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A Sectoral Impact Analysis of the ASEAN-India Free Trade Agreement

Under the asean-India Free Trade Agreement, the trade bloc's members will have increased access to the Indian market for semi-processed and processed agricultural products and close substitutes, which could adversely affect the country's agricultural sector. Indian small and medium enterprises in food and other agriculture-related products, some intermediate goods, and light manufacturing products are also likely to suffer. But import liberalisation in intermediate goods will encourage multinational corporations to undertake production rationalisation across the region in the transport equipment, machinery, chemicals and iron and steel sectors. This could lead to India's deeper integration in production networks in such sectors. All this, combined with the neglect of the development needs of domestic agriculture and a manufacturing base for the expected gains in service sector liberalisation with asean, is likely to make India's employment and livelihood issues even more challenging.

SPECIAL ARTICLE

A Sectoral Impact Analysis of the ASEAN-India Free Trade Agreement

Smitha Francis

Under the ASEAN-India Free Trade Agreement, the trade bloc’s members will have increased access to the Indian market for semi-processed and processed agricultural products and close substitutes, which could adversely affect the country’s agricultural sector. Indian small and medium enterprises in food and other agriculturerelated products, some intermediate goods, and light manufacturing products are also likely to suffer. But import liberalisation in intermediate goods will encourage multinational corporations to undertake production rationalisation across the region in the transport equipment, machinery, chemicals and iron and steel sectors. This could lead to India’s deeper integration in production networks in such sectors. All this, combined with the neglect of the development needs of domestic agriculture and a manufacturing base for the expected gains in service sector liberalisation with ASEAN, is likely to make India’s employment and livelihood issues even more challenging.

I am grateful to Jayati Ghosh and Murali Kallummal as well as to participants at the IDEAs-ITD-GSEI Asian Regional Workshop on “FTAs: Towards Inclusive Trade Policies in Post-Crisis Asia”, Bangkok, 8-9 December 2009, and the CDS-CWS-IIFT-RIS National Seminar on “ASEAN-India Free Trade Agreement and Way Forward”, Thiruvananthapuram, 5-6 February 2010, for their comments and suggestions. However, the usual caveat stands.

Smitha Francis (smithafrancis@gmail.com) is with the Economic Research Foundation, New Delhi.

Due to an internal software error, an incorrect version of the paper was published in the print version of EPW (8-14 January 2011). The author’s revised version is posted on the web.

1 Introduction

I
ndia’s economic relations with the member countries of the Association of South East Asian Nations (ASEAN) are set to undergo major changes as the ASEAN-India Free Trade Agreement (AIFTA) has come into force since 1 January 2010. Until the early 2000s, India and the south-east Asian countries were not significant trade partners, except for Singapore. This was fundamentally because all the bigger south-east Asian economies had been following a foreign direct investment (FDI)-driven exportled growth strategy since the mid-1980s, while India’s trade and investment policies remained quite conservative in comparison. Consequently, the de facto market-driven trade integration that ensued in east Asia because of the production network strategies of multinational corporations (MNCs) meant that trade links of ASEAN countries have been the greatest with the other countries in the east Asian region that drove or have been part of production sharing arrangements, or with the developed countries that had been their major markets in prominent export sectors. India did not attempt to follow production network-driven export growth strategies, at least until recently.

Industries involved in international fragmentation of production processes typically exhibit high shares of intra-industry trade. With India steadily liberalising trade and investment rules in many sectors unilaterally or under regional trade agreements such as the Comprehensive Economic Cooperation Agreement (CECA), recent trends in India’s export and import structure do point towards an increase in two-way trade1 in some sectors. It is against this backdrop that the implications of the tariff reduction commitments under the AIFTA for India’s agricultural and nonagricultural sectors are analysed.

This paper is organised as follows. In the following section, we present an overview of the pattern and composition of India’s trade in the context of India’s growing integration with Asia. Section 3 looks at India’s increasing trade with the ASEAN countries in detail. Section 4 examines the tariff reduction commitments under the AIFTA and analyses the extent of potential market access that will be gained by ASEAN countries in India’s agricultural and non-agricultural sectors. Section 5 examines the potential market access scenario for India in some of the major ASEAN countries. The last section makes some concluding observations.

2 India’s Trade Patterns

One of the most striking aspects of India’s expanding presence in global trade is related to India’s increased integration with Asian countries (IDEAs 2009). While the dominance of developed countries

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in India’s trade has reduced since the late 1990s, the shares of Asian developing countries in India’s exports and imports have gone up significantly. Despite a decline in their share over time, the developed countries continue to remain more important as destinations of India’s exports. However, the gap between the shares of the developed countries and the Asian developing countries in India’s imports has reduced more sharply.2 That is, Asian developing countries have increasingly become nearly as important as the industrial countries as sources of India’s imports. Along with increased trade with east Asia including China and South Korea, followed by the United Arab Emirates (UAE) and Saudi Arabia, south-east Asia has played a major role in this changing trade pattern.

It is important to understand if these directional changes have been accompanied by any compositional changes. A comparison of the commodity composition of India’s imports at the two-digit Harmonised System (HS) level between 1995 and 2008 (using United Nations Commodity trade statistics) does not show much change among the top six ranks. India’s global imports in 1995 as well as during 2007-08 were dominated by petroleum and petroleum products, followed by pearls, precious stones, metals and coins (all referred to as gems and jewellery hereafter); nonelectrical machinery; electrical machinery and parts; iron and steel; and organic chemicals. Their cumulative share, which constituted about 63% of India’s global imports in 1995, went up to 71% in 2008. The increase in concentration was because of the increased shares of the petroleum sector, followed by gems and jewellery and electrical machinery. Four sectors that have become increasingly significant in India’s global imports are ores, slag and ash; optical, photo, technical and medical apparatus; articles of iron and steel; and ships, boats and other floating structures. Fertilisers; plastics and plastic products; animal and vegetable fats and oils; inorganic chemicals; and automobiles have continued to be important imports even though their relative shares have come down.

But there are more discernible changes when it comes to the composition of India’s global exports. The gems and jewellery sector, previously the largest export sector, was pushed down to the second rank by the dramatic rise in India’s exports of petroleum and petroleum products after 2002. More importantly, traditional labour-intensive and natural resource-based sectors such as apparels, cotton, cereals, fish and crustaceans, coffee, tea and spices, etc, as well as automobiles, which dominated India’s exports during 1995-2002 lost in relative shares subsequently. The major sectors that have become increasingly more significant in India’s exports to the world are iron and steel; organic chemicals; non-electrical machinery, ores, slag and ash; electrical machinery and parts; and articles of iron and steel.

It is thus observed that there is a significant increase in two-way trade in several sectors. While in 2007, petroleum and products topped this list with a share of 50% in India’s total trade in that year, the gems and jewellery sector continued to be the most significant non-oil sector with two-way trade. However, four other non-oil sectors, namely, organic chemicals, electrical machinery, ores, slag and ash, and articles of iron and steel show significant increases in two-way trade. Other sectors

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that remain important participants in two-way trade are nonelectrical machinery, iron and steel, automobiles and plastics and plastic products.

3 India’s Trade with ASEAN

While Singapore and Indonesia were the most important markets for India within ASEAN in 1995, Malaysia and Thailand became more relevant later on. But by 2004, Singapore’s shares in Indian exports increased much faster and following the signing of the CECA in 2005, this increased to nearly 5% in 2008. On the other hand, the share of India’s exports going to Thailand declined after 2002 and has hovered around 1.1% despite the coming into force of the Early Harvest Program (EHP) of the India-Thai FTA in 2004. In 2008, a total 10% of India’s exports were absorbed by the ASEAN-5 countries.

