DPG Policy Brief

Boosting Australia-India Economic Relations

Date: December 07, 2020
The emerging strategic context in Asia and across the Indo-Pacific requires India and Australia, as two democracies which are also partners in the Quad, to work closer together. In his opening remarks at the Australia-India bilateral summit in June this year, Prime Minister Narendra Modi[1] referred to the shared values, shared interests, shared geography and shared objectives of the two countries and observed: “I believe that this is the perfect time, the perfect opportunity to further strengthen the relations between India and Australia”.

While the political and security aspects of cooperation between the two countries have seen steady growth in recent years and have received an impetus from several high level visits, joint military exercises and dialogue mechanisms, the economic dimension remains under exploited. The question for the two countries, which are at different levels of development, is whether they can work out a framework for trade and economic cooperation that can accommodate each other’s interests and aspirations? This brief is intended to address three aspects that require more immediate focus and could provide the momentum to move forward:
  • Concluding the ongoing CECA negotiations; 
  • Creating synergies between global supply chain resilience cooperation and India’s reform initiatives in manufacturing; and
  • Identifying areas for cooperation on WTO reforms and trade rules.
The Prime Ministers of the two countries have already decided to move towards a Comprehensive Strategic Partnership. At their virtual summit on June 4, 2020 they have also decided to re-engage on concluding CECA, taking into account earlier bilateral discussions. If CECA can be concluded in good time, it can certainly energise and enlarge bilateral merchandise and services trade and provide a strong framework for widening economic cooperation.

The two sides already know each other’s red lines and sensitivities considering that CECA negotiations have been held over several rounds between May 2011 and September 2015. These issues would have also figured in some manner during the RCEP negotiations until India withdrew from the process in November 2019.  So the key is for the two countries to craft a deal that can work around those sensitivities, or provide adequate flexibilities to effectively address them. This approach was hinted at when Australian trade minister Simon Birmingham visited New Delhi in March this year[2].

It must, however, be mentioned that in India a perception has gained ground that its existing FTAs have not brought commensurate benefits.  In trying to conclude future FTAs, the government of India will, therefore, be under some pressure. In any new FTA, it may have to demonstrate that India’s own access to the partner’s market will not remain unrealised due to NTBs, or protective visa provisions and standards, or because mutual recognition negotiations on professional competence and qualifications cannot make progress.

Moving forward with the negotiations will also require taking a medium to long term perspective, and not merely for early harvest deals. The ambitious “India Strategy” recommended by Mr. Peter Varghese[3], the former Australian High Commissioner to India, also looks at such a framework upto 2035, even as it is devoted mainly to how Australia should go about it and the recommendations have a wider scope than CECA. In any case, an approach to CECA that can work as a ladder for development for India has a better chance of success.

A look at trade and investment numbers suggests that bilateral trade in goods and cross border investment have been experiencing reasonable growth, considering the depressed global economic circumstances. But they could be far more dynamic, considering the potential. For Australia, India is the 4th largest export partner accounting for 5% of Australia’s exports. But India’s rank is far lower in Australia’s imports, with a share of less than 2%. Similar disparities exist in services trade as well, which is also in Australia’s favour. However, the growth rates in services are significantly better in both directions.

As reflected in Mr. Varghese’s report, Australia is well aware of the sensitive areas for India in agriculture. Farming in India covers a large population and is mostly of the subsistence kind, rather than being run substantially on a commercial scale. The sector does need reform, even as these are politically sensitive. The Indian government has recently initiated liberalisation measures allowing more open access to private marketing for farmers and removing inter-state barriers for movement of produce. If India’s sensitivities in this sector are better understood and accommodated, and FTAs are framed to foster and be supportive of reform without carrying the potential for depriving livelihoods, some forward movement can be expected.

Product standards and phytosanitary measures form another key issue, both in terms of access to the Australian market for some of India’s agricultural and other products and to Australia’s products in India. Here again, if there can be greater cooperation, including technical cooperation, in being able to make progress on equivalence or mutual recognition arrangements, along with a degree of reciprocity in the enhancement of market access, perhaps it will incentivise progress on CECA.
On services, there is fair degree of complementarity[4]. India is already a significant consumer of Australia’s education services which may only grow. If India’s IT and IT enabled services exports can also build further on present growth trends, this could provide another basis for building favourable momentum. Australia is a net importer of skilled manpower. Here again, India could serve as a steady source. Greater professionalism could be imparted to manpower availability if investments can be made through bilateral cooperation on skilling, technical training and certification.

In non-agricultural products, considering that mutual sensitivities may be relatively lower, it should be possible to move forward more quickly. Australia is a substantial supplier of coal, iron ore, alumina, wool, cotton and gold, which go on to meet India’s needs[5]. Even the imports of steel and aluminium are mainly of scrap used for recycling in India. Australia’s interest will of course be to improve access for its other manufactured products through lower Indian tariffs. Some of its competitors from Korea, Japan and the ASEAN countries already enjoy such access through their prevailing FTAs with India.

India’s exports to Australia have not seen steady growth partly because of the unsteady pattern of exports of India’s refined petroleum products, the leading item, that have fluctuated considerably depending on oil prices and demand[6]. But certain products such as pharmaceuticals, machinery, leather goods, garments and textiles have seen a steadier rise. A few items like railway coaches, steel tubes and passenger vehicles have shown spurts in certain years, but have not maintained a steady trend.

