SINGAPORE: 2018 heralds a significant milestone for the Association of Southeast Asian Nations (ASEAN) and India, marking 25 years of dialogue and partnership between the two.
Trade and consumption will spearhead both India’s and ASEAN’s economic fortunes over the medium term.
By seeking to tap and complement each other’s vast and growing markets, these two nascent economic powerhouses can further bolster their growth potential.
Take a look at the numbers.
India’s and ASEAN’s economies, if combined, would comprise the third-largest economy in the world.
Crucially, affluence, while still low compared to the United States or Europe, is rising. About 550 million Indians will be defined as middle class by 2025, double the number they are today – and adding more to the global pool than any other country.
Similarly, in the ten-member ASEAN region, the number of middle class households is forecast to roughly double in number by 2025 compared to how many there were in 2010.
OPPORTUNITY TO BOOST TRADE LINKAGES
Greater mutual market access would allow both economies to get greater traction to boost trade linkages.
Of course the cultural, geographic and business diversity and – at times – commercial complexity that is inherent with such diverse economies means that doing so is not always going to be easy.
But some links are, in fact, already in place, and improving.
India’s Northeastern states are connecting with ASEAN through the Thailand/Myanmar Trilateral Highway and deep-sea ports.
Singapore is working with the southern Indian state of Andhra Pradesh to develop its new capital city and build its fintech credentials.
Chennai and New Delhi have inked US$32 billion in deals with Malaysia aimed at boosting services including medical tourism and education.
The Philippines has witnessed a steep rise in Indian IT companies setting up business processing operations in Manila.
Indonesia supplies a third of India’s total vegetable oils.
Cambodia, Laos, Myanmar and Vietnam are connecting with India’s textiles operations through trade and investment.
At present, ASEAN is India’s fourth largest trading partner, accounting for 10 per cent of India’s total trade, while India is ASEAN’s seventh largest trading partner.
Both sides have set a target of at least US$200 billion in two-way trade by 2022 compared to US$65 billion over 2015 to 2016.
REDUCING TRADE BARRIERS AN IMPERATIVE
But all this only touches the surface of what could be possible if India and ASEAN worked to reduce the barriers that currently still stand in the way of greater trade and investment flows.
Full implementation of the free trade agreement (FTA) in goods between India and ASEAN will no doubt help boost trade between the two regions.
For ASEAN and India, the focus currently will be on the completion of the Regional Comprehensive Economic Partnership (RCEP) – the multilateral trade accord that is spearheaded by ASEAN and involves six of its Free Trade Agreement partners, including India and China, which together cover 50 per cent of the world’s population.
India has warmed to RCEP recently, committing to eliminate up to 80 per cent of its goods tariffs in return for greater market access to ASEAN (and other signatory members’) service sectors and freer movement of its labour.
Doing so will unlock significant growth potential for India’s burgeoning IT services sector, which constitutes 48 per cent of its total exports. The conclusion of the deal could collectively boost exports among the participating countries by 4 per cent going forward.
RCEP members hope to conclude the agreement in time for the ASEAN summit in Singapore this coming November.
GROWTH IN INNOVATIVE WAYS
Improving trade accords that open the trade and investment pipes should remain the topline strategy but in the meantime, the commercial and investment ties between ASEAN and India need to grow in innovative and practical ways.
Building on the existing beachheads mentioned above is an obvious start. Utilising leadership meetings like the recent Summit that marked the 25th anniversary of the formal ASEAN-India dialogue – is another.
But ultimately the key to increased entry of foreign companies and greater mutual business ties will be through supply chains. And this is where India Prime Minister Modi’s manufacturing push – dubbed “Make in India” – should help link the country to regional and global supply chains.
Take the example of Apple. The iPhone manufacturer, which already has a strong supply chain in ASEAN, last year began to manufacture iPhones in India, to capitalise on the expected growth of smartphone ownership in that market. Only 300 million Indians currently own a smartphone; that figure set to rise by 50 per cent in the next few years.
The broad electronics supply chain is vital to ASEAN, making up 30 per cent of the region’s total exports. This ranges from Singapore’s semi-conductor foundries, to chip testing in Malaysia, and assembly in the Philippines, Thailand and Vietnam.
What’s not to say that the companies that already support Apple in ASEAN cannot follow its move to India?
There is a myriad examples across all facets of consumption that can replicate this (think fashion, food, pharmaceuticals), and many more in future as Indian incomes rise.
India and ASEAN may not have the heft of the US, EU or China’s economies. But they are rapidly becoming economic powerhouses that play a growing role in the global economy. Deeper ties between them will help both gain further international significance.
Against that backdrop, global conglomerates - and their regional supply chains - seeking fresh drivers of growth need look no further than these two markets.
Tony Cripps is CEO of HSBC Singapore.