India ASEAN Free Trade Agreement Implications for IndiaвЂ™s Economy A Deloitte-FICCI White Paper March 2011 www.deloitte.com/in Table of Contents 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 FTAвЂџs ............................................................................................. 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 FTAвЂџs..................................................... 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 FTAвЂџs 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 вЂ“ 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 IndiaвЂџs Growth .......................................... 87 8. Appendix ....................................................................................................... 89 Appendix 1 .................................................................................................... 89 Appendix 2 .................................................................................................... 92 Appendix 3 .................................................................................................... 93 Contacts ............................................................................................................... 94 Abbreviations 1MDB 1Malaysia Development Berhad ACE ASEAN Centre for Energy ADB Asian Development Bank AIFTA ASEAN India Free Trade Area APEC Asia Pacific Economic Co-operation ARIC Asia Regional Integration Centre ASEAN Association of South-East Asian Nations ASEAN+3 The 10 ASEAN countries plus People's Republic of China, Republic of Korea and State of Japan ASEAN+6 The 10 ASEAN countries along with India, Australia , NewZealand, People's Republic of China, Republic of Korea and State of Japan ASEAN 5 The five countries of Singapore , Malaysia , Indonesia, Brunei Darussalam &Thailand ASSOCHAM Associated Chambers of Commerce of India BIMSTEC Bengal Initiative for Multisectoral Technical and Economic Cooperation BO Business Opportunities CCI Communications Content & Infrastructure, Malaysia CEPC Carpet Export Promotion Council, India CFTA Canada-U.S. Free Trade Agreement CITI Confederation of Indian Textile Industries, India CMLV Acronym for Cambodia, Myanmar, Lao's People Democratic Republic CP Complaining Party CPI Consumer Price Index DIPP Department of Industrial Policy and Promotion DSM (ASEAN-India) Dispute Settlement Mechanism Agreement 1 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper E&E Electrical and Electronics EPP Entry Point Projects ESC Economic Strategies Committee ,Singapore ETP Economic Transformation Programme EU European Union FDI Foreign Direct Investment FICCI Federation of Indian Chambers of Commerce and Industry FTAA Free Trade Area of the Americas FTA Free Trade Agreement GATT General Agreement on Tariff and Trade GDP Gross Domestic Product GERD Gross Expenditure on R&D GLC Government-linked company GNI Gross National Income ICT Information and communication technology IP Intellectual Property IT Information Technology KG D 6 Krishna Godavari-D6 Gas project, India KLIA Expressway Kuala Lumpur International Airport Expressway KLIFD Kuala Lumpur International Financial District LAO PDR Lao PeopleвЂџs Democratic Republic LNG Liquefied Natural Gas MDG Millennium Goal MFN Most Favored Nation MNC Multi- national Corporation MRO Maintenance, Repair and Overhaul MRT Mass Rapid Transit MTDC Malaysian Technology Development Corporation NAFTA North American Free Trade Agreement NKEA National Key Economic Areas 2 OECD Organization for Economic Cooperation and Development PCA Party Complained Against PRC- PeopleвЂџs Republic of China PTA Preferential Trade Agreement R&D Research and Development R&D&C Research, Development and Commercialization RCA Revealed Comparative Advantage RIL Reliance Industries Limited RFP Request for Proposal RM Ringgit Malaysia ROO Rules of Origin SAARC South Asian Association for Regional Cooperation SCORE Sarawak Corridor of Renewable Energy, Malaysia SITC Standard International Trade Classification SME Small and Medium Enterprise UAE United Arab Emirates UK United Kingdom US/ USA United States of America USTR U.S. Trade Representative WTO World Trade Organization 3 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Federation of Indian Chambers of Commerce and Industry (FICCI) Established in 1927, FICCI is the largest and oldest apex business organisation in India. Its history is closely interwoven with India's struggle for independence and its subsequent emergence as one of the most rapidly growing economies globally. FICCI plays a leading role in policy debates that are at the forefront of social, economic and political change. Through its 400 professionals, FICCI is active in 44 sectors of the economy. FICCI's stand on policy issues is sought out by think tanks, governments and academia. Its publications are widely read for their in-depth research and policy prescriptions. FICCI has joint business councils with 75 countries around the world. A non-government, not-for-profit organisation, FICCI is the voice of India's business and industry. FICCI has direct membership from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 2,50,000 companies from regional chambers of commerce. FICCI works closely with the government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sector specific consensus building and networking. Partnerships with countries across the world carry forward our initiatives in inclusive development, which encompass health, education, livelihood, governance, skill development, etc. FICCI serves as the first port of call for Indian industry and the international business community. 4 About Deloitte Deloitte Touche Tohmatsu Limited is a UK private company whose member firms around the world provide integrated professional services in Audit, Tax, Enterprise Risk Services, Consulting and Financial Advisory. We provide services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, we bring worldclass capabilities and deep local expertise to help clients succeed wherever they operate. Our more than 170,000 professionals are committed to becoming the standard of excellence. In India, we are spread across 13 locations and our 15,000 professionals take pride in their ability to deliver to clients the right combination of local insight and international expertise. Our professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. We enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Our professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. 5 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 1. Executive Summary 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. The theoretical underpinnings leading to an advocacy for free trade agreements is unequivocal as free trade is expected to increase production, improve specialization and lead to other welfare improvements in the long run for consumers and producers alike. However the practical experience and lessons from the FTAвЂџs that have been in place in other regions of the world does not provide the necessary backing to the conclusions that emerge from the theory of free trade. What is therefore the likely impact of the India-ASEAN FTA on the Indian economy? What industries will benefit from the implementation of the FTA and what industries will be hurt? Is this likely to create a significant impact on the wages, employment and trading patterns in India in the years to come? What opportunities and threats should Indian businesses be aware of? These are some of the issues that we address in this white paper. 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 IndiaвЂџs 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 IndiaвЂџs 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 indepth 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 IndiaвЂџs import profile is more compatible in contrast with IndiaвЂџs 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. Our industry specific analysis focuses on determining the relative comparative advantage enjoyed by IndiaвЂџs industry vis-a-vis that of the ASEAN trading partners. The basis for this analysis stems from the fundamentals of trade theory that concludes that free trade will result in specialization in certain products/industries in which a country enjoys a comparative advantage and will end up producing and exporting more products from these industries. Based on our analysis, we find that the following Indian industries enjoy a greater competitive advantage relative to their counterparts in the ASEAN countries: п‚· Chemicals п‚· Medical and pharmaceutical п‚· Textiles, apparels and accessories п‚· Handicrafts & carpets On the other hand, the following industries in ASEAN enjoy a larger competitive advantage than the counterparts in India: п‚· Machinery and appliances п‚· Electrical equipment 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 7 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper interests in these countries. These opportunities will result in enhancing the growth of key businesses in these sectors with the benefits of income and employment generation in India that will add to the India growth momentum. We duly emphasize the importance of an enabling policy environment that can enhance or pull down the chances of the FTA becoming a catalyst in IndiaвЂџs growth story. No free trade agreement can result in the intended outcome in fostering trade, growth and employment creation in a country if the FTA is juxtaposed against a myriad set of conflicting subsidies and taxes in the domestic front that can destroy the very competitiveness that the FTA can usher in. This is critical to the success of the India ASEAN FTA and cannot be emphasized enough. 8 2. Introduction 2.1 Background and Scope 1 The India ASEAN Free Trade Agreement (FTA) was signed in Bangkok on August 13, 2009, and came into effect from January 1, 2010 amidst mounting scepticism from the business community in India regarding the asymmetric impact of this agreement on certain sectors of the Indian economy. The FTA, drafted after almost six years of tough negotiations, is expected to be implemented in phases with Malaysia, Thailand and Singapore implementing the agreement from January 1, 2010 in the first phase. 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 ASEANвЂџs 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 FTAвЂџs 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 вЂ“ 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. 9 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper usher in. An important analysis presented in this paper is the possible impact of the FTA on some key industries using the relative production advantages or disadvantages that Indian industry reflects in the region. 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 вЂњfree marketsвЂќ 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. Before moving on to an analysis of the impact of the FTA on India, we summarize the impact of other existing FTAвЂџs on the participating nations. The evidence on the benefits of such trade pacts in other regions is mixed and the success, if any, can best be described as limited. However, trade relations and the impact of trade liberalization is a dynamic phenomenon and we recognize the limited tenure of some of these agreements to be able to draw meaningful conclusions; hence, it is possible that a longer term analysis on the impact of other FTAвЂџs is required before one draws a conclusion about their success. We then provide a snapshot of the characteristics of India-ASEAN trade. This allows us to delve into a before and after comparison of the impact of the FTA on the Indian economy. We focus on some of the key member countries that are a party to the FTA and draw inferences on the impact of the agreement on the Indian economy based on the economic policies and priorities that have been announced by the respective countries. As the current India-ASEAN FTA pertains to goods only, we restrict our analysis to the impact on those sectors that are directly impacted by the FTA. However, inter-industry linkages and multiplier effects in the economy are important determinants that will ensure that the impact from the FTA will flow through to the other sectors as well. We make some observations on the impact of the FTA on the services sector in this context. 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 IndiaвЂџs 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. 11 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 3. Decoding FTAвЂ™s 3.1 Economics of Free Trade 3.1.1 Benefits of Free Trade 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 вЂ“ human, industrial, natural, financial вЂ“ 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 вЂњcomparative advantageвЂќ 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 вЂ“ policies that allow the unrestricted flow of goods and services вЂ“ 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 (вЂњWTOвЂќ) вЂ“ the international organization whose main function is to ensure that trade flows as smoothly, predictably and freely as possible. 3.1.2 Historical Background The desirability of free trade, originally put forth by Adam Smith in вЂњThe Wealth of NationsвЂќ 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. RicardoвЂџs seminal work has spawned a rich literature in international trade theory 12 showing that even under more general conditions, RicardoвЂџs conclusion that free trade is mutually beneficial continues to hold good. Of particular interest is the Heckscher-Ohlin theory that introduced a second factor of production, capital, and showed that a country will export the commodity that intensively uses the factor that is relatively more abundant in that country (and will import the good that intensively uses the scarce factor). In other words, as observed by Markusen et al., the Heckscher-Ohlin theory may be used to support certain empirical observations including evidence that labor-abundant developing nations such as India tend to export labor-intensive goods such as clothing, footwear etc. 3.1.3 Impediments to Free Trade Given the overwhelming theoretical basis favouring free trade, it is somewhat surprising to find that free trade is almost never observed in practice. Free trade, in its purest form, refers to the unfettered export and import of goods and services between one country and another with no government intervention on either countryвЂџs side. However, barriers to free trade are an observed phenomenon and manifest themselves as: I. Tariff barriers: A вЂњtaxвЂќ on imports that are invoked by countries mainly to protect the domestic industries from the possible consequences of greater competition. II. Non-tariff barriers: These can be in form of quantitative restrictions on imports/exports (вЂњquotasвЂќ) or existing government regulations governing technical and safety standards for products that can have the effect of restricting imports. Another form of non-tariff barrier to free trade is found in вЂњDomestic Content RequirementsвЂќ that are regulations wherein importers are forced to import goods that contain minimum prescribed amounts of domestically produced components. Such restrictions are commonly imposed on the domestic operations of foreign firms that engage in foreign direct investment in production facilities in the regulating country. It should be noted that there can be a number of other regulatory/administrative measures that can be put in place to indirectly restrict import quantities. 