
than 1 since 1998, but the index has fallen for the year 2009. This can be
interpreted as India having some comparative advantage in this sector in
general, and the decline in 2009 appears to be a one-off event. In this particular
sector ASEAN countries have had RCA Values lower than one throughout he
period of study. Thus India is in general in more competitive than ASEAN in this
sector.. Further, given the importance of the medical and pharmaceutical sector
to the Indian economy, we have also analysed India‟s competitiveness in this sub
sector separately. RCA for India in this sector has been greater than one,
throughout the period of study, although it exhibits a falling trend over the years.
RCA value fell steeply in 2009( falling below 1 to .97) over 2008 values. This can
be treated as an one-off event or a repercussion of the recession. As for the
ASEAN countries RCA values have been consistently at values below 1
throughout the period of study. Globally the economies of EU(27) together enjoy
comparative advantages in Chemical and Pharmaceutical sector in comparison
to the rest of the world. India definitely stands to gain in this sector if trade is
opened up between the two trade partners.
In the Automotive Sector and Energy sector neither India nor ASEAN has any
comparative advantage globally.
42
Leather Goods form a very insignificant part of India‟s export (0.378% of export
in 2009) and thus has not been considered in this part of the analysis
50
In the Automotive sector both India and the ASEAN countries taken together
have RCA values lower than that of 1 .Thus neither of the trading partners have
any comparative advantage in this sector. Globally Germany leads the world
among the countries considered in the study followed by USA, through USA has
seen a decline in comparative advantage in the year 2009 (A probable effect of
the recession).
RCA values for India in the Energy sector has been low throughout, though it has
been increasing over the period of study implying that India has had comparative
disadvantage for most of the time period in this sector. RCA figures were greater
than one for the two FY of 2008 and 2007, but the index has again slipped at
value less than 1 in 2009. The ASEAN countries exhibited some amount of
comparative advantage in the initial 4 years of the study, but the index fell
thereafter (though remaining in the range of 0.91 to 0.98) implying revealed
comparative disadvantage. For the FY 2009 ASEAN recorded RCA greater than
1. Comparing India and the ASEAN economies, the ASEAN economies have
fared better than the Indian economy in this sector, with higher RCA figures
implying more competitiveness compared to that of India. India‟s export share in
this sector is at 1.29% compared to 6.63% of ASEAN‟s.
Service has been one of the thrust areas of the Indian economy. A key generator
of employment, the service sector contributes approximately 58% of India‟s GDP.
It covers a wide range of activities, such as trading, transportation and
communication, financial, real estate and business services, as well as
community, social and personal services. Exports in services stood at US$ 90.6
billion in 2009. Currently India‟s share in world service exports stands at 2.64%
for the year 2008 vis-a-vis 1.14% for merchandise trade. On the other hand,
ASEAN countries together comprised 5.13% of total world exports in services in
the year 2008.
Currently negotiations between the ASEAN nations and India has been facing
some serious road blocks over the issue of including services as a part of the
FTA along with the free trade in goods. Concerns have emerged over the issue
of movement of natural persons, or Mode IV, as referred in trade terminology.
India has been demanding more liberalization in the Mode IV category so as to
enable more Indian professionals like doctors, nurses, chefs and accountants to
find greater job opportunities in countries like Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Countries like Indonesia and Philippines have raised objection to such further
liberalization, owing to their specific economic scenarios like unemployment or
unskilled workers. Many of these ASEAN countries are yet to recover fully from
Below, we have analysed the competitiveness of India and ASEAN with respect
to other major economies in the world in each of the major sub sectors within the
services sector.
Graph 5.16: RCA Comparison for the service sector over the
period 2000 – 2009
India has a RCA greater than one in the service sector, indicating that it enjoys
comparative advantage in this sector .The ASEAN countries have RCA value
lesser than one implying that they have no comparative advantage, rather
comparative disadvantage in this sector. So opening up service trade will prove
beneficial for the Indian service sector as it enjoys a comparative advantage in
this sector.
Graphs plotting RCAs for India, ASEAN and major economies for some of the
sub sectors within the service sectors have been given below.
52
5.3.1 Telecommunication
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
India has had RCA values greater than one in this sector though the period of
study with the exception of, in the year of 2008, where the value has dipped to
0.99. But the RCA value for the sector has been declining over the years. RCA
values for ASEAN has been greater than 1 for the period of 2003 to 2007, where
after the value has again fallen to less than one. But overall India has always had
greater value of RCA than ASEAN throughout the period of study, indicating that
communication sector in India has been more competitive than that of ASEAN
economies put together.
