Chapter - III

INDIA’S REGIONAL TRADE AGREEMENTS: ANALYSIS AND TRENDS

3.1. Introduction:

The formation of regional trade agreements is legalized and governed by Article XXIV 1
of GATT 1947 as well as in Article V of the GATS.2 India was an active member of the
GATT and until the beginning of this millennium believed that multilateral process at
the WTO along with unilateral trade liberalization were the two major means of
international trade liberalization.3 India’s approach to RTAs was quite reserved till the
late 1990s, when trade was closely regulated by a regime of import licences, high
tariffs, and the prevalence of quantitative restrictions. With foreign exchange posing a
major constraint, any decision to arrive at a preferential trade agreement had to have a
strong political or the compelling rationale. But with the economy becoming more open
and showing rapid growth, India’s approach to RTAs has also seen a change. In tandem
with the high domestic economic growth, India has entered into numerous regional
trade agreements with other countries, while many other such agreements are in the
pipeline. All of these are either free trade agreements or developing country regional
trade agreements and none of them are Customs Union. These agreements are briefly
described below.

This chapter deals overview of India’s Regional Trade Agreements, its trends,
performances and how they have proving to be a gateway to international trade
liberalisation, and what India can learn from the international experience.

3.2. An Analysis of India’s Regional Trade Agreements:

In line with the objective of increased liberalization through trade, India has taken a
number of initiatives to contribute to multilateral trade negotiations to facilitate
enhanced participation of developing countries in international trade transactions.

1
Article XXIV of the GATT mentions three types of Regional Trade Agreements: (i) Free Trade
Agreements;(ii) Customs Unions; and (iii) Interim Agreements that lead to the formation of Free Trade
Agreements or Customs Union.
2
These provisions are an exception to an elementary and cardinal Most-Favoured-Nation rinciple i.e.,
that trade must be conducted on a non-discriminatory basis.
3
Ever since 1991 a substantial portion of India’s trade liberalization has been carried out by unilateral
reduction of tariff rates, which have been announced in subsequent annual budgets.

57
India’s endeavour to foster its international trade has also been well complemented by
its efforts to promote regional trade. This has its reflection in the various initiatives
India has effected in fostering and facilitating trade with select countries and regions.

Target countries and regions in India’s regional trade initiatives cover various regions
of the world. In Asia, India made a foray in RTAs with an FTA with Sri Lanka in 1998.
India’s engagement with Sri Lanka has proved to be beneficial both for India and Sri
Lanka with bilateral trade rising from US$ 0.7 billion in 2001-02to US$ 2.7 billion in
2011-12.4Subsequently, India has put in place a Comprehensive Economic Cooperation
Agreement with Singapore, an FTA with SAARC members (SAFTA) and with the
members of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC), a framework agreement for FTA with Thailand and a
framework agreement for Comprehensive Economic Cooperation Agreement with
ASEAN. These initiatives form an integral part of India’s ‘Look-East Policy’, which
took off in the early 1990s with India entering into a sectoral dialogue partnership with
the ASEAN in 1992. However, the policy has gained substantial momentum only in
recent years. 5

During the ASEAN Ministerial Meeting at Bangkok in July 2000 it was decided to
initiate the ‘Thailand Mekong Ganga Cooperation Project’ to revitalize and develop
overland trade, tourism, communication and transport. India has played a crucial role
and has been instrumental in launching this cooperative venture between India and the
ASEAN nations of Myanmar, Thailand, Laos, Cambodia and Vietnam.

Abundance in natural resources, a significant technological base in ASEAN and a

strong human capital base in India provide immense opportunities to India and ASEAN
to integrate and synergize their trade and investment potential. The present level of
bilateral trade with ASEAN amounts to more than US$ 30 billion in 2011-12, and is
growing at a compounded annual growth rate of over 32%, since 2004-056. India’s
relationship with ASEAN is going to be stronger and more beneficial. Look-East policy
is now being pursued aggressively and has started yielding desirable results on the

4
See Ministry of Commerce and Industry, Government of India, “India's Current Engagements in
R.T.As.”, available at: http://commerce.nic.in/india_rta_main.htm
5
Ibid.
6
Mehta, Rajesh and Narayanan S., “India’s Regional Trading Arrangements”, 114 RIS Discussion Paper
28 (2006).

58
economic, political and strategic fronts. 7 The policy, which was mainly directed
towards improving relations with ASEAN, will now also cover other nations of the
region such as China, Japan and Korea where the interaction was more bilateral till
date.

Other than looking East, India has also seriously begun efforts to develop preferential
trade linkages with developing countries located elsewhere. In Latin America, India has
in place preferential trade agreements (PTA) with MERCOSUR, as also with Chile. In
West Asia, India has in place a framework agreement for FTA with the Gulf
Cooperation Council (GCC). In the African region, India and SACU have a preferential
trade agreement in place, while India is in talks with Mauritius to set in place a
Comprehensive Economic Cooperation and Partnership Agreement. Besides these
initiatives, a number of Joint Study Groups (JSGs) have also been set up to examine the
potential for cooperation in trade in goods and services, investments and other areas of
economic cooperation with a number of countries. The following section provides an
overview of India’s regional trade engagements with a number of countries and trade
blocs across the globe.

3.2.1. India’s Regional Trade Agreements with Asian Countries:

3.2.1.1. India-Sri Lanka Free Trade Agreement

Bilateral trade between India and Sri Lanka is regulated by the India-Sri Lanka Free
Trade Agreement (ISLFTA) signed in December 1998, and operational with effect
from March 2000. Under this agreement, both countries are committed to the
elimination of tariffs in a phased manner. India has already completed its commitment
of reducing its duty to zero in March 2003, except for 429 items appearing in the
negative list. Sri Lanka would do the same by 2008.8 Both sides are now negotiating on
not only trade in goods but also on trade in services and economic cooperation.
Negotiations are being held to expand the FTA and broaden it into a Comprehensive
Economic Partnership Agreement (CEPA).

Trend Analysis: Sri Lanka is an important trading partner of India in South Asia. The
total trade between India and Sri Lanka has increased form US$ 0.7 billion in 2001-02

7
Amar Nath Ram, Two Decades of India’s Look East Policy: Partnership for Peace, Progress and
Prosperity? 156 (Indian Council of World Affairs (ICWS), New Delhi, 2012).
8
Signed at New Delhi, 28 December 1998, available at:http://commerce.nic.in/ilfta.htm.

59
to more than US$ 2.7 billion in 2011-12, primarily due to increase in India’s exports to
Sri Lanka since 2001. This could also be attributed to the free trade agreement between
the two countries that became operational from March 2000. The aggregate of exports
to Sri Lanka amounted to US$ 0.6 billion in 2001-02, increasing to around US$ 2.25
billion by 2011-12.9 Though India’s imports from Sri Lanka too have steadily
increased, the magnitude of total imports remains relatively low being US$ 0.47 billion
in 2011-12. This reveals that India’s exports to Sri Lanka are much higher than its
imports and thus India enjoys favourable trade surplus with Sri Lanka.

Sectoral Performance: It can be noted from the above data that petroleum products and
transport equipment have played a very significant role in boosting India’s exports to
Sri Lanka. Share of India’s exports of petroleum products to Sri Lanka account to
around 31% of its total exports to Sri Lanka. India’s exports of petroleum products to
Sri Lanka, which amounted to a mere US$ 0.1 million in 2001-02 has shot up to US$
699 million in 2011-12.10 Transport equipment, cotton yarn fabrics and primary and
semi-finished iron and steel are the other important export items also showing an
impressive growth over the period.

An analysis of the trend in the composition of India’s import basket from Sri Lanka
reveals that nonferrous metals, which comprised a mere 7% of India’s total imports
from Sri Lanka in 2001-02 have grown to constitute nearly 15% of India’s imports from
the country in 2011-12.11 Electrical machinery, manufacturers of metals and non-
metallic mineral manufacturers too have shown a good growth performance in the
recent years.

There have however, been some areas of concern on both sides, viz;

 The areas of concern for India include the issue of circumvention of rules of
origin (inexplicable surges in Sri Lankan exports of certain commodities such as
copper and pepper).

9
Weerakoon, Dushni and JayantiThennakoon, “India-Sri Lanka FTA: Lessons for SAFTA”, Mimeo
written for CUTS International, Jaipur, under research grant from the Economic Affairs Division of the
Commonwealth Secretariat (2007).
10
Kelegama, Saman, “Indo- Sri Lanka Trade and the Bilateral Free Trade Agreement: A Sri Lankan
Perspective”, 6 Asia-Pacific Development Journal 467 (2011).
11
Mehta, R. and S. K. Bhattacharya, “The South Asian Preferential Trading Arrangement: Impact on
Intra-regional Trade” 4The Asia Pacific Journal of Business and Economics 224(2000).

