ASEAN-India: Growing together

Laying the cornerstone with its Look East Policy in 1990, India has traversed a long way strengthening its economic and socio-cultural relationship with Association of Southeast Asian Nations (ASEAN) at various milestones. As India commemorates its 25 years of ‘dialogue partnership’ with ASEAN, the country builds conducive investment environment for multiple industries, including digital and creative.

Background

ASEAN and India with combined population of approximately 2 billion (26.6 per cent of global population) and combined Gross Domestic Product (GDP) of USD4.5 trillion (5.9 per cent of global GDP) present immense mutual investment opportunities.01,02 The relationship between ASEAN and India began in 1992 and has grown steadily from sectoral dialogue partnership to summit-level partnership in 2002. At the second ASEAN-India summit held in 2003, ASEAN and India signed an ASEAN-India Framework Agreement on Comprehensive Economic Cooperation that served as a guidance to establish further agreements such as Trade in Goods Agreement, Trade in Services, and Investment Agreement as part of ASEAN-India Free Trade Area (AIFTA). Effective January 2010, the Trade in Goods Agreement came into force, wherein, ASEAN and India agreed to gradually reduce and eliminate duties on more than 90 per cent coverage of products traded between the regions over a period of time. Further in July 2015, ASEAN-India Trade in Services and Investment Agreement was initiated, which includes provisions on transparency, domestic regulations and dispute settlement. The agreement also laid down policies to ensure fair and equitable treatment for investors.

Trade and investment

ASEAN is India’s second largest trading partner with a total trade value of USD71.7 billion in 2016–17, which has increased from USD56.2 billion in 2010–11, reflecting a Compound Annual Growth Rate (CAGR) of about 4 per cent.05 After a steep rise in 2011–12 (up 40.4 per cent YoY), the trade value remained stable till 2016–17. Despite buoyant economic sentiment in India, the trade value has remained subdued on account of soft commodity prices. However, this trend is set to reverse owing to rigorous focus of both parties for expanding trade relations in existing areas, as well as exploring opportunities in new sectors. With renewed interest in economic cooperation, the bilateral trade value is expected to reach USD200 billion by 2022.06

While the trade value between the two parties has largely been unchanged, true growth of the partnership is reflected through rapid growth in Foreign Direct Investment (FDI) flow from ASEAN to India.

India, one of the fastest growing economies in the world has emerged as a favoured foreign investment destination owing to various market-led factors such as availability of large talent-pool and huge domestic market. In addition, various flagships initiatives such as:

‘Make in India’, ‘Skill India’ and ‘Digital India’ introduced by the Indian government. These initiatives are directed to enhance India’s competitiveness as an investment destination.

Key initiatives taken under these include:

• Increase in upper limit for foreign investment in various industries, including digital and creative
• Introduction of reforms, such as labour (allotment of labour identification number to simplify online compliance filing, among others), tax (launched Goods and Services Tax or GST), innovation (improved and faster registration of Intellectual Property Rights or IPR)
• Improvement of business environment by withdrawing obsolete and outdated policies (scrapped retrospective tax, withdrawn customs and duty exemptions on parts and components of mobile devices).

Driven by these advantages, FDI in India is growing at an unprecedented rate. ASEAN, a key trading partner, also realises these benefits and is therefore investing in India. During 2010–11 to 2016–17, FDI from ASEAN to India grew five folds from USD1.8 billion to USD8.9 billion.07 While most of the growth has come from Singapore (about 98 per cent of the cumulative FDI inflows from ASEAN, during 2011–17),07 other ASEAN members have made significant investment commitments in recent times. In April 2017, major Indian and Malaysian companies in the oil and gas, infrastructure, and engineering sectors signed 31 Memorandum of Understanding (MoUs) to facilitate investment proposals worth USD36 billion in both countries.08 Similarly, other ASEAN members, such as Myanmar, Vietnam and Thailand have signed MoUs in the areas of power and energy, financial services, and Information and Communication Technologies (ICT).

In general, India’s market dynamics complements the business needs of ASEAN. For instance, Singapore’s outward FDIs appears to be focused on growing markets (as observed in financial/retail/construction sectors) or achieving efficiencies in the existing business processes (as observed in the manufacturing sector). India, with its sheer population size, availability of labour and technical capabilities, serves as an appropriate investment destination for Singapore based companies. The similar case is observed in Malaysia, where government-linked programmes encourage local companies to expand operations overseas to gain scale and leverage technological advancements in the destination country. On the contrary, Thailand’s outward FDIs in foreign markets to overcome their domestic challenges.

Driven by the above factors, various companies based in ASEAN plan to set up and expand operations in India. For instance, several Thailand-based companies plan to invest USD772 million in food processing, automobile components, electronic devices, and telecommunications sectors in India.

If looked at the sectoral split, services sector attracts largest FDI inflows from the ASEAN region, followed by software and hardware, and telecommunication sectors. A large market coupled with vast availability of skilled talent has been driving investments into these sectors. In the recent past, the pharmaceutical sector also invited greater focus due to low-cost production, availability of qualified researchers, robust patent regime and liberalised FDI policies.