Globally India had comparative advantage over other nations earlier, but its
position has slipped.
43
Due to unavailability of data for the telecommunication industry separately, we have
taken the entire communication industry together ( communication includes postal and
courier services) in computing the Revealed Comparative Advantage
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
RCA value for India has not only been greater than 1, it has been higher than all
the major economies. India has a very clear comparative advantage in this sector
in comparison to not only the ASEAN trading bloc, but also in respect to the other
major economies of the world. ASEAN countries have RCA greater than one, but
it is much lower compared to that of India. Opening up this sector for trade would
immensely benefit the IT sector of the country which is already a global leader in
the sector.
54
5.3.3 Financial Service sector
The ASEAN countries and India have similar RCA in the financial service sector.
Both the partners have had RCA below 1, depicting no comparative advantage or
comparative disadvantage in this sector. For the year 2008 the ASEAN countries
had a higher comparative advantage over India in this sector. UK leads the world
in the comparative advantage in this sector.
If we study in detail the two plots depicting the RCAs for the two trading partners,
we can see that the two graphs have intersected thrice over the period of last
nine years implying that two partners have been at a similar position in this sector
with the rest of the world. If trading was allowed the two economies could
compete on a similar footing. As far as the global scenario is concerned UK has
the highest RCA followed by USA. Another reason for the low RCA‟s of India and
ASEAN in this sector could be due to the regulatory environment in each of these
economies where the Indian and ASEAN (especially after the 1998 financial
crisis) financial sector regulators have restricted the exposure of these
economies to the global financial markets.
Graph 5.20: RCA Comparison for the Insurance sector over the
period 2000 – 2009
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
The ASEAN trading bloc and India exhibit very similar revealed comparative
advantage in insurance services. Both have RCA lesser than one, which can be
interpreted as that neither has any comparative advantage in this sector. The
graph plotting the RCAs for the two countries have intersected four times over
the period of last nine years. One conclusion that can be drawn from the graph is
that if trade is opened up in this sector the two trading partners would be able to
compete on an equal footing as depicted by their RCAs. The low RCAs of both
the countries could be due to strict regulatory norms in the sector for both India
and ASEAN.
56
5.3.5 Construction Services
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
This section presents the impact of the FTA on Indian industry based on
anecdotal evidence compiled from published press reports and web
based research.
The likely beneficiaries in India from the FTA are the exporters of machinery,
steel, oilcake, wheat, buffalo meat, auto components, synthetic textiles, refined
petroleum products, organic chemicals, pharmaceuticals and gems &
jewellery. India‟s trade with ASEAN is mainly concentrated in Singapore,
Malaysia and Thailand. Singapore continues to remain the largest market in
ASEAN for India‟s merchandise exports.
The energy and resources sector is an important area which has received
considerable attention in the Indo-ASEAN FTA. Several rounds of discussion
have focused on this sector. From India‟s perspective the bilateral discussions
have mostly focused on using the Indo-ASEAN FTA as a base to grow trade with
member countries.
44
Economic Times, 22 Dec 2010
45
Business Line, 19 Dec, 2010
58
investor in India amongst the ASEAN countries and the second largest
amongst all countries with foreign direct investment (FDI) inflows into India,
totalling US$ 2.4 billion in 2009-10. The cumulative FDI inflows from
Singapore during April 2000 and March 2010 were US$ 10.2 billion, according
to data released by the Department of Industrial Policy and Promotion (DIPP).
During 2008-09, India exported goods worth US$ 8.45 billion to Singapore.
During April-December 2009-10, Indian merchandise exports to Singapore
totalled US$ 5.12 billion, comprising mainly of mineral fuels and oils, ships,
boats and floating structures amongst others.
Overall, this bears well for India and the prospects of multilateral growth in the
energy and resources sector is promising. However, a lot still remains to be
done to provide India with a competitive advantage for trade in this sector.
In the Plan of Action to implement the ASEAN-India Partnership for Peace,
Progress and Shared Prosperity, the following extract addresses the
cooperation plan on Energy.
Table 5.5 – Excerpt from the India ASEAN Plan of Action tabled
on October 2010
2.6. Energy
2.6.1 Promote and develop trade and investment interest in gas-related projects;
Promote and develop trade and investment interest in the electricity sector, and pursue
an integrated and coordinated development programme to establish compatibility of
2.6.2
electricity grids, and work towards liberalisation of power trade among ASEAN Member
Countries and India;
Develop and strengthen institutional linkages between ASEAN Centre for Energy
2.6.3 (ACE) and India to cooperate on R&D into energy efficiency and renewable energy,
and to establish programmes of cooperation; and
Promote sustainable and optimal utilisation of renewable energy, coal and new
hydrocarbon projects, and cooperate in energy policy and planning, energy efficiency
2.6.4
and conservation, as well as in the establishment of institutional linkages for
developing other programmes of cooperation.