3.1.4 Trade Liberalization and FTAвЂ™s 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 вЂњtrade liberalizationвЂќ 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 (вЂњGATTвЂќ), or an agreement among a smaller set of countries, typically with some geographical proximity. This latter type of agreement is called a вЂњpreferential 13 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper trade agreementвЂќ (вЂњPTAвЂќ) and forms the starting point for our analysis of the ASEAN-India Free Trade Area (вЂњAIFTAвЂќ) under consideration. п‚· Free trade area: A вЂњfree trade areaвЂќ 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 (вЂњNAFTAвЂќ) signed by the United States, Canada and Mexico is an example in this regard. п‚· Customs Union: A higher level of economic integration takes the form of a вЂњcustoms unionвЂќ in which member countries, in addition to eliminating all trade barriers among themselves, also adopt a common tariff against non-member countries. п‚· 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 вЂњcommon marketвЂќ is formed. п‚· Economic Union: Greater levels of economic integration may take place in the case of an вЂњeconomic unionвЂќ, 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. Beneficial Effects of FTAs The beneficial effects of FTAs are several as listed below. п‚· Increase in Incomes/Growth: An FTA expands trade volumes among member countries and tends to increase incomes/growth of the members. Intuitively, starting from a situation of tariff-distorted trade, the elimination of tariffs allows each member to specialize in the production of the goods in which it has a comparative advantage and trade those goods in exchange for imports of other goods from fellow members. п‚· Achievement of Economies of Scale: An FTA, by eliminating tariffs, expands a member countryвЂџs export market thereby allowing it to expand its scale of operations and lower its average cost of production. п‚· Reduction of Monopoly Inefficiencies: If inefficient monopolies exist in the domestic market, then increased competition from foreign products dampen domestic monopoly inefficiencies, if not eliminate them altogether. п‚· Availability of Greater Product Variety: The opening up of free trade increases trade flows and expands the variety of products available to consumers in the home country. Potential Negative Effects of FTAs There can also be potential drawbacks associated with FTAs. п‚· Trade Diversion: Trade diversion refers to the possibility of an FTA member country switching its import supplier from a more efficient (low cost) country to a less efficient member country resulting in an inefficient allocation of resources. 14 п‚· 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 вЂњfair valueвЂќ. 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. п‚· 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. п‚· 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 вЂ“ 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 вЂњmarketвЂќ 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 вЂњfreeвЂќ trade agreement. 3.2 Trade Patterns in Asia AsiaвЂџs rise in the 1960s from a poor underdeveloped agro based economy to a вЂћglobal factoryвЂџ 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 15 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper crisis (1997) and this significantly changed the outlook of outward orientation in the region. 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 вЂћeconomic regionalismвЂџ 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. 3.3 FTAs in Asia 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 transregional (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. Table 3.1: No of FTAs in in various Asian countries (as of 2010) UNDER NEGOTIATION CONCLUDED Country Proposed Framework Agreement Signed/Under Negotiation Under Negotiation Signed In Effect Singapore 4 1 9 3 18 35 India 11 4 7 0 11 33 Korea, Republic of 10 2 8 1 6 27 Pakistan 10 5 3 2 6 26 China, People's Republic of 8 3 3 1 10 25 Thailand 6 4 3 0 11 24 16 TOTAL 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 Zealand 4 1 3 2 7 17 Brunei Darussalam 4 1 1 0 8 14 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 Source: Asian Regional Integration Centre website 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 USSingapore 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 вЂ“ 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 PeopleвЂџs 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: п‚· The deepening of market-driven economic integration - Asian policymakers have realized the potential of FTAs in reducing trade barriers, 17 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper harmonizing rules, standards and regulations and the long term economic benefits that these can bring in and have embarked on a mission to foster greater economic integration in the region through trade pacts. п‚· The success of European and North American economic integration initiatives - The successes of initiatives for economic integration in Europe and the Americas have proved to be a strong motivation for the region to move towards regional economic cooperation and integration. The successful launch of an economic and monetary union by the euro area countries and the expansion of EU to further east as well as the success of NAFTA and the Free Trade Area of the Americas (FTAA) in North Central, and South America have proven beneficial to the participating economies. The fear that the two trading giants, the EU and the US, might become more dominant and influential in rule-setting in the global trading arena and thus marginalizing Asian economies has been a major impetus for the regional leaders to come forward to step up initiatives of regional cooperation and integration. Also, the slow progress in the WTO/Doha round and the APEC process has prompted the regional economies to come together themselves and form trade agreements that are mutually beneficial to their circumstances. п‚· The Asian financial crisis - The financial crisis of 1997-98 that rocked the economies of East Asia has been an eye-opener to the fact that the region needs to strengthen regional economic cooperation in order to sustain economic growth along with stability. Though it adversely affected the east Asian Economies only, the crisis became a lesson for all emerging Asian economies and triggered a need among the east Asian economies to strengthen their regional economic cooperation to ensure sustainable growth and stability in the region. Fear of exclusion has also prompted many nations to join the FTA bandwagon. п‚· Slow progress of the WTO DOHA negotiations - The WTO Doha Development Round commenced on November 2001 as an initiative to promote trade-led growth in developing countries. The negotiations were primarily centered on two key areas: agriculture and non-agricultural market access. After seven years of negotiations, talks were suspended over the growing concerns that there werenвЂџt appropriate safeguard measures to protect poor farmers in the developing nations from the rising food and oil prices. With the dim prospect of a finalized trade agreement, pro-business Asian economies started to initiate bilateral and multilateral trade treaties among themselves to further talks on liberalization of trade in goods and services. 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 countryвЂџs 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 economyвЂџs bilateral trade with its FTA partners in its total trade with the world for 2000 and 2008. Graph 3.1: Share of an economyвЂ™s bilateral trade with its FTA partners Japan India 2008 Philippines Vietnam Indonesia Thailand Korea Cambodia Hong Kong, China Myanmar Malaysia Singapore Lao PDR Brunei Darussalam 2000 China 80 70 60 50 40 30 20 10 0 Source : вЂ�Asian FTAs: Trends and ChallengesвЂ™ by Masahiro Kawai and Ganeshan Wignaraja 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. 3.4 Challenges Posed by FTAs in Asia 2 ADB has pinpointed some challenges confronting FTAs in Asia. They have made their own study and surveys to come to the conclusions that are summarized below. п‚· Low utilization of rates of FTA: A free trade agreement bestows numerous benefits like preferential tariffs, market access, and new business opportunities for partner economies. To automatically assume that such benefits are exploited or enjoyed by the individual industries and firms would be grossly inaccurate. In fact studies have shown that FTA preference 2 This section has been compiled mainly from the working paper by Asian Development bank on FTAs in Asia. 19 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 3 utilization rates (estimated by shares of export value enjoying preferences ) is low in Asia. This implies that although a number of FTAs have been concluded in the region, in reality they are underutilized. The direct implication is that the full benefit of free trade is not being actualized and it is ultimately a waste of scarce resources used in negotiating trade treaties in developing 4 countries . Lack of awareness by the firms in member countries were found to be one of the major reasons behind this low utilization of FTAвЂџs. п‚· Thus an important policy implication arising out of the above problem is to raise awareness about FTAs and their various benefits and clauses to firms and industries at a micro level. Government and Industry bodies could play an important role in making FTAs more transparent to industries - especially small and medium scale industries - which might not have the relevant information or the capacity to decode the scope of FTAs. п‚· Coverage of Agricultural Goods in FTA: Another potential problem with Asian FTAs is the suboptimal level of liberalization in agricultural products. The coverage of the goods in the Asian FTAs differs from agreement to agreement. Agricultural goods have been largely excluded in coverage owing to the pressures from the farm lobbies and social concerns in the rural sectors, where poverty looms large. According to the ADB report, it is important for FTAs in the region to ensure coverage of at least 85% of all agricultural product lines in a given agreement and minimize exclusions to not more than 150 product lines. This can be achieved by adopting a negative list approach to agricultural products with a few sensitive items. A realistic tariff elimination schedule, a transparent regime, and reform of subsidies are issues that need to be further addressed under FTAs. п‚· Rules of Origin (ROO): Rules of origin are used to determine the country of origin of a product for purposes of international trade. They are used to determine which goods will enjoy preferential tariffs to prevent trade deflection among FTA members. For manufactured goods, ROOs comprise three types: (i) a change in tariff classification rule defined at a detailed harmonized system level; (ii) a local (or regional) value content rule, which requires a product to satisfy a minimum local (or regional) value in the country (or region) of an FTA; and (iii) a specific process rule, which requires a specific production process for an item. It has been argued that Asian FTAs have complicated ROOs and this deters the use of FTA preferences and raises transaction costs for firms. Multiple ROOs in overlapping FTAs could pose a severe burden on SMEs, which have less ability to meet such costs. This problem was originally termed a вЂњspaghetti bowlвЂќ of trade deals (Bhagwati 1995), and has now come to be known as the вЂњnoodle bowlвЂќ effect in Asia. Another group of analysts have argued that the Asian FTAs could be actually creating a new order by building the foundation for a stronger regional trading system (Petri 2008). 3 Baldwin 2006; World Bank 2007 4 Bhagwati 2008 20 п‚· 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. п‚· 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. п‚· 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. 21 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 4. Benefits from FTAвЂ™s and the Empirical Evidence The following gains from trade are predicted by economic theory: п‚· Economic growth; п‚· Fall in prices after tariff reductions due to increased economies of scale as well as greater competition between firms; п‚· An increase in the variety of products available to consumers; п‚· Self-selection of firms with only the efficient firms surviving after trade liberalization; п‚· Employment and wage effects associated with greater trade; and п‚· 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 4.1 Economic Growth 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, вЂњNew Evidence On The Gains From TradeвЂќ, Review of World Economics/Weltwirtschaftliches Archive, December 2006; and вЂћTrade as a driver of ProsperityвЂџ вЂ“ 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 FTAвЂџs 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)вЂџs 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) 33вЂ“49. 8 N. Chen, J. Imbs and A. Scott, вЂњCompetition, Globalization and the Decline of InflationвЂќ, CEPR Discussion Paper Series No. 4695, 2004. 9 Steven Zahniser and John Link (editors) вЂњEffects of North American Free Trade Agreement on Agriculture and the Rural EconomyвЂќ (July 2002) 10 Lee Hudson Teslik вЂњNAFTA's Economic ImpactвЂќ Backgrounder, Council on Foreign Relations (July 2009) 23 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper negotiator in foreign trade and a major booster of NAFTA and other free trade accords, the overall value of intra-North American trade has more than tripled since the agreement's inception. The USTR adds that regional business investment in the United States rose 117 percent between 1993 and 2007, as compared to a 45 percent rise in the fourteen years prior. Trade with NAFTA partners now accounts for more than 80 percent of Canadian and Mexican trade, and more than a third of U.S. trade. 4.2 Price Reductions Gains through increase in economies of scale There is inadequate empirical support that trade liberalization resulted in expanded scale of operations for domestic firms/industries (in FTA member countries) resulting in economies of scale and subsequent price reductions. Gains through reduction of barriers and increased competition 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 pricediscrimination 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) вЂњHas the EUвЂџs Single Market Programme fostered competition? Testing for a decrease in markup ratios in EU industries,вЂќ 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. 4.3 Gains from product variety In addition to reduction in prices, trade liberalization generates gains for the customers also through an increase in the variety of goods available through trade. Economists have estimated that in a typical country, new import varieties account for 15 percent of productivity growth. For the developing countries, they estimate the median impact of new imported varieties to be as high as 25 percent of national productivity growth. 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 в‚¬ per year, in addition to the gains due to 15 lower prices . 4.4 The Survival of More Productive Firms 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, вЂњThe Openness- Inflation Puzzle RevisitedвЂќ, Applied Economics Letters, 11,2004, pp.465-468. 