60
  Exploitation of duty differentials that may harm Indian producers (there is a
concern that vanaspati plants being set up in Sri Lanka ill have an adverse
impact on the Indian vanaspati industry. Duty on palm oil imports in Sri Lanka
is zero as against 65% in India) is a matter of concern.
 In the latest trade talks between the two countries, India has agreed to lift
restrictions relating to fabric origins on duty free Sri Lankan apparel exports to
the Indian market.12 The recent agreement on fabric was part of a wider deal
during the last talks between the two sides that saw restrictions on Ceylon Tea
exports too being lifted.
 Slow progress on the Comprehensive Economic Partnership Agreement
(CEPA).

3.2.1.2. Comprehensive Economic Cooperation Agreement (CECA) between India

and Singapore

After the establishment of the Joint Study Group (JSG) in 2002, the Comprehensive
Economic Cooperation Agreement (CECA) between India and Singapore was signed on
June 29, 2005, and has become operational with effect from August 1, 2005. The
objectives of the agreement are to strengthen and enhance the economic, trade and
investment cooperation, to liberalise and promote trade in goods and services, to
enhance competitiveness in manufacturing and service sectors, explore new areas of
economic cooperation and facilitate and enhance regional economic cooperation and
integration.13 The CECA has been structured as an integrated package of agreement
which includes:14 (a) a free trade agreement, covering, inter-alia, trade in goods and
services and investment, (b) a bilateral agreement on investment promotion, protection
and cooperation, (c) an improved Double Taxation Avoidance Agreement; (d) a more
liberal Air Services Agreement for open skies for charter flights, and (e) a work

12
Weerakoon, Dushni and Jayanti Thennakoon. “India-Sri Lanka FTA: Lessons for SAFTA”, Mimeo
written for CUTS International, Jaipur, under research grant from the Economic Affairs Division of the
Commonwealth Secretariat(2007).
13
M.K. Venu, “Times for Asian Renaissance: ET Catches up with Singapore Prime Minister Lee Hsien
Loong” 8 (July) Economic Times 2 (2005).
14
See Annexure 7:A and Annexure 7:B of the CECA.

61
programmer of cooperation in a number of areas including health care, education,
media and tourism, media and tourism15
Trend Analysis: The free trade agreement with Singapore gives considerable trade and
investment opportunities to India. Singapore’s total trade with India has increased
significantly in the last couple of years, especially since 2003-04. The increase in total
trade has largely been the result of a sharp increase in India’s exports to Singapore.16
The value of India’s exports to Singapore has increased from US$ 0.98 billion in 2001-
02 to more than US$ 6 billion in 2011-12 recording a CAGR of 43%. The value of
imports too has increased from US$ 1.3 billion in 2001-02 to US$ 5.4 billion in 2011-
12.17 The very fact that the total trade between the two countries has seen a rapid
fivefold increase during the five years period reveals the high level of trade
complementarities and growth potential.

Sectoral Performance: It appears that India’s trade reforms since 1991 has led to
fostering India-Singapore trade links. India’s trade with Singapore is presently more
than $11 billion which has immense potential to increase because of complementarities
that exists between Singapore and India in areas of manufacturing and services. 18

The importance of the IT industry in both Singapore and India, may lead to economic
and technical cooperation between the two countries for the following reasons:

 Singapore has a well-developed IT infrastructure and capital surplus while India

has trained human capital. There are ample opportunities for co-operation in
production.
 A large number of opportunities exist for designing, manufacturing, distribution
and trading of commodities in which software is an important input. The major
commodities/sectors in which Indian software companies have a proved specialisation
are: (a) financial services; (b) manufacturing, marketing and distribution; (c) electronic,
engineering; (d) telecommunication, and (e) education, health and medical services.

15 As stated on Government of Singapore website in the FAQ Section on CECA, available at:
www.iesingapore.gov.sg/wps/ortal/FTA
16
Joint Study Group Report on “India-Singapore Comprehensive Economic Cooperation”, April, 2003,
available at: http://www.fta.gov.sg/fta/pdf/FTA_CECA_JSG_Report.pdf
17
Mehta, R., “Economic Co-operation between India and Singapore: A Feasibility Study”. 41 RIS
Discussion Paper 14 (2013).
18
Ibid.

62
Singapore has been dealing in these sectors in a prominent way. Hence, there exist
complementarities in supply of IT software to these sectors.

Singapore gives a number of incentives in the forms of tax holidays, exemption,

concessional tax rates, and exemption on taxable income and non-tax incentives. India
could ask for more concessions as a part of bilateral free trade agreement. Petroleum
products constitute a very significant part of India’s export basket to Singapore
constituting around 55%, followed by transport equipment, electronic goods and
nonferrous metals. Exports of petroleum products have seen a quantum increase from a
mere US$ 0.28 million in 2001-02 to more than US$ 3 billion in 2011-12. The exports
of transport equipment, electronic goods and non-ferrous metals have steadily increased
over the period. India’s exports to Singapore have grown at a CAGR of 44% during
2001-02 to 2011-12.19
As far as imports from Singapore are concerned the largest imported commodities
include electronic goods constituting around 30% of India’s total imports from
Singapore growing at a rate of 26% over the last year. Petroleum crude & products
constitute around 19% of India’s total imports from Singapore.20 Other top items of
import like organic chemicals, non-electrical machinery and transport equipment too
are growing at an impressive rate but their share in India’s total imports from Singapore
is relatively low. India’s Imports from Singapore have grown at a compound rate of
33% during the five year period.

Recent Key Developments and Issues: India has listed 506 items with zero duty under
the early harvest scheme for export from Singapore from 1st August 2005. Singapore as
agreed to eliminate customs duties on all originating goods of India as per the
agreement.

 Under the India-Singapore CECA signed in June 2005, India has offered tariff
liberalisation on 5,099 lines while keeping 6,551 lines in the negative list.
Singapore wants India to review the negative list and bring down the number of
protected items. The list of items which Singapore wants to be excluded from
India’s negative list include condensed items like milk, edible oils, chocolate &

19
Government of Singapore website in the FAQ Section on CECA, available at:
www.iesingapore.gov.sg/wps/ortal/FTA
20
Mehta, R, “Economic Co-operation between India and Singapore: A Feasibility Study”. 41 RIS
Discussion Paper 56 (2003).

63
 cocoa products, tea, coffee, confectionery items, cigarettes, high speed diesel,
shampoos, deodorants, yarn & fibre, CD & DVD players and auto-parts.21
 Singapore had asked India to add 752 items ranging from edible oils to
electronics to the list of products being imported from Singapore on
concessional terms. Singapore also wants India to relax the rules for determining
the origin of products so that more items could qualify for preferential
treatment.22
 It may be highlighted that Singapore has imposed prohibitions under various
orders and license measures for considerations of public safety, health,
environment, etc. Bilateral trade negotiations should also address the issue of
non-tariff barriers.

3.2.1.3. ASEAN-India Free Trade Agreement (AIFTA)

As a part of its “look east” policy, India has been pursuing closer economic and
strategic ties with the countries of south-east Asia. In August 2009, India signed a free
trade agreement (FTA) for goods with the ten-member Association of South-East Asian
Nations (ASEAN). The ASEAN-India FTA (AIFTA) can be considered as a major
foray by India into a formidable regional trade bloc. India’s economic relations with the
member countries of the Association of South East Asian Nations (ASEAN) are set to
undergo major changes as the ASEAN-India Free Trade Agreement (AIFTA) has come
into force since 1 January 2010.23 Until the late nineties, India and the south-east Asian
countries were not significant trade partners, except for Singapore. This was
fundamentally because all the bigger south-east Asian economies had been following a
growth led economic strategy since the mid-1980s, while India’s trade and investment
policies remained quite conservative in comparison. 24 Consequently, the de facto
market-driven trade integration that ensued in east Asia because of the production
network strategies of multinational corporations (MNCs) meant that trade links of
ASEAN countries have been the greatest with the other countries in the east Asian

21
Ministry of Commerce, Government of India, “Brief of India’s Current Engagement in RTAs”,
available at: http://commerce.nic.in/india_rta_mainhtm
22
Ibid.
23
Rahul Sen, “New Regionalism” in Asia: A Comparative Analysis of Emerging Regional and Bilateral
Trade Agreements involving ASEAN, China and India” 40 Journal of World Trade 4-18 (2011).
24
Karmakar, S, “India-ASEAN Cooperation in Trade and Services - An Overview”, Working Paper No
176, (ICRIER, New Delhi, 2005).