Secondly, if there are secondary effects arising out of the India ASEAN FTA such
as regional preference for an Indian consortium on a bidding process, entry into
rural rectification projects, collaboration advantages on oil and gas projects etc,
this will help boost India‟s trade in this sector.
600 Vietnam
500 Thailand
400
Singapore
300
Philippines
200
Malaysia
100
0 Indonesia
46
IEA-MoEN Joint Workshop on „OIL SECURITY AND NATIONAL EMERGENCY
PREPAREDNESS‟ by Zainal Matassan, ASEAN Council on Petroleum, 2007
47
Energy Resources and Regional Economic Cooperation in SAARC Countries –
Ramzan Ali
60
importance, the idea of setting up an energy grid in the region is very
encouraging. Discussions have taken place in the past, thought much remains to
happen on the ASEAN Power Grid.
Manufacturing
There is also a sensitive list comprising of items for which a timeline has been
agreed upon. 489 items are excluded from the list of tariff concessions. The
items excluded are farm products, automobiles, some auto parts, machinery,
chemicals and textile products. In respect of the sensitive items like crude and
refined palm oil, tea, coffee and pepper, tariff concessions will be graduated over
a period of ten years.
There are also certain technical issues arising from the text of the agreement.
India's schedule of tariff concessions is heterogeneous in its product-wise
composition and orientation of the implementation period for some of the sub-
country groups Asean5 and CMLV comprising of Cambodia, Laos, Myanmar and
Viet Nam. This may be seen as being disadvantageous. For example, the CLMV
group are required to fulfill their commitments only at a later stage for products
covered under the Normal Track(1&2) and the Sensitive Track(1). In addition,
other salient features of India's tariff concessions are the non-reciprocal nature of
the implementation period with the less developed Members and inverted duty
structure in the case of selected products.
In spite of this, the likely beneficiaries in India are the exporters of steel,
machinery, auto components synthetic textiles, refined petroleum products,
organic chemicals, pharmaceuticals, gems and jewelry.
India‟s manufacturing sector on the other hand is approximately 17 per cent of its
GDP and comprises a much smaller fraction of its exports. After specializing in
Another question relates to the effect this India ASEAN FTA is going to have on
the small and medium scale industries.
While this may well be the case in the short run, it is quite imperative that India
does not follow a protectionist regime and evaluates this from a long run
perspective. As the Union Minster of Commerce has earlier commented, Indian
manufacturers would be able to source products and inputs at competitive prices
from the ASEAN countries. Further, it is for Indian manufacturers to realize this
change as an opportunity and align their businesses accordingly. This will allow
the small and medium size industries to be globally competitive.
The exchange of tariff concessions between India and the ASEAN Member
Countries would lead to growth in bilateral trade and investment resulting in
economic benefits to India and the ASEAN Member Countries.
The details show that in the manufacturing sector, the India ASEAN FTA is a
challenge as well as an opportunity. While there are definite benefits in terms of
trade for India, there are also areas of concerns and challenges. It is
important that well before 2013, steps are taken to provide a level playing field
to the industry.
62
6. Business Opportunities in
ASEAN Countries
6.1.1 Malaysia
Malaysia has recovered from the global economic recession resulting from
proactive measures undertaken by the Government and the successful
implementation of two Economic Stimulus Packages amounting to RM67 billion.
