THE ASEAN-INDIA FREE TRADE AGREEMENT: IMPACT ON THE KERALA ECONOMY

Abstract


India has several compulsions under its ‘Look East’ policy to be in good terms with its south eastern neighbours which are close to China. As part of the policy, India has been pursuing closer economic and strategic ties with the countries of south East Asia. In August 2009, India has signed a free trade agreement (FTA) for goods with the ten-member Association of South-East Asian Nations (ASEAN). This agreement which came into force on 1 January 2010 targeted to eliminate tariffs on 80% of the tariff lines accounting for 75% of the trade in a gradual manner. However, signing of free trade agreement for goods has evoked mixed reactions in India. While it has been hailed as the beginning of the end of India’s isolation from major trading blocs and a firm step towards Pan Asian economic integration, the Agreement has been opposed in some regions and by a few sectoral interests in India which feel threatened because imports from the ASEAN would be promoted.

The agricultural sector in India, particularly plantation sector like tea, spices, coffee and rubber will be negatively affected. Marine products, textiles and garments, and the auto components industry are also likely to face increased competition due to AIFTA. This is not completely unexpected as some of the south-east Asian countries have a much higher level of efficiency in these sectors as compared to India. Responses from different sectors indicate that farmers in the southern Indian states especially Kerala are feeling particularly threatened by this deal. This paper studies the problems faced by the farmers of Kerala with its impact on the economy of Kerala.

Keywords: Free Trade Agreement, Sensitive Track, Negative List, Productivity

ASEAN-India Free Trade Agreement (AIFTA) – An Introduction




India and the Association of South East Asian Nations (ASEAN) on August 13, 2009 signed a Free Trade Agreement (FTA). ASEAN, established on 8th August 1967, comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The agreement, which relates only to goods, took nearly six years to negotiate. The accord, India’s first with a trade bloc, will cover 11 countries with a combined Gross Domestic Product (GDP) of over $2 trillion. The combined population of the region is of the order of 1.6 billion.



Nine members of the 10 nation regional trade bloc signed the pact. Vietnam, the 10th member nation, would do so after its formal recognition by India as a “market economy”. According to an official report, India and Vietnam has already agreed to sign a memorandum of understanding on this issue. The FTA came into being from January 1, 2010.



The press statement released after the finalization of the deal said that the mutually agreed tariff liberalization would gradually cover 75 percent of the two-way trade, beginning from January 2010. Indian –ASEAN trade was of the order of $40 billion in the 2007-08 accounting year. As of now, the regional bloc is India’s fourth largest trading partner and it currently accounts for about 10 percent of its global trade. The two sides have set an ambitious target of achieving an increase of $10 billion worth of trade in the first year after the agreement comes into force from January 2010.



Under the ASEAN-India FTA (AIFTA), the ASEAN member countries and India will lift import tariffs on more than 80 percent of traded products between 2013 and 2016. The agreement has provided flexibilities to India and the ASEAN countries to exclude some of the products from tariff concessions or eliminations to address their respective domestic sensitivity. India, on its part, has excluded 489 items from the list of tariff concessions and 590 items from the list of tariff elimination to address sensitivities in agriculture, textiles, auto, chemicals, crude and refined palm oil, coffee, tea, pepper, etc. The ASEAN member countries have also maintained similar exclusion lists from the proposed tariff concessions or eliminations.



According to the agreement, the involved countries will not institute or maintain any non-tariff measure on the importation of goods from other members of the FTA. They have also pledged to reduce tariff rates on a large number of tariff lines.