14 Broda, C. and D. E. Weinstein (2006) вЂњGlobalization and the Gains from Variety,вЂќ 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) вЂњThe Long and Short of the Canada-U.S. Free Trade Agreement,вЂќ American Economic Review, 94(4), September, 870-895. 25 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper high-productivity Canadian manufacturers expanded into the United States. Third, the trade agreement set off a productivity boom. Formerly sheltered Canadian companies began to compete with, and compare themselves to, more efficient American businesses. In the formerly sheltered industries most affected by the tariff cuts, labor productivity jumped 15 percent, at least half from closing inefficient plants. That corresponds to a compound annual growth rate of 1.9 percent in productivity. To summarize, Trefler finds overwhelming evidence that the Canada-US free trade agreement resulted in the self-selection of Canadian firms, with only the more productive firms surviving. Productivity in Canadian manufacturing overall rose 6 percent. This productivity gain translates directly into higher wages or lower prices, and is a gain from trade for consumers. 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 вЂ“ 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. 4.5 Trade and Employment At a theoretical level, trade openness creates new jobs while protectionism reduces competitiveness of industries and thus destroys jobs. A report by European commission finds a negative correlation between openness in trade and unemployment. There persists a general misconception that trade opening destroys jobs, and only exports create jobs. While this might hold true for certain individual firms the reverse is true at the level of the entire economy. Trade openness facilitates the integration of local companies in global production chains. It makes them more productive and competitive, and creates more employment. 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 Feenstra, R. C. and H. L. Kee (2006) вЂњExport Variety and Country Productivity: Estimating the Monopolistic Competition Model with Endogenous Productivity,вЂќ University of California, Davis and World Bank Policy Research Group. 17 18 Steven Zahniser and John Link (editors) вЂњEffects of North American Free Trade Agreement on Agriculture and the Rural EconomyвЂќ (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 . Trade may also have created a "polarization" of employment in recent years. Employment has been growing both in the high-skilled (professional and managerial) jobs and in the lowest-skilled (personal services) jobs, whereas there was a decline in medium-skilled jobs in manufacturing and routine office 22 jobs . This phenomenon is not unique to EU and also has been observed 23 in US. 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. 4.6 Attracting Foreign Investments: 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. 27 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper John Link (2002)24, such rules generally strengthen the rights of foreign investors to retain profits and returns from their initial investments. They also guarantee equal treatment to foreign and domestic investors alike under the laws of each NAFTA country and prohibit new laws that would change the status of foreign investments, once they are established. It is further stated that econometric studies demonstrate that NAFTA has fostered a positive synergy between trade and FDI in the North American processed food industry. As a result, U.S. exports and U.S. FDI have grown together which is one of NAFTA's success stories. Also, U.S. direct investment in the Mexican food processing industry has more than doubled since NAFTA's implementation, reaching $5.3 billion in 1999. Similarly, under Canada-U.S. Free Trade Agreement (CFTA) and NAFTA, U.S. FDI in the Canadian food processing industry expanded from $1.8 billion in 1989 to $5.0 billion in 1999. 24 Steven Zahniser and John Link (editors) вЂњEffects of North American Free Trade Agreement on Agriculture and the Rural EconomyвЂќ (July 2002) 28 5. Economic Impact of IndiaASEAN 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. The economies of ASEAN and India together comprise a $ 2,809.58 million economy with a total population of approximately 1.8 billion. India is one of the largest economies of the Asian region and the ASEAN countries together have become both prominent and influential in Asia owing to their increased importance in trade and commerce. India already has an effective bilateral FTA with Singapore, negotiation for two FTAs with Japan and Malaysia were recently concluded and another FTA with Thailand is being discussed. 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 ASEANвЂџs 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. 5.1 India ASEAN Trade and Impact of FTA on the Economy In this section, we provide an outline of the current profile of the international trade between India and ASEAN at an aggregate level. We first outline the trends in the bilateral export and import growth rates as well as the import and export shares from IndiaвЂџs perspective. We then present - through the calculation of various indices such as the Trade Intensity index, the Regional Hirschman index, 29 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper and the Complementarity index - India-ASEAN trade relations in the context of 25 IndiaвЂџs trade patterns with other major economies such as US and China . Graph 5.1: Patterns observed for Export Growth and Export Share 40 30 20 10 0 -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 IndiaвЂџs 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, IndiaвЂџs exports to the region recovered to pre-crisis levels. There has also been a gradual increase in the share of ASEAN region in IndiaвЂџs total exports as depicted by a gradual rise in the export share variable. The share of the ASEAN market in IndiaвЂџs 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)вЂџs website. URL: http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration CenterвЂџs (ARIC: an affiliate of the Asian Development Bank) website. URL: http://aric.adb.org/index.php Please refer to Appendix 2 for definition 30 With respect to imports, over the period 1991 to 2008, though the growth of ASEANвЂџs exports to India has been more volatile than the growth of IndiaвЂџs exports to ASEAN, there has been no erosion in the share of imports from ASEAN in IndiaвЂџs total imports. ASEANвЂџs import share out of IndiaвЂџs total imports has increased from 4.82% in 1991 to 8.88% in 2008. Graph 5.2:26 Patterns observed for Import Growth and Import Share 80 60 40 20 0 -20 -40 -60 Import Growth (%) Import Share (%) Linear (Import Growth (%)) On the whole, the share of IndiaвЂџs total trade with ASEAN has shown a steady increase over the period of the analysis. ASEANвЂџs share in IndiaвЂџs total trade has increased to 9.42% in 2009 growing by 80% since 1991. 5.1.1 Export Intensity & Trade Intensity Indices 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)вЂџs website. URL: http://www.unescap.org/tid/aptiad/index_trdi1_fm.aspx and from Asia Regional Integration CenterвЂџs (ARIC: an affiliate of the Asian Development Bank) website. URL: http://aric.adb.org/index.php Please refer to Appendix 2 for definition 31 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper exports of the region under study (the source country) while the denominator is the share of the destination of interest in the exports of the world as a whole. 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 +в€ћ 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. Graph 5.3: Export Intensity Indices 27 2.50 2.00 1.50 1.00 0.50 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0.00 India's Export Intensity Index with ASEAN ASEAN's Export Intensity Index with India Graph 5.3 plots the export intensity indices from both IndiaвЂџs as well as ASEANвЂџs perspective from 1990 to 2008. The plot, вЂћIndiaвЂџs Export Intensity with ASEANвЂџ indicates whether India exports more (as a percentage) to ASEAN than the world does while вЂћASEANвЂџs Export Intensity with IndiaвЂџ 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 вЂћIMF Directions of Trade StatisticsвЂџ. 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, ASEANвЂџs 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. Graph 5.4:28 Trade Intensity Indices 2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 India's Trade Intensity Index with ASEAN ASEAN's Trade Intensity Index with India 5.1.2 Sectorial Hirschman The Sectorial Hirschmann index is a measure of the sectorial concentration of a region/countryвЂџs exports. It tells us the degree to which a region or countryвЂџs exports are dispersed across different economic activities. High concentration levels can be interpreted as an indication of vulnerability to economic changes in a small number of product markets. An increase in the value of the index over time implies that the countryвЂџs exports to another region/country are becoming 28 Data has been considered from the ARIC website where in the source has been given as вЂћIMF Directions of Trade StatisticsвЂџ Please refer to the Appendix 2-technical appendix for a detailed description of the index along with an illustration. 33 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper concentrated in a few product products rather than spreading across a broad range of product profile. Graph 5.5: Sectorial Hirschmann index for IndiaвЂ™s exports29 Sectoral Hirschmann Index 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 0.6 0.5 0.4 0.3 0.2 0.1 0 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 IndiaвЂџs exports to major economies such as China and the USA. As we can see from the plot, the fact that IndiaвЂџs 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 ASEANвЂџs index can be explained by an increase in the concentration of IndiaвЂџs exports to the region towards mineral fuels and mineral 31 oils . IndiaвЂџs exports to the USA have become broader based over the past few years. 29 вЂћWorld (other countries)вЂџ is as per UNESCAPвЂџs 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, вЂњORES, SLAG AND ASHвЂќ in IndiaвЂџs 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. Graph 5.632: Complementarity Index 80 70 60 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Complementarity of ASEAN's exports to India Complementarity of Indian exports to ASEAN Linear (Complementarity of ASEAN's exports to India) Linear (Complementarity of Indian exports to ASEAN) . 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 ASEANвЂџs exports to India, though both of them show an increasing trend. Complementarity of Indian Similarly, the share of the HS Code 27, вЂњMINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXESвЂќ in IndiaвЂџs 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. 35 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper exports stood at 52.95% for 2007, whereas the complementarity of ASEANвЂџs exports to India was 69.1%. Complementarity for ASEANвЂџs exports has increased at a much higher pace (116.04%) compared to that of the complementarity of Indian exports to the ASEAN market (38%). 5.2 Impact of FTA on Indian Industries Based on Revealed Comparative Advantage 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-Г -vis other major exporters of the world using the RCA index. The sectors that have considered for the analysis include the following: Table 5.1: List of Commodities and Services Merchandise Services п‚· Chemicals and Pharmaceuticals п‚· Communications п‚· Electrical Equipments п‚· Financial Services п‚· Textiles, Apparels & Accessories п‚· Insurance Services п‚· Leather & Leather Accessories п‚· Construction п‚· Handicrafts & Carpets п‚· Gems & Jewellery п‚· Machinery and Appliances п‚· Automotive sector п‚· Renewable & Non-Renewable Energy п‚· Power п‚· 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 вЂ“ 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. Table 5.2: India and ASEANвЂ™s export and percentage share of world export (2009) Commodity World's Commodity Export, 2009 ( Billlion $) India's Commodity Export, 2009 (Billlion $) IndiaвЂ™s share of world exports % ASEAN's Commodity Export, 2009 (Billlion $) ASEANвЂ™s share of world exports % Chemical and Pharmaceuticals 1433.31 18.52 1.29 60.17 4.20 Medicinal and pharmaceutical products 425.06 5.92 1.39 6.59 1.55 Handicrafts and Carpets Textiles, Apparels and Accessories Leather and Leather accessories 682.19 37.13 5.44 46.50 6.82 Handicrafts and Carpets 80.77 13.83 17.13 6.73 8.33 Textiles, Apparels and Accessories 580.82 22.62 3.90 38.99 6.71 Automotive Sector 1133.04 10.29 0.91 32.74 3479.91 17.78 Electrical Equipments 982.61 4.10 0.42 144.64 14.72 Energy and 35 resources: Power Renewable and Non-renewable Petroleum and natural gas 2032.03 26.30 1.29 134.78 6.63 Machinery and Appliances 0.51 308.84 2.89 8.87 Appendix 3 gives the details of subsectors considered under each sector 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 37 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 5.2.1 Overview of the Sectors Pharmaceutical Sector 36 IndiaвЂџs 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 countryвЂџs 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. Generic drug production is critical to IndiaвЂџs pharmaceutical sectorвЂџs success. India currently tops in the export of generic medicines with export of drugs worth about US$ 11 billion. About 40% of the domestic pharmaceutical market in India is comprised of 74 bulk drugs and their formulations. Domestic pharmaceutical companies have thrived by using their low labour and research costs to export generic drugs to developed countries. India is also considered to be having the second largest number of US Food and Drug Administration approved manufacturing facilities after the USA. According to data published by Department of Industrial Policy and Promotion (DIPP), the drugs and pharmaceuticals sector has attracted FDI worth US$ 1,825.43 million between April 2000 and September 2010. Sector for Textiles, Apparels and Accessories; Handicrafts and carpets; and Leather and leather Accessories 5.2.2 Textiles, Apparels and Accessories37 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 вЂ“ Cygnus; Annual Report 2009-10 вЂ“ 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$55 billion is domestic sales. ASSOCHAM noted a decline of 1.71% in textile exports during April 2009 March 2010 which fell from US$ 22.13 billion in 2008-09 to US$ 21.75 billion in 2009-10. In addition, garments exports also from fell by 2.64% - from US$ 10.93 billion in the previous fiscal year to US$ 10.64 billion, on account of lower demand from the major markets like the US and the Europe. Indian textile industry is complexly structured with hand-spinning and hand weaving sector on one hand and modern, sophisticated and highly mechanized mill sector in on the other hand, between whom the small-scale power loom sector is sandwiched. The textile industry comprises of the following sub-sectors: п‚· Organized Cotton / Man-Made Fibre Textiles Mill Industry, п‚· Man-made Fibre / Filament Yarn Industry п‚· Wool and Woolen Textiles Industry п‚· Sericulture and Silk Textiles Industry п‚· Handlooms п‚· Jute and Jute Textiles Industry п‚· Textiles Exports The textile industry wasnвЂџt 