Figure 1: ASEAN’s Share in Indian Exports (1995-2008, in %)

1995 2002 2004 2007 2008 Singapore Indonesia Thailand Malaysia Vietnam ASEAN-5 total Other ASEAN 12 10 8 6 4 2 0 8.0 7.9 9.3 8.9 10.1 0.6 1.1 0.6 0.5 0.6

Source: Based on UN Comtrade Database.

When it comes to imports, India’s total imports from ASEAN showed a steady rise until 2007. Singapore followed by Malaysia were the most important sources within ASEAN in 1995. But, by 2002, Indonesia too had become equally important, followed by Thailand. However, it is interesting to note that in 2008, there is a significant drop in the share of ASEAN in India’s total imports under the impact of the global recession that had hit India’s exports too. (There is a hint here that India’s global export growth is linked to the import supply from ASEAN.)3

Figure 2: ASEAN’s Share in Indian Imports (1995-2008, in %) 10

9.1

6.5 7.5 1995 2002 2004 2007 2008 8 6 4 2 0 0.5 0.8 0.6 0.6 0.5 8.1 8.0
Singapore Malaysia Indonesia Thailand
Vietnam ASEAN-5 total Other ASEAN
Source: Based on UN Comtrade Database.

Thus, neither the Philippines nor the newer ASEAN members (Cambodia, Laos, Myanmar and Brunei Darussalam) have accounted for even a 1% share in India’s exports or imports until now. Given that Vietnam’s share in India’s total trade with ASEAN also remains very low, we focus the rest of the detailed analysis in this paper to the four ASEAN countries, Singapore, Malaysia, Indonesia and Thailand.

Composition of India-ASEAN Bilateral Trade

A country-by-country analysis of the bilateral trade between India and the four ASEAN countries shows that two-way trade between India and ASEAN has increased in about 13 sectors. These are (i) mineral fuels, oils, and distillation products, (ii) organic chemicals, (iii) miscellaneous chemical products, (iv) plastics and articles thereof, (v) rubber and articles thereof, (vi) pearls, precious stones, metals, and coins, (vii) iron and steel, (viii) articles of iron and steel, (ix) copper and articles thereof, (x) nuclear reactors, boilers, and machinery, (xi) electrical, electronic equipment, (xii) vehicles other than railway, tramway (transport equipment), and (xiii) Optical, photo, technical, medical apparatus and the like.

While a detailed analysis of India’s bilateral trade with each of these four countries at the six-digit product level is called for to understand the dynamics of this increased two-way trade, there is preliminary evidence pointing towards India’s increased integration with the regional and global production networks centred on ASEAN.

The most fundamental aspect about the export growth of ASEAN-5 has been integration in global production networks driven by FDI, which has led to most of these developing countries achieving export-led growth. Thus, the patterns of manufacturing sector production in most of these countries has been highly dependent on the networks put in place by MNCs, which have been able to base parts of their production processes in different countries across the region based on the availability of skills and resources required for particular stages of production along the value chain. ASEAN has been the most important production base for not only Japanese but also American and European multinational firms, which have invested and organised production and procurement networks in ASEAN for half a century. Firms from South Korea and Taiwan Province of China too have built production networks across the region since the late 1980s. But liberalisation of trade and investment regimes as part of regional trade agreements (RTAs) removes the need for MNCs to maintain horizontal national operations. That is, RTAs enable MNCs to restructure their operations by assigning the responsibility for serving specific regional or even global markets in particular product lines to certain affiliates in particular countries.

It has been observed that the implementation of the Indo-Thai bilateral FTA in terms of the EHP4 led to significant industrial restructuring in the operations of not only Japanese corporations, but also South Korean and Indian MNCs. For instance, Toyota was reportedly restructuring its operations in Thailand and India, under which some models of vehicles would be sourced from Thailand for the Indian market and gearboxes exported to Thailand from India. A similar restructuring was on in Sony’s operations in India and Thailand. On the other hand, Hyundai was making India a regional and global hub for compact cars and was to source them from India. Other MNCs like Honda which have built up sizeable capacities in India for two-wheeler production might use it as a regional base while sourcing some models of cars from Thailand (Kumar 2007). Some Indian companies are also developing their regional production networks across the region. Indian companies are looking at Thailand as an important investment destination both for its domestic market and as a gateway to other ASEAN countries. Tata Motors, Tata Consultancy, Mittal Group, Tata Steel and Satyam Computers are among major Indian players in Thailand.

Thus, there is evidence that the bilateral FTA between India and Thailand has led to some production restructuring by both Indian and east Asian MNCs. As result, FDI-led trade integration is emerging between India and Thailand. The India-Thai FTA’s EHP was thus seen to have had a major impact in changing the composition of bilateral trade between India and Thailand.5 In fact, while India had maintained trade surplus vis-à-vis Thailand continuously during 1995-2004, with the higher growth in Thailand’s exports to India, this turned into a trade deficit in 2005.

Table 1: India’s Balance of Trade with ASEAN Countries (1995-2008, in $ million)

1995 2002 2005 2007 2008
Singapore 45.5 46.7 2,268.1 -511.5 549.1
Indonesia 200.3 -493.6 -1,628.9 -2,962.2 -3,772.0
Thailand 302.2 376.1 -137.3 -519.0 -659.5
Malaysia -504.9 -587.7 -1,292.2 -3,875.3 -4,427.0
Vietnam 108.5 276.4 506.1 1,088.3 1,441.0
ASEAN-5 151.7 -382.2 -284.2 -6,779.7 -6,868.4
Philippines 122.4 334.5 278.9 397.9 527.4
Myanmar -131.9 -278.9 -371.9 -646.3 -668.9
Cambodia 1.8 16.3 20.9 43.6 49.6
Brunei Darussalam 7.2 4.3 3.6 -225.3 -308.7
Lao People’s DR na na na na na
Other ASEAN -0.6 76.2 -68.5 -430.1 -400.7

Na= not applicable. Source: Based on UN Comtrade Database.

Among the ASEAN-5, India has maintained a trade deficit in most years with Indonesia, Malaysia and Myanmar, and with Thailand more recently. India has run a trade surplus with Singapore, Vietnam, Cambodia and the Philippines. However, India’s overall trade balance with ASEAN countries is significantly negative. Given this backdrop, we examine the implications of India’s tariff reduction commitments under AIFTA in the following section.

4 The ASEAN-India FTA in Goods

Some of the main features of the tariff reduction commitment are

(i) AIFTA provides for a phased reduction of import duties on Indian and ASEAN member countries’ agricultural and non-agricultural goods between January 2010 and January 2016; (ii) These duties will come down from the 2007 applied most favoured nation (MFN) tariff levels; (iii) India, Indonesia, Malaysia, Singapore, Thailand and Brunei Darussalam have to eliminate tariffs by 2013 for the products listed under normal track-1 (NT-1) and by 2016 for normal track-2 (NT-2) products; and (iv) The deadlines for bilateral duty elimination for India and the Philippines are 2018 and 2019, respectively.

Apart from a sensitive track, there is a list of special products, for which tariffs will be reduced at a much lower pace than the normal track and sensitive track. There is also an exclusion list of products for which no tariff reduction commitments have been made.