Recent government initiatives

Government of India has undertaken various initiatives to affirm its relationship with the ASEAN community. In addition to providing support in various areas, such as promoting socio-cultural integration and minimising the development gap between ASEAN member states, India is working on various economic initiatives to strengthen its relationship with ASEAN. Enhancing connectivity (physical as well as digital) can provide an added impetus to growth of trade and investment opportunities between both parties. Key initiatives in this regard include:

Trade and investment

• ASEAN-India Agreement on Trade in Service was signed in November 2014 with an aim to increase movement of labour between India and ASEAN. The agreement lists the provisions on domestic regulations, recognition, market access, national treatment and dispute settlement procedures during services exchange among India and ASEAN transacting parties.
• The ASEAN-India Agreement in Investment was also signed in November 2014 to boost flow of investments. The investment agreement stipulates protection of investment to ensure fair and equitable treatment for investors, non-discriminatory treatment in expropriation or nationalisation and fair compensation.
• ASEAN-India Trade Negotiating Committee was reconvened in 2015 to monitor problems associated with ASEAN-India Trade in Goods Agreement that came into effect in 2010. The committee aims to promote and increase the Free Trade Agreement utilisation between India and ASEAN.
• In August 2017, India created a Project Development Fund (PDF) with a corpus of USD77.0 million to develop manufacturing hubs in Cambodia, Laos Myanmar and Vietnam (CLMV). In addition, EXIM Bank of India also provided lines of credit worth USD750.0 million for projects in power, irrigation and railways, among others to CLMV countries.

Connectivity

• Promote and expedite development of roads, railways, seaports, maritime logistics network and other related physical infrastructure. This is aimed to extend economic integration, facilitate movement of goods and mobilise private sector investment in the region. Key projects include: India–Myanmar–Thailand Trilateral Highway Project (to be completed by 2020), Kaladan Multimodal Project and India-Myanmar-Thailand Motor Vehicle Agreement (IMT MVA) and India-Myanmar-Laos-Vietnam-Cambodia highway.
• At the India Telecom-2017 conference, India offered ICT products, technical knowledge and financial help to ASEAN countries for developing telecommunication ecosystem in their respective nations. The aim of the meet was to promote Indian telecommunication companies as service and technology providers in ASEAN markets.
• During the 13th ASEAN-India summit, India committed a Line of Credit of USD1.0 billion to support projects aimed at boosting physical and digital connectivity between ASEAN and India.

Sector-focused initiatives

Science and Technology

• At the 14th ASEAN-India summit held in 2016, Government of India increased the ASEAN-India Science and Technology Development Fund from USD1 million to USD5 million. The fund was established in November 2007 to promote collaborative Research and Development (R&D) projects in science and technology21
• Government of India plans to commercialise low-cost technologies, collaborative R&D projects and technology transfer through ASEAN-India Innovation Platform.

Space

• India and Vietnam have signed a framework agreement to explore outer space for peaceful purposes. The countries will collaborate in the areas of satellite communication and satellite-based navigation, space science, remote sensing of the earth, and planetary exploration. As part of ASEAN-India initiative India plans to open Indian Space Research Organisation (ISRO) Satellite Tracking Centre in Vietnam.

Bilateral agreements between ASEAN and India

Malaysia

• Visa-free programme for Indian nationals between 1 April 2017 and 31 March 2018
• In 2017, seven MoUs were signed to promote bilateral cooperation, and economic growth and development. The areas included cooperation in development of 4th technology park in India, urea and ammonia manufacturing plant development in Malaysia, sports, education and air travel.
• At the India-Malaysia Business Forum held in April 2017, Indian companies operating in oil and gas, infrastructure and engineering sectors signed 31 MoUs with Malaysian counterparts to facilitate investments of USD36 billion.
• In 2015, Construction Industry Development Board (CIDB) of Malaysia proposed to invest USD30 billion in India’s Smart City project
• In 2017, Government of Malaysia launched Digital Free Trade Zones (DFTZ) for SMEs/entrepreneurs with an aim to boost e-commerce growth in the country. As part of the DFTZ, Malaysia offers number of facilities such as faster customs and cargo clearance, satellite services and proximity to sea and airports.

Myanmar

• In 2016, during Myanmar’s President, Htin Kyaw’s visit to India, both the governments signed four MoUs for cooperation in the areas of traditional medicine, renewable energy, and construction of Myanmar’s Tamu-Kyigone-Kalewa section (India to invest USD57.2 million) and Kalewa-Yagyi road section of the India, Myanmar and Thailand Trilateral Highway. The Trilateral highway aims to facilitate movement of goods and traffic among nations.27, 28

Indonesia

• In order to promote usage and access to reliable, clean and affordable energy, India and Indonesia signed an MoU on new and renewable energy in November 2015.29

Singapore

• In December 2016, India and Singapore signed a protocol to amend their bilateral Double Taxation Avoidance Agreement (DTAA) in New Delhi. As per the agreement, the existing tax exemption on capital gains for acquired shares has been amended. For shares acquired before 1 April 2017, existing tax exemption on capital gains will be preserved. However, for those acquired after 1 April 2017, a capital gain tax of 50 per cent of Indai’s domestic tax rate will be levied.30
  Vietnam
• During Indian Prime Minister, Narendra Modi’s visit to Vietnam in 2016, 11 MoUs of cooperation were signed between both the parties. Both countries plan to bolster trade, investment, defence and technology partnership through these MoUs

This extract is from the report, ASEAN-India: Growing together, prepared by KPMG for the  Federation of Indian Chambers of Commerce and Industry. It is  reproduced by arrangement with FICCI and KPMG