64
region that drove or have been part of production sharing arrangements, or with the
developed countries that had been their major markets in prominent export sectors.25
India did not attempt to follow production network-driven export growth strategies, at
least until recently.

Industries involved in international fragmentation of production processes typically

exhibit high shares of intra-industry trade. With India steadily liberalising trade and
investment policies in many sectors unilaterally or under regional trade agreements
such as the Comprehensive Economic Cooperation Agreement (CECA), recent trends
in India’s export and import structure do point towards an increase in two-way trade26
in some sectors.

Trend Analysis: Introduction of FTA with ASEAN provides varied opportunities for
India. ASEAN offers an attractive market for Indian companies to invest either on their
own or in the form of joint ventures with Indian companies. India’s trade with ASEAN
has increased to over US$ 30 billion in 2011-12, growing at a promising CAGR of 31%
during the past five years.27 The trade balance however remains marginally in favour of
ASEAN. The total exports of India to ASEAN have increased from US$ 3.4 billion in
2001-02 to US$ 12.56 billion in 2011-12.28 The corresponding imports too have risen
steadily to US$ 18 billion in 2011-12. It can be noticed from the above information, that
there has been a steady rise in India’s total trade with ASEAN since 2001-02, due to a
steady and consistent increase in both imports and exports. It is interesting to note that
the increasing trend in India’s trade has been more prominent since 2003, when the
framework agreement for a comprehensive economic cooperation agreement was
signed.

25
Bhattacharya, B and M Ariff, “Study on AFTA-India Linkages for the Enhancement of Trade and
Investment”, a report submitted to the Government of India and the ASEAN Secretariat, May, 2002.
26
Note that not all simultaneous bilateral exchange of exports and imports at the 2-digit HS level
necessarily classifies as intra-industry trade (IIT) as often considered in the literature, since some part of
the two-way trade may be inter-industry trade. Also, IIT itself can be divided into two parts – IIT in
horizontally differentiated products and IIT in vertically differentiated products, accounting for
specialisation along ranges of quality within industries. These distinctions are important to understand the
nature of production specialization between countries and this can be explored only using data at the 6-
digit HS level.
27
Grarer, F., and A. Mattoo (eds).,India and ASEAN: The Politics of India’s Look East Policy23
(Manohar Publishers, New Delhi, 2001).
28
Peter Lloyd & Penny Smith, “International trade Economic Challenges to ASEAN Integration and
Competitiveness: A Prospective Look” REPSF Project 03/006a, at 11, available at: http://www.aadcp-
repsf.org/docs/03-006a-FinalReport.pdf.

65
The sectors of cooperation between India and ASEAN, that were identified in the
agreement include agriculture, fisheries and forestry; services sector like media and
entertainment, health, financial, tourism, construction, business process outsourcing,
environmental services; power & energy; information and communications technology,
electronic-commerce, biotechnology; transport and infrastructure; automotive, drugs
and pharmaceuticals, textiles, petrochemicals, garments, food processing, leather goods,
light engineering goods, gems and jewellery processing; and education. 29 India enjoys
strong business complementarities and trade advantage in these sectors.

Sectoral Performance: It is important to analyse the trends in the composition of trade

basket after the establishment of the framework agreement on comprehensive economic
cooperation between India and ASAEN in October 2003. It is interesting to note that
around 33% of India’s export basket to ASEAN in 2011-12 comprised of petroleum
products. Further analysis shows that the largest export destination of petroleum
products from India is Singapore to which exports amounted more than US$ 3.3 billion
in 2011-12, followed by Indonesia and Thailand which account for US$ 553 million
and US$ 178 million respectively. The other main items of export to ASEAN include
non-ferrous metals, oil meals, dyes intermediates & coal tar chemicals and gems &
jewellery, which have all accounted for more than US$ 500 million each during 2011-
12. The CAGR of India’s total exports to ASEAN has been 29% during 2003-04 to
2011-12. Moreover, though the magnitude of trade between India and ASEAN has
more than tripled over the five-year period, the compounded annual growth rate over
the five-year period too has been 29%. Owing to the immense size of the economies,
there remains huge potential to further grow at a faster rate post the agreement period of
2003.30

The major import items into India from ASEAN comprise petroleum crude, electronic
goods and edible vegetable oil. The imports of petroleum crude accounted for around
23% of the total imports in 2011-12. The import of electronic goods has increased
three-folds during the last five years from around US$ 1 billion to around US$ 3 billion
in 2011-12. It is noted that US$ 1.6 billion worth of imports of electronic goods come
from Singapore followed by Malaysia and Thailand. The import of edible vegetable oil,

29
Article 3 of the India-ASEAN Framework Agreement.
30
Reuters, “ASEAN says expect India Free Trade Deal by 2008”, 28 August 2007, available at:
http://inreuters.com/Article/businessNews/idINIndia-29186220070828

66
which accounts for 7% of India’s total imports from ASEAN, has reduced to US$ 1.2
billion in 2011-12 from US$ 1.8 billion in 2003-04.31 The growth in the imports of
metal ferrous ores & metal scrap, coal, coke & briquettes and organic chemicals too has
been high especially after the framework agreement came into existence. India’s total
imports have grown at a compounded annual growth rate of 34% post signing of the
framework agreement with ASEAN compared to 32% during 2001-02 to 2011-12. 32

Recent Key Developments and Issues:India has offered tariff cuts on around 80 percent
of goods and services traded between India and ASEAN. The negotiations are,
however, deadlocked on agricultural products, which India wants to exclude from tariff
cuts. Farm products are among ASEAN’s biggest exports to India.

 The Prime Minister’s Trade and Economic Relations Committee which met in
the first week of July 2007 to discuss key strategies and matters pertaining to
India’s “sensitivities” during negotiations with ASEAN felt that a further
reduction of duties on sensitive products such as palm oils, tea and pepper
would adversely affect India’s agriculture, for which it is a livelihood issue. 33
 According to Government of India sources, Malaysia wants the tariff on palm
oil to be reduced to 35 per cent by 2018 as against India’s proposal to bring
down the duty on crude palm oil to 50 per cent by 2018. Vietnam wants greater
market access and the tariff on tea and coffee to be reduced to 30 per cent and
that on pepper be reduced to 25 per cent by 2018, against India’s offer to reduce
them to 50 per cent by 2018.34 These products are also important to India in
terms of economic value and employment and any decision on this should result
in a win win situation for both countries.
 Recent negotiations on the proposed trade deal were hampered with ASEAN not
agreeing to the pruned negative list of 563 items suggested by India and
insisting on restricting the number to its own list of just 60 items. In its latest
offer, India proposed to scale its list to 490. The figure of 60 items being far

31
Peter Lloyd & Penny Smith, “Global Economic Challenges to ASEAN Integration and
Competitiveness: A Prospective Look” REPSF Project 03/006a, (2006), available at: http://www.aadcp-
repsf.org/docs/03-006a-FinalReport.pdf
32
Ibid.
33
Round Table on Indo-ASEAN Free trade agreement: Organized by Confederation of Indian Industry,
available at: www.ciionline.org/services/2256/round.pdf
34
Sen, Rahul, M Asher and R S Rajan, “ASEAN-India Economic Relations: Current Status and Future
Prospects”, 73 RIS Discussion Paper 26 (2004).

67
 elusive. The negative list includes items such as spices, plantation crops (tea and
coffee), vegetable oils (vanaspati and other edible oils), rice, fish, textiles,
chemicals and plastics, electronics, automobile components and footwear.
 While Vietnam’s bilateral trade with China and US is in excess of US$ 10
billion each, its trade with India has just touched US$ 1 billion. Vietnam has
expressed keenness to largely enhance bilateral trade and investment with India.
Energy sector was considered as a potential sector of investment by India.
Vietnam has proposed setting up of a Forum for Trade and Investment Policy
Exchange to enhance trade and investment relations. Vietnam and India have
also agreed to officially establish a strategic partnership between the two
countries. The two countries expressed willingness to increase two-way trade to
US$ 2 billion in 2010 and US$ 5 billion in 2015. 35
 India’s manufacturing capability is not as competitive as compared to its
potential free trade partners. Many segments of the domestic manufacturing
industry need to gear up and acquire competitive strength to take on tax-free
imports. In services, India has a comparative advantage in many sectors like
health, tourism, law and accounting. India also needs to attract large amounts of
foreign investments to spur its manufacturing and services industries, with gains
for agriculture as well.
 According to some studies36, the ASEAN FTA holds a high-level of asymmetry.
In terms of aggregate trade potential, the benefit to ASEAN members and India
is in the ratio of 1:4. Indonesia and the Philippines would be the major
beneficiaries. 37 The export potential for ASEAN members like Indonesia,
Malaysia, Philippines, Singapore and Thailand was estimated by the study at
US$ 10.2bn. In comparison, the benefit potential for India has been estimated at
US$ 2.7bn.38
 While Singapore will emerge as a major trade partner for India in the ASEAN in
services, banking and legal profession, its trade prospects in other ASEAN countries

35
Ibid.
36
For example a joint study by the Malaysian Institute of Economic Research and the Indian Institute of
Foreign trade. The study was based on UNCTAD methodology.
37
Mario B. Lamberte, “An Overview of Economic Cooperation and Integration in Asia” in Asian
Development Bank (ADB), Asian Economic Cooperation and Integration: Progress, Prospects, and
Challenges4 (Manila: ADB, 2005).
38
Sen, Rahul, M Asher and R S Rajan, “ASEAN-India Economic Relations: Current Status and Future
Prospects”, 73 RIS Discussion Paper 24 (2004).