With the signing of AIFTA, India has made commitments to reduce or eliminate tariffs for over 89% of all of its agriculture, marine and manufactured goods by 2016. Nearly 70% of India’s

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tariff lines fall under NT-1, for which tariffs reduce to zero by 2013. The remaining nearly 9% tariff lines fall under NT-2, for which tariffs reduce to zero by 2016. The 496 products excluded from tariff reduction commitments and kept under the exclusion list constitute 9.8% of India’s total tariff lines, while India has kept 11.1% of its total tariff lines under the sensitive track. Special products constitute just 0.1% of its total tariff lines. Evidently, the vast majority of products come under the lists for tariff rate eliminations by 2013 or 2016.

In the following sections, we examine the implications of the tariff reduction commitments undertaken by India on its agricultural and manufacturing sectors by analysing the nature of tariff reductions under different categories.

Impact on the Agricultural Sector

Out of the 722 six-digit tariff lines coming under the agricultural sector (HS 1-24 including fisheries), 402 products fall under the normal track with tariffs to be reduced to zero by 2013 or 2016, while 14 are in the sensitive track, five are special products, and 301 products are in the exclusion list.

Under the sensitive track, India has to bring down tariffs on products with applied MFN tariffs above 5% to 5% by 2016. Applied MFN tariffs can be maintained at 5% for only 50 tariff lines. Tariffs for the remaining products with applied MFN at 5% had to be reduced to 4.5% in January 2010, which will be reduced further to 4% by 2016. Applied MFN tariffs on another 4% of the products placed in the sensitive track will drop to zero by 2019.

It is observed that out of the 14 agricultural products (HS 1-24), as many as 13 had their 2007 MFN applied rates at an average of 30%. Even if the government plans to maintain the tariffs on all 14 products at 5% or 4%, it is clear that AIFTA involves high tariff reductions on these products given that their applied MFN level in 2007 averaged about 30%.

It is also relevant to consider the non-agricultural products on the sensitive track, apart from product lines under the automobiles sector with the highest 2007 applied tariff of 32.5%. There are several other manufactured sectors including organic chemicals, plastic products, rubber products, machinery and electrical machineries, textiles, footwear and parts, etc, whose 2007 applied MFN rates ranged from 7% to 25%. In the entire sensitive list, only “residue of food and animal fodder” (HS 23) had its 2007 applied MFN tariff at 5%. Thus, all the remaining tariffs have to be brought down to 5% by 2016. Out of the 563 tariff lines under the sensitive track, this implies quite a significant tariff reduction across a wide range of products. Many of these will be further brought down to zero by 2019 and tariffs on only 50 lines will be maintained at 5%.

Next we consider India’s special products, which are crude palm oil (CPO; applied MFN 80%); refined palm oil (RPO; 90%), coffee (100%), black tea (100%); and pepper (70%). The initial tariff drops for these five products were in the range of only 3%5% in January 2010. However, in four years by 2014, these will drop by 20%, 20%, 25%, 25% and 10%, respectively. By 31 December 2019, the rates will be 37.5%, 45%, 45%, 45% and 50%.

It is evident that this involves significant tariff reduction and implies a significant increase in market access in animal and

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Figure 3: Trends in Tariff Reduction for India’s Special Products under AIFTA

120

100 80 60 40 Crude Palm Oil Refined Palm Oil Coffee Pepper Black tea

20 Base rate 2010 2013 2015 2018 31/12/2019 Coffee and Black tea have exactly the same 2007 base tariff rates (100%) and the same tariff reduction schedule, with the result that the final 2019 tariff rates for both stand at 45%.The two lines therefore merge. Source: Based on India’s schedule of commitments to ASEAN-5 and Cambodia, Laos, Myanmar and Vietnam (CLMV).

vegetable oils and fats (HS 15) and coffee, tea, maté and spices (HS 9), where Indonesia, Malaysia and Vietnam are already significant exporters to India. In 2008, India imported 67% of its total global imports of animal and vegetable oils and fats from Indonesia, followed by about 15% from Malaysia. As for coffee, tea, maté and spices, Indonesia provided nearly 21% and Vietnam provided 13% of India’s total imports in these two segments in 2008. Thus, under AIFTA, Indian farmers are likely to encounter significantly increased volumes of imports in the domestic markets. It should also be noted that whenever applied tariff rates in a particular year are lower than the preferential tariffs under AIFTA, the lower tariffs will apply. Thus, having these products listed as special products under AIFTA will not be sufficient to protect them in the future, if India chooses to reduce such tariff rates at the MFN level.

India’s exclusion list contains some of the agricultural products of livelihood concern. These are coconut, cotton, milk/dairy products, wheat, paddy/rice, sugar cane, apples, etc. However, as is known, having a product on the exclusion list does not imply effective protection from all competition. Local producers of the agricultural and other products listed in the exclusion list will still face increased competition from cheaper imports of substitutes for these products whose tariffs are being reduced under different tracks in the FTA, as we will discuss below. Further, the exclusion list itself is subject to an annual tariff review with a view to improving market access.6

Several agricultural crops could face increased demand and price uncertainties also because many semi-processed or processed versions of these crops are not included in the exclusion list. Tariffs for many agricultural products (listed under HS 1-24) do drop to zero under the normal track by 2013 or 2016, as we will see in the following section. The consequent reduced demand for local agricultural produce will hit local farmers.

Bad News for Farmers

Tariff reduction and elimination under AIFTA will not only directly disrupt farmers’ domestic markets, but the increased supply of agricultural and related semi-processed (and processed) products will also reduce their bargaining power and lead to a fall in the domestic prices of many of these agricultural products. Further, it should be noted that even while utilising safeguard provisions under the FTA, tariffs cannot be raised above the levels scheduled in it. This means that India will have the right to raise those tariffs with ASEAN only to the highest level that is committed to in the agreement. With tariffs dropping to zero in most cases, this becomes meaningless. Therefore, India’s commitments under AIFTA are likely to cause significant negative impact on livelihoods and food security across several segments of rural population in India.

According to Viswanathan and Shah (2008), the launching of trade reforms and liberalisation policies in the post-World Trade Organisation (WTO) context has already seriously affected the Indian plantation sector in general and the tea and rubber production sectors in particular. One of the most explicit effects of the trade reforms has been the emergence of market uncertainties leading to high volatility or steep fall in the international and domestic prices of these commodities due to the removal or dilution in tariff and non-tariff trade barriers. The extent of decline in prices and their instability have both been the highest for rubber and tea, which have had adverse effects on tea and rubber production. In the case of rubber, the liberal trade policies have resulted in the removal of quantitative restrictions (QRs), which in turn enabled the manufacturers of rubber products to directly import rubber through the duty free channels (as an incentive for export of rubber products). The coping mechanisms adopted by the tea and rubber planting communities (medium and large tea planters and small rubber producers) in response to the crisis have included cost saving and labour displacing measures such as dilution and even discarding of scientifically recommended agro-management practices, labour retrenchment, lockouts and resistance to routine tripartite wage negotiations. A large number of medium and small-scale tea estates were closed down in the major tea growing regions in India due to the crisis and troubled labour relations. This has severely affected the livelihoods of labourers and the dependent communities, following a reduction in employment, and/or non-payment of wage and non-wage benefits and other social security measures.

