Integrating East Asia with India: Win-win for Asia

Prof. Mukul Asher
National University of Singapore

There appears to be a perception in some circles in East Asia that India’s economic integration with them is limited. This perception, in part a hangover of the relatively less-outward oriented economic growth strategy of the past, has the counter-productive consequence of East Asia not grasping win-win economic and strategic opportunities with India and with the Indian businesses. 

Analysts in East Asia usually cite the following statistics to support their perception. India’s global merchandise trade share of 0.8 percent (same as for Indonesia) is relatively low; and so is the share of India’s merchandise trade in relation to GDP (In 2004-05, India’s merchandise trade is expected to be USD 160billion, about 25 percent of GDP). India’s exports to the rest of Asia, mainly East Asia, were about 30 per cent of its total exports in 2002-03 (up from 23 per cent in 1990-91), while corresponding ratio for its imports was around 20 per cent (up from 8 per cent in 1990-91). India’s official FDI at around USD 4 billion (nearly USD 10 billion if measured using international norms) is also regarded as too low; and relatively small share is from East Asia. Only Japan, and Korea have significant FDI; with China and Singapore slowly making their presence felt.

There are several reasons why the usual indicators do not fully convey India’s rapid integration with the rest of the world in general, and with the rest of Asia in particular.

First, between 2000 and 2004, India’s merchandise trade has grown by USD51 billion. As a recent Business Week Story (Sept 27, 2004) shows, India is set to be a major consumer of electronic and other goods. This is reflected in the considerable acceleration in the merchandise trade between India and other key Asian nations such as China. In 2004, bilateral trade between the two is expected to exceed USD10 billion. India’s capacities for exports have also increased considerably in recent years, and this is set to continue.  India can be a supplier of key commodities (food, pharmaceuticals, chemicals and machinery).

India’s FTA with Sri Lanka and Thailand are already operational. India-ASEAN FTA; and India-Singapore agreement are making progress. India is also not averse to having bilateral pacts with China and Korea.

As India’s tariff levels become more closely aligned to those of East Asia, recent sharp growth in merchandise trade is expected to continue. India is indeed proving to be an energetic unilateral liberalizer.

Second, the emphasis on merchandise trade alone ignores the increasingly critical role of international trade in service transactions. According to the International Trade Statistics 2003 by the WTO, India ranks 19th in world exports and imports of commercial services. Indeed, none of the ASEAN countries rank higher than India in service imports.

India’s software service exports alone are estimated to be USD 50 billion by 2007-08. The slogan “served in India for the world” captures India’s aspirations in the services area well. It is widely acknowledged that in many services, not just the ICT services, Indian businesses are globally competitive, and they have made important contributions to enhancing competitiveness of firms around the world, including increasingly those of East Asia.

Third, a large number of Fortune 500 and other companies (including from China, Japan and Korea) have set up engineering, design and R&D centers in India. Some of the activities are dedicated to bringing about future high technology products. One of the key chip design centers for Intel is located in India. Thus, while East Asia is undoubtedly a leader in electronic manufacturing, the fact that a key common component, the chip, has  a “served in India, for the world” element, makes India very much a part of the electronics research-production-distribution chain. Chip is an indispensable component, but its contribution to total value-added may be small. Thus merchandise trade does not fully capture India’s key contribution. India’s huge and growing consumption of electronic products also needs to be recognized. India is gradually developing capacities in some areas of electronics hardware, and will be at least a modest player in this area, complementing its competitive advantage in software. Since a significant proportion of FDI has been in such R&D and service sector facilities, which do not require large investments, the linkages and employment multiplier impact of such FDI is also higher.

Fourth, two way investment flows between India and the rest of Asia are increasing rapidly. Korea, China, Japan and Singapore have made significant direct and/or portfolio investments in India. As Indian companies globalize, they are making increasingly large and strategic investments in East Asia. As an example, Tata Steel’s recent acquisition of National Steel based in Singapore will impact several Southeast Asian economies where National Steel has manufacturing facilities. Similarly, Tata Motors’ acquisition of Daewoo’s truck plant in South Korea will enhance its presence in East Asia.

Large infrastructure investments in roads, airports and sea ports are being made in India. Countries such as Malaysia have won substantial projects in roads in open competitive bidding. India is also increasingly playing a role in two way flow in education services. Many Indian students study in rest of Asia, while Indian schools (two are already operating in Singapore) and Universities are venturing in Southeast Asia. India is also expanding collaboration with Malaysia beyond just medical education. India’s world class technical and management institutions are being recognized in the rest of Asia as well. Its media and entertainment industry is influencing audiences in Asia as well as the rest of the world, and ‘Bollywood’ is now a global brand.

Fifth, the Indian diaspora is nearly 25 million strong, and in most of the countries their socio-economic status is well above average. As far as Asia is concerned, global Indian professionals are both internationally competitive and culturally compatible. In almost every Asian country, Indian managers, technicians, professionals and semi-skilled workers are making important economic contributions. These do not get captured in the usual statistics but nevertheless are an important indicator of India’s integration with the rest of Asia.

Sixth, India, in cooperation with Brazil and China, played a key role in constructive agreement at WTO’s recent meeting in Geneva. India’s integration with the rest of Asia could prove to be a further catalyst in making WTO, a preferred institution for multilateral liberalization, more effective and responsive. There is emerging consensus among economists and trade policy specialists that bilateral and sub-regional FTAs which have been in fashion recently are at best of symbolic value, though they may occasionally provide political cover for liberalization. If pursued too vigorously, such FTAs could end up increasing transaction costs, and reducing world efficiency.

Seventh, there are complementarities in demographic trends of East Asia and India. Just as East Asia is about to enter into a phase of demographic burden, implying lower share of working age population, and higher median age of workers, India is entering a demographic gift phase, with higher share of working age population. Along with information technology, an India integrated into Asia could help address East Asia’s demographic challenges.

The above analysis strongly suggests that India’s participation in existing and prospective formal organizations and institutions will significantly enhance Asia’s capacity to address the continent’s challenges; and enhance its leverage and influence in world affairs. It is in this context that focusing integration efforts on East Asia alone is arguably not optimal strategy for Asia as a continent. Non-inclusion of India will force it to look extra-regionally for economic and strategic regions. A non-integrated India, with a USD trillion dollar economy before the end of this decade, is not in the interest of rest of Asia either economically or strategically. India will need to be more proficient at strategic economic diplomacy, and at soft power skills, while the rest of India will need to shed its cold war mind set to grasp win-win opportunities.

Currently, ASEAN plus three (China, Japan, Korea) and ASEAN plus India have separate summits. If regular meetings of ASEAN plus four are initiated, then all the major economies of Asia will be able to co-ordinate and cooperate while setting norms for competing with each other. It is time to pursue such win-win strategy for Asia by beginning a journey towards Asian Economic Community.

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