68
such as Thailand, Malaysia, Indonesia, Philippines and Vietnam could suffer because of
protective measures, both tariff and non-tariff, which these nations are unlikely to lift
until the Free Trade Agreement (FTA) between India and ASEAN is executed by 2012.

3.2.1.4. Framework Agreement for Establishing Free Trade Agreement between

India and Thailand

A Framework Agreement for establishing a Free Trade Agreement between India and
Thailand was signed on October 9, 2003, in Bangkok, Thailand. The Framework
Agreement covers FTA in goods, services and investment and areas of economic
cooperation. The Framework Agreement also provides for an Early Harvest Scheme
(EHS) under which 82 common items of export which are of interest to both sides have
been agreed for elimination of tariffs on a fast track basis. 39

India-Thailand Trade Negotiating Committee (TNC) has been constituted and

discussions are being held on the text of FTA, Rules of Origin, Dispute Settlement
Mechanism and Sensitive List. There have been a number of rounds of negotiations for
FTA in goods so far; but due to difference of opinion on certain issues, the deadline
prescribed in the framework agreement for FTA in goods, of March 2005, could not be
met. Negotiations for FTA in services and investment have also begun. A meeting of
the India-Thailand Trade Negotiating Committee (TNC) was held in Chiang Mai from
9-13 January 2006. While negotiations on goods are at an advanced stage, talks on
services are at initial stages. In recent negotiations, Thailand has been insisting on
completing talks on goods and then move on to services and investments, contrary to
India’s stand to negotiate all the three areas at the same time resulting in delay in
negotiations.

Trend Analysis: Thailand is an important trading partner of India in South East Asia.
Though India’s total trade with Thailand as a percentage of India’s total international
trade trade accounts for a modest 1% in 2011-12, and the same is true from Thailand’s
point of view as well, Thailand continue to remain an important trading partner for
India due to its strategic location right at the heart of Asia. It serves as a gateway to
Southeast Asia and the Greater Mekong sub-region, where newly emerging markets

39
Weerakoon, Dushni and Jayanti Thennakoon, “India-Sri Lanka FTA: Lessons for SAFTA”, Mimeo
written for CUTS International, Jaipur, under research grant from the Economic Affairs Division of the
Commonwealth Secretariat (2007).

69
offer great business potential. 40 The amount of India’s total exports to Thailand, in
2001-02, amounted to US$ 0.64 billion while the corresponding value of India’s
imports from Thailand was US$ 0.42 billion. By 2011-12, the exports have crossed over
US$ 1.4 billion and imports over US$ 1.7 billion. Though it is seen that the present
level of India-Thailand trade is low, it is increasing over time. 41 India’s total trade with
Thailand has increased especially since 2002-03 during which the framework
agreement for a free trade agreement between the two countries was signed. Imports
from Thailand have been increasing at a faster rate than the increase in exports. India
has enjoyed a trade surplus since 2001-02 to 2004-05 after which imports have been
more predominant.42 Thailand’s import demands are high and India has great capacity
to meet export supply for a large number of commodities of Thailand’s import
demands. Indian business can also take the advantage of Thailand’s liberal attitude
towards foreign investment as the Thai government recognises the important
contribution of foreign investment to the domestic economy.

Sectoral Performance: Thailand’s export basket to India is diversified, while India’s

export basket to Thailand is relatively skewed and is dominated by gems & jewellery
accounting for around 23% of India’s total export to Thailand. The reduction in tariff
will give more export opportunities for India. The other main items of export include
petroleum products, non-ferrous metals, oil meals, primary & semi-finished iron &
steel. Export of petroleum products has recorded a robust growth since 2001-02.
Exports of cotton raw have also seen a sharp increase since 2001-02 increasing from a
mere US$ 0.05 million to more than US$ 65 million in 2011-12.43 Other items, which
have shown a good performance in export’s growth, include transport equipment, and
nonferrous metals. India’s total exports to Thailand have grown at a CAGR of 17%
during 2001-02 to 2011-12. After the framework agreement with Thailand in October
2003, the exports have grown at a CAGR of 20% during 2003-04 to 2011-12.44

40
Das, Ram Upendra, S. Ratanakomut and S. Mallikamas,A Feasibility Study on A Free Trade
Agreement between India and Thailand. Joint Working Group (Ministryof Commerce, Govt. of India and
Ministry of Commerce, Govt. of Thailand) 2002.
41
Mehta, R., “Potential of India’s Bi-lateral Free Trade Arrangements: A Case Study of India and
Thailand”. 24 RIS Discussion Paper 2012.
42
Ibid.
43
Mehta, R., “Potential of India’s Bi-lateral Free Trade Arrangements: A Case Study of India and
Thailand”. 24 RIS Discussion Study11 (2002).
44
Ibid.

70
As far as imports from Thailand are concerned, electronic goods, nonelectrical
machinery, artificial resins, plastic material etc. are the main items that come into India.
Electronic goods comprise around 18% of India’s total imports from Thailand and non-
electrical machinery around 16%. It is interesting to note that the total imports from
Thailand have grown at a compounded annual growth rate of 32% between 2001-02
and 2011-12, as compared to 42% since 2003-04 during which the framework
agreement was signed.45 Thus, an overall trend in the growth of exports and imports
between India and Thailand shows that the growth in both exports and imports has been
at faster rate after the framework agreement was signed between the two nations.

Recent Developments and Some Important Issues: Thailand has expressed optimism
over the agreed target of India-Thailand trade of US$ 4 billion by end of 2007 being
achieved. Indian industry groups too expect total trade to reach US$ 7 billion by 2010.

 Thailand has sought more Indian investment in IT and pharmaceuticals - the two
areas in which India has proven expertise.
 India and Thailand have already cut duties on 82 products, including fruits,
vegetables, wheat, diamonds and some metals, under a framework agreement
that came into operation in September 2004. India and Thailand are aiming to
abolish duties on goods traded between the two countries by 2010.
 According to government sources, Thailand wants greater market access in
natural rubber, being a major exporter of the product. However, natural rubber is
expected to be a part of India’s negative list. In the negotiations on goods, India
has agreed to eliminate tariff on more than 4,000 products in a phased manner,
while 500 others will be in the sensitive list, which will see partial duty cuts,
over a period of time. Nearly 500 other items in the negative list will not be
subject to any tariff cut, so as to protect the interests of the domestic industry. 46
 Thailand, which used to run a deficit in its trade with India, has registered a
$140-million trade surplus in 2005-06, even before tariffs on 82 items covered
under the scheme were brought to zero.

45
Ibid.
46
Das, Ram Upendra, S. Ratanakomut and S. Mallikamas.,A Feasibility Study on A Free Trade
Agreement between India and Thailand. Joint Working Group. (Ministryof Commerce, Govt. of India
and Ministry of Commerce, Govt. of Thailand) (2002).