The experiences of other countries also indicate that adjustment of farmers to trade liberalisation has had adverse impact on their livelihoods and income levels. It is believed that agricultural trade liberalisation will help boost international agriculture trade and automatically pressurise farmers and entrepreneurs to adjust themselves more efficiently to international competition. But as Prachason (2009) has argued in the case of Thailand, in reality, adjustment often means continuing to grow the same crops at a disadvantage because they are a part of the farmers’ lives and these very crops provided them and their families with basic needs and some level of luxury for years. For other farmers, adjustment means joining companies in contract farming. Livelihood concerns could drive farmers towards becoming a part of vertically integrated agri-commodity value chains through contract farming. This may be favourable for farmers if contracts are negotiated on equal footing and there is a mechanism to regulate and control unfair practices. But experiences in developed and developing countries have shown that farmers are usually put in a disadvantageous position on both the production and marketing sides.7

Further, as Francis and Kallummal (2009) have argued, financial liberalisation is already affecting the agricultural sector in developing countries through three different channels – the direct channel on cost of capital and its availability for farmers, the macroeconomic channel, and the indirect channel through the impact of financial liberalisation on the various links in the agri-product value chain. The adverse effects of domestic financial deregulation and the overall reduced role of government financing get further vitiated by the constraints imposed by external financial liberalisation, through its interactions with monetary and fiscal policies as well as through the liberalisation of FDI and foreign portfolio investment policies. The liberalisation of FDI norms, which brings in MNCs into the value chain of food products (including distribution services), serve to exacerbate the difficulties faced by small farmers in developing countries. It has been observed that foreign investment and trade liberalisation together with technological changes have led to MNCs becoming dominant in the entire chain of agricultural production and distribution, comprising farmers, fuel companies, fertilisers and chemical companies, seed companies, machinery companies, grain companies, packers and processors, and retailers. It is therefore the balance of market power between farmers and corporations that is the primary determinant of the distribution of profits within the agri-food production chain. This leads to a disconnect between the gross farm revenue and net farm income.8

The various channels of interaction between financial and trade liberalisation in the agricultural sector, together with the current trends in changing ownership patterns in farm input industries and related service sectors such as wholesale and retail distribution, and heightened integration within the agricultural products value chain could lead to significant loss of income for the farmers as well as a decline in their food security. The integration of India’s urban and even small town food markets, which are already linked to the international economy through the ongoing penetration of transnational companies (global or regional) with the liberalisation of the multi-brand retail, will increase further with trade liberalisation under the AIFTA. This will be enabled by the process of consolidation and multinationalisation occurring in the case of fast-food chains as well as in second stage processing (defined as processed food products for final consumers, such as yogurts and cheese, breads and noodles), facilitated through liberalised trade in food products through ASEAN countries. It is important to note that apart from being integrated with Japanese and American food producing MNCs through their production facilities in these countries, ASEAN has also signed FTAs with both Australia and New Zealand, which are major producers and exporters of milk products. Thus, the AIFTA will push India into getting deeply integrated into the international food production and marketing chains. Drawing from experiences in other countries (Francis and Kallummal 2009), this portends adverse consequences for many segments of the Indian farming community.

Manufacturing Sector: Gains for ASEAN

In this section, we examine the extent of India’s tariff reductions under NT-1 and NT-2. We first consider those sectors in which imports from any of the ASEAN-5 countries contributed to at least a 5% share in India’s total imports in those sectors in 2007.

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Table 2: India’s Tariff Reduction in Major Agricultural Sectors under Normal Track-1 vegetable extracts; (v) olive oil as well as animal fats and oils;

HS Chapter Description 2007 Average Average

(vi) miscellaneous edible preparations (such as yeasts, baking

Average Preferential Preferential MFN (%) Tariff in Tariff in

powders, soya sauce, tomato ketchup, mustard flour, curry

2010 (%) 2013 (%)

paste, ice creams, protein concentrates, etc); and (vii) meat

Meat and edible meat offal 30.0 25.0 0.0

meals and pellets, maize bran, wheat bran, residues of starch,

Products of animal origin, nes 28.7 23.9 0.0

Edible fruit, nuts, peel of citrus fruit, melons 27.4 22.9 0.0 dog or cat food. Coffee, tea, mate and spices 30.0 25.0 0.0 Tables 3 and 5 provide the tariff reduction scenarios for major

Lac, gums, resins, vegetable saps and extracts nes 27.0 22.5 0.0 agricultural and non-agricultural sectors where tariffs will drop Vegetable planting materials, vegetable products nes 30.0 25.0 0.0 to zero by 2016 under NT-2 (from an average 30% in 2007). It is Animal, vegetable fats and oils, cleavage products, etc 31.0 24.7 0.0

seen in Table 3 that tariff rates on a set of 10 agricultural products

Miscellaneous edible preparations 30.0 25.0 0.0

– such as apples, cardamom and saffron, rye flour, fractions of

Residues, wastes of food industry, animal fodder 29.1 24.1 0.0

animal fats and oils and waxes will drop significantly by 2013

Average for the above nine agricultural sectors 29.2 24.2 0.0

and become zero by 2016.

These are sectors in which India’s imports from any of the ASEAN-5 countries constituted at least a 5% share in India’s total imports from the world in 2007. Source: Author’s calculation based on India’s AIFTA Tariff Reduction Schedule to ASEAN-5 + CLMV.

Table 5: India’s Tariff Reduction Scenario of Major Non-Agricultural Sectors under Normal Track-2

HS Chapter Description 2007 Average Average Average

India typically maintained relatively high tariff rates in agri-

MFN (%) Preferential Preferential Tariff in 2010 Tariff in 2013

cultural products listed under HS 1-24 (Table 2). An analysis of

(%) (%)

India’s tariff reduction commitments under NT-1 shows that the

Rubber and articles thereof 10.0 7.5 3.0

immediate drop in tariffs (that is, in January 2010) across the

Wood and articles of wood, wood charcoal 10.0 7.5 3.0

nine agricultural sectors is on average only 5 percentage points.

Pulp of wood, fibrous cellulose material, waste, etc. 10.0 7.5 3.0

However, by January 2013, average tariffs in all these sectors will

Manmade staple fibres 10.0 7.5 3.0

drop to zero, from as high as an average of 29%.

Furniture, lighting, signs, prefabricated buildings 10.0 7.5 3.0 Given that ASEAN countries are already significant exporters to Average for the above five sectors 10.0 7.5 3.0 India in several of these sectors, AIFTA will increase their market

Same as Table 2.

access in India significantly for agricultural products, as well as in Table 6: India’s Tariff Reduction Scenario in Major Sectors involved in Two-way Trade with ASEAN

semi-processed and processed agricultural products in these sec-

Sector NT-1 Products NT-2 Products tors. This is true of (i) meat and edible meat offal; (ii) edible fruits Average Average Average Average Average Average 2007 MFN Preferential Preferential 2007 MFN Preferential Preferential

and nuts (such as pears, plums, peaches, strawberries, kiwi fruits,

Tariff in Tariff in Tariff in Tariff in 2010 2013 2010 2013

pomogranates, avacados, etc; citrus fruits peels, and walnuts, hazel

Mineral fuels, oils,

nuts, pistachios, etc); (iii) maté, cinnamon, cassia; (iv) lac, gums,

distillation products, etc 8.5 6.4 0 ---

Organic chemicals 7.1 4.9 0 7.5 5.0 2.0

Table 3: India’s Tariff Reduction Scenario of Major Agricultural Sectors under Normal Track-2

Miscellaneous chemical

HS Chapter Description 2007 Average Average Average products 8.8 6.3 0 10.0 7.5 3.0 MFN (%) preferential Preferential

Plastics and articles thereof 7.5 5.0 0 8.5 6.2 2.5

Tariff in Tariff in 2010 (%) 2013 (%) Rubber and articles thereof 9.4 7.1 0 10.0 7.5 3.0

Edible fruit, nuts, peel of citrus fruit, melons (Apples) 30.0 25.0 11.0 Pearls, precious stones,

metals, coins, etc 9.2 6.9 0 ---Coffee, tea, mate and spices (Cardamom and Saffron) 30.0 25.0 11.0

Iron and steel 10.0 7.5 0 ---Milling products, malt, starches, insulin,

wheat gluten (Rye flour) 30.0 25.0 11.0 Articles of iron or steel 10.0 7.5 0 ----

Animal, vegetable fats and oils, cleavage products, etc. Copper and articles thereof 6.5 5.0 0 7.5 5.8 2.5 (Fractions of animal fats and oils and animal waxes) 37.0 23.6 10.0

Nuclear reactors, boilers,Average for the above four sectors 31.8 24.7 10.8 machinery, etc 7.0 4.8 0 7.5 5.0 2.0 Same as Table 2.