The effectiveness of these measures is reflected by the 9.5% expansion in gross
domestic product (GDP) in the first half of 2010 compared with -5% during the
same period the previous year. The Economic Transformation Program which
was unveiled recently set forth an ambitious 10-year economic roadmap to power
the country towards becoming a high income nation by 2020. It involves
64
investments worth approximately RM 1.4 trillion (US$ 523 billion) with an
objective to grow the Gross National Income (GNI) at six percent annually to hit
RM 1.7 trillion by 2020, from RM 660 billion in 2009. As an initial catalyst towards
economic transformation, 131 Entry Point Projects (EPPs) would be carried out
across 12 National Key Economic Areas (NKEAs), with 60 Business
Opportunities (BOs) being made available as a result of it, as summarized in the
table below –
US$ b RM b US$ b RM b
Oil, Gas &
Energy 12 45.8 141.4 7 19.1 58.9 52,300
Palm Oil 8 39.2 121 4 23.3 71.9 123,400
Financial
Services 8 41.8 129 6 24.8 76.6 275,000
Tourism 12 20.9 64.5 4 8.9 27.5 497,200
Business
Services 8 17.8 54.9 9 6.1 18.8 245,500
Improving
Electronics &
Electrical 15 16.8 51.9 4 4.3 13.3 157,000
Wholesale &
Retail 13 34.1 105.2 1 14.1 43.5 595,000
Education 13 10.4 32.1 4 4.5 13.9 536,000
Healthcare 6 11.1 34.2 5 4.6 14.2 181,000
Communication
s Content &
Infrastructure 10 11.9 36.7 4 3.7 11.4 43,162
Agriculture 16 9.1 28.1 11 1.1 3.4 74,000
Greater
KualaLumpur 10 121.8 376 1 62.1 191.7 520,438
3,300,00
Total 131 381 1,175 60 177 545 0
Notably, the ETP would be private sector driven – expected to fund 92% of the
NKEA projects while the remaining funds would come from the government
which would also act as an enabler and catalyst. As a result of this, Gross
National Income per capita is expected to increase by 103% to reach RM 48,000
(US$ 15,000) within 10 years from RM 23,700 (US$ 6,700) in 2009.
Out of the above NKEAs, the Oil, Gas and Energy industry is one of the main
contributors to the economy. In 2009, it contributed 10.2% to GDP with export
revenue amounting to RM56 billion. This industry has the potential to expand,
particularly in downstream activities. This NKEA is aimed at raising the sector‟s
output and meet energy demand over the 10-year period. It is also aimed at
enhancing downstream growth, making Malaysia the number one hub for oil field
services and building a sustainable energy platform for growth, requiring an
investment of RM 217 billion from the private sector. To achieve this objective,
the Government will allocate RM146 million to support the sector. Among the
projects to be implemented include the establishment of the Oil Field Services
and Equipment Centre in Johor with private investment of RM6 billion over a
period of 10 years.
With total healthcare expenditure representing 4.8% of GDP, the ETP aims to
grow three sub-sectors within the healthcare industry; namely, the
pharmaceutical, health travel and medical technology products segment. Quick-
wins include to mandate health insurance for foreign workers and to create an
eco-system to support clinical trials. In addition, the Healthcare NKEA intends to
develop and pursue exports in generic drugs and reinvigorating our health travel
segment with an investment of RM 23.2 billion within 10 years.
66
to achieve a high-income economy, the continued development of the
communications content and infrastructure sector is therefore fundamental. It
would be critical to ensure smart deployment of next generation infrastructure
throughout the country and capitalize on opportunity to develop
Telecommunications as an enabler to other sectors. Capital expenditure is
estimated to amount to RM 51.5 billion over the 10 year period.
The Tourism industry, which generated revenue of RM53 billion in 2009, has the
potential to provide more business and employment opportunities as well as
further increase the nation‟s income. For this, the Government will implement the
initiatives such as providing infrastructure facilities to facilitate construction of
hotels and resorts in remote areas, Construct several shaded walkways, Nexus
Karambunai, a renowned resort in Sabah is committed to develop an integrated
eco-nature resort, the first in the world, by leveraging on the natural beauty and
uniqueness of Karambunai. The RM3 billion project will commence next year.
The 10th Malaysian Plan will continue to focus on the provision of infrastructure
to support national growth, while ensuring that it benefits all segments, as well as
continue its efforts to encourage the private sector to invest in physical
infrastructure and provide services such as skills training. The implementation of
the high-speed broadband project will cover major towns, priority economic
growth areas and industrial areas. This will be complemented with the roll out of
the Broadband for General Population which will provide coverage for sub-urban
and rural areas. For the rural population, last mile broadband services
will be provided through wireless infrastructure, offering a variety of
affordable packages.
The private sector will also have the opportunity to participate in the development
of several projects led by government-linked companies (GLCs). These include
projects such as the Kuala Lumpur Strategic Development by 1Malaysia
Development Berhad (1MDB) covering the Sungai Besi Airport area, the KL
International Financial District in Kuala Lumpur, construction of the liquefied
natural gas regasification plant by PETRONAS in Melaka at an estimated cost of
3 billion ringgit as well as two aluminium smelters in SCORE Sarawak with an
estimated cost of 18 billion ringgit.
