Originally Published 2014-10-14 00:00:00 Published on Oct 14, 2014
Amidst the challenges like less liberalised service sector of certain ASEAN members, there exists an opportunity for India to harness the gains from trade in services in the wake of the comparative advantage that it enjoys in certain services.
India-ASEAN FTA in Services: Leading to enhanced trade prospects

Ever since India's 'Look East' policy was initiated in 1991 following the collapse of Soviet Union, India's relation with the South East Asian nations have been evolving both on economic and socio-cultural fronts but at a pace slower than it was envisaged. Establishing trade relations with the member countries of Association of South East Asian Nations (ASEAN) has remained of strategic and economic significance to India. ASEAN countries together recorded an average GDP growth rate of 5.5% for the period of 2008-11 when the world was still under the impact of global financial crisis. The corresponding figure for the world was recorded at 2.8%.

In the past, India has entered into several bilateral trade agreements with South East Asian countries. For the decade 1993 to 2003, bilateral trade between India and ASEAN grew at a high rate of 11% per annum. Against this backdrop of rapidly expanding trade with ASEAN, India signed the Comprehensive Economic Cooperation Agreement with ASEAN where grounds for a Free Trade Agreement in goods, services and investments were laid. After various rounds of negotiations, FTA in goods was signed in 2010 and that in services and investments was signed only in September this year.

In the backdrop of near failure of WTO's Doha Round, formalisation of an FTA in goods, services and investment with the ASEAN is expected to give a fillip to the integration of Indian economy with global economy. Moreover, materialising the pact with ASEAN presents an opportunity before India to utilise its partnership with the fast growing bloc to revive its GDP growth amidst the recent slowdown of the global economy.

According to FICCI, ASEAN import of services has been witnessing an upward trend. The share of ASEAN in the global trade for services rose from 5% in 2000 to 8% in 2012. The total imports of services of ASEAN were recorded to be at $306 billion. Indian service providers thus have an opportunity to cater to the growing demand for services in ASEAN and in turn contribute more to not only the economy's income but also to development on a broader perspective.

India has witnessed rising growth rates in services since the beginning of the 21st century. Service sector has been seen as the driver of GDP growth for the high growth period of 2004-05 to 2007-08. Nearly 58% of India's GDP comes from the service sector in the current era. This sector includes activities ranging from trading, transportation, communication, real estate, financial to social as well as personal services. In the backdrop of such occupational structure, an FTA in services has reinvigorated the hopes of the economy to witness a service driven period of growth after the slump in GDP growth being observed from 2010.

A combined study by Deloitte-FICCI (Federation of Indian Chambers of Commerce and Industry) in 2011 pointed towards the comparative advantage that India enjoys in several services over the ASEAN. Greater advantage for India lies in area of computer and information services, while potential exists in other sectors like telecommunications also. On the other hand ASEAN appears to be more efficient in construction services. In insurance and financial services both the signatories appear to be equally efficient. Also, the member countries of ASEAN apparently offer markets in consultancy services, software services, maintenance and installation services, education services, health and social work services. Therefore, the FTA in services comes with an opportunity for India to access these markets. Trade in services is also important for being able to realise gains from trade in goods. For instance, a well established transportation and communication network is necessary for easy provision of merchandise to the consumers. Also it is being pointed out that the surplus on current account that could be generated from exporting Indian services to ASEAN member countries would provide a cushion against the deficit generated from the trade in merchandise.

The recently signed FTA has also given rise to sceptical views revolving around the proposed gains to India from the trade in services. The realisation of the expected benefits is contingent upon the extent of liberalisation of the service sector to which the ASEAN members have agreed. Countries, namely, Vietnam and Philippines have agreed to lower levels of liberalisation. India has pledged three sets of commitments, one to Indonesia, one to Philippines and one to the rest of ASEAN members, while all the 10 member countries have made separate commitments to India. Though the agreement is sought to provide for increased movement of professional and skilled manpower across borders by including an annexure on Mode- 4 for the supply of services, the actual level of trade in services depends on the mutual recognition of qualifications of professionals. Critics have also argued that India needs to be cautious of the free flow of professionals and skilled manpower to other countries for it might hinder the development process of the Indian economy, particularly the development of health and education sectors.

However, much of scepticism generated can be accounted to low levels of gains from trade in merchandise with ASEAN. However, the low levels of gains from trade in goods can be attributed to the fact that a similar pact for the trade in services and investments that tends to boost trade in goods was still underway and as India enjoys a relative strength in services, ASEAN countries portray the same in manufacturing. Hence a comprehensive assessment of the levels of gain can be made only after the FTA in services and investments becomes operational.

Amidst the challenges like less liberalised service sector of certain ASEAN members, there exists an opportunity for India to harness the gains from trade in services in the wake of the comparative advantage that it enjoys in certain services. Eventually a comparison of the proposed benefits arising from the FTA in services and the challenges placed before the Indian economy to realise these benefits indicates the prospects of further developing country's service sector and thus exploring its potential of carving a major share in world export of services.

(The writers are with Observer research Foundation, Delhi)

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Kangkanika Neog

Kangkanika Neog

Kangkanika Neog Programme Associate Council on Energy Environment and Water (CEEW)

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