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Free trade for Thailand, free fall
for India
By Debasish Roy
Chowdhury
HUA HIN - India's "Look
East" policy seems to be dragging its economy
southward. So reveals a recent survey by the Federation
of Indian Chambers of Commerce and Industry
(FICCI), which warns that India may end up paying dearly
as a result of a free-trade agreement (FTA) with
Thailand if India's internal bottlenecks are not
eliminated before opening up its market any
further.
In October 2003,
India and Thailand signed a Framework Agreement for
an FTA, the first of its kind between India and
an ASEAN (Association of Southeast Asian
Nations) member state. The two sides agreed that tariffs
on a select list of 82 "early harvest" items,
to begin with, would be slashed by 50% in 2004-05,
by 75% in 2005-06 and completely
eliminated thereafter. By 2010, India and Thailand hope to put in
place a comprehensive FTA covering all
items.
The two had even set March 2005
as deadline for a final agreement, but the talks
got stuck over the contentious "sensitive list",
or the list of items that will not come under an
FTA regime. India has named 1,000 items in its
list while Thailand has put only 100, a disparity
which the Thai government wants rectified before
it takes the talks any further. "If the
sensitive list covers 1,000 of the 5,000 items that
are currently traded, how could we call it a
free-trade agreement?" Thailand's deputy chief
negotiator Chana Kanaratanadilok was recently
quoted as saying. The items on the Indian list
include garments, textiles and auto parts.
Thailand has listed mostly agricultural and
industrial products. Thai Prime Minister Thaksin
Shinawatra made a brief visit to India earlier
this month to break the deadlock.
But the
FICCI's survey has put up a fresh hurdle for a
full-fledged FTA as it, in a way, vindicates the
Indian side's fear of cheap Thai imports flooding
the market and its insistence on protecting the
products it deems most vulnerable. Imports from
Thailand of the 82 "early harvest" items stood at
US$104.84 million for just the April-December 2005
period as against $84.44 million for the same
basket of commodities for the whole of 2003-04. On
the other hand, exports from India of the items
included in the list have shown a reverse trend.
While exports of these items were valued at $64.22
million in 2003-04, it was only $24.54 million in
April-December 2004-05. An earlier report,
compiled by the department of foreign trade in
Thailand for the first three months since the
Indo-Thai FTA was put into effect on September 1,
2004, had even worse news for India. It showed
that Thailand enjoyed an astounding 400:1 trade
surplus in the 82 items.
Indo-Thai Trade
statistics for 32 "early harvest"
items
|
Fiscal
Year 2003-4 |
Apr-Dec
2004 |
| Imports
from India (US$m) |
84.44 |
104.84 |
| Exports
from India (US$m) |
64.22 |
24.54 | Source: Ministry of Commerce, Government of
India
The survey of 35
companies whose products feature in the list of 82
items, entitled "India-Thailand FTA - Emerging
Issues", shows that India's cost disadvantages are
severely eroding the competitiveness of domestic
companies compared to Thai products. The survey,
conducted during April-May 2005, pinpoints three
segments - color picture tubes (CPT), color
televisions and auto components - which have borne
the brunt of Thai competition as a result of the
FTA.
The
most notable cost imbalance is visible in
electricity. A kilowatt-hour (kWh) costs Rs2.50 (5
US cents) in Thailand compared with Rs5.50 in
India. Again, the average interest rate in
Thailand is 4-5% against nearly 13% in India. What
compounds the problems for Indian industry is the
country's irrational import duty structure. Major
inputs like glass parts and chemicals, which are
the main components of the CPT industry, can be
imported duty-free into Thailand but attract a 15%
duty when imported into India. Thus Indian
CPT-makers are naturally disadvantaged vis-a-vis
their Thai competitors. Similarly, alloy steel and
stainless steel attract a 5% higher import duty in
India compared to Thailand, severely impairing
Indian auto parts manufacturers. In the case of
electric fans, iron alloy coils - the major input
- carry a 20% duty as against 15% in case of the
final product. Thus it makes more sense to just
import electric fans from Thailand to India,
rather than try to make them in India.
Comparison of Import
Duties on Certain
Raw Materials in
Thailand and India
|
Raw
material |
Import duty % in
Thailand |
Import duty % in
India |
|
Glass parts (used in CPT
industry) |
0 |
15 |
|
Chemicals (used in CPT
industry) |
0 |
15 |
|
Pulp (used in paper
industry) |
0 |
5 |
|
Chemicals (used in paper
industry) |
0-5 |
15 |
|
Alloy steel (used in transmission
assembly) |
5 |
10 |
|
Stainless steel (used in
transmission assembly) |
5 |
10 | Source: FICCI
The National Council of
Applied Economic Research (NCAER), an Indian
economic think-tank, predicted last year that an
FTA with Thailand would "create more problems than
it solves". According to NCAER, the FTA wasn't
even necessary as Thailand did not  figure among India's
top 20 trading partners, accounted for only 1.4%
of India's total merchandise exports and 0.7% of
its imports. India, according to NCAER, had been
doing just fine in its trade with Thailand from
2000 to 2003, the three years preceding the
Framework Agreement. India's exports to Thailand
grew at an average 16.6% from 2000-01 to 2002-03,
compared with 13.3% growth in India's exports to
the rest of the world. Imports from Thailand over
the same period grew at only 6.8%, lower than the
7.6% growth in India's non-oil imports from other
parts of the world. "India was performing
relatively better in its bilateral trade with
Thailand, both when compared to Thailand's trade
performance with India as well as India's trade
performance with the world," the NCAER said.