To help the private sector finance these projects, a Facilitation Fund of 20 billion
ringgit will be provided under the 10MP. This fund aims to help bridge the private
sector viability gap with respect to projects that have a strategic impact and those
with huge economic spill over. The fund is expected to attract private sector
investments worth at least 200 billion ringgit during the Plan period. Projects that
are being considered for financing under this fund include Land Reclamation in
Westport in Port Klang, Malaysia Truly Asia Centre in Kuala Lumpur and Senai
High Technology Park in Iskandar Malaysia, Johor.
The Electrical and Electronics (E&E) industry remained the largest contributor to
exports with 41% or RM228 billion in 2009. However, the E&E industry is still
focused on assembling activities. A sum of RM857 million is allocated for local
companies to invest in high value-added activities, particularly in Penang and the
Kulim High-Tech Park in Kedah.
68
as well as use high quality paddy seeds to enhance productivity, Foster
partnership between small-scale fruit and vegetable farmers with anchor
companies, Build an International Centre for Crops of the Future.
The NKEAs will have dedicated focus from the Prime Minister and will have fast-
track mechanisms to resolve disputes or bottlenecks. The Malaysian
Government is committed to the ongoing support of growth in the non-NKEA
sectors. However, it will focus its efforts on the NKEAs because of the
significance of the GNI contribution that these parts of the economy can drive.
Based on the focus areas / NKEAs of the Malaysian Economy for the coming
years, as discussed above and the flourishing competencies & strengths of the
Indian entrepreneurs in the fields of Infrastructure, Energy, Information
Technology, Pharmaceuticals sectors, there seem to be a genuine scope for the
Indian business groups to help Malaysia in achieving their top priorities in these
sectors.
70
6.1.2 Singapore
As the world suffered its worst and most wide-spread recession in over 60 years,
the Resilience Package kept confidence up and helped Singapore avoid the
worst of the global crisis. Taking both the recession and the recovery together,
the Singapore economy contracted less than most other highly globalised
economies. Singapore could not avoid this global contraction as a small
economy which lives by exporting to Asia and the world as from the peak to the
trough of this cycle, its GDP contracted by 10%. Resident unemployment
reached 5% in the third quarter of 2009, but has since fallen back to 3%. Barring
further major problems in global finance, Singapore‟s growth for 2010 is expected
to be around 4.5% to 6.5%.
The Singapore Government has accepted the key thrusts of the Economic
Strategies Committee (ESC) report. Budget 2010 sets out the main actions the
Government will take to help Singapore succeed in these new directions.
Singapore‟s key goal is to grow productivity by 2% to 3% per year over the next
decade (more than double the 1% achieved over the last decade), which will also
allow maintaining a healthy rate of economic growth of 3% to 5% a year, even
with slower growth of work force.
Budget 2010 provides a major investment for the future. First, the Singapore
Government will launch a sustained initiative to help enterprises and workers
raise productivity – by deepening skills and expertise, and innovating to create
more value. Second, it will further support the growth of more globally
competitive Singapore companies, by helping companies which are seeking to
commercialise R&D, and those which are expanding abroad. Third, it will help
include everyone in growth. It will continue to build a society where everyone has
the best opportunity to reach further and stretch their potential, and every family
can progress and enjoy a better quality of life.
The Singapore Government will complement this broad-based tax reduction for
all companies which invest in innovation, with funding for initiatives customised to
specific industries, clusters, and enterprises, for which a new National
Productivity Fund of $2 billion will be created. The National Productivity Fund will
provide grants to help enterprises in all sectors, with special emphasis initially on
sectors where there is potential for large gains in productivity. The Fund can also
be used to develop centres of expertise for a range of industries, which will grow
a knowledge base for enterprises to tap on to develop productivity solutions.
Construction is a key sector which needs to improve. Its productivity levels are
estimated to be about half of that in Australia and one-third of that in Japan.
Around $250 million out of the first $1 billion of funding for the National
Productivity Fund will be dedicated to raising productivity in the construction
sector. This will include initiatives to help our local contractors develop
capabilities in areas such as complex civil engineering and building projects, to
invest in new technologies, and upgrade to a higher quality workforce.
The Government wants to encourage more angel investments, and it will be done
by incentivising private individuals with appropriate investment and business
expertise to provide financing to start-ups. Angel investing is at the higher end of
the risk spectrum, with less assurance of returns. Successful angel investors
nurture start-ups not just by contributing funds, but also by providing mentorship,
and access to business networks and markets. Therefore the Government will
introduce a new incentive for angel investors. Under this incentive, an eligible
angel investor who commits a minimum of $100,000 of equity investment in a
qualifying start-up in a given year can claim 50% tax deduction on his investment
at the end of a two-year holding period. This deduction is subject to a cap of
$500,000 of investments in each Year of Assessment.