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. Exports of textile can be broadly classified into: п‚· Fabrics п‚· Apparels п‚· Man-made textiles п‚· Yarn Exports have started to show improvement since November 2009, and the Confederation of Indian Textile Industries (CITI) anticipates a rise in garment 39 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper exports to the US, the European Union and Japan as a result of improvement in their retail markets. Handicrafts and Carpets 38 The Handicrafts and Carpets sector is one of the significant industries and plays a vital in the countryвЂџs 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. The unorganized Handicraft had constraints such as lack of education, low capital, poor exposure to new technologies, absence of market intelligence, and a poor institutional framework. Despite all these short comings, the sector has grown significantly by 3% annually. The export decreased to Rs.10,891.85 crores at the end of the year 2008-09 from Rs.12,434.38 crores in the year 2002-03, accounting for a cumulative decline of 12.40%. The budget outlay for the year 2010-11 was anticipated to be Rs 285 Crore. Types Of carpets п‚· Woven п‚· Needle felt п‚· Knotted pile п‚· 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 вЂ“ Cygnus; Annual Report 2009-10 вЂ“ Ministry of Textiles, Govt. of India; 40 Table 5.3: Export of Handicrafts over the period 2003 - 2009 (Rs in Crores) Item 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 200910(AprilDec.) Carpet and other Floor Covering 2779.79 2583.62 3082.06 3674.86 3524.73 2708.73 1737.47 Other Handicrafts 13555.8 16984.14 16185.59 17288.14 14012.05 8183.12 5536.28 Grand Total (A+B) 16335.27 18567.76 19267.65 20963.00 17536.78 10891.85 7273.75 Source: Ministry of Textiles: Annual Report 2009-10 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. Leather and Leather accessories 39 The Leather industry, with an annual turnover of US$5 million, holds a strong position in the Indian economy. The leather and leather products industry has been one among the oldest manufacturing industries in India. This massive industry provides employment to about 2.5 million people. The leather industry has changed significantly from being just an exporter of raw materials around early 60s and 70s to becoming an exporter of finished leather goods. Government of India has played a major role in this transformation by taking several policy initiatives. As a result of these initiatives the India leather industry is one among the top 7 industries that earns foreign exchange for the country. Though the industry has transformed and developed over time, there is still scope for more growth and investment. Indian leather industry can be an attractive industry for investment because of its growth and its ability to capture major share in the global trading market. Investments can be made in various sub-sector of the industry: п‚· Tanning and finishing of leather products п‚· Manufacturing of leather garments п‚· Manufacturing of leather footwear and footwear parts, п‚· Manufacturing of leather goods, such as harness and saddler 39 Indian Leather Industry, Leather and Allied Product Manufacturing вЂ“ ISI Emerging Markets, Indian Leather Industry: Perspective and Export Potential 41 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Table 5.4: Export targets from 2007-08 to 2010-11 (In Million US$) Product 2006-07 2007-08 2008-09 2009-10 2010-11 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 & Harness 81.85 105.66 127.85 154.70 187.19 Total 2981.79 3892.26 4682.01 5689.17 6980.21 Source: Indian Leather Industry: Perspective and Export Potential 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 leather industry is expected to double its current manufacturing value to US$8 billion and exports to about US$4 billion. By achieving this, the leather industry would be able increase to 4% in world leather trade from its current 3%. 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, governmentвЂџ 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. IndiaвЂџs 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. Machinery and Appliances Sector 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 Automotive Sector 40 In studying the Automotive Sector we have taken into consideration two subsectors namely: Road vehicles and other transport equipment. Between 2004вЂ“05 and 2009вЂ“2010, automobile production in India increased from 9.7 to 14 million units. Exports more than doubled in five years to 1.8 million units in 2009вЂ“2010 from 0.8 million units in 2004вЂ“05.India is emerging as a as a manufacturing and R&D hub, especially for small cars. The sector witnessed the launch of the worldвЂћs first sub-US$ 2,500 PV, Tata Nano(an innovation in the ultra-low cost segment).The passenger vehicles segment during April-September 2010 grew at 32.91 per cent over same period last year. The two wheelers segment of the industry registered a growth of 25.86 per cent during AprilSeptember 2010. Currently India is the WorldвЂћs second-largest two-wheeler market and AsiaвЂћs third-largest passenger vehicle market. Exports from the auto component industry are estimated to be worth US$ 5 billion in 2010-11. Tata Motors, Mahindra & Mahindra, BajajAuto, Ashok Leyland, MarutiSuzuki, TVS Motor Company, Hindustan Motors, Eicher are some of the Key Indian players in the market .India also has a strong presence of international companies like ToyotaMotors, Volkswagen AG, General Motors, Ford Motors, Honda Motors, Daimler AG, Fiat, Hyundai Motors, Renault, PiaggioVehicles. Power Sector : Energy & Resources Industry 41 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 41 IBEF Indian Oil and Gas вЂ“ Prabhudas Lilladher; Natural Gas: A Base Sector Report вЂ“ Anagram; 43 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper The demand supply gap is gradually narrowing due to the commencement of production from KG D 6. There has been continuous rise in crude oil price, which has resulted in natural gas emerging as a cheap alternative source of energy. In the power and fertilizer sector, natural gas has been used as a fuel as well as feedstock. However, despite IndiaвЂџs production capability, the supply for natural gas does not match the demand adequately. The tightness in the supply of natural gas is set to be eased by commencing peak production at RILвЂџs GS-D6 gas field. 5.2.3 Competitiveness analysis 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 sectorвЂџs 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 interestвЂџs trade profile with the world average. The Index can take a value between 0 and +в€ћ. 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. Graphs for RCA Computation 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 вЂ“ 2009 RCA for Chemical and Pharmaceutical Sector 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 ASEAN India China USA EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data Graph 5.8: RCA Comparison of Medical and Pharmaceuticals products sector over the period 1995 - 2009 RCA for Medicinal & Pharmaceutical products 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 ASEAN India China USA EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development 45 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Graph 5.9: RCA Comparison of Textile, Apparels and Accessories; Handicrafts and Carpets; and Leather and Leather Accessories over the period 1995 вЂ“ 2009 RCA for Textiles,Apparels & Accessories ; Handicrafts and Crafts ; Leather & Leather Accessories 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 ASEAN India China USA EU(27) EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data Graph 5.10: RCA Comparison of Textile, Apparels and Accessories over the period 1995 вЂ“ 2009 RCA for Textile, Apparels & Accessories 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 ASEAN India China USA EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data 46 Graph 5.11: RCA Comparison of Handicrafts and Carpets over the period 1995 вЂ“ 2009 RCA for the Handicrafts and Carpets Sector 14 12 10 8 6 4 2 0 ASEAN India China USA EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data Graph 5.12: RCA Comparison of Machinery and Appliances sector over the period 1995 - 2009 RCA for the Machinery and Appliances Sector 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 ASEAN UK India Germany China UAE USA Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data 47 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Graph 5.13: RCA Comparison of Electrical Equipments sector over the period 1995 - 2009 RCA for Electrical Equipment Sector 3.00 2.50 2.00 1.50 1.00 0.50 0.00 ASEAN India China USA EU(27) Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data Graph 5.14: RCA Comparison of The Automotive sector over the period 1995 вЂ“ 2009 RCA for Automotive Sector 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 ASEAN India China USA UK Germany Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development Data 48 Graph 5.15: RCA Comparison of Power Sector over the period 1995 - 2009 RCA for Power Sector 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 ASEAN India China USA EU(27) UAE Source: AuthorвЂ™s Calculations based on United Nations Conference on Trade & Development data Analysis of Comparative Advantage 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. 49 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Next we have taken the sectors of Handicrafts & Carpet and Gems & Jewellery 42 together and calculated RCA index for the sector. It is seen that India is a global leader in this sector. RCA has been increasing in this sector, implying that India has gained comparative advantage in this sector over the time. ASEAN economies have had RCA greater than one over the last seven years (with the exception in 2006) but RCA index for the ASEAN counties has been much lower than India. Unlike India, the index has remained stable and does not exhibit an increasing trend. This means that although ASEAN has some comparative advantage in this sector, it is much lower than that of India. 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 IndiaвЂџs 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. The ASEAN countries have comparative advantage in the machinery and appliances sector. They had a globally higher RCA value till 2005, after which they were overtaken by China. In contrast India has the lowest RCA values among all the economies considered in the study. We also considered the subsector of Electrical Equipments and did computation for RCA for this sector separately. The ASEAN countries exhibit a very high RCA in this sector and thus have high comparative advantage in this sector. They have globally higher RCA compared to all the other economies considered in the study. Their share in the total world exports in Electrical Equipments stands at 14.72%. Economies of Malaysia and Thailand are global leaders in manufacturing of electrical equipments. India on the other hand has very low RCA (less than1) and thus no comparative advantage (or comparative disadvantage) in this sector. 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 IndiaвЂџs 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. IndiaвЂџs export share in this sector is at 1.29% compared to 6.63% of ASEANвЂџs. To conclude the section India stands to gain in sectors of Textiles, Handicrafts, Chemicals and sub sector the medical and pharmaceutical sector from its trade with the ASEAN Economies. In the sector of Machinery and Appliances and subsector Electrical Equipments ASEAN economies stand to gain in comparison to India. 5.3 Impact of FTA on Services Sector Service has been one of the thrust areas of the Indian economy. A key generator of employment, the service sector contributes approximately 58% of IndiaвЂџs 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 IndiaвЂџs 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 51 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper the financial strain that overtook the entire world till recently. Unemployment rates in Indonesia were around 8 per cent last year and poverty rate had reached 14.15 per cent in March 2009. 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 вЂ“ 2009 RCA for the Service Sector 4.50 4.00 3.50 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 India ASEAN USA UK China Germany Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics 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 Graph 5.17: RCA Comparison for the Communication43 service sector over the period 2000 вЂ“ 2009 RCA for Communications Sector 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 India ASEAN USA UK China Germany Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics 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 53 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 5.3.2 Computer and Information Services Graph 5.18: RCA Comparison for the Computer and Information service sector over the period 2000 вЂ“ 2009 RCA for Computer and Information Services 14.00 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 India ASEAN USA USA UK Germany Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics 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 Graph 5.19: RCA Comparison for the Financial service sector over the period 2000 вЂ“ 2009 RCA for Financial Services Sector 3.50 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 India ASEAN USA UK China Germany Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics 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 RCAвЂџs 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. 55 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 5.3.4 Insurance services Graph 5.20: RCA Comparison for the Insurance sector over the period 2000 вЂ“ 2009 RCA for Insurance Services Sector 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 India ASEAN USA UK China Germany Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics 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 Graph 5.21: RCA Comparison for the Construction sector over the period 2000 вЂ“ 2009 RCA for Construction Services Sector 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 India India ASEAN USA UK China China Germany UK Source: AuthorвЂ™s Calculations based on United Nations Statistics Division statistics At present ASEAN countries have a higher RCA in this sector in comparison to India, though both have RCA lesser than one meaning that neither has any revealed comparative advantage in this sector. Germany leads the world in comparative advantage in this sector. 5.4 Impact on Industry вЂ“ Supplementary Evidence 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. IndiaвЂџs trade with ASEAN is mainly concentrated in Singapore, Malaysia and Thailand. Singapore continues to remain the largest market in ASEAN for IndiaвЂџs merchandise exports. 