FICCI's survey now adds weight
to that reading. Some 48% of the respondents to
FICCI's survey feared that if the cost imbalance
is not tackled at an early stage, many Indian
companies may start  outsourcing products
from Thailand, while 21% felt it would force
Indian companies to set up manufacturing bases in
Thailand, both leading to massive job losses in
India. A further 26% of the respondents felt that
third-country imports into India would be
re-routed through Thailand. But most felt that an
FTA, while leading to a surge in imports from
Thailand into India, would not boost exports from
India given the small size of the Thai
market.
The trade figures of the
items in the early harvest list certainly bear
this out. But some analysts argue that loss of
exports will be compensated by India's access to
Southeast Asia and other major markets with which
Thailand has free trade deals, giving Indian
companies an opportunity to become truly global.
India is a summit-level partner of ASEAN and is
working on an FTA with the trading bloc. A
successful FTA with Thailand would go a long way
in achieving this. Trade, tourism, training,
transportation and technology are said to be the
key synergy areas between India and the ASEAN.
Between 1993 and 2003, ASEAN-India trade grew at
an annual rate of 11.2%, from $2.9 billion to
$12.1 billion. It is predicted to grow to $30
billion by 2007.
India is already
beginning to make headway in its trading ties with
other ASEAN nations. India and Singapore will sign
the comprehensive economic cooperation agreement
(CECA) on June 27, following two and half years of
hectic negotiations. The agreement will be signed
during Singapore Prime Minister Lee Hsien Loong's
visit to India later this month. The CECA will
include a free trade agreement in goods and
services.
Overall, the limited FTA has
beefed up India-Thailand trade significantly. In
2004-05, bilateral trade reached $2 billion, an
increase of 34% from 2003. In a recent statement,
the Thai Foreign Ministry said bilateral trade
could rise to $4 billion by 2007. India's primary
imports from Thailand are machinery, electronic
appliances, textiles, plastic material, transport
equipment, vegetable oil and latex, while its main
exports to the country are jewelry, gemstones,
steel, pharmaceuticals and ferrous metal ores.
But Indian industry wants certain policy
measures at home before going the whole hog on an
FTA. Among the wish list is a phased reduction in
import duties with a three-tier duty structure, in
which the highest duty is levied on finished goods
and the least on raw materials, with rates on
intermediates somewhere between these two. Indian
businesses also want the problem of high
infrastructure services costs, such as power and
transportation, and cost of finance (interest
rates) addressed.
Another pet peeve of
Indian industry is the country's restrictive labor
laws compared to Thailand's, which the companies
affected by the FTA say ensure higher labor
productivity in Thailand. "Industry members feel
that the option to right-size their workforce when
needed would create more jobs and not less. The
existence of stringent labor laws is forcing the
industry to adopt more capital-intensive
technologies that at times are costly and have to
be imported. This also has an adverse impact on
employment generation," the FICCI report says.
While the tax problem can be fixed, labor reform
is an area in which the Indian government might
finds its hands tied, as the ruling Congress
party's leftist partners will have none of it.
Thai-Indian business relations have been on an upswing
since the end of the Cold War, with reciprocal visits by
India's then Prime Minister Rajiv Gandhi
in 1986, and Thai Prime Minister General Chatichai
Choonhavan in 1989. The visit of the then
Indian Prime Minister PV Narasimha Rao to
Thailand in 1993 was another watershed, as were
the economic reforms initiated by Rao, which
opened up new opportunities for bilateral trade
and investments. The ties strengthened after India
became first a dialogue, and then a summit,
partner of the ASEAN, and a member of the ASEAN
Regional Forum (ARF). The formation of the
BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka,
Thailand Economic Cooperation) and the launching
of Mekong-Ganga Cooperation in 2000 also went a
long way in forging closer Indo-Thai relations.
On his brief visit to India
this month, Prime Minister Thaksin held talks with
a select gathering of Indian businessmen, apart
from his Indian counterpart Manmohan Singh and
other government dignitaries. He had a separate
meeting with Ratan Tata, chairman of the Tata
Group, which has interests ranging from steel to
auto products and telecom. It's not immediately
clear just how far the Thai prime minister managed
to convince Indian government and business leaders
of the need to get going on the FTA path, but the
FICCI survey, released just a few days after
Thaksin's visit, will have definitely undone some
of his sales pitch.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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