71
  Overall, the balance of trade has tilted in favour of Thailand with India’s exports
growing at an average of 14% for the past 3 years since 2003 and Indian imports
growing at 42% during the period. Seven of the top 10 items imported from
Thailand in terms of value have shown a growth of above 45% in 2005-06,
compared to only dyes intermediates & coal tar chemicals having grown above
an impressive 45% among the exported commodities.
 High rates of taxes and duties, low labour productivity and procedural
complexities are impacting the competitiveness of Indian industries.
 India needs to improve the quality of infrastructure facilities with a view to
become more competitive vis-à-vis imports from Thailand.
3.2.1.5. Agreement on India-Bhutan Trade and Commerce

The Indo-Bhutan Trade and Commerce Agreement, which was concluded in 1972, are
periodically renewed, incorporating mutually agreed modifications. The current
agreement on Trade, Commerce and Transit was renewed on 28th July 2006 for a
period of 10 years. The salient features of the agreement include free trade and
commerce between the two countries with concessions granted to Bhutan to impose
non-tariff restrictions on import of certain goods of Indian origin for protection of their
industries, no restrictions by India on Bhutan’s trade with third countries, imposition of
non-tariff restrictions by both sides on import of third country goods from each other’s
territory, and mutual refund of annual excise duties on goods exported to each other. 47

3.2.1.6. Trade Agreement between India and Bangladesh

India had entered into a bilateral agreement with Bangladesh in 1980 for a period of
three years, which was periodically renewed by mutual consent. An amended Trade
Agreement was signed in March 2012, which is valid till March 2015. This agreement
primarily focuses on expansion of trade and economic cooperation, building a mutually
beneficial arrangement for the use of waterways, railways and roadways, exchange of
business and trade delegations and consultation to review the working of the agreement
at least once a year. 48

3.2.17. India-Nepal Treaty of Trade

47
See Ministry of Commerce and Industry, Government of India, “India's Current Engagements in
R.T.As.”, available at: http://commerce.nic.in/india_rta_main.htm.
48
Ibid.

72
India-Nepal bilateral treaty of trade was in force for a period of five years with effect
from March 2002. With the expiry of the treaty in March 2007 after a five-year period
of agreement, both Governments of Nepal and India decided to renew the Treaty in its
current form with effect from March 6, 2007.49 Mutual consultations are also in
progress to amend the treaty of trade to replace the existing treaty. Under this Treaty,
there is a provision for free trade on mutually agreed primary products from each other,
and a provision for India to provide on a non-reciprocal basis, duty-free access to
Nepalese industrial goods without any quantity restriction, subject to fulfillment of
some conditions. Under the current Treaty of Transit, India provides transit facilities to
Nepal. The current Treaty was renewed in January 2006 and would be in force for a
period of seven years up to 2013.50 This Treaty provides for free movement of traffic-
in-transit across territories of each other through mutually agreed routes for trade with
third countries subject to taking measures to ensure that this does not infringe legitimate
interests/security interests of each other. Traffic in transit is exempted from customs/all
transit duties. India has allowed 15 transit routes to Nepal but so far not availed of this
facility from Nepal. 51

India and Nepal have also signed an Agreement of Cooperation to Control

Unauthorized Trade. Its main objective is to check illegal trade (smuggling) between
the two countries. This agreement has been renewed in 2007 in its present form. Both
countries have also established a forum known as Inter-Governmental Committee to
address the problems relating to bilateral trade, transit facilities and prevention of
unauthorized trade.

3.2.1.8. India-Afghanistan Preferential Trade Agreement

The bilateral trade between India and Afghanistan is regulated by the India-Afghanistan
Preferential Trade Agreement signed between India and Afghanistan on March 6, 2003
in New Delhi, which promotes harmonious development of the economic relations and
free movement of goods through reduction of tariffs between the two countries. By this
agreement, preferential tariff is granted by the Government of Afghanistan to 8 items
from India including tea, medicines, refined sugar, cement clinkers and white cement.

49
Ibid.
50
See Ministry of Commerce and Industry, Government of India, “India's Current Engagements in
R.T.As.”, available at: http://commerce.nic.in/india_rta_main.htm.
51
Ibid.

73
India has granted preferential tariff to 38 products from Afghanistan including raisins,
dry fruit, fresh fruits and spices. The agreement would remain in force till either party
wishes to terminate it through notification. 52

3.2.1.9. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation (BIMSTEC)

The initiative to originally establish Bangladesh-India-Sri Lanka-Thailand Economic

Cooperation (BISTEC) was taken by Thailand in 1994 to explore economic cooperation
on a sub-regional basis involving neighbouring countries of South and South-East Asia
grouped around the Bay of Bengal. With the inclusion of Myanmar in December, 1997
the initiative was renamed as BIMSTEC. In July 2004, the initiative was renamed as the
Bay of Bengal Initiative for Multi Sectoral Technical and Economic Co-operation
(BIMSTEC) with the admission of Bhutan and Nepal as members to the group. 53 The
initiative involves five members of SAARC (India, Bangladesh, Bhutan, Nepal and Sri
Lanka) and 2 members of ASEAN (Thailand and Myanmar), and therefore, is
visualized as a ‘bridging link’ between two major regional groupings i.e., ASEAN and
SAARC. BIMSTEC is an important element in India’s ‘Look-East’ strategy and adds a
new dimension to India’s economic cooperation with South Asian and South East Asian
countries. 54

At the first meeting of the Economic/ Trade Ministers of BIMSTEC, which was held in
Bangkok in August, 1998, it was agreed that BIMSTEC should aim and strive to
develop into a Free Trade Area, and should focus on activities that facilitate trade,
increase investment & promote technical cooperation among member countries. Six
areas were identified for cooperation in BIMSTEC, namely, trade and investment,
technology, transportation and communication, energy, tourism and fisheries. In the
fourth BIMSTEC Trade & Economic Ministers meeting held in Colombo on March 7,
2003, it was decided to constitute a Group of Experts (GoE) for drafting the Framework
Agreement on BIMSTEC Free Trade Area (FTA). Subsequently, the Framework
Agreement on the BIMSTEC FTA was signed on February 8, 2004 in Phuket, Thailand
by Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand during the Fifth BIMSTEC

52
Ibid.
53
Sunjoon Cho, “Breaking the Barrier between Regionalism and Multilateralism: A Perspective on Trade
Regionalism”, 42 Harv. Int'l L. J. 419-436 (2000).
54
Framework Agreement on the BIMST-EC Free Trade Area, done at Phuket, 8 February 2004,
available at:www.mofa.gov.bd/bimstec/BIMSTEC%20FTA.pdf

74
Economic Ministers’ Meeting. Bangladesh, however, did not sign the BIMSTEC FTA
Agreement in February 2004, but nevertheless has acceded by signing a Protocol to this
effect in June 2004.55 The Framework Agreement includes provisions for negotiations
on FTA in goods, services and investment. A Trade Negotiating Committee (TNC) has
been constituted to carry forward the programme of negotiations.

Trend Analysis: India’s total trade has steadily risen since 2002-03 owing to the sharp
increase in India’s exports to BIMSTEC countries. The exports have grown steadily
since 2004-05, subsequent to the signing of the framework agreement between
BIMSTEC and India. The value of India’s exports to BIMSTEC has increased from
US$ 2.56 billion in 2001-02 to US$ 6.45 billion in 2011-12 at a CAGR of 20%. Imports
have been steady over the period being US$ 3.66 billion in 2011-12.56

As far as India’s relation with Bhutan is concerned the total trade though has been very
low, it has been increasing over time from US$ 31 million in 2001-02 to around US$
200 million in 2011-12. The export basket from India to Bhutan mainly comprises
machinery & instruments, transport equipment, manufactures of metals and petroleum
products. The imports from Bhutan to India amounted to US$141 million in 2006- 07
and primarily include non-ferrous metals, edible vegetable oils, primary steel, pig iron
based items, iron & steel and inorganic chemicals.

With regard to India’s trade relation with Nepal, India enjoys a favourable trade balance
which has been consistently increasing in India’s favour over the period. The trade
surplus has been around US$ 625 million in 2011-12. The main items of import to India
from Nepal include iron & steel, manmade filament, spun yarn, chemical material &
products, essential oil & cosmetic preparations, other textile yarn, fabrics etc. India’s
export basket to Nepal is dominated by petroleum products, constituting around 40% of
India exports to Nepal. The other commodities include transport equipment, drugs,
pharmaceuticals & fine chemicals, glass & glassware, ceramics, cement, machinery &
instruments, non-basmati rice.

In case of Bangladesh it is noticed that India has huge trade surplus being more than
US$ 1.4 billion in 2011-12. Bangladesh’s exports to India are concentrated in very few

55
Ratnayak, R., “Prospects for BIMST-EC Cooperation in Textiles and Clothing following Abolition of
The Multi-fibre Arrangement”, (2001)available at: www.bimstec.org
56
Ratnayak, R.,Prospects for BIMST-EC Cooperation in Textiles and Clothing following Abolition of The
Multi-fibre Arrangement, available at: www.bimstec.org(2001).

75
commodities like inorganic chemicals, manufactured fertilizers, and raw jute. The main
items of export to Bangladesh include cotton yarn fabrics, cereals, sugar, transport
equipment etc.57 in this context, it should be remembered that India has already given
tariff concessions on a large number of items/lines to Bangladesh, as a part of SAPTA
process.