57 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Energy & Resources 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 IndiaвЂџs perspective the bilateral discussions have mostly focused on using the Indo-ASEAN FTA as a base to grow trade with member countries. An overview of some of these exchanges is highlighted below. п‚· In the joint statement on the Framework for India-Malaysia strategic partnership, Cabinet Ministry level exchange has been planned to identify collaborative projects in the new and renewable energy sector. Setting up of a Joint Working Group between the Ministry of Energy, Green Technology & Water of Malaysia and the Ministry of New & Renewable Energy of India has also been announced. Focus has also been given to the possibility of enhancing the scope and level of joint collaboration in the hydrocarbons sector between PETRONAS of Malaysia and ONGC Videsh Limited of India. During April-December 2009-10, IndiaвЂџs exports to Malaysia totalled US$ 2.14 billion, comprising ships, boats and floating structures, mineral oils and fuels, and organic chemicals, according to data released by the Ministry of Commerce and Industry. п‚· ThailandвЂџs Deputy Minister of Commerce has recently stated that in the first 10 months of 2010, there has been a 30% rise in Indo-Thai trade value leading to expectations of $6.5 billion bilateral trade next year. Thailand and India are converging on regional cooperation frameworks such as the AseanSaarc, Bimstec, Asean-India and the Mekong-Ganga agreement to grow 44. relationships also in the energy and resources sector п‚· For this sector, a country of notable importance for India is Indonesia. Indian companies have considerable investments in the mining sector in Indonesia. In recent acquisition deals, a number of Indian outbound companies have acquired Indonesian mines for supply of coal. п‚· The Indonesian Trade Minister, Dr Mari Elka Pangestu in late 2010 commented that there is continuing interest from India to invest in coal mining in Indonesia than there is supply. However, large concessions on mining activities are owned by Indonesian companies. Therefore Indian companies have overcome this by taking a share in some of the Indonesian concessions. Cooperation is also required in other areas such as processing of coal and 45. iron particularly technology to gasify coal for energy needs п‚· Singapore continues to be one of the largest trading partners of India. The growing bilateral economic relationship is reflected in the rapidly rising trade between Singapore and India. Singapore continues to be the single largest 44 Economic Times, 22 Dec 2010 45 Business Line, 19 Dec, 2010 58 investor in India amongst the ASEAN countries and the second largest amongst all countries with foreign direct investment (FDI) inflows into India, totalling US$ 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. п‚· 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 вЂ“ 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; 2.6.2 Promote and develop trade and investment interest in the electricity sector, and pursue an integrated and coordinated development programme to establish compatibility of electricity grids, and work towards liberalisation of power trade among ASEAN Member Countries and India; 2.6.3 Develop and strengthen institutional linkages between ASEAN Centre for Energy (ACE) and India to cooperate on R&D into energy efficiency and renewable energy, and to establish programmes of cooperation; and 2.6.4 Promote sustainable and optimal utilisation of renewable energy, coal and new hydrocarbon projects, and cooperate in energy policy and planning, energy efficiency and conservation, as well as in the establishment of institutional linkages for developing other programmes of cooperation. India is well-endowed with both exhaustible and renewable energy resources. Coal, oil, and natural gas are the three primary commercial energy sources. IndiaвЂџs energy policy, till the end of the 1980s, was mainly based on availability of indigenous resources. Coal was by far the largest source of energy. Trade in commodities is quite prevalent in the region and India is an important part of it. However, as an importer there are tariffs and trade barriers that India face. If tariffs related to imports from the region come down, this will substantially help India benefit in the long run from the India ASEAN FTA. 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 IndiaвЂџs trade in this sector. 59 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper A final thrust area under the India ASEAN FTA with an eye towards the future would be areas such as efficient technology and renewable resources. Focus on non-grid sectors have traditionally been low though there is a huge potential this area has not been addressed. While bilateral agreements (e.g. with Malaysia) take up the issue of collaboration in hydrocarbons and renewable sources, the 46 details are missing in the India-ASEAN FTA . Graph 5.22 вЂ“ ASEAN energy demand in million tons of oil 600 Vietnam 500 Thailand 400 Singapore 300 Philippines 200 Malaysia 100 Indonesia 0 1990 1999 2010 2020 Brunei Source: Asia Pacific Energy Research Centre, Tokyo A regional energy market could be formed through sustained dialogue. Asian countries, especially rapidly-growing economies of the region, need long-term energy supply security. Energy producing countries are concerned about demand security. This is where regional interdependence may best serve the interests of all parties. Regional countries need to strive to establish a structure in which regional producers would charge less from regional consumers on the basis of reciprocity in the region. Asia is one of the fastest-growth markets for oil in the world where half of the total incremental oil demand is forecast to take place during the next few years. Gas is increasingly taking the place of oil as a comparatively cheaper and cleaner source of energy. It is therefore quite logical that the development of partnerships between producers and consumers should go a long way in addressing mutual concerns. The surge in international energy prices leads to higher costs of production and to some extent slows 47 economic growth . Regional energy cooperation is in the interest of entire Asia. South AsiaвЂџs growing energy demands, its skilled and hardworking manpower and together with regional strengths in industrial and managerial know-how and science and technology make ideal space for long-term economic complementarities and regional partnership. With the economic agenda of the ASEAN countries gaining 46 IEA-MoEN Joint Workshop on вЂћOIL SECURITY AND NATIONAL EMERGENCY PREPAREDNESSвЂџ by Zainal Matassan, ASEAN Council on Petroleum, 2007 47 Energy Resources and Regional Economic Cooperation in SAARC Countries вЂ“ 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. It is important that India becomes a trading partner with ASEAN in relation to such large projects amongst Member countries. There would be significant areas of synergy through which both parties will benefit. With limitless possibilities, the idea of cooperating in supply and availability of energy resources should be taken up on a priority basis under the India ASEAN FTA. Manufacturing The manufacturing sector is where India is expected to be impacted the most under the FTA framework. As indicated earlier, the India ASEAN FTA is expected to eliminate tariffs for about 4000 products (which include electronics, chemicals, machinery and textiles) out of which duties for 3200 products will reduce by December 2013, while duties on the remaining 800 products will be brought down to zero or near zero levels by December 2016. 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 subcountry 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. Another important factor in this arrangement is the China element. It is well known that China is one of the leaders in the global manufacturing sector. China has experienced growth in its manufacturing skills, output pattern and consequently export structure. ChinaвЂџs manufacturing sector accounts for 41 per cent of its GDP. Exports from the manufacturing sector constitute over 93 per cent of its exports. IndiaвЂџs 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 61 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper unskilled labour intensive sectors like toys, footwear, apparel, manufactures in the earlier part of the decade, China has since advanced to office machinery, electrical and electronic equipment and appliances. Today China is the manufacturing hub of the world. India on the other hand has continued to specialize in lower levels of manufacturing and does not have the prowess currently to compete with China in the global or regional market. However, there are sectors where for some commodities India does have a comparative advantage like organic chemicals, rubber and articles thereof and articles of iron or steel. Another question relates to the effect this India ASEAN FTA is going to have on the small and medium scale industries. The Trade in Goods agreement focuses on tariff liberalization on mutually agreed tariff lines from both the sides and is targeted to eliminate tariffs on 80% of the tariff lines accounting for 75% of the trade in a gradual manner starting from 1st January, 2010. As customs duties are withdrawn, will there be an inflow of cheap products flooding the India market and putting the small and medium scale industry at risk? Tariff lines which come to mind include food processing, paper products, pharmaceutical products, electronics, textiles and auto equipment amongst others. 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 Agreement also provides for bilateral safeguard mechanisms to address sudden surge in imports after the Agreement comes into force. In such an eventuality if it hurts a domestic industry, safeguard measures including imposition of safeguard duties may be put in place for a period up to 4 years. The flexibility to invoke the safeguard measures will remain available for both the sides for a period of 7 years to 15 years from the date, the Agreement comes into force. 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 The main economies in the Association of South-East Asian Nations (ASEAN) like Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, have all benefited from the strong recovery in global trade and the strength of demand from China. Most of these countries have introduced massive stimulus programmes that are still supporting GDP growth. They have also been boosted by capital inflows. Thailand is growing strongly this year but its medium-term performance will be constrained by political instability, which will undermine investor and consumer confidence. Vietnam's economy is strong (7% growth is forecast in 2011), a trend that we expect will continue despite policy weaknesses and concerns about the banking sector following excessive credit growth in recent years. With a view to exploring opportunities for Indian industry and entrepreneurs in ASEAN countries with respect to international trade and FDI (Foreign Direct Investment), this Chapter provides an analysis based on information on published tenders. This provides an indication of business opportunities and projects that Indian industry may capitalize on as a part of their advent into the ASEAN region once the FTA is in place. 63 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper 6.1 Findings based on current open project tenders In terms projects announced, as gathered from various sources, we find that there are ample business opportunities in вЂњconstruction workвЂќ related activities in all the ASEAN countries. This segment includes construction of agricultural buildings, bridges, canal construction, concrete work, roads & highways, school buildings, sports facilities, water-treatment plants, etc. ASEAN countries also provided considerable number of opportunities in following industry/services categories: п‚· Machinery, equipment, appliances apparatus and associated products п‚· Office equipment, Computers and Supplies п‚· Instruments and appliances, Industrial process control equipment, Optical instruments, Horological instruments п‚· Electrical machinery, apparatus, equipment and consumables п‚· Pharmaceuticals and Medical Supplies п‚· Telecommunication, Radio, Television and communication equipment and related apparatus п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables п‚· Fabricated products and materials п‚· Motor vehicles, trailers and vehicle parts п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business п‚· Software Services п‚· Repair, maintenance and installation services п‚· Sewage- and refuse-disposal services, sanitation and environmental services. п‚· Education Services п‚· Health and social work services Following is the country-wise snapshot of number of opportunities available. (Figures given in bracket show number of tenders available in that particular category.) 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 вЂ“ EPPs National Key Economic Areas Expected EPP GNI contribution in 2020 US$ b RM b No. of BOs Expected BO GNI Contribution in 2020 US$ b RM b Jobs created 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 Total 131 381 1,175 60 177 545 3,300,00 0 Notably, the ETP would be private sector driven вЂ“ 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. The main approach in transforming to a high income economy will be to adopt strategies based on specialisation, given that strong and sustainable competitiveness is difficult to achieve without specialisation. This Plan will focus on 12 national key economic areas or NKEAs which have potential to generate high income, which are as follows вЂ“ 65 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Oil and gas; п‚· Palm oil and related products; п‚· Financial services; п‚· Wholesale and retail; п‚· Tourism; п‚· Information and communications technology (ICT); п‚· Education services; п‚· Electrical and electronic; п‚· Business services; п‚· Private healthcare; п‚· Agriculture; and п‚· Greater Kuala Lumpur. 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 sectorвЂџs 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. The Business Services sector encompasses a vast array of industries and professions, covering 41 sub-segments вЂ“ healthcare, IT services, Consulting, Engineering, Accounting, Law, Construction, Advertising, Events Management and Fashion to name a few, that is fast growing and is driven by a series of powerful global trends which include globalization and outsourcing, climate change, rise of social media and IT enabled services. Thus, in order to increase skilled workforce to meet the service sector growth, the ETP also aspires to grow the pool of skilled labor to 46% of MalaysiaвЂџs workforce to support the skills demand from the sector. 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. Quickwins 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. The Communications Content & Infrastructure (CCI) sector spans a wide ecosystem, from content generation to networks, services and devices. In order 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 nationвЂџs 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. Private investment is increasing through various strategic high-impact projects. Recently, the 1Malaysia Development Berhad (1MDB) in collaboration with Mubadala Development Company, an investment arm of the Government of Abu Dhabi, agreed to develop the Kuala Lumpur International Financial District (KLIFD) valued at RM26 billion, commencing in 2011. The Mass Rapid Transit (MRT) in Greater KL (Klang Valley) will be implemented beginning 2011. This project, with an estimated private investment of RM40 billion, is expected to be fully completed by 2020. Another landmark to be developed by Permodalan Nasional Berhad is Warisan Merdeka, expected to be completed by 2020. This is an integrated development project comprising a 100-storey tower, the tallest in Malaysia. The project will retain Stadium Merdeka and Stadium Negara as national heritage. The total project cost is RM5 billion, with the tower expected to be completed by 2015. Major international banks and professional financial services firms, including syariah experts will be located in the KLIFD. More importantly, such strategic development will further strengthen MalaysiaвЂџs position as the premier international Islamic financial hub. The Government is prepared to consider special incentive packages to attract investors to the KLIFD. Another major project is the development of the Malaysian Rubber Board land in Sungai Buloh covering an area of 2,680 acres. The entire development is estimated at RM10 billion and is expected to be completed by 2025. 