Electrical, electronic equipment 6.1 4.4 0 9.2 6.7 2.7

Table 4: India’s Tariff Reduction Scenario in Major Non-Agricultural Sectors under Normal Track-1 Vehicles other thanHS Chapter Description 2007 Average Average Average railway, tramway 17.0 9.1 0 10.0 7.5 3.0

MFN (%) Preferential Preferential

Optical, photo, technical,

Tariff in 2010 Tariff in 2013 (%) (%) medical, etc apparatus 7.3 5.1 0 8.0 5.5 2.2

Blank cells denote that there were no products listed under that category (NT-2) in those

Ores, slag and ash 3.3 2.8 0.0

particular sectors. Rubber and articles thereof 9.4 7.1 0.0

Source: Author’s calculation based on India’s AIFTA Tariff Reduction Schedule to ASEAN-5 + CLMV.

Wood and articles of wood, wood charcoal 9.0 6.8 0.0 Table 7: India’s Market Access Scenario in ASEAN for Normal Track Products Pulp of wood, fibrous cellulose material, waste, etc 5.5 4.4 0.0 Normal Track-1 Normal Track-2 Average 2007 Average Average Average 2007 Average Average

Printed books, newspapers, pictures, etc 4.7 3.5 0.0

MFN Preferential Preferential MFN Preferential Preferential Manmade staple fibres 10.0 7.5 0.0 Tariff in 2010 Tariff in 2013 Tariff in 2010 Tariff in 2013

Tin and articles thereof 6.0 4.7 0.0 India 12.9 10.1 0 9.5 6.4 0

Musical instruments, parts and accessories 10.0 7.5 0.0 Malaysia 1.9 1.5 0 19 15.8 6.9

Furniture, lighting, signs, prefabricated buildings 10.0 7.5 0.0 Indonesia 2.6 2.1 0 4.7 3.8 1.9

Average for the above nine non-agricultural sectors 7.5 5.7 0.0 Thailand 6.5 5.2 0 18 14 5.7 Same as Table 2. Source: Author’s calculation based on AIFTA Tariff Reduction Schedules.

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january 8, 2011 vol xlvi no 2

Table 8: Indonesian Sectors with Significant Tariff Reduction by 2013 (in %) with the highest average MFN tariff rates in
Sector Average 2007 Average Average 2007 Average 2007 (10%). As seen in Table 4, once again,
MFN for Preferential MFN for Preferential
NT-1 Tariff in 2013 for NT-2 Products Tariff in 2013 for while the immediate drop in tariffs with the
NT-1 Products NT-2 Products
Cocoa and cocoa preparations 12.8 0.0 - -AIFTA coming into force in January 2010
Cereal, flour, starch, milk preparations and products 6.5 0.0 was not drastic, by 2013 all these tariffs will
Beverages, spirits and vinegar 6.3 0.0 - -become zero.
Vegetable, fruit, nut, etc food preparations 6.0 0.0 -Additionally, sectors such as: pulp of
Meat, fish and seafood food preparations nes 5.9 0.0 7.5 2.5 wood, fibrous cellulose material, etc; tin and
Sugars and sugar confectionery 5.9 0.0 - - articles thereof; printed books and newspa-
Dairy products, eggs, honey, edible animal product nes 5.6 0.0 - - pers, ores, slag and ash are also likely to
Meat and edible meat offal 5.0 0.0 5.0 2.0 witness an increase in imports from ASEAN.
Edible fruit, nuts, peel of citrus fruit, melons 5.0 0.0 5.0 2.0 Therefore, Indian small and medium
Coffee, tea, mate and spices 5.0 0.0 - enterprises (SMEs) in agriculture-related
Milling products, malt, starches, inulin, wheat glute Lac, gums, resins, vegetable saps and extracts nes Miscellaneous edible preparations Tobacco and manufactured tobacco substitutes 5.0 5.0 5.0 5.0 0.00.0 0.0 0.0 5.0 5.0 - 2.0 2.0 - products and food products, intermediate goods such as man made staple fibres and light manufacturing products such as furni-
Explosives, pyrotechnics, matches, pyrophorics, etc Articles of leather, animal gut, harness, travel good 5.0 5.0 0.00.0 ture, lighting and prefabricated buildings; musical instruments and parts; rubber and
Furskins and artificial fur, manufactures thereof 5.0 0.0 rubber products; as well as wood and wood
Cork and articles of cork 5.0 0.0 - - products are likely to be adversely affected
Silk 5.0 0.0 - - by the much greater market access the

Wool, animal hair, horsehair yarn and fabric thereof 5.0 0.0 --ASEAN economies will gain due to tariff Other made textile articles, sets, worn clothing, etc 5.0 0.0 -

liberalisation under NT-1 and NT-2.

Miscellaneous articles of base metal 5.0 0.0 --

Let us now consider the sectors that are

Musical instruments, parts and accessories 5.0 0.0 --

significant in two-way trade between India

Toys, games, sports requisites 5.0 0.0 --

and individual ASEAN-5 countries.

We consider only those sectors with 5 percentage point or more average tariff reduction for NT-1 products. Blank cells denote that there were no products listed under that category in those particular sectors. It is evident from Table 6 that India’s Source: Author’s calculation based on AIFTA Tariff Reduction Schedules.

tariff reductions under NT-1 and NT-2 will

There are other food products-related sectors such as sugar be the most significant in the case of automobiles. From an averand sugar confectionaries; cocoa and cocoa preparations; as well age MFN rate of 17% in 2007, NT-1 tariffs will drop significantly as cereal, flour, starch, milk preparations and products, which by 2010 and subsequently to zero by 2013, and NT-2 tariffs also might witness a surge in imports under NT-1 liberalisation, even drop significantly by 2013. The other sectors with significant though they are not currently imported by India in a major way tariff reductions include electrical machinery; nuclear reactors from ASEAN. Food preparations out of cucumbers and gherkins, and machinery; optical, photo, medical apparatus; rubber and olives, mangoes, groundnuts, cashew nuts (roasted, salted, etc), articles; miscellaneous chemical products; organic chemicals; fruit juices out of grapes, mangoes, pineapples, apples (all under plastics and articles; copper and articles; etc. Such tariff reductions HS 20), are another set of agricultural-related products that are

Table 9: India’s Exports to Indonesia (1995-2008, Percentage share)

likely to witness an increase in imports from ASEAN. S Sector 1995 2002 2007 2008 2008 No Rank