The ASEAN-India FTA classifies the tariff lines into four broad heads. These are:

o Normal Track: The applied most favoured nation (MFN) rates will be reduced and subsequently eliminated. This is divided into 2 sub-categories called Normal track 1 and Normal Track 2. The difference between the two is that NT-2 has a longer implementation period (till 2019) than NT-1 (till 2013).

o Sensitive Track: For the first stage of implementation, applied MFN rates that are above 5% will be reduced to 5% in accordance with the country-specific reduction schedules. It is possible to maintain the same 5% tariff rate in respect of 50 items under this group. The tariff rate of items under this group must be reduced to 4% by the year 2016 and it will become zero percent by the year 2019.

o Special products: These refers to some select products for which India has decided to reduce tariff rates at a much more gradual pace than either the normal track or sensitive track.
o Exclusion List/ Negative List: For these products no reduction commitments have been made. 489 items are included under this list. India has 489 tariff lines under the negative list which includes 302 agricultural items, 81 items from textiles and clothing, 52 items from machinery and auto, and 32 items from chemicals and plastics. In addition, there are 22 other items from various other sectors. For products that are not on the negative list, duties will be reduced in a phased manner and the duty will be brought down to zero by 2019.


The exchange of tariff concessions between India and the ASEAN member countries would lead to growth in bilateral trade investments resulting in economic benefits to both the sides. Indian exporters of machinery and machine parts, steel and steel products, agriculture products such as oilcake, wheat and buffalo meat, auto components, chemicals, and synthetic textiles would gain additional market access as a result of tariff liberalization by ASEAN. Indian manufacturers would also be able to source products at competitive prices from the ASEAN countries. The agreement also provides for bilateral safeguard mechanisms to address sudden surge in imports after the agreement comes into effect. In such an eventuality if it hurts domestic industry, safeguard measures like the imposition of safeguard duties may be put in place for a period of up to four years. The flexibility to invoke safeguard measures will remain available for both the sides for a period of seven years to 15 years from the date the agreement comes into force.



AIFTA – Importance

ASEAN is India's fourth-largest trading partner after the European Union, the United States and China. Trade between ASEAN and India has risen by more than 27% annually since 2000. The agreement is key to creating an open market across the region. India is looking to boost its export sector, which accounts for only 26% of its economy, said Union Commerce Minister Anand Sharma. ASEAN with 600 million people - against India's billion plus - presents a substantial opportunity for Indian exporters and businessmen. India would - through the FTA - gain access to machinery, steel products, chemicals and synthetic textiles and also allow Indian business opportunities in ASEAN countries and open up the bloc's services sector. Further more, Australia, China, Japan, New Zealand and South Korea have already signed FTAs with ASEAN and India cannot stay away.
The signing of the agreement signals India’s firm commitment to its “Look East” policy of building upon its historical links with the countries of the south East Asian region and further deepening and widening this partnership. India and ASEAN are currently negotiating agreements on Trade in Services and Investment, which are to be concluded by December 2010. Of the total $936 billion worth of ASEAN imports, services import account for $180 billion which is the primary focus of Indian industry.

AIFTA: Impact on Kerala Economy




Kerala state is known for the lush expanses of cardamom, pepper, tea and rubber that grow on its misty hills, and the bountiful catches of fish on a coastline punctuated by lagoons and backwaters. Kerala accounts for 91% of India’s rubber, 70% of coconut, 60% of tapioca and almost 100% of lemon grass oil. Kerala is the single largest producer of a number of other crops like banana and ginger, besides tea and coffee in abundance. 50% of people engaged in agriculture. Kerala accounts for about 1/3 of India’s marine exports.



Kerala remains a primarily agrarian State, despite the considerable share of foreign remittances in the State GDP. Commercial crops account for over 84 per cent of Kerala’s net sown area and provide livelihood to nearly half of the State’s population; agricultural income (growing at 3.73 per cent) accounts for over 21 per cent to the total income of the State (2000-01 census data).

AIFTA: Kerala’s Perspective

The AIFTA will have a far reaching impact on in Indian Economy and Agriculture especially for Kerala. The major threat is for crops from Kerala, like rubber, palm oil, black pepper, cashew nut, green coffee, mace, nutmeg, cardamom, pineapple, vanilla, arecanut and tea. According to the present pattern of exports, ASEAN accounts for 31.56% of copra, 82.41% of coconut oil, 64% of desiccated coconut and 92% of natural rubber. Vietnam alone accounts for 45% of the world pepper exports.