India has been maintaining a consistent trade deficit with Myanmar since 2001-02. The
amount of deficit is quite significant and it has been continuing for last couple of years.
The gap was to the tune of US$ 638 million in 2011-12.58 The export basket of
Myanmar to India is concentrated in few items such as pulses and wood & wood
products, which account for about 80% of the total exports from Myanmar to India.
India has already given preferential tariff, for most of these items, to Myanmar.59 On
the other hand, India’s export basket to Myanmar mainly comprises of primary & semi-
finished iron & steel, drugs, pharmaceuticals & fine chemicals, manufactures of metals,
machinery & instruments, manufactured rubber products, plastic & linoleum products,
transport equipment.

India’s exports to both Bangladesh and Myanmar have seen a decent increase over the
past five years. Most prominent commodities in the export basket include cotton yarn
fabrics madeups, drugs, pharmaceuticals & fine chemicals and fresh vegetables.60
Though the magnitude of imports from Bangladesh and Myanmar to India has been
low, imports have been steadily increasing over the period. Inorganic chemicals,
manufactured fertilizers and raw jute comprise the main import items to India. India has
export competitiveness in a large number of commodities as compared to other
BIMSTEC countries and there exists a great scope and capacity for India to penetrate
the markets of other BIMSTEC countries. However, lack of basic infrastructure in the
region, in particular transportation and communication linkages, act as a bottleneck to
the development of trade and development.

3.2.1.10. Agreement on South Asian Free Trade Area (SAFTA)

57
Framework Agreement on the BIMST-EC Free Trade Area, done at Phuket, 8 February 2004,
available at:www.mofa.gov.bd/bimstec/BIMSTEC%20FTA.pdf
58
Framework Agreement on the BIMST-EC Free Trade Area, done at Phuket, 8 February 2012,
available at:www.mofa.gov.bd/bimstec/BIMSTEC%20FTA.pdf
59
Ibid.
60
Pal, P., “Indo-Bangladesh Trade: Trade Facilitation for Efficiency and Regional Integration”, Mimeo
(2011).

76
South Asian countries, which had open economies in the immediate post-independence
period in the 1940s, had become some of the most highly protectionist economies in the
world by the 1970s. Tariff and, even more important, nontariff barriers were extremely
high, state interventions in economic activity had become pervasive, attitudes to foreign
investments were negative, often hostile, and stringent exchange controls were in place.
This started to change in the late 1970s, however. In 1977, Sri Lanka initiated a process
of policy liberalization, and other countries followed in the 1980s.61 The liberalization
process, however, was often rather hesitant and was uneven across countries. It was
from the early 1990s, with the start of a major reform process in India that the region as
a whole really started to liberalize. By the end of the decade, although important policy
barriers to trade and foreign investment remained, enormous progress had bepen made
throughout the region in this direction.

The changes to the trade policy regime in South Asia have been driven primarily by
across-the-board, unilateral liberalization by individual countries. However, a process
of preferential trade liberalization also has been ongoing since the establishment in
1985 of the South Asian Association for Regional Cooperation (SAARC). South Asia
was fairly late in embracing the concept of regional economic cooperation - it took a
decade after the initial establishment of SAARC for the region to turn its attention to
the promotion of trade through a regional agreement. Nevertheless, having accepted the
concept of regional economic cooperation, SAARC was quick to set itself an ambitious
agenda. The proposal to set up a South Asian Preferential Trade Agreement (SAPTA)
was accepted and came into formal operation in December 1995. In 1996, SAARC
member countries agreed in principle to go a step further and attempt to enact a South
Asian Free Trade Agreement (SAFTA) by 2000, but not later than 2005. With the
apparent progress of three rounds of negotiations under SAPTA completed by 1998, it
was proposed that the date for establishing SAFTA be brought forward to 2001.62

The momentum of economic cooperation in South Asia suffered a setback from late
1998, however, with the deterioration in bilateral relations between India and Pakistan
that saw the consequent postponement of SAARC Heads of State Summits for the next

61
Ratna, R. S. and GeetuSidhu, “Making SAFTA a Success: The Role of India”, Mimeo written for
CUTS International, Jaipur, under research grant from the Economic Affairs Division of the
Commonwealth Secretariat 2007.
62
Deshal de Mel, “Bilateral Free Trade Agreements in SAARC and Implications for SAFTA” in Ahmed,
S. et.al. (ed.) Promoting Economic Cooperation in South Asia 142 (Sage Publications, New Delhi, 2010).

77
three years. With the resumption of official contact in January 2002, negotiations on a
Framework Treaty on SAFTA were initiated and the framework was adopted in January
2004. Outstanding issues in key areas of the tariff liberalization program, rules of
origin, sensitive lists, and so on, were completed on schedule by January 2006 to allow
the implementation of SAFTA to begin in July 2006. 63 Under the proposed tariff
liberalization program (TLP), SAFTA will become fully effective for non - least
developed country (NLDC) member countries of SAARC by 2013 (and by 2016 for
LDC member states).

Trend Analysis: The SAFTA envisages a phased tariff liberalisation programme under
which non-LDCs (viz. India, Pakistan and Sri Lanka) will bring down tariffs to 20% in
two years, while LDC members (viz. Bangladesh, Bhutan, Maldives and Nepal) will
bring them down to 30%. Further, the non-LDC members will further reduce tariffs
from 20% to 0-5% in 5 years (Sri Lanka in 6 years), while LDC members will do so in
8 years.64 Moreover, non-LDC members will reduce their tariffs for LDC members’
products to 0-5% in 3 years.

To date, the SAFTA process has generated only limited enthusiasm. It suffers from
significant shortcomings, primarily on account of a cautious approach adopted to
achieve the ultimate objective of free trade within the South Asian region. Concerns
about the very usefulness of SAFTA have been mounting in light of more liberal
bilateral free trade agreements (FTAs) - as well as preferential access that could
conceivably be granted through alternative trading arrangements - among SAARC
countries. 65 The dynamics of regional integration in South Asia have also changed with
the growing emergence of India not only as an Asian economic power, but also as a
rapidly emerging world economic power. With India looking increasingly to strengthen
economic relations with the wider Asian region through initiatives such as association
of Southeast Asian Nations (ASEAN)+3+India, the strategic interests of the smaller
South Asian economies are likely to become inextricably linked to successful

63
Dubey, Muchkund, “SAARC and South Asian Economic Integration” April 17 Economic and Political
Weekly 786 (2007).
64
P.V.Rao, “Globalisation and Regional Cooperation: The South Asian Experience”, in, B.C. Upreti,
(ed.), SAARC: Dynamics of Regional Cooperation in South Asia (Kalinga Publications, New Delhi,
2001).
65
Ratna, R. S. and GeetuSidhu, “Making SAFTA a Success: The Role of India”, Mimeo written for
CUTS International, Jaipur, under research grant from the Economic Affairs Division of the
Commonwealth Secretariat 2007.

78
integration with the Indian economy. The evidence to date suggests that economic
integration of the South Asian region is gathering pace, but that SAFTA remains fairly
marginal in that process.

3.2.1.11. Asia Pacific Trade Agreement (APTA)

The Bangkok Agreement renamed as Asia Pacific Trade Agreement (APTA) was
signed in November 2005 in Beijing and came into force with effect from July 1, 2006.
The original agreement signed in 1975 was an initiative under the Economic and Social
Commission for Asia and Pacific (ESCAP) for trade expansion through exchange of
tariff concessions among developing countries of the ESCAP region. 66 The agreement
is operational among five countries namely, Bangladesh, China, India, Republic of
Korea and Sri Lanka. Till date three rounds of trade negotiations have taken place. The
third round of negotiations under the Bangkok Agreement was launched in October
2001 and concluded in July 2004.67 The objectives of this agreement are to promote
economic development through a continuous process of trade expansion among the
developing member countries of ESCAP and to further international economic co-
operation through the adoption of mutually beneficial trade liberalisation measures
consistent with their respective present and future development and trade needs.