It will further continue to update tax incentives for the financial services sector to
ensure that they remain relevant, and encourage institutions to build up high
value activities and expand their professional teams in Singapore and will also
introduce a tax incentive to grow shipbroking and extend that for maritime
financing activities. The Maintenance, Repair and Overhaul (MRO) business is a
growing opportunity for Singapore. To further enhance the competitiveness, the
72
Investment Allowance scheme which grants an additional 50% allowance for
48
aircraft rotables for another five years, will be renewed.
In line with the three broad priorities set out in the ESC Report, the ESC
recommends seven strategies over the next 10 years to sustain economic growth
and enable broad-based improvement in Singaporeans‟ living standards, relevant
of which are discussed below -
48
Budget Speech 2010 Towards An Advanced Economy
Desired Outcomes
49
Report of the Economic Strategies Committee
74
To create 80,000 additional jobs
To achieve 90 per cent broadband usage in all homes
To achieve 100 per cent computer ownership in homes with
school-going children
6.1.3 Indonesia
As the first decade of the 21st century draws to a close, Indonesia has emerged
as a middle-income economy, economically strong, politically stable, and with
76
increasing confidence and global standing. This was unexpected a decade ago,
when Indonesia experienced a severe economic crisis that resulted in the
economic dislocation of millions of households, a sharp rise in poverty, a 13
percent decline in GDP, and near bankruptcy of the financial sector.
On the production side, after experiencing low growth rates in the period 2004-
2009, growth of the non-oil and gas processing industry will be increased to
reach an average growth rate of 6.1-6.7%. The measures to stimulate growth of
the industrial sector will be through policies to expand the total number of the
industrial business units, to strengthen the industrial sector, and by increasing
industrial activities productivity. Meanwhile, agriculture, fisheries, and forestry
sectors are estimated to grow at an average rate of 3.5-3.6% per year. Also, the
Electricity, Gas and Water (13.8-13.9%), Transportation and
Telecommunications (14.7-15.4%) and the Construction (8.4-9.2%) sectors are
projected to grow at high rates during the next 5 years.
The strategy to implement the Vision and Mission is specified in five year stages
into the Medium Term Development Plans (RPJMs). Each of the stages has a
scale of priorities and development strategy that constitute a continuity of scale of
priorities and development strategies of preceding periods. The basic scale of
priorities and strategies of the respective RPJMNs are summarized in the
following:
78
that is more solid on the basis of competitive advantage in various regions,
and is supported by quality and competitive human resources.
In accordance with the main problems faced by the Indonesian nation, the
government is determined to continue the process of accelerating economic
development in the next five years. Within 1-2 years, the global economy should
be recovered. The highest economic growth rate that Indonesia ever attained
before the crisis was around 7%, this can be reached again before the end of the
period 2010-2014.
Following are Development priorities of Indonesia during next 5 years (till 2014)–
g) Reduced disparity in participation and quality of education services among regions, gender,
social‐economic groups, and between education units that are implemented by the government
and private institutions
4 Food
a) Production of paddy Growth rate of 3.22% per year
b) Production of maize Growth rate of 10.02% per year
c) Production of soybean Growth rate of 20.05% per year
d) Production of sugar Growth rate of 12.55% per year
e) Production of cow meat Growth rate of 7.3% per year
5 Energy
a) Increased capacity of electricity generating stations 3,000 MW per year
b) Increased electrification ratio Reaching 80% in 2014
Reaching 1.01 million barrel per
c) Increased production of crude oil
day in 2014
d) Increased utilization of geothermal power stations Reaching 5,000 MW in 2014
6 Infrastructure
80
opportunities in Indonesia, particularly those industries and sectors, being given
special importance by the Indonesian Government itself.