The Kerala Government fears that sectors such as plantations, fisheries, textiles and light manufacturing goods will be seriously affected by the FTA. The major farm exports deemed to be under threat are tea, coffee, cashew, coconut, oil palm, rubber, spices (especially pepper) and other plantation items. Kerala Government had asked the Centre to put 1400 items under the Negative List. Only 489 items have been now included in the Negative List.

The Indo-ASEAN free trade agreement seeks to remove or reduce the tariff on trade-in-goods including sensitive products such as coffee, tea, palm oil and pepper in a phased manner. The import tax on Kerala’s products like coffee, tea, rubber, copra, coconut, coir, cashew, pepper, cardamom, coconut oil etc will have to be brought down to 50% or less by 2019. Import tax for Palm Oil has to be brought down to 40%. At present the import tax is cent percent for tea and coffee. It is 70% for pepper and 90% for Palm Oil. The liberalisation in trading of cash crops will expose Kerala’s small and marginal farmers in the plantation sector to the competition and this, some argue, may lead to over one million job losses. The partial duty cuts in 2019 will mean that the import prices will become cheaper than the local produce which will eventually jeopardise the interests of millions of cash crop farmers. Tariff reduction is only a beginning of the move towards a free trade regime or to say it differently, the ultimate objective would be to eliminate tariff for these commodities. The backbone of Kerala economy will be threatened.

Kerala's farmers already have the bitter experience of past free trade agreements, such as the South Asia Free Trade Agreement (SAFTA) signed in 2006, which saw the state flooded with cheap Sri Lankan coconuts. Also the import of cheap palm oil from Malaysia and Indonesia has seriously affected coconut cultivation. Back in 2005, Sri Lankan pepper flooded North Indian markets and depressed domestic prices forcing the govt. to enforce a quota regime.

Kerala's four million coconut farmers stand to be truly ruined by the Indo-ASEAN FTA because it will allow the import of coconut oil from the Philippines - a major producer which enjoys significantly lower costs of production. The Central government’s argument that coconut is in the negative list and the coconut farmers are thus protected does not hold ground in reality. Reduction in palm oil tariff will have severe implications on the coconut farmers as Palm oil is a substitute of coconut oil and the deal will enable palm oil to take over the market. The import of palm oil has already caused huge economic distress among the groundnut farmers, leading to suicides in regions such as Ananthapur in Andhra Pradesh. There are 3.6 lakh workers working in the coir sector and 2.5 lakh in the cashew sector. This year’s cashew exports are 1500crores. All these will be affected as a result of the FTA.

The sector that is going to be hit worst is fisheries - particularly artisanal fishing which will be unable to compete with the factory fishing carried out by such countries as Thailand. The FTAs direct impact would hit Kerala severely given the huge numbers of people involved in fishing, fish vending and processing. Some two million fishermen and their families are at risk in Kerala alone. Recent years have seen fish stocks depleted due to over fishing by trawlers and foreign vessels, and falling prices forcing many fishermen in Kerala to find other means of livelihood. Further liberalisation of fisheries in the name of increasing trade will only deepen the problems of the fishing community. The biggest threats come from Thailand, the world's largest exporter of farmed shrimp, and Vietnam, the world's eighth largest seafood exporter. The trade in goods agreement will enable the dumping of up to 177 species of fish in the Indian market.

The FTA is likely to permit zero tariff imports of sardines, mackerels, anchovies and crabs. Cheaper imports of local popular varieties such as cuttlefish, squid, shrimp, sole and pomfret will spell doom for fishing communities.

