Expert Speak Raisina Debates
Published on Feb 27, 2017
It is important for India to analyse its ASEAN strategy more closely, as it has the potential to result in significant benefits.
From trade to investments, re-orienting India's ASEAN strategy

ASEAN in India's East policy

In the last two decades of its focused engagement with the East, India has been involved in various cohorts in the form of the Bay of Bengal initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), the South Asian Association for Regional Cooperation (SAARC), and the Association of Southeast Asian Nations (ASEAN). While India is a member of both BIMSTEC and SAARC, it is not included in the ASEAN; still, it has weaved one of its largest trade agreements with the bloc, which comprises ten Southeast Asian nations. Following the signing in 2009 of a Free Trade Agreement (FTA) with ASEAN, India managed to get a similar deal in services in 2012. This, however, is still awaiting ratification by some of the members of ASEAN.

India's trade deficit

Since the signing of the FTA with ASEAN, India has been experiencing a negative trade balance with the regional grouping, which has hurt its objective for entering into such a deal, to begin with. Indeed, its trade deficit with ASEAN has more than doubled, from USD 6.7 billion in 2010 to USD 15.1 billion in 2015. This is largely because India faces competition from Southeast Asian countries in the manufacturing and plantations sectors. The imbalance becomes more apparent in these figures: ASEAN meets around 11 percent of India’s import demand, while India caters to a much lower three percent of ASEAN's. This, despite India’s geographical proximity to the region.

Exploring proactive investments

Given current circumstances, India will likely be unable to change its trade narrative with ASEAN in merchandise goods, unless certain amendments are considered in the signed FTA. However, the possibility of these revisions being carried out remains extremely remote. India should then look towards making more investments in the region. While trade relations between nations and regions work on the basis of comparative advantage, cross-border investments are undertaken after weighing the prospective markets, resource availability, and efficiency, amongst other variables. India should take cognizance of the huge prospects in investing in ASEAN, and pursue a more proactive approach in increasing its investments in the region. A four-prong course correction will help serve India's purpose. First, it may be surprising that the Southeast Asian region has been been receiving massive amounts of investments from abroad. Indian businesses have often been found to look either inward, or towards the West, while remaining skeptical when it comes to investments in its immediate neighbourhood. ASEAN countries have received USD 1,252 billion in FDI from 2003 to 2016.

The CLMV region, comprising Cambodia, Laos, Myanmar and Vietnam — considered the most promising countries of ASEAN — grows at around eight percent and has attracted 33 percent of this total investment in the bloc.

In all this, though, India is nowhere to be seen. Despite being an emerging economy in Asia, India accounted for a measly three percent of ASEAN's total FDI from 2003 to 2016, and two percent of CLMV's. Indian businesses require to be acquainted with the huge opportunity that exists only a few hundred miles away, as other countries continue to establish their footprint in that region. Of the top ten investors in ASEAN, seven are developed countries constituting almost 55 percent who are proactively participating in the growth story of this regional trade bloc. China, ranking after the US and Japan, had a 10 percent share. Mechanisms must be created to expose Indian businesses to the success stories involved in investing in ASEAN, including in the emerging CLMV. Second, Indian business should realise the multifold market size that it will be able to tap by investing in this region. Investment in any country across any sector in ASEAN provides access to the region's flourishing middle-class market, which is expected to touch 400 million by 2020, thereby offering huge potential on the supply side, especially for consumption focused businesses. Investors are also positioned to access other mostly developed nations with whom ASEAN has signed FTAs, namely, Australia, New Zealand, China, Japan and South Korea. Moreover, Indian businesses investing in Myanmar, Cambodia and Laos, by virtue of these countries carrying a 'Least Developed Country' status, stand to benefit from the most favourable regime available under the European Union's (EU) 'Everything but Arms' scheme, which provides duty-free and quota-free access to the EU for the export of commodities, except arms and ammunition.

Indian business should realise the multifold market size that it will be able to tap by investing in this region.

Third is the cost arbitrage. Base salaries among emerging economies like CLMV in the ASEAN are substantially lower than those in India, and thus these countries are winning in terms of labour-cost competitiveness. The most apt example is seen in readymade garments, where India is increasingly being left behind in its key markets by countries like Cambodia, Indonesia and Vietnam. Three of the ASEAN countries are amongst the top ten exporters of readymade garments to the US. Vietnam, for example, has a 10 percent share in this USD 104 billion market, as compared to India's six percent. Other ASEAN economies are also close by, with Indonesia having a five percent share, and Cambodia, two percent. Given such increasing competition from its Asian peers, India's textile exports to the world have almost halved from 24.26 percent in 2001 to 13.71 percent in 2016. Indian textile firms, amongst other stakeholders, should proactively seek to explore the ASEAN market to take advantage of the economies of scale, and protect itself from losing revenue.

Three of the ASEAN countries are amongst the top ten exporters of readymade garments to the US. Vietnam, for example, has a 10 percent share in this USD 104 billion market, as compared to India's six percent.

The fourth is a geostrategic consideration. ASEAN is a crucial pathway for India to expand its economic interests and outreach to the Asia Pacific. Political commitment and consensus have been high on the list of priorities for connecting India with ASEAN by investing in infrastructure development along India's Northeast and bridge it to Myanmar and Thailand. However, the pace of implementation has not been too encouraging. The Mekong-India Economic Corridor (MIEC) linking India to the CLMV countries has been in limbo. The Kaladan Multimodal Transit Transport project, meanwhile, has witnessed inordinate delay, and the construction of the Thailand-Myanmar-India Trilateral Highway has been intermittent. India should provide these infrastructure projects adequate priority and push for their completion. These strategic projects will help in enhancing the flow of trade, investment and people. Finally, since India has not met with much success in the trade of merchandise goods with the ASEAN bloc, it should look to penetrating ASEAN's services market. After all, India has comparative advantages in information technology, healthcare and education. These are soft interventions which, if accomplished over a sustained period, will provide huge socioeconomic dividends.


India's 'Look East' (later rechristened 'Act East') narrative of more than 25 years deserves more results. Improving economic relations with its close neighbours will spell the success or failure of such policy. It is unfortunate that India's old policy towards the East has failed to get adequate attention in the international arena, as compared to the more recent One Belt One Road initiative of China. India also needs to overcome its 'obsession' with invoking its historical linkages with ASEAN. The Indian government has announced the setting up of a INR 500 crore Project Development Fund, which will be housed in the Department of Commerce and operated through the EXIM Bank. This is meant to encourage Indian businesses to set up ventures in CLMV countries. It is important for India to analyse its ASEAN strategy more closely, as it has the potential to result in significant benefits in many fronts — economic, political and geostrategic.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Rahul Mazumdar

Rahul Mazumdar

Rahul has been associated with India EXIM Bank since 2007. He has been working on issues related to international economics public policy and sustainability: and ...

Read More +