6.1.4 Thailand
82
Electricity, gas, nuclear energy and fuels, steam, hot water and other sources
of energy (1)
Instruments and appliances, Industrial process control equipment‟s, Optical
instruments, Horological instruments. (2)
Machinery, equipment, appliances, apparatus and associated products (10)
Metals and associated products (3)
Office equipments Computers and Supplies (10)
Petroleum products and fuels (1)
Petroleum(Crude), Natural Gas, Oil and associated products (1)
Pharmaceuticals and Medical Supplies (3)
Printed matter and articles for printing (2)
Telecommunication, Radio, Television and communication equipments and
related apparatus (7)
Textiles and textile articles (1)
Transport equipment (3)
6.1.5 Philippines
84
Consultancy Services: Architectural, Construction, Legal, Accounting and
Business (455)
Education services (70)
Health and social work services (40)
Hire services of machinery and equipment and of personal and household
goods (6)
Hotel and restaurant services (12)
Insurance and pension funding services, except compulsory social security
services and insurance-related services (6)
Land transport services and transport via pipeline services (3)
Manpower Supply Services (9)
Membership organization services (9)
Miscellaneous services (25)
Postal and Telecommunications services (6)
Printing, publishing and related services (34)
Real estate services (11)
Recreational, cultural and sporting services (28)
Repair, maintenance and installation services (54)
Research and development services (1)
Services auxiliary to financial intermediation (20)
Sewage- and refuse-disposal services, sanitation and environmental
services (78)
Software Services (93)
Supporting and auxiliary transport services; travel agencies services (16)
6.1.6 Vietnam
86
7. India-ASEAN FTA and
Vision for India’s Growth
Shared and sustained economic growth is the most powerful driver of poverty
reduction and is critical to achieving development outcomes, including the
Millennium Development Goals (MDGs). There has been a continuous and
sustained reduction in the number of poor people in the world (despite the
definitional confusion on “poverty”) and the fact that continued growth has been
instrumental in achieving this outcome is hardly contested by any economist or
policy maker.
Evidence supports the idea nations more open to trade tend to be richer than
those that are less open. Columbia University economist Arvind Panagariya
wrote in a paper 'Miracles and Debacles: Do Free-Trade Skeptics Have a
Case?': “On the poverty front, there is overwhelming evidence that trade
openness is a more trustworthy friend of the poor than protectionism.
Few countries have grown rapidly without a simultaneous rapid expansion of
trade. In turn, rapid growth has almost always led to reduction in poverty.”
India‟s growth story in the last decade has been nothing short of remarkable. Yet,
India has been lagging in terms of social sector priorities such as health,
education, basic infrastructural constraints like safe drinking water and hygiene,
and a vast majority of its population living under extreme poverty. It is in
this context that India laid out its Millennium Development Goals which are
as follows:
Whether the trade liberalization and other multilateral agreements being pursued
by the nation with its trading partners across the globe will help in achieving the
stated MDG‟s is an open question at this stage. A lot will depend on the
seriousness and will of the policy makers in the years ahead to foster an enabling
government infrastructure that works on well defined priorities and a vision that
will help India achieve growth with development and progress. The track record
of the country in balancing these objectives have been dismal so far; but perhaps
the future will evolve in a more optimistic way riding on the success of the
ongoing trade and other policies that are pursued by the government.
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8. Appendix
Appendix 1
Introduction
National Treatment
The Agreement stipulates that each Party shall accord national treatment to the
goods of the other Parties in accordance with GATT principles, i.e., domestic
taxes and regulations cannot be biased against imports from other Parties.
Normal Track: In general, for goods classified under this category, complete
elimination of tariffs (i.e., tariffs of 0 percent) is scheduled to be achieved
among all Parties by December 31, 2019, at the latest. Once achieved, the 0
percent tariff rate must be maintained by all Parties.
Sensitive Track: For goods under this track, tariffs must be reduced by all
Parties to 5 percent by December 31, 2019, at the latest. This 5 percent tariff
can be maintained for only 50 product lines under this category and the
remaining tariff lines must be reduced to 4.5 percent.
Special Products: These products refer to India‟s crude and refined palm oil,
coffee, black tea and pepper, and, tariffs on these products are slated to be
reduced from current base rates by approximately 50 percent, on average, by
December 31, 2019.
Each Party can unilaterally accelerate its tariff reduction ahead of the stipulated
schedules if it so desires.
Rules of Origin
The Agreement lays out detailed rules to be applied for determining the origin of
products eligible for preferential tariff treatment under the FTA. In general, in
addition to goods wholly obtained or produced in the exporting Party‟s territory,
products with at least 35 percent of AIFTA content are eligible for preferential
tariff treatment. The Agreement provides very specific formulas for determining
the AIFTA content including guidance on the calculation of ex-factory price (along
with the specific costs to be taken into consideration). The Agreement also
contains a product-specific list of textiles and textile products that are eligible for
preferential tariff treatment.