As already argued, duty-free trade in these semi-processed

1 Organic chemicals 3.9 8.0 20.7 15.5 2

products (by either 2013 or 2016) will give a major incentive for

2 Mineral fuels, oils, distillation products, etc 0.2 17.5 12.1 23.1 1

agro-processing units to import them directly from ASEAN than

3 Iron and steel 8.6 5.9 11.9 6.8 4

to source them locally. Additionally, there will be increased sup

4 Residues, wastes of food industry, animal fodder 15.4 8.3 8.5 9.8 3

ply of processed foods also. This is likely to have some impact on

5 Oil seed, oleagic fruits, grain, fruit, etc, nes 5.1 3.6 6.7 5.5 5

the small and medium enterprises in the Indian food products

6 Cotton 1.3 2.3 4.8 4.7 6 industry. Further, both the reduced demand for local agricultural 7 Sugars and sugar confectionery 5.3 2.6 3.5 1.2 16

products because of the availability of imported semi-processed 8 Nuclear reactors, boilers, machinery, etc 5.6 3.7 3.2 3.7 8

products and the increased imports of close substitutes to domes-9 Copper and articles thereof 0.0 0.1 3.0 2.2 11 tic produce may lead to a fall in the prices of local crops and other 10 Miscellaneous chemical products 0.4 0.4 2.5 2.3 10 produce, including livestock. This will have a negative impact on

11 Vehicles other than railway, tramway 1.2 2.5 2.3 3.3 9

12 manmade staple fibres 0.1 0.4 2.2 1.4 15

farm employment and livelihood.

13 Plastics and articles thereof 0.6 2.2 1.6 1.0 17

Next we consider the non-agricultural sectors under NT-1, in

14 Inorganic chemicals 1.7 2.0 1.6 1.4 14

which imports from any of the ASEAN-5 countries constituted at

15 Electrical, electronic equipment 2.2 2.3 1.5 1.5 12

least a 5% share in India’s total imports from the world in 2007. It

16 Tanning, dyeing extracts, etc 1.3 1.9 1.5 1.5 13

is observed that man made staple fibres, furniture, lighting and

17 Zinc and articles thereof 0.0 0.0 1.3 0.8 19

prefabricated buildings; musical instruments and parts; rubber

Cumulative total 53.0 63.9 88.8 85.6 and rubber products; wood and wood products were the sectors Source: Author’s calculation based on UN Comtrade database.

52 january 8, 2011 vol xlvi no 2

Table 10: Malaysian Sectors with Significant Tariff Reduction by 2013 (in %) ASEAN as a base to enter other major mar-
Sector Average 2007 MFN for Average Preferential Average 2007 MFN for Average Preferential kets and are working their way into the dy
NT-1 Products Tariff in 2013 NT-2 Products Tariff in 2013 namics of ASEAN+1 FTAs. It should be noted
for NT-1 for NT-2
Products Products that under the rules of origin criteria of
Bird skin, feathers, artificial flowers, human hair 20.0 0 20.0 7.3 AIFTA, a product is deemed to be originat-
Cocoa and cocoa preparations 13.0 0 - - ing in the region and will be eligible for
Beverages, spirits and vinegar 13.0 0 - - preferential market access if they follow
Miscellaneous manufactured articles 10.8 0 21.3 8.0 two criteria:
Cotton 9.5 0 - - (i) the AIFTA content is not less than 35% of
Miscellaneous edible preparations Manmade staple fibres Manmade filaments Tools, implements, cutlery, etc of base metal Rubber and articles thereof 7.8 7.4 7.0 6.5 6.4 0 0 0 0 0 ---25.0 20.9 ---10.0 7.9 the freight on board value; and (ii) the nonoriginating materials have undergone at least a change in tariff sub-heading (CTSH) level of the HS.
Paper and paperboard, articles of pulp, paper and board 6.1 0 20.0 7.3 It is also required that the final process of
Same as Table 8. the manufacture be performed within the
Source: Author’s calculation based on AIFTA Tariff Reduction Schedules. territory of the exporting party. According
are likely to lead to an increase in the recent trends witnessed in to Sukegawa (2009), the procurement ratio of Japanese firms in
India’s two-way trade with ASEAN countries. In particular, import ASEAN exceeds 40% except in the Philippines. Thus Japanese
liberalisation in intermediate goods will give greater benefits to firms are qualified to utilise the AIFTA. In fact, a JETRO survey of
MNCs for undertaking production rationalisation across the Japanese firms in Asia and Oceania has established that Japanese
region, particularly in the transport equipment and machinery firms intend to use Thailand as a production base to export to the
sectors. This will also help the Indian MNCs who are active in the Indian market utlitising the ASEAN-India FTA. The author con
region, especially in the chemicals and also to a lesser extent the firms that since the Indo-Thai EHP in 2004, Japanese manufac
iron and steel sectors. Thus, it is envisaged that AIFTA will lead to turers have shifted production base to Thailand for exporting to
India’s deeper integration into production networks in some India, especially for air conditioners, television sets and other
industries like transport equipment, machinery and chemicals. machinery equipment. Sony, which had television factories in
This is supported by Japan External Trade Organisation both countries, stopped production in India and started import
(JETRO) surveys on Japanese manufacturers operating in ASEAN ing from Thailand.9
and in India cited by Sukegawa (2009). These surveys showed Clearly, such production restructuring by MNCs across the
that Japanese affiliates intend to reinforce their operations in region under AIFTA has adverse implications for employment
Table 11: India’s Exports to Malaysia (1995-2008, Percentage share) generation and technological capability building for India, espe-
S No Sector 1995 2002 2007 2008 2008 Rank cially if the country is unable to move up the value chain of indus
1 Copper and articles thereof 0.8 0.9 12.5 11.6 2 trial production. Further, greater trade integration with Asia
2 Cereals 0.6 10.6 10.0 11.0 3 built through production chains will increase the country’s vul
3 Mineral fuels, oils, distillation products, etc 0.1 3.4 8.7 13.3 1 nerability to external shocks further, as was seen during the glo
4 Organic chemicals 2.2 2.7 6.2 7.7 4 bal crisis in 2008-09.
5 Nuclear reactors, boilers, machinery, etc 12.7 5.7 5.9 4.0 6
6 Coffee, tea, mate and spices 1.5 1.6 5.8 2.9 9 5 India’s Market Access Scenario in ASEAN-5 Countries
7 Iron and steel 7.2 3.2 5.3 2.2 15 Given that India already had significantly tariff-free trade with
8 Meat and edible meat offal 13.9 10.7 4.7 3.8 7 9 Electrical, electronic equipment 5.4 4.1 3.4 2.9 10 10 Articles of iron or steel 3.6 2.0 3.1 2.9 8 11 Edible vegetables and certain roots and tubers 5.9 3.6 3.0 2.3 14 12 Aluminium and articles thereof 0.4 2.1 2.9 4.1 5 Singapore and that it will eliminate customs duties on all originating goods under this agreement, our focus in this section is on Indonesia, Malaysia and Thailand, the other three major ASEAN trading partners.
13 Oil seed, oleagic fruits, grain, seed, fruit, etc, nec 1.6 1.6 2.3 1.7 17 As seen in Table 7, the 2007 average applied MFN tariff rates in
14 Articles of apparel, accessories, not knit or crochet 1.5 3.8 1.8 1.4 18 Malaysia and Indonesia were already relatively low for NT-1 prod
15 Cotton 7.4 4.9 1.7 1.4 19 ucts (when compared to India’s). Further, even though all NT-1
16 Miscellaneous chemical products 1.8 1.7 1.5 1.3 20 tariffs will drop to zero by 2013, there are unlikely to be any ma
17 Raw hides and skins (other than furskins) and leather 0.5 0.7 1.5 1.3 21 jor immediate benefits for India in the Malaysian and Indonesian
18 Rubber and articles thereof 0.5 1.1 1.3 2.0 16 markets, as average tariff drop by 2010 in Malaysia’s and Indone
19 Manmade filaments 1.4 2.5 1.2 0.8 23 sia’s NT-1 products are quite low.
20 Pearls, precious stones, metals, coins, etc 1.2 2.1 1.2 0.7 28 In Thailand’s case, the average drop in tariffs of 6.5 percentage
21 Residues, wastes of food industry, animal fodder 9.3 0.1 1.1 2.4 13 points by 2013 is significant and we need to examine the Indian
22 Fish, crustaceans, molluscs, aquatic invertebrates nec 4.0 1.7 1.0 0.5 32 sectors that may be able to gain from this increase in market
23 Animal,vegetable fats and oils, cleavage products, etc 0.3 0.4 1.0 1.3 22 access there.
Cumulative total 83.9 71.2 87.1 83.7 When it comes to NT-2 products, Malaysia and Thailand had
Source: Author’s calculation based on UN Comtrade database. significantly higher 2007 MFN tariffs than India. But the reductions
Economic & Political Weekly january 8, 2011 vol xlvi no 2 53
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Table 12: Thailand’s Sectors with Significant Tariff Reduction by 2013 (Percentage) In the case of Malaysia’s tariff reductions
Sector Average 2007 Average Average 2007 Average under AIFTA, it is seen that India is likely to
MFN for Preferential MFN for Preferential
NT-1 Products Tariff in 2013 for NT-2 Products Tariff in 2013 for benefit significantly from the increase in
NT-1 Products NT-2 Products
Articles of apparel, accessories, not knit or crochet 32.5 0.0 market access for cotton, rubber and rubber
Meat and edible meat offal 30.0 0.0 47.5 12.0 articles as well as man-made filaments,
Live trees, plants, bulbs, roots, cut flowers, etc 30.0 0.0 given that these are already among India’s
Edible vegetables and certain roots and tubers 30.0 0.0 39. - 75 11.9 exports to Malaysia (Tables 10 and 11).
Manufactures of plaiting material, basketwork, etc 30.0 0.0 - - In the case of Thailand (Tables 12 and 13),
Articles of apparel, accessories, knit or crochet 30.0 0.0 it is clear that vehicles other than railway,
Footwear, gaiters and the like, parts thereof 30.0 0.0 3 - 11.0 tramway (that is, automobiles), is one impor-
Coffee, tea, mate and spices 27.0 0.0 23.9 8.9 tant sector of Indian exports to Thailand,
Dairy products, eggs, honey, edible animal product nes 26.7 0.0 - - which will gain from significant tariff
Bird skin, feathers, artificial flowers, human hair 25.8 0.0 reductions under the AIFTA.
Vegetable, fruit, nut, etc food preparations Meat, fish and seafood food preparations nes Miscellaneous edible preparations Cereal, flour, starch, milk preparations and products 25.7 24.7 24.4 24.3 0.00.0 0.0 0.0 25.0 2 - 9.0 7.0 - It is observed that for Indonesia, Malaysia and Thailand, the largest tariff reductions under the AIFTA will occur in sectors
Arms and ammunition, parts and accessories thereof 24.0 0.0 - - consisting largely of agriculture and food
Other made textile articles, sets, worn clothing, etc 23.4 0.0 1 3.0 products as well as a range of light manu-
Headgear and parts thereof 22.5 0.0 facturing products, in which they are lead-
Umbrellas, walking-sticks, seat-sticks, whips, etc 22.0 0.0 3 11.0 ing exporters. While some Indian firms
Edible fruit, nuts, peel of citrus fruit, melons 21.1 0.0 4 12.0 might be able to make a presence in ASEAN
Sugars and sugar confectionery 21.0 0.0 markets (say, for Indian food products),
Explosives, pyrotechnics, matches, pyrophorics, etc 20.0 0.0 15.0 5.0 overall it is unlikely that Indian companies,
Articles of leather, animal gut, harness, travel good Ceramic products Milling products, malt, starches, inulin, wheat glute Furniture, lighting, signs, prefabricated buildings Animal, vegetable fats and oils, cleavage products, etc 20.0 19.8 19.3 18.4 17.5 0.0 0.0 0.0 0.0 0.0 25.0 1 -17.1 2 - .5 9.0 3.0 5.9 7.8 in particular the SMEs will be able to gain significantly out of this preferential access. In the case of light manufactured goods, Indian companies will also be competing
Works of art, collectors pieces and antiques 17.1 0.0 with China and South Korea in the ASEAN
Essential oils, perfumes, cosmetics, toileteries 15.7 0.0 15.0 5.0 market, which have already signed FTAs
Miscellaneous manufactured articles 15.2 0.0 17.5 6.0 with ASEAN.
Beverages, spirits and vinegar 15.0 0.0
Vehicles other than railway, tramway 14.2 0.0 11.4 3.6 6 Concluding Observations

