Challenges of integrating India’s economy with the Asia-Pacific

India is not an official member of the Asia-Pacific Economic Cooperation (APEC) grouping. Yet, for quite a few years now, it has featured prominently in APEC’s economic discussions. This has much to do with the strong links that several APEC economies have developed with India.

These links will deepen once Indiaconcludes talks on the Regional Comprehensive Economic Partnership (RCEP) and other bilateral trade pacts.

With a new, pro-business and trade-friendly Prime Minister in Mr NarendraModi and a fresh national medium-term trade policy on the anvil, the RCEP negotiations and integrating deeper with APEC are expected to be top priorities for India.

REVERSING 50 years OF ISOLATION

For almost five decades after the end of World War II, India had limited economic links with the Asia-Pacific. This was largely due to its pursuit of an inward-looking economic policy of import substitution for developing domestic self-reliance. The policy hardly encouraged exports and integration with the world economy.

As a result, India missed the chance to develop economic partnerships with the Asia-Pacific when the region witnessed sustained periods of export-led high economic growth starting in the 1960s.

The missed opportunity resulted in Indian industries and producers having limited presence in regional supply chains and production networks. India has to work on addressing this gap.

Since the beginning of the current century, India’s economic links with the Asia-Pacific have risen sharply. Coupled with robust economic growth averaging at about 8.5 per cent annually for a large part of the past decade, outward-oriented economic policies have increased India’s trade and commercial exchanges with the Asia-Pacific.

Several APEC members, including China, the United States, Singapore, Indonesia, Hong Kong, Japan, South Korea, Malaysia and Australia, are now among India’s top trade partners. Greater trade interface with the ASEAN, made possible through various free trade agreements (FTAs), has been a key driver of India’s increasing economic links with the Asia-Pacific.

GREATER INTEGRATION THROUGH TRADE DEALS

ASEAN and the six countries (Australia, China, India, Japan, South Koreaand New Zealand) with which it has bilateral FTAs are now negotiating an exhaustive FTA — the RCEP.

Except for Cambodia, Laos, Myanmar and India, all the other 12 negotiating partners in the RCEP are APEC members.

The RCEP is expected to plant India firmly in the trade and economic architecture of the Asia-Pacific. Several members of the RCEP — Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam — are also negotiating the Trans Pacific Partnership (TPP) with Canada, Chile, Mexico, Peru and the US.

There is a strong possibility of more RCEP members, such as South Korea, Thailand and China, joining the TPP in the foreseeable future.

Indeed, the RCEP can be a stepping stone for India to join the TPP in future, with this embedding the nation even more firmly in the trade architecture of the Asia-Pacific.

While India would look forward to greater integration with supply chains and business networks in the Asia-Pacific, regional economies would also be keenly eyeing business opportunities in India — one of the largest emerging markets with an economic size of almost US$2 trillion (S$2.5 trillion).

Quick completion of trade agreements being negotiated between India and APEC economies holds the key to greater economic integration of India with the region.

However, there are some challenges in this regard.

UNDERSTANDING INDIA’S DEFENSIVE COMPULSIONS

Over the years, India has acquired the reputation of being a “defensive” trade negotiator, due to its reluctance to grant greater access to foreign producers in several segments of its economy by maintaining high import tariffs and barriers on foreign investment.

This reluctance has led to many of India’s FTAs being limited in coverage of issues and shallow in the depth of market access they offer. The country needs to revisit these issues for more comprehensive coverage of the FTAs it is negotiating.

India’s unwillingness to grant greater market access has often generated disappointment and frustration among its negotiating partners. It is important for APEC members to realise the indisposition of Indian negotiators is the result of strong pressures exerted by influential business lobbies seeking protection.

Given the history of several decades of inward-looking protective policies, it is not easy for domestic industries and businesses to reconcile themselves to open economic frameworks allowing liberal imports and foreign investments.

The compulsion, understandably, is particularly difficult to comprehend for APEC members who have, for decades, been used to open economic regimes allowing unhindered flows of goods and services.

The overloading of the “defensive” agenda in trade negotiations has prevented India from focusing on new-generation trade issues. Modern trade negotiations are more preoccupied with services, investment, quality standards, intellectual property, rules of origin, competition policy and labour and environment issues, as opposed to tariffs.

The emphasis in negotiations has shifted to alignment of domestic standards and regulations between negotiating partners.

India has relatively less negotiating experience in this regard. This limited experience vis-a-vis other APEC members, particularly industrially mature nations with modern economic regulations such as Australia, Japan and Singapore (and China in some respects), may lead to it being indecisive on specific issues at the RCEP and other bilateral talks.

The challenge for India is to make its trade negotiations broad-based and constructive, with adequate clarity and decisive positions on new-generation trade issues.

This is necessary for it to avoid being marginalised in the trade rule-making process in a region fast adopting 21st-century trade governance.

However, it is also important for APEC members to understand India’s compulsions. A patient approach can bring APEC members great benefits by connecting deeper with an Indian economy that will open only wider and deeper in days to come.

ABOUT THE AUTHOR:

Amitendu Palit is a senior research fellow and head (Partnerships and Programme) at the Institute of South Asian Studies at the National University of Singapore. The views expressed in this commentary are his own.