ECONOMY: India Returns to Asia

By IPS Correspondents Reprint | | Print |

Paranjoy Guha Thakurta

NEW DELHI , Mar 7 2006 (IPS) - Is India really a part of Asia? Economically speaking, the answer would be ‘no’. But, after decades of isolated development, the country’s savings and investment rates are moving towards levels prevalent in East and South-east Asia.

India’s Finance Minister Palaniappan Chidambaram, while presenting the annual budget for the financial year starting Apr.1, observed that the country’s savings and investment rates had touched record heights of around 30 per cent of gross domestic product (GDP). ”There is an investment boom in the countryà it appears that India is catching up with the high investment rates of East Asia and China,” he told the Lok Sabha or the lower house of Parliament.

In his Feb. 28 budget speech, Chidambaram announced that the peak customs tariff for non-agricultural products was being brought down from 15 per cent to 12.5 percent. ”I believe that we are now only a short distance away from East Asian rates,” he said..

Till 1991, when the Indian government initiated economic liberalisation, the peak customs duty rate used to be as high as 150 per cent. The entire structure of customs duties was such that inefficient local industries were protected from international competition.

The government justified protectionism on the grounds that the country was acutely short of hard currency at that time. Thus, high customs tariffs assured domestic industrialists comfortable profits while consumers were deprived of cheap imported goods.

”Since the early-1990s, customs duties in India have been slashed drastically and dramatically,” Nagesh Kumar, director-general, Research and Information System for Developing Countries (RIS), a government-supported New Delhi based think-tank, told IPS in an interview. ”In the next few years, India’s peak customs tariffs should match Asian levels,” he anticipates.

Peak customs tariffs in countries belonging to the ten-nation Association of South East Asian Nations (ASEAN) vary between 8 percent and ten percent. The bloc includes Singapore, Malaysia, Thailand, Cambodia, Laos, Vietnam, Burma, the Philippines, Brunei and Indonesia.

Not everyone is satisfied with the pace at which customs duty rates have been coming down in India. ”We should have, by now, brought down our peak customs rate to 8 percent as we have been talking about bringing our peak customs rate to ASEAN levels for umpteen years,” S. S. Mehta, former director, Indian Institute of Foreign Trade, told IPS.

At 30 percent of GDP, India’s savings and investment rates are also moving towards Asian levels – these rates are roughly 35 percent in countries like Thailand and Malaysia and over 40 percent in China.

As far as foreign trade is concerned, the Asia Pacific region currently accounts for 40 percent of India’s exports and imports and nearly half of cumulative inflows of foreign direct investment since 1991. Companies from the region are actively seeking investment opportunities in India, particularly in the construction of highways, ports, power projects and hotels, besides telecommunications and aviation ventures.

Singapore has established an information technology park and Australia is keen on developing mines and ports. Japanese and South Korean investors are participating in India’s consumer goods, electronics and automotive industries, apart from being involved in infrastructure projects.

Indian businesspersons too have set up over 200 joint ventures and wholly-owned subsidiaries in the Asia Pacific to manufacture a range of products such as paper, chemicals, petrochemicals and pharmaceuticals.

India shares a 1,600 km land boundary with ASEAN countries and participated in the launch of the Indian Ocean Rim Association for Regional Cooperation and the Bangladesh, India, Myanmar, Sri Lanka, and Thailand Economic Cooperation (BIMSTEC) grouping that was earlier known as the Bay of Bengal Initiative for Multi-Sectoral Technical Cooperation when it was set up in June 1997.

ASEAN and its dialogue partners have recognised India’s membership of the ASEAN Regional Forum and the country is in the geographical footprint of the Asia Pacific region. A study conducted during the 1990s by the Asian Development Bank entitled “Emerging Asia” concluded that the next wave of Asian growth over the next three decades would come from countries in South Asia, including India.

India hopes to be able to keep its tryst with a free trade and investment regime in the Asia Pacific region by 2010-2020, the deadline set by the Asia Pacific Economic Cooperation (APEC) initiative. (APEC claims to be the only inter-governmental grouping in the world that operates on non-binding commitments, open dialogue and equal respect for the views of all participants).

India has a billion-plus people, like China. The two countries account for around 40 percent of the population of the planet. But there are major differences in the political and economic systems of the two Asian giants. India prides itself as being the world’s largest democracy. But its economy is smaller and growing at a slower pace in comparison to that of China.

In 2004, foreign direct investment poured into China at record levels totalling more than 153 billion dollars in new agreements, up by a third over 2003. By way of contrast, over the last years, cumulative inflows of FDI to India have aggregated 37 billion dollars. These figures are, however, not strictly comparable.

A study conducted by the International Monetary Fund concluded that if India and China defined FDI in an identical manner, the differences in the FDI inflows claimed by the governments of the two countries would narrow considerably and if FDI as a proportion of GDP is compared, the difference would be negligible – 2 per cent in the case of China against 1.7 percent for India.

A major difference between the two economies is that, whereas China is a manufacturing powerhouse, India has emerged as an important provider of a range of services, especially those related to computer software and information technology.

Labour laws are another area where the two countries are different. It is far easier for employers to hire and fire workers in China than in India. While the minimum wage in China is in the region of 85-90 dollars per month, the figure is at half this level in India. Permanent workers in India earn more than four times the wages of contract workers.

China continues to have serious problems with intellectual property protection- unlike India where the legal system is more developed, transparent and with more predictable outcomes. Nevertheless, the Indian legal system is slow in resolving commercial disputes.

U.S. and European companies investing in China can and do generally establish a wholly-owned subsidiary with no requirement for local participation in ownership. In India, on the other hand, certain sectors of the economy are still not open to foreign investors while in others, there are restrictions on ownership. Safety rules and pollution control norms tend to be less restrictive in China than in India where civil society organisations are more active.

Kumar says China should emerge as India’s largest trading partner overtaking the U.S. within a year or so, with the value of two-way trade exceeding 30 billion dollars in 2007. He points out that successive Indian governments have been following a “look east” policy over the last decade whereas, in the past, India had failed to engage with the rest of Asia.

”India’s historical links with East and South-east Asia are thousands of years old from the days of the Silk Route and the Spice Route,” said Kumar, adding that they were unlike, say, Japan’s links with Korea and China that remain troubled.

”India’s historical engagement with the rest of Asia was rather benign,” said Kumar adding that he was optimistic that India was on a path that would ”retrace” and ”rediscover” its ancient links with Asia.