It is relevant to note here that Australia has entered into several FTAs in the last few years[7] with countries which are India’s competitors for some of these products. The average preferential tariff in Australia in 2019[8] for non-agricultural products was 0.2% for ASEAN countries and zero for China, Japan and Republic of Korea. On the other hand, the average tariff was 2.5% for Indian non-agricultural products. An FTA could make a vital difference, particularly for products like garments or textiles on which the applicable tariffs are even higher.

India’s generics are well accepted worldwide and pharmaceuticals form a principal item of export to Australia, accounting for over US$ 250 m in 2019-20. Greater linkages with Australia’s pharma procurement process can help. To the extent the FTA is seen as bringing additionality to these and other promising sectors, it will make progress easier for India.

Recently, the trade ministers of Australia, Japan and India have talked about developing a supply chain resilience programme[9]. Separately, in India the government has launched a production linked incentive (PLI) scheme[10] whose objective, among others, is to build competitive manufacturing locally and make India a part of global supply chains. These PLI schemes now cover several areas: electronics, automobiles and components; pharmaceutical drugs and APIs; medical devices; solar modules; advanced chemical cell batteries; white goods; textiles; food products; phones and other telecom products; and speciality steel. Foreign investments and technology is being welcomed and incentivised.

The trilateral supply chain resilience initiative with Japan and Australia can well plug into the PLI scheme in India through investments in a range of sectors. Here again, for the supply chain to work well, a bilateral FTA between India and Australia could make it more attractive for investors. Moving together on both PLI scheme investments and FTA fronts can prove helpful. India’s former High Commissioner to Australia, Navdeep Suri[11], has observed that while official Canberra sees the opportunity in India, private Australian business groups have been shy to grab it. Serious efforts towards concluding an FTA and the launch of these parallel investment initiatives could change the outlook.

One aspect that has been a handicap for India in forging greater economic cooperation with the region is its absence from APEC. While APEC has brought together its members on trade and investment issues through its various activities, its signature contribution stands out on trade facilitation. Through its trade facilitation action plan between 2001[12] and 2006, it significantly brought down transaction costs in its member countries by 5%. Spurred by its success, APEC also adopted a successor Trade Facilitation Action Plan 2 which took this process forward even further. This was a very technical exercise, with cost measurements at each stage and steps suggested on how the time and cost in each identified aspect could be reduced or minimised. All this was done not through coercive measures, but through peer pressure and making available the best practices for emulation.

India was not part of this exercise and could certainly gain from the APEC experience on trade facilitation, possibly even through the trilateral supply chain resilience initiative.

In a sense, not being a member of APEC was also a handicap for India in the RCEP negotiations in which all the other countries (barring Cambodia, Laos and Myanmar which in any case received flexible treatment in RCEP) were very familiar with each other’s trade practices because of frequent APEC meetings. If India has to integrate closely with Asia, then greater trade facilitation cooperation will be an important component.

Finally, a point regarding possible cooperation between India and Australia on WTO matters. While the interests of the two countries in that forum somewhat differ, reflected also in the different interest groups that India and Australia are part of at the WTO, a proposal by the United States last year to define ‘developing countries’ has been of particular concern to India. To take a country out of the developing country category because its international trade share is more than 0.5%, or it is a member of G-20, lacks any objective basis. While it may be argued that this should not be left to self-selection, this US-suggested criteria is certainly not appropriate. It is possible that the new US Administration may see the demerits of this proposal and review it. But the larger point in respect of WTO is this: in trying to discipline the role of state owned enterprises or subsidies or tightening up on transparency and ensuring timely filing of notifications etc., it is to be hoped that all developing countries will not get collaterally burdened. There is no doubt that one or two economies, while proclaiming to be open or market driven, are in reality not so. But in an effort to discipline erring economies which have flouted or skirted around WTO rules and gamed the system, there is no reason why other developing countries should be adversely affected. Proposed WTO reforms will need careful targeting, and it would certainly be worthwhile for India and Australia to engage in a bilateral dialogue to build consensus on this and other issues.
[3] ‘An India Economic strategy to 2035: Navigating from potential to delivery” A report to the Australian government by Mr.Peter N Varghese AO, 2018
[4] India’s trade with Australia in services is captured in Annex 3  based on Australian sources
[5] See Annex 2 giving details about top items of goods import from Australia into India
[6] See Annex 1 for details about top items of goods exports from India to Australia
[7] Since the commencement of negotiations of India-Australia FTA, Australia has signed nine more FTAs, eight of which have entered into force. These are with Malaysia (2013), Korea (2014), Japan (2015), China (2015), Hong Kong (2020), Peru (2020) and Indonesia (2020). Australia is also a party to CPTPP (2018) and RCEP. The former has entered into force already and the latter awaits ratification.
[8] See the Table 3.4 which is an analysis of preferential tariffs in Australia in 2019 available at page 45 of the WTO Secretariat report in the context of Australia’s trade policy review held in the WTO in March 2020. The report may be accessed at https://www.wto.org/english/tratop_e/tpr_e/s396_e.pdf
[9] See the link at https://timesofindia.indiatimes.com/business/international-business/australia-india-japan-trade-ministers-for-enhanced-cooperation-in-supply-chain-resilience/articleshow/77871221.cms.
[10] Details about the sectors and items in the expanded scheme announced on 11 November 2011 may be accessed at https://pib.gov.in/PressReleasePage.aspx?PRID=1671912
[11] See the article by Navdeep Suri which can be accessed at https://www.orfonline.org/research/belligerent-china-can-be-just-catalyst-india-australia-ties-need-67313/
[12] This has been dealt with in some detail also in a report by the author titled ‘India and APEC: An appraisal’, Research and Information System for Developing Countries, 2015, which may be accessed at http://www.ris.org.in/india-and-apec-appraisal