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India Looking East: Does the East Notice?

Delhi’s Trade Presence in Asia Needs a Serious Boost
14 October 2009

by Daniel Michaeli

Earlier tonight, I gave a presentation on the China-India relationship for a Washington foreign policy group. I spoke on the imbalance in bilateral trade, areas of cooperation, security competition, regional profiles, and the border dispute.

I showed slides of some thought-provoking (and perhaps disappointing) data on India’s economic weight in Asia; since the audience found it interesting, I am posting some of it here with a bit of discussion.

India’s global aspirations require it to escape the confines of South Asia, where it was effectively boxed in for most of the Cold War. This led to the “look east” policy introduced in the early 1990s, described in a 2003 speech by India’s external affairs minister at the time.

“Look east” was motivated by security and political considerations, too. This year, India signed free trade agreements with ASEAN and South Korea, but not only for economic reasons: India seeks, through greater regional engagement, to counterbalance China and develop closer ties with the countries on China’s periphery.

India’s trade with the region has already grown significantly:

Indian Trade with East and Southeast Asia

Indian Trade with East and Southeast Asia
Source: IMF Direction of Trade Statistics

But the measure of India’s economic heft in the east is the relative importance of Indian trade for East and Southeast Asian countries.

Let’s start with ASEAN. Despite India’s proximity, India constitutes only 2.7% of ASEAN’s total trade; China constitutes 10.4%. Most unfortunate of all, however, is the fact that India’s weight has increased very slowly since the emergence of its “look east” policy. (India stood at 0.9% in 1981.)

Trading Partners for ASEAN Member Countries (% of Total Trade)

Trading Partners for ASEAN Member Countries
Source: IMF Direction of Trade Statistics

How about Japan and South Korea? India fares even worse, though the trends are also moving slowly in the right direction.

China vs. India as Trade Partners for Japan (% of Total Japanese Trade)

China vs. India as Trade Partners for Japan
Source: Finance Ministry of Japan

China vs. India as Trade Partners for Korea (% of Total Korean Trade)

China vs. India as Trade Partners for Korea
Source: IMF Direction of Trade Statistics

India hopes that its free trade agreements will bolster its regional profile. But there are at least two reasons to be skeptical.

First, China’s trade gains did not come from free trade agreements. China did not have free trade agreements with any of the countries above in the years cited. Rather, China’s regional heft came from economic factors like investment in manufacturing and an almost regulatory-free environment. With so little manufacturing capacity, how could India rely on free trade agreements as its primary tool for economic engagement?

Second, since India’s trade profile will inevitably be measured compared to China’s (as it is here), it is worth noting that China has free trade agreements pending with the same countries as India. Both China and India have FTAs with ASEAN that will come into effect soon, and China is working with Japan and Korea on a potential trilateral FTA, which would negate any benefit of the India-Korea FTA.

More than anything else, India needs domestic economic reforms, including major infrastructure development, if it hopes to increase its contribution to regional trade.

Given recent political inertia in Delhi on meaningful reform, one cannot help but wonder: if India is unable to overcome domestic constraints to development, can it reach its potential as a regional, or even global power?

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  • Kyle said:

    With all due respect to India optimists, I have to say India’s incessant comparisons between itself and China and its attempts to mimic superficially many of the key indicators of China’s growth have been almost consistently disappointing to any realistic observer.

    India’s trade statistics capture this well: efforts like the “Look East” policy have yielded paltry results, particularly when placed beside China’s numbers, with negligible effects on the economies of other countries as well as India’s. They seem to serve, unsurprisingly, as symbolic political tools on the domestic front—a way for the country to pat itself on the back in its illusory competition with China.

    India needs to either fully incorporate aspects of Chinese growth such as the development of a powerful manufacturing base or else stop pretending to catch up to the Chinese in their own game and strike out on an alternative path to growth such as leveraging the crown jewel of its economy, its IT service sector, and possibly circumventing the heavy industry stage of conventional growth like the Singaporeans.

    Anyways, great post, Dan. This is Kyle writing from New Delhi.

  • Dan said:

    Kyle, thanks for chiming in! I didn't realize you were in Delhi.

    It's interesting that even historically, India's economy has been oriented away from manufacturing compared to other countries of the region. In 1975, before China's economic reforms, manufacturing constituted 38% of China's GDP (which is not surprising given the way money was funneled away from rural areas into industry). Manufacturing was 23% of Singapore's GDP, and 22% of Korea's. In comparison, Indian manufacturing was just over 16% of GDP. (World Bank data)

    In 2008, manufacturing was still 16% of India's GDP, vs. 34% for China.

    India's services sector is very competitive (53% of India's GDP vs. 40% for China), but it is much harder to export services than goods to other Asian countries due to a host of trade barriers. This may be one reason India's economy remains more inwardly-focused than those of other Asian countries, in spite of the government's trade efforts.

  • Daniel Michaeli: Asia Ruminations » Blog Archive » Indian Trade Looking Up? said:

    […] month, I wrote a blog post questioning India’s potential as a trading power, and raised potential implications of Indian […]