Non-Tariff Measures
Safeguard Measures
The Agreement provides for certain conditions under which a Party can initiate a
“safeguard measure” and suspend its tariff reduction obligations in accordance
with GATT and WTO standards. A safeguard measure may be taken by an
importing Party if it can demonstrate that its tariff reduction on a good has
resulted in such increased imports of that good so as to cause (or threaten to
cause) serious injury to its domestic import-competing industry. In such cases,
the following provisions would apply:
the importing Party has the right to suspend further tariff reduction and
increase the tariff to its pre-FTA level;
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the safeguard measure may be maintained for a period of up to 3 years and
may be extended for a period up to 1 year if continuing serious domestic injury
can be demonstrated;
the safeguard measure will not be applied on exports of a Party whose share
of imports of the good concerned is less than 3 percent of the total imports
from the other Parties;
the exporting Parties affected by the safeguard measure have the right to
seek compensation from the importing Party as per the standards specified by
GATT and WTO principles. If no agreement on compensation is reached
within 90 days, the affected exporting Parties have the right to suspend tariff
concessions that are substantially equivalent on goods originating from the
importing Party‟s territory; and
upon termination of a safeguard measure, the tariff rate for the good
shall be the rate that would have prevailed as per the original tariff
reduction schedule.
The Agreement allows a Party to impose import quotas consistent with GATT
and WTO provisions in order to safeguard its balance of payments.
Customs Procedures
Dispute Settlement
The Agreement provides for resolution of any dispute among Parties through
procedures and mechanisms as set out in the ASEAN-India Dispute Settlement
Mechanism Agreement (“DSM”). In general, the DSM envisages establishment
of a three-member arbitral panel to settle disputes if mutual consultations fail.
The arbitral panel consists of one arbitrator each appointed by the Complaining
Party (“CP”) and the Party Complained Against (“PCA”), respectively, and a third
arbitrator jointly appointed to serve as the chair of the panel. The arbitral panel
must, within 90 days of its establishment, present its “interim report” containing
its findings and determinations on whether the PCA has failed to meet its AIFTA
obligations. The parties to the dispute may submit written comments on the
interim report after which a “final report” is prepared. The final report of the
arbitral panel is final and binding on the Parties to the dispute.
Technical Appendix
Export growth is the percentage change in the value of exports relative to the
previous year.
Export intensity index is the ratio of export share of a country (or region) to the
share of world exports going to a partner. It is calculated as:
Xij/Xiw
XIIij=
Xwj/Xww
where xij is the dollar value of exports of country(or region) i to country(or region)
j, Xiw is the dollar value of the exports of country(or region) i to the world, xwj is
the dollar value of world exports to country(or region) j, and Xww is the dollar
value of world exports. An index of more than one indicates that trade flow
between countries/regions is larger than expected given their importance in
world trade.
Import growth is the percentage change in the value of imports relative to the
previous year.
Trade growth is the percentage change in the value of total trade relative to the
previous year.
Trade intensity index is the ratio of trade share of a country/region to the share
of world trade with a partner. It is calculated as:
tij/Tiw
TIIij=
twj/Tww
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where tij is the dollar value of total trade of country/region i with country/region j,
Tiw is the dollar value of the total trade of country/region i with the world, twj is the
dollar value of world trade with country/region j, and Tww is the dollar value of
world trade. An index of more than one indicates that trade flow between
countries/regions is larger than expected given their importance in world trade.
Appendix 3
Classification of Sectors
Textiles, Apparels & Textile yarn, fabrics, made-up articles, n.e.s., and related Products
Accessories (SITC 65)
Leather & Leather Textile fibres (other than wool tops and other combed wool) and
Accessories
their wastes (not manufactured into yarn or fabric) (SITC 26)
Handicrafts & Carpets
Articles of apparel and clothing accessories (SITC 84)
Gems & Jewellery
Leather, leather manufactures and dressed furskins (SITC 61)
Works of art, collectors' pieces & antiques
Jewellery & articles of precious material., n.e.s.
Machinery and Power generating machinery and equipment(SITC 71)
Appliances
Specialized machinery (SITC 72)
Metal working machinery (SITC 73)
Other industrial machinery and parts (SITC 74)
Office machines and automatic data processing machines (SITC 75)
Telecommunication and sound recording apparatus (SITC 76)
Electrical machinery, apparatus and appliances, n.e.s. (SITC 77)
Professional and scientific instruments, n.e.s. (SITC 87)
Photo apparatus, optical goods, watches and clocks (SITC 88)
Automotive Sector Road vehicles (SITC 78)
Other transport equipment (SITC 79)
Renewable & Non- Fuels (SITC 3)
Renewable Energy
Power generating machinery and equipment (SITC 71)
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