Toys, games, sports requisites 13.8 0.0 13.6 4.5

Presenting an overview of the pattern and

Cocoa and cocoa preparations 12.9 0.0 --

composition of India’s global trade as well

Live animals 12.1 0.0 3 -11.0

as its trade with the major ASEAN countries,

Miscellaneous articles of base metal 12.0 0.0 12.5 4.0

this paper argued that the recent trends in

Tools, implements, cutlery, etc of base metal 11.9 0.0 15.4 5.1

India’s export and import structures point

Products of animal origin, nes 10.4 0.0 -

towards its increasing participation in FDI-

Musical instruments, parts and accessories 10.0 0.0 14.0 4.6 We consider only those sectors with 10 percentage point or more average tariff reduction for NT-1 products. Blank cells denote driven production networks centred on

that there were no products listed under that category in those particular sectors. Source: Author’s calculation based on AIFTA Tariff Reduction Schedules.

in Malaysian and Thai tariffs by 2010 are comparable to that of India’s and slightly greater only for Thailand. Thus, the preferential tariffs offered by both Malaysia and Thailand in 2010 are still significantly high (15.8% and 14% respectively). On the other hand, the tariff reductions to be carried out by Malaysia and Thailand by 2013 are definitely larger for NT-2 products and could offer some potential market access benefits to India. So we examine the different sectors in Indonesia, Malaysia and Thailand, which offer the greatest tariff reductions for Indian products.

Table 13 lists the Indonesian sectors that offer the largest tariff reduction to India under AIFTA’s Normal Tracks 1 and 2. Comparing these with India’s major export sectors to Indonesia (Table 13), it can be observed that India is currently not a significant exporter to Indonesia in any of the sectors with significant tariff reductions by 2013.

ASEAN. The implications of tariff reduction

commitments under the AIFTA for India’s agricultural and non-agricultural sectors were analysed against this backdrop.

It is established that ASEAN countries will gain significantly increased market access in India in several semi-processed or processed agricultural products. Thus, the reduced demand for local agricultural products due to increased market access by ASEAN countries and the increased imports of close substitutes could lead to a fall in the prices of local crops and thus impact the domestic agricultural sector adversely. Further, Indian SMEs in agriculture-related products and food products, as well as in some intermediate goods and light manufacturing products are also likely to be hit due to drastic tariff liberalisation under the AIFTA.

