Why India is looking east for economic growth

India's involvement in the Regional Comprehensive Economic Partnership will strengthen its ties with East Asia, but domestic reforms are needed if it is going to consolidate the benefits of the agreement.

East Asia Forum

Indian Prime Minister Narendra Modi is set to visit Japan after the budget session of parliament in mid-August 2014 for his first state visit outside South Asia. Reinvigorating economic ties with Japan and the rest of East Asia presents a critical opportunity for the Modi government to foster new business opportunities and address India’s recent growth slowdown. By looking to East Asia, business and government can work together to foster economic gains for India.

India’s Look East Policy of 1991 signalled its intention to revitalise cultural, defence and economic ties with East Asia. Since the 1990s, India has experienced double-digit growth in trade with East Asia. East Asian markets currently account for one-fifth of India’s exports and a quarter of its imports. Since the mid-2000s, India has concluded several free trade agreements with East Asian economies including a plurilateral agreement with ASEAN, as well as bilateral agreements with Singapore, South Korea, Japan and Malaysia.

A mega-regional trade deal -- the Regional Comprehensive Economic Partnership -- encompassing India, Australia, New Zealand and major East Asian economies, is currently being negotiated. The RCEP establishes important FTAs between India and other RCEP members, such as China, Australia and New Zealand, which are currently missing. This will give the Indian business sector greater opportunities to access a larger regional market and integrate into regional production networks.

Developing trade preferences and regional, rules-based trade with China offers important advantages for India. But there are concerns among some business sectors in India, particularly in the manufacturing sector, about expanding India-China trade.

Some in the business sector fear cheap imports of manufactured goods from China will adversely affect Indian businesses because Chinese firms have price and quality standards that few Indian firms can match. Concerns have also been raised about opening sensitive economic sectors and infrastructure to foreign investment from China, particularly investment from state-owned enterprises that unfairly benefit from government subsidies.

But this preoccupation with the absolute advantage of Chinese traders and investors is misplaced. Projections indicate India can achieve potential income gains of 2.4 per cent by implementing the RCEP. India has a comparative advantage on world markets in areas such as information and communication technology, professional services, law, banking, and educational services.

The RCEP provides inroads for Indian services in China and the rest of East Asia. Moreover, India has emerged as an important destination for tourists from the Asia Pacific region, presenting further opportunities for Indian businesses. India has also shown growth in some manufacturing sectors in world markets (including pharmaceuticals, the automotive sector, textiles, and food processing), and this trend is likely to continue under the RCEP.

Lobbying for exemptions for sensitive sectors or more protection for declining manufacturing sectors would be an unproductive, defensive approach to RCEP negotiations. Instead, Indian businesses should prepare for a gradual opening of the market under the RCEP by developing quality, cost-competitive goods and services, and investing in delivery systems that meet international standards. New technology, quality management and timely procurement systems, research and development, relationships with overseas buyers, and technical training are essential if India is to be internationally competitive.

The Indian government can support Indian firms by investing in implementing second-generation structural reforms, providing access to industrial finance and investing in transport and energy infrastructure, tertiary-level technical education and science and technology institutions. India should also use RCEP negotiations to push for lower barriers to services trade and more transparent investment rules.

So far India’s approach to the RCEP negotiations has been positive. Modi’s new pro-business government has unveiled new economic reforms including liberalisation of entry regulations for foreign investment and proposals to simplify taxation. But more ambitious domestic reforms are necessary if India is to consolidate the benefits of an eventual RCEP agreement.

This piece was originally published at East Asia Forum. Reproduced with permission.