67 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Smart and effective partnerships between the public and private sectors will be established to drive the economic transformation agenda. To date, 52 highimpact projects worth RM 63 billion have been identified for implementation. These include: п‚· Seven highway projects at an estimated cost of RM 19 billion. Among the projects are the West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway; п‚· Two coal electricity generation plants at an estimated cost of RM 7 billion; and п‚· Development of the Malaysian Rubber BoardвЂџs land in Sungai Buloh, Selangor covering an area of 3,300 acres at an estimated cost of RM 10 billion. 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. The Venture Capital industry plays an important role in contributing towards economic growth, particularly in high technology sectors such as information and communication technology (ICT), biotechnology and the creative industry. For this, the Government will provide Entrepreneurship Enhancement Training Programme to train 500 new technopreneurs and attract more angel investors. MTDC will also host an International Venture Capital Symposium in 2011 to enable networking and partnering of foreign and local venture capitalists to boost high technology industries. 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. The Government allocates RM3.8 billion in 2011 to increase productivity and generate higher returns in the Agriculture sector. This will include Develop largescale integrated Aquaculture Zones, Upgrade the drainage and irrigation system 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. To accelerate the economy towards a high-income nation, Research, Development and Commercialisation (R&D&C) activity will be the platform for enhancing value-added activities across economic sectors. The creative industry has great potential for further development to generate national income. This industry encompasses animation, advertising, films, fashion design, crafts and cultural heritage. To fully tap the potential of this industry, the Government will develop a creative industry policy in an integrated manner. Several programmes and activities will be designed to enhance innovation, creation and commercialisation of new products. The NKEAs will have dedicated focus from the Prime Minister and will have fasttrack 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. Malaysia tenders and RFP's from electrical machinery, equipment and consumables are invited and in great demand in Malaysia. There are as many as 203 business opportunities in construction work related activities. Other product / services categories where number of opportunities available are given below: Opportunities by Product categories п‚· Agricultural, horticultural, hunting and related products (1) п‚· Chemicals, chemical products and man-made fibres (4) п‚· Clothing and footwear (4) п‚· Coal, lignite, peat and other coal-related products (2) п‚· Construction work (203) п‚· Electrical machinery, apparatus, equipment and consumables (62) п‚· Fabricated products and materials (31) п‚· Food products and beverages (4) п‚· Forestry and Logging industry (1) п‚· Instruments and appliances, Industrial process control equipments, Optical instruments, Horological instruments. (19) 69 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Machinery, equipment, appliances, apparatus and associated products (69) п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables (12) п‚· Metals and associated products (5) п‚· Mining, quarrying and other associated products (2) п‚· Motor vehicles, trailers and vehicle parts (4) п‚· Office equipment Computers and Supplies (15) п‚· Paper and Pulp products (2) п‚· Printed matter and articles for printing (5) п‚· Rubber, Plastic and Film products (2) п‚· Telecommunication, Radio, Television and communication equipment and related apparatus (13) п‚· Textiles and textile articles (4) п‚· Transport equipment (3) Opportunities by Service categories п‚· Administration, defence and social security services (1) п‚· Agricultural, forestry, horticultural and other related services (9) п‚· Air transport services (2) п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (51) п‚· Hire services of machinery and equipment and of personal and household goods (1) п‚· Hotel and restaurant services (3) п‚· Land transport services and transport via pipeline services (2) п‚· Membership organization services (1) п‚· Miscellaneous services (3) п‚· Postal and Telecommunications services (1) п‚· Printing, publishing and related services (3) п‚· Real estate services (1) п‚· Recreational, cultural and sporting services (1) п‚· Repair, maintenance and installation services (34) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (12) п‚· Software Services (7) п‚· Supporting and auxiliary transport services; travel agencies services (3) п‚· Water transport services (2) 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, SingaporeвЂџs 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. SingaporeвЂџs 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 вЂ“ 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 GovernmentвЂџs one of the major areas of investment is aimed at catalysing improvements in enterprises themselves. The Government will support businesses that are re-engineering their work processes and re-designing jobs so as to help their employees create more value their efforts to innovate вЂ“ to gain competitiveness, come up with new products and services and generate additional revenue streams. It will provide tax incentives for businesses in all sectors to invest in upgrading their operations and creating new value. The Singapore Government will also extend substantial grants to specific industries, clusters and even enterprises. Specifically, it would cover spending on the following activities within this innovation value chain вЂ“ п‚· Research & Development; п‚· Registration of intellectual property вЂ“ including patents, trademarks, and designs; п‚· Acquisition of intellectual property вЂ“ for example, when a company buys a patent or copyright for use in its business; п‚· Design activities; 71 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Automation through technology or software; and finally п‚· Training of employees. 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. The Government will also introduce additional incentives to encourage the expansion of specific economic activities with high growth potential. First of these incentives will be to extend the Development and Expansion Incentive scheme to law practices providing international legal services so as to enhance position as an arbitration hub. Under this incentive, approved law practices will enjoy a 10% concessionary tax rate on incremental income derived from performing international legal services. 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 SingaporeansвЂџ living standards, relevant of which are discussed below п‚· Growing Through Skills and Innovation п‚· With an aim to achieve higher productivity growth of 2 to 3 percent per year, enabling GDP to grow on average by 3 to 5 percent per year over the next decade, the Singapore Government will encourage enterprise innovation and investments in technology and training, both through broad-based and targeted sectoral approaches in addition to other initiatives. п‚· Anchor Singapore as a Global-Asia Hub п‚· The Singapore Government aims to be the key base for global players seeking to tap into opportunities offered by a rising Asia by building on physical and cultural connectivity to Asia and the world and also to grow opportunities in ASEAN, working together with our regional partners to realise the vision of a single market under the ASEAN Economic Community by 2015. For this, the Government plans to retain a globally competitive manufacturing sector at between 20 to 25 percent of the economy, with continued shift into complex manufacturing вЂ“ areas where know-how and intellectual property are crucial such as nutriceuticals; the design and production of вЂњmission-criticalвЂќ components such as those in medical devices; and cross-disciplinary areas like bioelectronics and growing manufacturingrelated services such as headquarter-related activities, R&D, Intellectual Property (IP) management and product lifecycle management by capitalising on the convergence of manufacturing with services. п‚· Make Innovation Pervasive, and Strengthen Commercialisation of R&D п‚· To strengthen emphasis on business innovation and commercialisation of R&D and to establish Singapore as AsiaвЂџs Innovation Capital вЂ“ a hub for innovation and enterprise, and a location of choice for commercialization, it plans to raise Gross Expenditure on R&D (GERD) to 3.5 percent of GDP by 2015 through increased private sector R&D expenditure. п‚· Become a Smart Energy Economy п‚· To become resilient, sustainable, and innovative in the energy use, the Singapore Government plans to explore coal and electricity imports in the medium term to diversify both the fuel types and fuel source countries in energy portfolio and continue supporting innovation and investing in the infrastructure necessary to develop renewable energy in the long term. п‚· Make Singapore a distinctive global city and an endearing home 48 Budget Speech 2010 Towards An Advanced Economy 73 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· To realise the potential as a global city, Singapore plans to focus more in two main areas: First, to grow the software that will make Singapore a distinctive global city - develop thriving creative and arts clusters вЂ“ distinguished for both their development of Asian content and appeal to an international audience. Also aim to host more pinnacle global events, building on the new vibrancy of the city and Marina Bay and to provide the best opportunities in Singapore for diverse talents to grow and develop. п‚· Second, to develop the infrastructure necessary to provide the highest quality of life in Asia - This will call for bold and imaginative urban planning and redevelopment such as to develop a masterplan for the progressive development of a new waterfront city at Tanjong Pagar once the portвЂџs lease expires in 2027, to expand вЂћland bankвЂџ by investing in the creation of underground space, especially around our transport nodes, to develop distinct eco-towns and residential precincts, as well as new models for resourceefficient industrial clusters, e.g. on Jurong Island вЂ“ where desalination and recycling of energy can be part of an integrated and cost efficient system.49 In May 2005, a high-level steering committee convened to spearhead the development of SingaporeвЂџs 10-year masterplan; to grow the infocomm sector and to use infocomm technologies to enhance the competitiveness of key economic sectors and build a well-connected society. SingaporeвЂ™s Strategy with iN2015 п‚· To establish an ultra-high speed, pervasive, intelligent and trusted infocomm infrastructure п‚· To develop a globally competitive infocomm industry п‚· To develop an infocomm-savvy workforce and globally competitive infocomm manpower п‚· To spearhead the transformation of key economic sectors, government and society through more sophisticated and innovative use of infocomm Desired Outcomes п‚· Enriched lives through infocomm п‚· Enhanced economic competitiveness and innovation through infocomm п‚· Increased growth and competitiveness of the infocomm industry Goals with iN2015 п‚· To be #1 in the world in harnessing infocomm to add value to the economy and society п‚· To realise a 2-fold increase in the value-add of the infocomm industry to S$26 billion п‚· To realise a 3-fold increase in infocomm export revenue to S$60 billion 49 Report of the Economic Strategies Committee 74 п‚· To create 80,000 additional jobs п‚· To achieve 90 per cent broadband usage in all homes п‚· To achieve 100 per cent computer ownership in homes with school-going children Considering the focus of the Singapore Government on the technology driven manufacturing, research & development activities, keenness on innovation and infrastructure for the growth in the coming years, these sectors will definitely open up the gates for the Indian entrepreneurs willing to invest abroad in these sectors. There are as many as 146 business opportunities in construction work related activities. Other product / services categories where number of opportunities available are given below: Opportunities by Product categories п‚· Chemicals, chemical products and man-made fibres (8) п‚· Clothing and footwear (9) п‚· Construction work (146) п‚· Electrical machinery, apparatus, equipment and consumables (40) п‚· Electricity, gas, nuclear energy and fuels, steam, hot water and other sources of energy (4) п‚· Fabricated products and materials (33) п‚· Food products and beverages (11) п‚· Forestry and Logging industry (3) п‚· Instruments and appliances, Industrial process control equipment, Optical instruments, Horological instruments. (62) п‚· Machinery, equipment, appliances, apparatus and associated products (76) п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables (24) п‚· Metals and associated products (2) п‚· Mining, quarrying and other associated products (1) п‚· Motor vehicles, trailers and vehicle parts (6) п‚· Non-metallic mineral products (2) п‚· Office equipment Computers and Supplies (39) п‚· Paper and Pulp products (2) п‚· Petroleum products and fuels (1) п‚· Pharmaceuticals and Medical Supplies (56) п‚· Printed matter and articles for printing (21) п‚· Rubber, Plastic and Film products (4) 75 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Telecommunication, Radio, Television and communication equipment and related apparatus (47) п‚· Textiles and textile articles (5) п‚· Transport equipment (15) п‚· Wood, wood products, cork products, basketware and wickerwork (1) Opportunities by Service categories п‚· Administration, defence and social security services (1) п‚· Agricultural, forestry, horticultural and other related services (3) п‚· Air transport services (2) п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (139) п‚· Education services (93) п‚· Health and social work services (4) п‚· Hire services of machinery and equipment and of personal and household goods (5) п‚· Hotel and restaurant services (21) п‚· Insurance and pension funding services, except compulsory social security services and insurance-related services (8) п‚· Land transport services and transport via pipeline services (6) п‚· Manpower Supply Services (3) п‚· Membership organization services (1) п‚· Miscellaneous services (2) п‚· Postal and Telecommunications services (11) п‚· Printing, publishing and related services (58) п‚· Real estate services (3) п‚· Recreational, cultural and sporting services (62) п‚· Repair, maintenance and installation services (28) п‚· Research and development services (1) п‚· Retail trade services (3) п‚· Services auxiliary to financial intermediation (2) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (7) п‚· Software Services (90) п‚· Supporting and auxiliary transport services; travel agencies services (21) п‚· Water transport services (3) 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. Generally, the 2009 macroeconomic condition is as follows. First, while economic growth declined slightly, there was reasonable growth during the impact of the global financial crisis in 2008. Since the beginning of 2009, domestic expenditure has become the main contributor to economic growth and most of the domestic economic indicators, such as consumersвЂџ confidence, retail and automobiles sales, and industrial activities, have increased since the beginning of 2009, after declining at the end of 2008. In order to accelerate the process of economic recovery, attempts to reduce the decline in export and the slow growth of investment have been intensified. The Indonesian economic condition in 2010-2014 is related to the state of the world economy. On the basis of various policy measures pursued in various fields, Indonesian economy is expected to gradually grow from 5.5-5.6% in 2010 to 7.0-7.7% in 2014, at the average growth rate of 6.3-6.8% per year over the next five years. On the production side, after experiencing low growth rates in the period 20042009, 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. Regarding expenditure, economic growth originates from private expenditure, as the main component of domestic demand, and from investment and the export of goods and services. Private consumption is projected to increase by 5.3-5.4% per year, while investment and exports are expected to gradually grow starting from 2010. Investment is estimated to grow at an average of 9.1-10.8% and exports of goods and services will grow at an average rate of 10.7-11.6% per year. Even though competition in the international market is getting tighter, the prediction of improving world economy in 2010, after experiencing the global financial crisis since the middle of 2008, and also induced by the utilization of the increased competitiveness and efforts to create a conducive business climate for export activities, means that the value of non-oil and gas export in the 2010-2014 period is estimated to gradually increase. After experiencing negative growth in 2009, non-oil and gas exports in 2010 are estimated to grow at 7-8%, reaching 14.5-16.5% in 2014. 77 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper On the import side, the increase in domestic demand will stimulate the growth of non-oil/gas import from 8-9% in 2010 to 18-19% in 2014. With the deficit in services that remains high in 2010 to 2014, it is estimated that the surplus in the current account will decline down to 2014. Foreign direct investment (net) is estimated to continue to increase in the 20102014 period, while foreign portfolio capital flow is estimated to remain stable. With such developments, it is estimated that foreign exchange reserves will increase to around USD 100 billion in 2014. The 2010-2014 National Medium Term Development Plan (RPJMN 2010-2014) is the elaboration of the Vision, Mission, and Program of the President, the formulation of which is guided by 2005-2025 National Long Term Development Plan (RPJPN 2005-2025) of Singapore. The National Development Vision and Mission of RPJPN 2005-2025 is to be вЂњINDONESIA THAT IS SELFRELIANT, ADVANCED, JUST, AND PROSPEROUSвЂќ. To meet the above Vision, Indonesia has defined вЂњthe eight National Development MissionsвЂќ such as вЂ“ вЂњRealizing an Indonesia as an archipelago nation that is self reliant, advanced, strong, and that is based on the national interestвЂќ, вЂњRealizing a nation that is competitiveвЂќ, вЂњRealizing an Indonesia that is balanced and sustainableвЂќ and вЂњRealizing an Indonesia that has an important role in the international communityвЂќ etc. 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: п‚· The First RPJM (2005-2009) is directed at reforming and developing Indonesia in all fields that are aimed at creating an Indonesia that is safe and peaceful, just and democratic, and that has an increasingly prosperous population. п‚· The Second RPJM (2010-2014) aims at the greater consolidation of the reform of Indonesia in all fields by emphasizing endeavors for increasing the quality of human resources, including the promotion of capacity building in science and technology and the strengthening of economic competitiveness. п‚· The Third RPJM (2015-2019) is aiming for the greater consolidation of development in a comprehensive manner in all fields by emphasizing attainment of economic competitiveness on the basis of competitiveness of natural resources and the quality of human resources and by the increasing capability to master science and technology. п‚· The Fourth RPJM (2020-2025) aims to realize an Indonesian society that is self reliant, advanced, just, and prosperous through the acceleration of development in various fields by emphasizing the realized economic structure 78 that is more solid on the basis of competitive advantage in various regions, and is supported by quality and competitive human resources. The Second Medium-Term Development Plan is currently being implemented on the basis of the implementation, achievements, and as the continuation of the First Medium Term Development Plan. 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. Economic growth is expected to be able to reduce the open unemployment rate by around 5-6% by the end of 2014, and the total created employment opportunities rise from 9.6 million to 10.7 million units in the 2010-2014. The combination of economic growth and various government interventions are expected to be able to accelerate the reduction of the poverty rate to around 810% by the end of 2014. In order to achieve accelerated economic growth, the government needs to continue with measurable and prudent macroeconomic policies in order to stabilize the inflation rate of 4-6% a year, which is at a lower level and is in proportion with nations that are equivalent to Indonesia. A stabilized inflation rate will enable the attainment of the exchange rates and interest rates that are competitive, which lead to the inducement of healthy growth in the sector. Following are Development priorities of Indonesia during next 5 years (till 2014)вЂ“ The main national development targets of the National Mediumterm Developemt Plan (RPJMN) OF 2010-2014 No. 1 Development Targets Economic Average of 6.3 вЂ“ 6.8% per year a) Economic growth rate Growth of 7% before 2014 2 b) Inflation rate Average of 4 вЂђ 6% per year c) Open unemployment rate 5 вЂђ 6% at end of 2014 d) Poverty rate 8 вЂђ 10% at end of 2014 Education Initial (2008) a) Increased average school stay of ppeople of 15 years and older (yrs) 7.5 8.25 b) Decline in illiteracy rate of population aged 15 and over (%) 5.97 4.18 c) Increased net enrolment rate of elementary schools (%) 95.14 96 d) Increased net enrolment rate of junior high school (%) 72.28 76 79 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Status Target 2014 in No. Development Targets e) Increased gross enrolment rate of senior high schools (%) 64.28 85 f) Increased gross enrolment rate at universities of those in 19вЂђ23 years age bracket (%) 21.26 30 g) Reduced disparity in participation and quality of education services among regions, gender, socialвЂђeconomic groups, and between education units that are implemented by the government and private institutions 3 4 5 6 Health Initial (2008) Status Target 2014 a) Increased life expectancy (years) 70.7 72 b) Decreased maternal mortality rate per 100,000 live births 228 118 c) Decreased infant mortality rate per 1,000 live births 34 24 d) Decreased prevalence of nutrition deficiency (deficient nutrition and malnutrition) by infants (%) 18.4 Less 15 in than 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 Energy a) Increased capacity of electricity generating stations 3,000 MW per year b) Increased electrification ratio Reaching 80% in 2014 c) Increased production of crude oil Reaching 1.01 million barrel per day in 2014 d) Increased utilization of geothermal power stations Reaching 5,000 MW in 2014 Infrastructure a) Construction of the Trans Sumatra, Java, Kalimantan, Sulawesi, West Nusa Tenggara, East Nusa Tenggara, and Papua infrastructure Reaching a length of 19,370 km by 2014 b) Construction of an integrated interвЂђmode and interвЂђisland transportation network, in accordance with the National Transportation System and MultiвЂђmode Transportation Blueprint Completed in 2014 c) Completing the construction of the Optic Fiber Network in Eastern Part of Indonesia Completed before 2013 d) Repairing the transportation system and network in 4 big cities (Jakarta, Bandung, Surabaya, and Medan) Completed in 2014 Therefore, similar to the Malaysian and Singapore Governments, the Indonesian Governments has targeted few sectors as immediate priority sectors such as Energy, Infrastructure, Education, Health & Agriculture etc. The burgeoning capabilities of the India Inc. in various industries including the above mentioned industries, creates a lots of opportunities for India to explore business 80 opportunities in Indonesia, particularly those industries and sectors, being given special importance by the Indonesian Government itself. Indonesia has a market-based economy in which the government plays a significant role. It is one of the world's major rubber producers and has a wide range of mineral deposits and production, including bauxite, silver, and tin, copper, nickel, gold, and coal. However, agriculture employs majority of the workforce. Petroleum and natural gas, textiles, apparel, and mining forms the backbone of the economy. In India, business tenders from Indonesia are invited from diverse industries with majority from construction, machinery and fabricated products. There are as many as 116 business opportunities in construction work related activities and 234 opportunities in Consultancy Services: Architectural, Construction, Legal, Accounting and Business. Other product / services categories where number of opportunities available are given below: Opportunities by Product categories п‚· Chemicals, chemical products and man-made fibres (3) п‚· Coal, lignite, peat and other coal-related products (1) п‚· Construction work (116) п‚· Electrical machinery, apparatus, equipment and consumables (8) п‚· Electricity, gas, nuclear energy and fuels, steam, hot water and other sources of energy (4) п‚· Fabricated products and materials (2) п‚· Food products and beverages (6) п‚· Instruments and appliances, Industrial process control equipments, Optical instruments, Horological instruments. (17) п‚· Machinery, equipment, appliances, apparatus and associated products (16) п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables (3) п‚· Motor vehicles, trailers and vehicle parts (1) п‚· Office equipments Computers and Supplies (23) п‚· Petroleum products and fuels (1) п‚· Petroleum(Crude), Natural Gas, Oil and associated products (1) п‚· Pharmaceuticals and Medical Supplies (3) п‚· Telecommunication, Radio, Television and communication equipments and related apparatus (18) Opportunities by Service categories п‚· Administration, defence and social security services (5) п‚· Agricultural, forestry, horticultural and other related services (4) 81 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (234) п‚· Education services (11) п‚· Health and social work services (2) п‚· Hire services of machinery and equipment and of personal and household goods (2) п‚· Hotel and restaurant services (2) п‚· Insurance and pension funding services, except compulsory social security services and insurance-related services (2) п‚· Land transport services and transport via pipeline services (3) п‚· Membership organization services (4) п‚· Miscellaneous services (4) п‚· Oil and Gas Related Services (4) п‚· Postal and Telecommunications services (12) п‚· Public utilities (3) п‚· Real estate services (6) п‚· Recreational, cultural and sporting services (2) п‚· Repair, maintenance and installation services (7) п‚· Research and development services (1) п‚· Services auxiliary to financial intermediation (2) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (13) п‚· Software Services (34) п‚· Supporting and auxiliary transport services; travel agencies services (5) 6.1.4 Thailand The economy of Thailand is an emerging economy which is heavily exportdependent, with exports accounting for more than two thirds of gross domestic product (GDP). The main trading partners are Japan, the United States, China, Malaysia, and Singapore. A large number of Thailand tenders are invited from Consultancy Services in Architectural, Construction, Legal, Accounting and Business. There are as many as 15 business opportunities in construction work related activities. Other product / services categories where number of opportunities available are given below: Opportunities by Product categories п‚· Chemicals, chemical products and man-made fibres (1) п‚· Construction work (15) п‚· Electrical machinery, apparatus, equipment and consumables (20) 82 п‚· Electricity, gas, nuclear energy and fuels, steam, hot water and other sources of energy (1) п‚· Instruments and appliances, Industrial process control equipmentвЂџs, Optical instruments, Horological instruments. (2) п‚· Machinery, equipment, appliances, apparatus and associated products (10) п‚· Metals and associated products (3) п‚· Office equipments Computers and Supplies (10) п‚· Petroleum products and fuels (1) п‚· Petroleum(Crude), Natural Gas, Oil and associated products (1) п‚· Pharmaceuticals and Medical Supplies (3) п‚· Printed matter and articles for printing (2) п‚· Telecommunication, Radio, Television and communication equipments and related apparatus (7) п‚· Textiles and textile articles (1) п‚· Transport equipment (3) Opportunities by Service categories п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (17) п‚· Manpower Supply Services (2) п‚· Oil and Gas Related Services (1) п‚· Repair, maintenance and installation services (3) п‚· Research and development services (1) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (2) п‚· Software Services (6) п‚· Supporting and auxiliary transport services; travel agencies services (2) 6.1.5 Philippines Philippines is an economically stable country. The economy partially depends on its agriculture and on its export business. The flourishing industries are garment industry, footwear industry, pharmaceuticals industry, chemicals, electronics assembly, food processing industry, wood industry, petroleum refining industry etc. The government is putting its best foot forward to streamline the economy that includes increasing trade regulations, improvement of infrastructure and privatization of the economy. In Philippines, a large number of procurement notices are from construction sector. There are as many as 1014 business