3.2.2. India’s Regional Trade Agreements with Latin American Countries:

3.2.2.1. India-MERCOSUR Preferential Trade Agreement

A Framework Agreement was signed between India and MERCOSUR on June 17,
2003 at Asuncion, Paraguay. The aim of this Framework Agreement is primarily to
create conditions and mechanisms for negotiations, by granting reciprocal tariff
preferences and, to negotiate a free trade area between the two parties in conformity
with the rules of the WTO.68

66
Homi Kharas, “Trade and Economic Integration in the Asia Pacific Region” in Organisation for
Economic Co-operation and Development (OECD), (ed.), Regional Integration in the Asia Pacific:
Issues and Prospects107 (OECD,Paris, 2005).
67
HomiKharas, “Trade and Economic Integration in the Asia Pacific Region” in Organisation for
Economic Co-operation and Development (OECD), (ed.), Regional Integration in the Asia Pacific:
Issues and Prospects 107 (OECD, Paris, 2005).
68
Ashok B. Sharma, “Free Trade Agreement with MERCOSUR Group should not hit domestic
Vegetable Oil and Food Industries”, 16 June 2004, available at: http://www.bilaterals.org/Article
.php3?id_Article+217

79
As a follow up to the Framework Agreement, a Preferential Trade Agreement (PTA)
was signed in New Delhi on January 25, 2004. The aim of this Preferential Trade
Agreement is to expand and strengthen the existing relations between MERCOSUR and
India, and promote the expansion of trade by granting reciprocal fixed tariff preferences
with the ultimate objective of creating a free trade area between the parties. Under the
PTA, India and MERCOSUR have agreed to give tariff concession, ranging from 10%
to 100% to the other side on 450 and 452 tariff lines, respectively. It was mutually
agreed that India-MERCOSUR PTA would be expanded by increasing the number of
products covered and increasing the tariff concessions agreed by each side. 69

3.2.2.2. Preferential Trade Agreement (PTA) between India and Chile

India has negotiated a Preferential Trade Agreement (PTA) with Chile. The Framework
Agreement to Promote Economic Cooperation, signed between India and Chile on
January 20, 2005, provided for a Joint Study Group (JSG) to identify the potential for
cooperation between the two sides in goods and services, investments and other areas of
economic cooperation. The PTA relates to the list of products on which the two sides
agreed to give fixed tariff preferences to each other, Rules of Origin, Preferential
Safeguard Measures and Dispute Settlement Procedures have been finalized during four
rounds of negotiations. While India has offered to provide fixed tariff preferences
ranging from 10% to 50% on 178 tariff lines at the 8 digit HS level to Chile, the latter
have offered a similar range of tariff preferences on 296 tariff lines at the 8 digit level.

The products on which India has offered tariff concessions relate to meat and fish
products, rock salt, iodine, copper ore and concentrates, chemicals, leather products,
newsprint, study and particle boards and some industrial products. Chile’s offer covers
some agriculture products, chemicals and pharmaceuticals, leather products, textiles and
clothing and some industrial products. The first meeting of the Joint Study Group was
held during the PTA negotiations in November 2005. The draft reports prepared by
Chile and India were discussed during the meeting. Both sides agreed to submit their
conclusions and recommendations to their governments for guiding further action on
the matter.

69
MERCOSUR was notified by the member states under the Enabling Clause, certain WTO members
raised objection and demanded that MERCOSUR needs to be examined under Article XXIV.

80
Trend Analysis: India and Chile entered into a Preferential Trade Agreement (PTA) on
March 9, 2006. This is the first such agreement between India and an individual Latin
American country. The PTA between both countries is expected to increase bilateral
trade and investment. The PTA is expected to be the first step towards an India-Chile
free trade agreement (FTA). It would enable India to better use raw materials from
South America and gain access into the vast markets in the continent. 70

The total trade has been rising steadily from 2001-02 to 2011-12. Owing to the sharp
increase in imports from Chile, the total trade shot up to more than US 2.29 billion in
2011-12 from US$ 0.59 billion in 2005-06. The aggregate Indian exports have remained
subdued over the period, but nevertheless, have been growing. As a result, India is
experiencing trade deficit from the year 2001-02 onwards and it has been widening. The
imports from Chile rose from US$ 0.1 billion in 2001-02 to US$ 1.92 billion in 2011-
12.71 It is interesting to note that among all the countries in the Latin American and
Caribbean region, Chile has emerged as the main sources of imports to India. It is
expected that the introduction of preferential trade agreement between India and Chile
may lead to increase in bilateral trade due to tariff reduction.

As indicated above, India’s total exports to Chile have been relatively low. The main
items of export from India to Chile include marine products, iron ore, raw cotton and
ores & minerals. The exports have grown at a CAGR of 16% during the period 2001-02
to 2005-06, compared to the growth rate of 146% during the last year after the PTA was
signed between the two nations.72

An observation of above mentioned information reveals that Imports from Chile to

India predominantly consists of metal ferrous ores & metal scrap, which accounts for
96% of total imports in 2011-12 from Chile to India, compared to 86% share during the
previous year. It is believed that the success of the preferential trade agreement depends
on phasing out of barriers by Chile. Moreover, due to low labour costs and a good
infrastructure, Chile is investment worthy and thus Indian investors seeking overseas
investment should be encouraged to invest in this country.

70
See Ministry of Commerce and Industry, Government of India, “India's Current Engagements in
R.T.As.”, available at: http://commerce.nic.in/india_rta_main.htm
71
Berthelon, M., “Growth Effects of Regional Integration Agreements”. 12 Central Bank of Chile
Working Papers 67 (2013).
72
World Bank, “Global Economic Prospects and the Developing Countries 2002: Making Trade Work
for the World’s Poor”. Washington, DC. (2001).

81
3.2.3. India’s Regional Trade Agreements with West Asian Countries:

3.2.3.1. FTA between India and Gulf Cooperation Council (GCC)

India is in the process of negotiating a Free Trade Agreement with GCC and the first
round of negotiations in this regard was held in March 2006. The Gulf Co-operation
Council (GCC) is a customs union comprising of Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and UAE. The GCC members are major trading partners for India, accounting
for around 13% of India’s international trade exports and around 16% of India’s
international trade imports in 2011-12. The FTA proposes to include Trade in Services
and Investment Cooperation as well as General Economic Cooperation.

Trend Analysis: India’s negotiations with GCC to explore the possibility of a free trade
agreement have opened many trade opportunities for India in the West Asian region.
India’s trade with GCC has shown a steady increase from 2001-02 to 2005-06. India-
GCC trade has witnessed a very sharp increase in imports from GCC to India since
2005-06. It is highly interesting to note that this sharp rise in imports from US$ 19.6
billion in 2005-06 to more than US$ 47 billion in 2011-12, immediately follows the
India- GCC first round of negotiations towards an FTA held in March 2006. This
substantial increase in imports has also boosted the total trade between India and GCC.
The total trade between India and GCC has increased from US$ 5.5 billion in 2001-02
to US$ 47.33 in 2011-12. 73

India’s exports to GCC mainly comprise of petroleum products, gems & jewellery, non-
ferrous metals, machinery & instruments and manufactures of metals. Moreover,
petroleum products and gems & jewellery together constitute around 42% of the total
exports from India to GCC. Petroleum exports have seen the largest increase from a
mere US$ 5 million in 2001-02 to more than US$ 3.7 billion in 2011-12.74

The main items of import to India from GCC include petroleum crude & products, gold,
pearls precious & semiprecious stones, metal ferrous ores & metal scrap, organic
chemicals, manufactured fertilisers artificial resins, plastic materials and electronic
goods. Petroleum crude & products is the most important item of India’s imports from

73
Ibid.
74
Government of India, “India's Current Engagements in R.T.As.”, (Ministry of Commerce and Industry,
2013), available at: http://commerce.nic.in/india_rta_main.htm

82
GCC constituting around 80% of total imports from the region. 75 The imports of gold
have also sharply increased from US$ 0.2 billion in 2001-02 to more than US$ 1.6
billion in 2011-12.

Lately, the Prime Minister’s Trade and Economic Relations Committee which met in
the first week of July 2007 discussed negotiations on the proposed trade agreement with
the Gulf countries and felt that the Indian petrochemical industry could be adversely
impacted as imports of refined petroleum could possibly have a negative impact on the
Indian petrochemical industry, in the long run.

3.2.3.2. Joint Study Group between India and Israel

India and Israel have constituted a Joint Study Group to examine ways and means of
promoting bilateral economic relations and to consider a Bilateral Economic
Partnership Agreement. The JSG report released in November, 2005 recommended an
India-Israel Action Plan for Comprehensive Economic Cooperation between the two
countries. The JSG focused on implementation of recommendations like PTA, Customs
Cooperation, early utilization of R&D funds, liberalisation of trade in services,
negotiations on bilateral shipping agreement etc.

3.2.4. India’s Regional Trade Agreements with African Countries:

3.2.4.1. Preferential Trade Agreement (PTA) between India and SACU

The South Africa Customs Union (SACU), with a Common Tariff Policy, comprises of
South Africa, Lesotho, Swaziland, Botswana and Namibia. In September 2004, the draft
Framework Agreement for a Preferential Trade Agreement (PTA) between India and
SACU countries was finalised, by a Joint Working Group (JWG) consisting of
government representatives from both sides. The sixth session of the India-South Africa
Joint Ministerial Commission Meeting was held in New Delhi in December 2005.76
Both sides agreed that a comprehensive Free Trade Agreement within a reasonable time
and in the interim, a limited scope agreement providing for exchange of tariff
concessions on select list of products, between India and SACU would give further
impetus to bilateral trade and urged its early conclusion. The agreement will aim to

75
Sunanda K Datta-Ray, Looking East to Look West (Penguin Group, New Delhi & Institute of
Southeast Asian Studies (ISEAS), Singapore 2009).
76
Mehta, R. and S. K. Mohanty, “Alternative Forms of Trading Arrangements in Indian Ocean
Implications for India from IO-ARC” 12 Indian Journal of African Studies 1-33 (2001).