The productivity levels of Kerala’s farmers are far lower than their counterparts in the ASEAN region who enjoy the benefits of economies of scale. The difference in productivity levels between Indian farmers and ASEAN farmers is so vast that any reduction in the existing tariff rates will “sound the death knell” for over one million farmers and labourers engaged in the plantation and maritime sectors. Productivity of all plantation crops except rubber are much higher in ASEAN countries than India. Pepper productivity in Kerala is around 320 kg/ha, while Vietnam produces 1.2 tonnes and Indonesia 2.3 tonnes from the same area. As a result of FTA pepper may cease to be produced in Kerala, the land where it originated. Productivity of coffee in India stands at 765 kg/ha while Vietnam produces 1.7 tonnes/ ha.

Production and productivity at the farm level are the most vital component of plantation industry. When the costs are sky rocketing beyond the control of the producers, the only alternative is to increase land productivity to reduce the cost of production. Kerala’s plantation sector is affected by declining productivity while the nearby competing states are making huge gains. For instance, in tea, the base output is around 17-35 kgs per person in Tamil Nadu, while the same is around 16-21 kgs in Kerala. In the case of Robusta coffee, the base output per day in Karnataka is 75 kgs, while in Kerala it is 50 kgs. Finally, the unit high costs of production and adverse climatic conditions, both having implications for productivity and competitiveness, are the other limiting factors. Productivity is a function of cost and quality of inputs administered, which is in turn a function of resources available to the farmer. However, farm sizes of 5 hectares and above (owners with better access to farm and non-farm income) comprise less than 0.23 per cent of all holdings in Kerala.

While in both India and ASEAN, agriculture accounts for about a fifth of GDP, India’s farm sector employs about 60 per cent of its total workforce compared with ASEAN 46.5 per cent.

Less productive plantations and relatively higher labour cost are making Kerala plantations more vulnerable under the Indo- ASEAN free trade agreement, officials of the Association of Planters of Kerala (APK) said.

Under the trade pact, India has included 489 items from agriculture, textiles and chemicals in the negative list, meaning these products will be kept out of the duty reduction. Addressing concerns of domestic planters, black tea, coffee, pepper etc have been included in the sensitive list, which could mean duties will be cut by 2019 only. However, duty on these items at no time will be eliminated. Farmers in South India, especially Kerala, fear lower duty on plantation crops like coffee and pepper would lead to a deluge of imports from ASEAN members like Indonesia, Malaysia, which could leave domestic farmers vulnerable to competition.

While natural rubber, cardamom and a few tariff lines in coffee are under an exclusion list at present, there is no guarantee that they will remain in this category forever.

AIFTA: Options for Kerala

The competitiveness of Kerala farm products is low. Hence, rather than expending energy lobbying for the protection of domestic markets, stakeholders need to address without further ado the nature and sequencing of domestic reforms necessary to reverse this trend, and for them to be implemented within the next 5-7 years. The different structural adversities should be corrected by this time.

US experience teaches an important lesson. The efforts of the Detroit automakers to win protection from Japanese competition in the 1980s did give temporary respite to the US auto industry, and helped sustain the American dream for autoworkers. But after 25 years and having experienced several recessions, the US auto industry lies in shambles; they now realise that unless operations are changed drastically, matters will turn even worse.

The India-ASEAN FTA can be interpreted as a unilateral initiative that sets a firm timeframe for much needed agriculture reforms in India. One also needs to acknowledge that competitiveness is dynamic. Furthermore, the composition of the trade basket changes significantly over time. The lesson from the recent Asian manufacturing success is as follows: adherence to fundamentals of commerce — give what the consumer wants, control costs and deliver value for money. Kerala’s agrarian communities need to address market demand and international competitiveness issues to remain viable.

Kerala, therefore, needs to adopt the recommendations of the M. S. Swaminathan Committee of seeking limited protection and additional investment support, and redress the structural issues on a priority basis.

The viability of farming in the State can be enhanced by diversification into crops meeting the changing domestic dietary pattern and export demand; strengthening linkages between agricultural training and extension; balanced soil and plant nutrition and pest management techniques; and increasing small farmers’ access to advanced technology, quality inputs, harvesting and post-harvest handling, bank credit, processing, marketing and crop insurance. Blocking competition can only buy time, not enhance efficiency.