However, import liberalisation in intermediate goods will impel MNCs to undertake production rationalisation across the region, particularly in the transport equipment and machinery

january 8, 2011 vol xlvi no 2

Table 13: India’s Exports to Thailand (1995-2008, Percentage share) of light manufacturing products. India will also be competing

Sector 1990 1995 2002 2007 2008 2008 Rank

with China and South Korea in the ASEAN market, which already

1 Pearls, precious stones, metals, coins, etc 50.7 48.6 35.9 23.1 17.8 1

have FTAs with ASEAN. Thus, Indian SMEs will find it difficult to

2 Mineral fuels, oils, distillation products, etc 0.0 0.2 7.1 11.1 2.5 11

compete with these countries in such sectors.

3 Copper and articles thereof 0.1 0.0 7.3 10.7 9.8 4

Apart from China and South Korea, ASEAN has also signed

4 Iron and steel 3.0 5.7 6.7 7.5 14.7 2

FTAs with a number of other major countries such as Australia

5 Organic chemicals 4.4 5.0 6.6 7.2 6.6 5

and New Zealand. While India has signed a CECA with South animal fodder 7.2 13.7 4.5 7.1 10.8 3 Korea, other countries could make use of the AIFTA to route their 7 Nuclear reactors, boilers, machinery, etc 7.0 3.4 4.7 5.8 5.4 6

6 Residues, wastes of food industry,

products through ASEAN into the Indian market. China is a

8 Cotton 13.9 3.2 1.0 4.0 3.2 8

major producer of agricultural goods and a variety of manufac

9 Vehicles other than railway, tramway 1.3 0.5 0.8 3.0 3.6 7

tured goods. Meanwhile, the fall in Japan’s share in India’s

10 Miscellaneous chemical products 0.6 1.2 2.9 2.8 2.7 9

imports is linked to Japanese MNCs reorganising their produc

11 #N/A 0.5 3.3 5.4 1.6 1.9 12

tion networks in Asia since the progress of bilateral FTAs in the

12 Pharmaceutical products 2.1 1.1 1.1 1.6 1.8 14

region. It should also be noted that Australia and New Zealand

13 Tanning, dyeing extracts, tannins, derivs, pigments, etc 2.4 1.7 1.6 1.5 1.8 13 are major producers of milk products. Therefore, the rise in im

14 Plastics and articles thereof 0.1 0.5 0.5 1.5 1.5 15 ports could be much more than is currently possible to envisage,

15 Electrical, electronic equipment 0.8 1.0 1.0 1.3 2.6 10 also because firms across these countries will be reorganising Cumulative total 94.2 89.1 87.1 89.8 86.6

their production and procurement strategies, following the

Source: Author’s calculation based on UN Comtrade database.

Japanese example. The consequent decline in the need for setsectors. This might also help Indian MNCs who are active in the ting up production facilities in India in favour of imports from region, especially in the chemicals and also the iron and steel any of these countries is also likely to have significant adverse sectors. The paper argues that this would lead to India’s deeper employment and livelihood impact. integration into production networks in some industries like In conclusion, neglect of the development needs of the machinery, chemicals and transport equipment. On the other domestic agriculture and manufacturing base for the expected hand, there are hardly any immediate benefits for Indian produc-gains from service sector liberalisation with ASEAN, together ers as average percentage tariff drops in Malaysia, Indonesia and with the known problems in service sector liberalisation, are Thailand’s normal track products are much lower than India’s likely to make India’s employment and livelihood issues even

reductions. Further, the ASEAN-5 economies are leading exporters more challenging.

Notes

1 Note that not all simultaneous bilateral exchange of exports and imports at the 2-digit HS level necessarily classifies as intra-industry trade (IIT) as often considered in the literature, since some part of the two-way trade may be inter-industry trade. Also, IIT itself can be divided into two parts – IIT in horizontally differentiated products and IIT in vertically differentiated products, accounting for specialisation along ranges of quality within industries. These distinctions are important to understand the nature of production specialisation between countries and this can be explored only using data at the 6-digit HS level. For a detailed discussion on this, see IDEAs (2009).

2 In 2006, while the shares of developed and developing countries in India’s exports were 43% and 28% respectively, their shares in India’s imports were 33% and 26%, respectively. See IDEAs (2009).

3 In the context of my overall argument of India’s growing integration with production networks, it is being inferred that India’s export growth is possibly linked to imports of intermediates from ASEAN. If so, slow down in India’s global export growth in certain sectors would show up as an overall decline in imports from ASEAN.

4 The EHP, agreed under the framework agreement to establish the Thailand-India FTA signed on 9 October 2003, reduced tariffs on 84 agricultural and industrial items (HS six-digit level) by 50% immediately in the first year on 1 September 2004, 75% in the second year (1 September 2005), with tariffs eliminated completely by 1 September 2006. The 84 items under the EHP included, for example, fruits (fresh mangosteens, mangoes, durian, rambutans, longans); fishery products (salmon, sardines, mackerel); electrical appliances (window/wall air-conditioners, colour TVs, ball bearings); precious metal and jewellery; polycarbonates, and more.

Economic & Political Weekly january 8, 2011

EPW

5 See IDEAs (2009). 6 For a detailed analysis of the exclusion list under

AIFTA, see Pal and Dasgupta (2009). 7 See also Ghosh (2003). 8 See Francis and Kallummal (2009). 9 But in November 2009, Sony announced that it

will cease television production in Thailand as it became certain that the ASEAN-India FTA will come into effect in January 2010. Malaysia will now be Sony’s only global production base for television sets.

References

Francis, Smitha and Murali Kallummal (2009): “Financial Liberalisation and the Agriculture: An Overview of the Challenges before Developing Countries”, paper presented at an international seminar on “Financial Structures and Economic Development: Financing Theories and the New Standards” (Mexico: UNAM), 31 August1 September.

Ghosh, Jayati (2003): “Corporate Agriculture: The Implications for Indian Farmers”, available at http://www.macroscan.org/the/food/dec03/ fod171203Corp_Agri.htm.

IDEAs (2009): “China, India and Asia: The Anatomy of an Economic Relationship”, International Development Economics Associates Report, available at www.networkdieas.org.

Kumar, Nagesh (2007): “Regional Economic Integration, Foreign Direct Investment and Efficiency-Seeking Industrial Restructuring in Asia: The Case of India”, RIS Discussion Paper 123, Research and Information Systems, New Delhi.

Prachason, Sajin (2009): “Impact of FTAs on Agriculture: Issues in Food Security and Livelihood”, paper presented at the IDEAs-GSEI-ITD Asian

vol xlvi no 2

Regional Workshop on “Free Trade Agreements: Towards Inclusive Trade Policies in Post-crisis Asia”, Bangkok, 8-9 December.

Sukegawa, Seiya (2009): “The Movement of Japanese Companies towards the FTA Era in East Asia”, paper presented at the IDEAs-GSEI-ITD Asian Regional Workshop on “Free Trade Agreements: Towards Inclusive Trade Policies in Post-crisis Asia”, Bangkok, 8-9 December.

Viswanathan, P K and Amita Shah (2008): “Trade Reforms and Crisis in India’s Plantation Agriculture: Case Studies of Tea and Rubber Plantation Sectors”, paper presented at the Fourth Annual South Asia Conference on “Trade and Development 2008, Centre for Trade and Development”, New Delhi, 17-18 December.

Pal, Parthapratim and Mitali Dasgupta (2009): “The ASEAN-India Free Trade Agreement: An Assessment”, Economic & Political Weekly, Vol XLIV, No 38, September.

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