opportunities in construction related activities. Other product / services categories where number of opportunities available are given below: 83 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Opportunities by Product categories п‚· Agricultural, horticultural, hunting and related products (2) п‚· Chemicals, chemical products and man-made fibres (30) п‚· Clothing and footwear (25) п‚· Coal, lignite, peat and other coal-related products (2) п‚· Construction work (1014) п‚· Electrical machinery, apparatus, equipment and consumables (72) п‚· Electricity, gas, nuclear energy and fuels, steam, hot water and other sources of energy (3) п‚· Fabricated products and materials (213) п‚· Fish, fishing products and other by-products of the fishing industry (2) п‚· Food products and beverages (19) п‚· Forestry and Logging industry (2) п‚· Instruments and appliances, Industrial process control equipments, Optical instruments, Horological instruments. (49) п‚· Leather and leather products (6) п‚· Machinery, equipment, appliances, apparatus and associated products (128) п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables (61) п‚· Metals and associated products (16) п‚· Mining, quarrying and other associated products (23) п‚· Motor vehicles, trailers and vehicle parts (73) п‚· Non-metallic mineral products (2) п‚· Office equipments Computers and Supplies (167) п‚· Paper and Pulp products (17) п‚· Petroleum products and fuels (13) п‚· Pharmaceuticals and Medical Supplies (199) п‚· Printed matter and articles for printing (24) п‚· Rubber, Plastic and Film products (30) п‚· Telecommunication, Radio, Television and communication equipments and related apparatus (60) п‚· Textiles and textile articles (17) п‚· Transport equipment (9) п‚· Wood, wood products, cork products, basketware and wickerwork (12) Opportunities by Service categories п‚· Administration, defence and social security services (17) п‚· Agricultural, forestry, horticultural and other related services (11) 84 п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (455) п‚· Education services (70) п‚· Health and social work services (40) п‚· Hire services of machinery and equipment and of personal and household goods (6) п‚· Hotel and restaurant services (12) п‚· Insurance and pension funding services, except compulsory social security services and insurance-related services (6) п‚· Land transport services and transport via pipeline services (3) п‚· Manpower Supply Services (9) п‚· Membership organization services (9) п‚· Miscellaneous services (25) п‚· Postal and Telecommunications services (6) п‚· Printing, publishing and related services (34) п‚· Real estate services (11) п‚· Recreational, cultural and sporting services (28) п‚· Repair, maintenance and installation services (54) п‚· Research and development services (1) п‚· Services auxiliary to financial intermediation (20) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (78) п‚· Software Services (93) п‚· Supporting and auxiliary transport services; travel agencies services (16) 6.1.6 Vietnam Vietnam is a highly industrialized country that depends on tourism and exports for the economic development. The per capita has been growing owing to the foreign exchange earned from tourism, and exports from manufacturing sector. A wide range of tenders are floated from consultancy services: Other product / services categories where number of opportunities available are given below: Opportunities by Product categories п‚· Agricultural, horticultural, hunting and related products (1) п‚· Chemicals, chemical products and man-made fibre (2) п‚· Clothing and footwear (1) п‚· Collected and purified water and water distribution (4) п‚· Construction work (110) п‚· Electrical machinery, apparatus, equipment and consumables (52) 85 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Electricity, gas, nuclear energy and fuels, steam, hot water and other sources of energy (5) п‚· Fabricated products and materials (23) п‚· Instruments and appliances, Industrial process control equipments ,Optical instruments, Horological instruments. (18) п‚· Machinery, equipment, appliances, apparatus and associated products (29) п‚· Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables (7) п‚· Metals and associated products (3) п‚· Motor vehicles, trailers and vehicle parts (5) п‚· Office equipments Computers and Supplies (54) п‚· Petroleum products and fuels (1) п‚· Pharmaceuticals and Medical Supplies (24) п‚· Printed matter and articles for printing (2) п‚· Telecommunication, Radio, Television and communication equipments and related apparatus (44) п‚· Transport equipment (2) Opportunities by Service categories п‚· Administration, defence and social security services (10) п‚· Agricultural, forestry, horticultural and other related services (20) п‚· Consultancy Services: Architectural, Construction, Legal, Accounting and Business (233) п‚· Education services (27) п‚· Health and social work services (25) п‚· Membership organization services (2) п‚· Postal and Telecommunications services (2) п‚· Public utilities (5) п‚· Real estate services (3) п‚· Recreational, cultural and sporting services (6) п‚· Repair, maintenance and installation services (7) п‚· Research and development services (1) п‚· Services auxiliary to financial intermediation (4) п‚· Sewage- and refuse-disposal services, sanitation and environmental services (25) п‚· Software Services (61) 86 7. India-ASEAN FTA and Vision for IndiaвЂ™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 вЂњpovertyвЂќ) and the fact that continued growth has been instrumental in achieving this outcome is hardly contested by any economist or policy maker. Economic growth improves livelihoods, creates job opportunities and raises household and government incomes. Higher household incomes directly reduce poverty and help people afford the basic necessities of life. Growth also increases government revenues that can be invested into schools, roads, and hospitals. These are critical investments for growth and development - a healthy, well educated workforce is a more productive workforce. And a prosperous society is more peaceful and stable. Growth and human development are therefore mutually reinforcing. One cannot be sustained without the other. 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?': вЂњOn 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.вЂќ 87 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Seen in this light, it is therefore amply clear that any policies to liberalize trade and remove protectionist government policies will help the Indian economy in the long run by making Indian industries more efficient and productive, by providing the Indian consumers access to cheaper and larger variety of products and generate employment for the rapidly expanding labor force. However, there are possible downsides to FTAвЂџs as well. Evidence from across the globe suggests that there is a very real chance that FTA will result in domestic job losses as industries tend to resort to layoffs in an attempt to cut costs and compete effectively with the industries in other FTA countries. Moreover, FTAвЂџs can adopt create significant diversions from important issues such as environmental concerns, human rights conditions for workers and workplaces as well as other social issues like child labor and decline in overall levels of education. IndiaвЂџs 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: п‚· Eradicate extreme poverty and hunger. п‚· Achieve universal primary education. п‚· Promote gender equality and empower women. п‚· Reduce child mortality. п‚· Improve maternal health. п‚· Combat HIV/ AIDS, malaria and other diseases. п‚· Ensure environmental sustainability п‚· Develop a global partnership for development 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 MDGвЂџs 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. 88 8. Appendix Appendix 1 Summary of the India ASEAN FTA Introduction Pursuant to the Framework Agreement on Comprehensive Economic Cooperation signed by India and the ASEAN member states (вЂњthe PartiesвЂќ) on October 8, 2003, the ASEAN-India agreement on trade in goods (вЂњthe AgreementвЂќ), effective January 1, 2010, envisages establishing a free trade area (вЂњFTAвЂќ) to increase economic integration and cooperation activities between India and the ASEAN. To this end, the principles governing the conduct of trade in the FTA have been embodied in Articles 1 through Article 24 of the Agreement. The following sections present a brief summary of the salient features of the Agreement. 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. Tariff Reduction and Elimination The Agreement envisages a gradual reduction in tariffs imposed by each Party on the other PartiesвЂџ goods as per the timelines set out in the Schedule of Tariff Commitments. The schedule groups goods into 5 different categories and sets out separate tariff liberalization rules for each of these categories. п‚· 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. п‚· 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. п‚· Special Products: These products refer to IndiaвЂџs 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. 89 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper п‚· Highly Sensitive List: This list consists of goods further classified into Category 1, 2 and 3 with tariffs reduction schedules as given below. пЂ Category 1: Tariffs on goods under this category must be reduced to 50 percent by the stipulated deadlines; пЂ Category 2: Tariffs on goods under this category must be reduced by 50 percent by the stipulated deadlines; and пЂ Category 3: Tariffs on goods under this category must be reduced by 25 percent by the stipulated deadlines. п‚· Excluded List: Goods under this category do not fall under the purview of the tariff reduction schedule but are subject to annual tariff reviews for purposes of improving market access. 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 PartyвЂџs 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 Each Party is prohibited from instituting any non-tariff measure on imports of goods from the other Parties or on exports of goods to the other PartiesвЂџ territories. In other words, all Parties are required to avoid the use of quantitative trade barriers, such as import quotas, and to forgo the payment of export subsidies. Safeguard Measures The Agreement provides for certain conditions under which a Party can initiate a вЂњsafeguard measureвЂќ 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: п‚· the importing Party has the right to suspend further tariff reduction and increase the tariff to its pre-FTA level; 90 п‚· 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; п‚· 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; п‚· 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 PartyвЂџs territory; and п‚· 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. Balance of Payments Safeguard Measures 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 Each Party is required to apply its customs procedures in a predictable and transparent manner. In order to achieve prompt customs clearance of goods traded among the Parties, each Party will endeavour to simplify its customs procedures and harmonize them with relevant international standards such as those recommended by the World Customs Organization. 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 (вЂњDSMвЂќ). 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 (вЂњCPвЂќ) and the Party Complained Against (вЂњPCAвЂќ), 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 вЂњinterim reportвЂќ 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 вЂњfinal reportвЂќ is prepared. The final report of the arbitral panel is final and binding on the Parties to the dispute. 91 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Appendix 2 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: XIIij= Xij/Xiw 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. Export share is the percentage of exports going to a partner to total exports of a country (or region). It is computed as the dollar value of exports of country (or region) i to country(or region) j expressed as a percentage share of the dollar value of exports of country(or region) i to the world. A higher share indicates a higher degree of integration between partner countries/regions. Import growth is the percentage change in the value of imports relative to the previous year. Import share is the percentage of imports from a partner to total imports of a country/region. It is computed as dollar value of imports of country/region i from country/region j expressed as a percentage share of the dollar value of imports of country/region i from the world. A higher share indicates a higher degree of integration between partner countries/regions. Total trade is the sum of the value of exports and imports. 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: TIIij= 92 tij/Tiw twj/Tww 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. Trade share is the percentage of trade with a partner to total trade of a country/region. It is computed as the dollar value of total trade of country/region i with country/region j expressed as a percentage share of the dollar value of total trade of country/region i with the world. A higher share indicates a higher degree of integration between partner countries/regions. Appendix 3 Classification of Sectors Sector Subsectors along with codes Chemicals and Pharmaceuticals п‚· Chemical products (SITC 5) Medicinal and pharmaceutical products п‚· Medicinal and pharmaceutical products (SITC54) Electrical Equipments п‚· Electrical machinery, apparatus and appliances, n.e.s (SITC 77) Textiles, Apparels & Accessories п‚· Textile yarn, fabrics, made-up articles, n.e.s., and related Products (SITC 65) Leather & Leather Accessories п‚· Textile fibres (other than wool tops and other combed wool) and Handicrafts & Carpets п‚· Articles of apparel and clothing accessories (SITC 84) п‚· Leather, leather manufactures and dressed furskins (SITC 61) п‚· Works of art, collectors' pieces & antiques п‚· Jewellery & articles of precious material., n.e.s. п‚· Power generating machinery and equipment(SITC 71) п‚· Specialized machinery (SITC 72) п‚· Metal working machinery (SITC 73) п‚· Other industrial machinery and parts (SITC 74) п‚· Office machines and automatic data processing machines (SITC 75) п‚· Telecommunication and sound recording apparatus (SITC 76) п‚· Electrical machinery, apparatus and appliances, n.e.s. (SITC 77) Gems & Jewellery Machinery and Appliances Automotive Sector Renewable & NonRenewable Energy their wastes (not manufactured into yarn or fabric) (SITC 26) п‚· Professional and scientific instruments, n.e.s. (SITC 87) п‚· Photo apparatus, optical goods, watches and clocks (SITC 88) п‚· Road vehicles (SITC 78) п‚· Other transport equipment (SITC 79) п‚· Fuels (SITC 3) п‚· Power generating machinery and equipment (SITC 71) 93 India ASEAN Free Trade Agreement A Deloitte-FICCI White Paper Contacts Dr. Shanto Ghosh Senior Director and Principal Economist вЂ“ Transfer Pricing Dr. Suddhasatwa Roy Senior Manager - Global Transfer Pricing [email protected] 94 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the вЂњDeloitte NetworkвЂќ) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material. В©2011 Deloitte Touche Tohmatsu India Private Limited Member of Deloitte Touche Tohmatsu Limited