In addition, Government should protect the interest of agricultural sector by envisaging schemes for increasing the productivity and ensuring reasonable prices to agricultural produces. Financial and Technical support can be given for adopting innovative methods of production.

Better farm practices have to be adopted in a competitive global market environment. With the Doha Round of the WTO negotiations nearing completion, and the world markets getting integrated, India as an emerging economic superpower would not be able to remain isolated for parochial interests.

Challenges can be converted into opportunity by increasing productivity and adopting innovative techniques. By increasing productivity of pepper kerala can attain top most position in international market. By forming cartels with different ASEAN nations India/Kerala can become monopoly in the production of spices, rubber, marine products etc. Like OPEC nations India and ASEAN nations, the eleven member countries can control the international market of the products in which they have competitive advantage.

Concluding Observations

The main objective of the FTA is to "gain markets for newer products instead of the lost traditional markets". Regarding traditional markets, India has been out-competed on spices and beverages (tea, coffee) by Vietnam and Indonesia. On gains, India has a negligible stake of 1 percent in ASEAN trade, and ASEAN countries already have very low import tariffs. Therefore India does not gain much from further tariff reductions by ASEAN members. The gains from trade creation are therefore limited while losses due to huge tariff cuts by India will outweigh these limited gains.

The present agreement on goods (including agricultural goods) is a red herring. The real gains that India will make will be from the upcoming agreement on services and investments. In order to get a favourable deal on this front, concessions are being made on goods. India, which has a large domestic market, would be a happy hunting ground for the low-cost ASEAN countries to flood their cheap and inferior products.

The degree of trade development and trade orientation in ASEAN is better than that of India. Most of the countries have their inherent strength in few products. Vietnam has good production base in all major plantation crops, nuts and spices which are produced by Kerala. Hence, it is necessary to develop effective safeguard measures to prevent excessive imports of these products into India under the FTA agreement.

Since Kerala exports 80 per cent of its farm produce, its concerns over the FTA are genuine, but resorting to protectionism may not be the ideal solution.

Even if a negative list provides protection to major cash crops, there is no guarantee that crops like rubber, tea, pepper and coffee will gain in productivity and competitiveness in that time. So if a cautious move to safeguard the interest of Kerala’s farmers is not taken, it may lead to further distress and agony. Equal efforts should come from the part of farmers and Government to attain international standards of productivity and price competitiveness.

REFERENCES:

1. ASEAN – India Trade in Goods Agreement (2009): “Agreement on Trade in Goods under the Framework agreement on Comprehensive Economic Cooperation between the Republic of India and the Association of South East Asian Nations”.

2. Vackayil, Joseph, “Why Kerala opposes ASEAN FTA?”, The Financial Express, 31 July 2009.

3. Swaminathan, M.S., Report of the Commission on WTO concerns in Agriculture, submitted to the Govt. of Kerala (2003). available at http://www.kerala.gov.in/agri2/dept_central_schemes.htm

4. Ministry of Commerce, Government of India: “Trade Statistics”, available at http://commerce.nic.in/tradestats/indiatrade.asp?id=1

5. Pal, Parthapratim and Dasgupta Mitali (2009): “The ASEAN-India Free Trade Agreement: An Assessment”, Economic and Political Weekly, Volume XLIV No.38, September 19, 2009.

6. Pradnya ,Parashar, “India-ASEAN Economic Relations”, IIMA Working Papers, No.35, 2009.

7. Sundararaman ,Shankari, “India-ASEAN FTA: To be or not to be”, Asian Age, 14 April 2009.

8. Karmakar ,Suparna, “Kerala fears over the Indo-ASEAN FTA”, Business Line, 09 October 2009.

9. Karmakar, Suparna, “Indo-ASEAN FTA – A realistic Assessment”, Business Line, 11 September 2009.

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