83
promote expansion of trade and provide a mechanism to negotiate and conclude a
comprehensive Free Trade Agreement within a reasonable time.

Trend Analysis: India’s trade relations with SACU have been growing over the period.
The total trade between India and SACU has seen an increase from US$ 1.8 billion in
2001-02 to US$ 4.8 billion in 2011-12. An analysis of above information reveals that,
India’s imports from SACU have dominated the total trade between India and SACU.
However, India’s exports too caught up pace since 2003-04 increasing from US$ 0.6
billion in 2003-04 to US$ 2.3 billion in 2011-12. Imports rose from US$ 1.4 billion in
2001-02 to US$ 2.5 billion in 2011-12.77 As a result of the increase in exports from
India to SACU the trade deficit has been reducing in India’s favour at a fast rate from
US$ 1.3 billion in 2003-04 to US$ 0.2 billion in 2011-12.78 The main items in India’s
export basket to SACU include petroleum products, transport equipment, electronic
goods, and primary & semi-finished iron & steel. The exports of petroleum products
from India rose from US$ 0.03 million in 2001-02 to US$ 793 million in 2011-12.79 As
far as imports are concerned, the main import items from SACU into India include
pearls and precious stones, chemicals, ores, iron & steel and electrical machinery.

3.2.4.2. Preferential Trade Agreement/Comprehensive Economic Cooperation and

Partnership Agreement (CECPA) between India with Mauritius

A Joint Study Group (JSG) constituted in November 2003 to study the modalities of the
CECPA discussed in detail the complementariness and potential synergies between the
two economies and, in its report of November, 2004, identified Investment, Trade in
Goods and Services and General Economic Cooperation for developing modalities of
CECPA. During his visit to Mauritius from March 30-April 2, 2005, the Hon’ble Prime
Minister of India conveyed India’s acceptance of the report by the Joint Study Group on
Comprehensive Economic Cooperation and Partnership Agreement and both sides
agreed to set up a high-powered negotiating team for processing and finalizing the
recommendations of this report within a twelve-month period.80 Accordingly an
empowered team was constituted for negotiating a Comprehensive Economic

77
Ibid.
78
Government of India, “India's Current Engagements in R.T.As.”, (Ministry of Commerce and Industry,
2013), available at: http://commerce.nic.in/india_rta_main.htm
79
JagdishBhagwati, Pravin Krishna &ArvindPanagariya, (eds.), Trading Blocs: Alternative Approaches
to Analying Preferential Trade Agreements 33 (The MIT Press, Cambridge, 1999).
80
Ibid.

84
Cooperation and Partnership Agreement (CECPA) with Mauritius. The Preferential
Trade Agreement (PTA)/Comprehensive Economic Cooperation & Partnership
Agreement (CECPA) being negotiated with Mauritius is likely to be finalized
shortly.”81

Trend Analysis:India’s trade with Mauritius is in favour of India, as India has much
diversified export relation with Mauritius. The imports on the other hand from
Mauritius are almost negligible. The Table 4.23 and Chart 4.8 present the recent trend
in India-Mauritius trade. The aggregate of exports to Mauritius amounted to US$ 163
million in 2001-02 and increased to US$ 736 million in 2011-12. The important export
items to Mauritius include: mineral fuels and oils, bituminous substances, mineral
waxes, other petroleum oils, cotton yarn, fabrics, made-ups, man-made yarn, and
fabrics, drugs, pharmaceuticals & fine chemicals. 82

The imports from Mauritius to India have been relatively low. However, the aggregate
of imports from Mauritius doubled from US$ 7.33 million in 2005-06 to US$ 14.51
million in 2011-12. The main items of imports from Mauritius include: iron and steel,
electrical machinery and equipment and parts thereof, sound recorders and reproducers,
television image and sound recorders other waste and scrap, machinery and mechanical
appliances. Thus, introduction of preferential trade agreement with Mauritius may lead
to increase in trade.

Some Important issues

 Mauritius, with a population of just 1.25 mn, offers a limited market to Indian
industries. An agreement between the two nations could prove to be more
beneficial to Mauritius due to large number of opportunities provided by the
Indian market. However, with an agreement with Mauritius, India could
possibly explore avenues of trade with SADC and COMESA, blocs in which
Mauritius is a member.
Therefore, Mauritius could be viewed as a promising manufacturing hub to explore the
market of the region.

81
JSG., Joint Study Group Report on “India-Singapore Comprehensive Economic Cooperation”, April,
2003, available at: http://www.fta.gov.sg/fta/pdf/FTA_CECA_JSG_Report.pdf
82
Ibid.

85
3.3. Conclusion:

It may be observed from the above discussion that India has been engaged in trade
agreements with a number of countries and is also strongly negotiating free trade
agreements and comprehensive economic cooperation agreements with several regions
of the world. These trade agreements are expected to significantly enhance India’s
international trade prospects. Engagement in regional trade agreements has had a
significant effect over the past decade on India’s trade performance with its partner
countries. An attempt was made in this chapter to analyse India’s trade performance
with its main trading partners and highlight some key issues regarding the agreements.

An analysis of India’s trade performance with its RTA partners, over the period of ten
years since 2001-02, reveals some interesting features. A mere observation of the trend
in India’s trade during the period, attests to the success of RTAs involving India, as
depicted by the sharp increase in bilateral trade benefiting both the partners to the
agreement. Exports have grown at a CAGR of 32% and imports at 44% during the
period. India’s total trade with its RTA partners, as a percentage of its international
trade has shown a decent rise from 20% to around 30% of total trade during the period
2001-02 and 2011-12.83 This clearly indicates that more of India’s trade is increasingly
taking place with countries with which it has established some kind of preferential trade
arrangement or negotiating a FTA or CEPA. This trend in India’s trade performance
strongly supports the belief that regional trade agreements indeed act as a gateway to
expansion of international trade.84

As far as India’s trade relations with Latin America are concerned, total trade with
Chile and MERCOSUR together, has grown by more than 4 times from US$ 1.26
billion in 2001-02 to US$ 5.89 billion in 2011-12. In the African region, India’s trade
with SACU showed a healthy performance, with India’s exports shooting up from US$
0.37 billion in2001-02 to more than US$ 2 billion in 2011-12. Similarly, India’s exports
to Mauritius have increased substantially in recent years.

Asia forms a very important region as far as India’s regional trade initiatives are
concerned, with nearly 40% of India’s total trade with RTA partners accounted for by

83
Pitigala, N., “What Does Regional Trade in South Asia Reveal about Future Trade Integration?: Some
Empirical Evidence”. 3497 World Bank Policy Research Working Paper February 2012.
84
Ibid.

86
the Asian countries. However, it is interesting to note that in 2001-02, the
corresponding share was 54.5%. The decline in the share between 2001-02 and 2011-12
could be due to India’s growing trade relations with other countries in different regions
of the world. Within Asia, China is emerging as a major trading partner. Among other
RTA partners in Asia, India’s major trade partners include Singapore, Malaysia,
Indonesia and Sri Lanka. Singapore and Malaysia together account for 47% of India’s
total trade with its RTA partners in Asia in 2011-12. India’s total trade with Indonesia
increased from US$ 1.6 billion in 2001-02 to more than US$ 6 billion in 2011-12.
India’s trade with Brunei also shot up from a mere US$ 3.2 million to more than US$
293 million during the same period primarily because of the sharp increase in India’s
imports from the country. Moreover, India’s trade with most of the Asian trading
partners, most of which are member of trading blocs with which has India is engaged in
preferential agreements, has seen an impressive growth.85

The extent to which trade between India and the GCC has grown is evident from the
fact that India’s trade with GCC has increased by more than eight times during the
period. Exports and Imports both have contributed to the growth of bilateral trade
between the two economies. Bilateral trade is further expected to increase once the
India-GCC FTA materialises. Thus, the overall trend in India’s trade performance with
its partner countries reveals the positive impact of RTAs and bilateral PTA/FTAs.

85
Weerakoon, D., and J. Thennakoon, “SAFTA: Which Way Forward?” 3 (1) Journal of South Asian
Development 135-50 (2008).

87