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[East Asia Forum] Six reasons for India to look east

April 2nd, 2013

Author: Vikram Nehru, Carnegie Endowment

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India’s recent growth deceleration highlights a simple truth: the reforms of the 1990s are no longer enough.

Passengers travel on a crowded train in Mumbai. The Indian railway minister announced on 9 January 2013 that the government would hike passenger fares for the first time in a decade to fund improvements in safety on the overburdened rail system. (Photo: AAP)

While the current slowdown is partially cyclical, growth is unlikely to return to above 8 per cent per year without further reform. But India also has a golden opportunity to ‘look east’ and sustain high growth rates for years to come.

The reform agenda is long and well understood — India needs to reform its trade, infrastructure, education and labour markets. What is needed now is the will to act. Perhaps the sense of urgency among Indian policy makers would be heightened if they had a greater appreciation of the new, significant opportunities in East Asia that will boost India’s growth.

There are six reasons — three economic and three geopolitical — for India to look and act east.

First, rising real wages and an appreciating real exchange rate in China creates an opening for India’s labour-intensive industries. These trends are a natural consequence of China’s rapid development and technological upgrading, and they will encourage the migration of labour-intensive industries to countries with a surplus of labour — such as India.

India can profit from this transition, provided it improves its infrastructure, especially along its east coast. India’s large domestic market, industrial depth, urban centres and sophisticated financial services are comparable to China’s in the 1990s.

Second, the coming wave of liberalisation in the services trade in East Asia gives India’s strong services sector a chance to get ahead. Just as trade in manufacturing drove growth in East Asia over the last three decades, trade in services is likely to drive growth in the next three.

Services are relatively underdeveloped in virtually all East Asian countries and account for a small proportion of trade. But in India services account for over a third of all exports, and access to the large markets of East Asia could give this sector a further boost. Markets in the region are gradually opening. China and ASEAN have a trade-in-services agreement, and India recently negotiated a similar deal with ASEAN.

Third, wider regional trade agreements offer India a chance to capitalise even further on these opportunities. India’s access to East Asian markets could increase further if the Regional Comprehensive Economic Partnership becomes a reality, especially as the agreement will cover services. Rather than being a reluctant participant in the negotiations, India should be an enthusiastic champion. The agreement will provide India with an external motive to implement desperately needed trade reforms at home and encourage it to lower trade costs — per container, India’s trade costs are more than double the average in East Asia. It’s important for New Delhi to remember that, for the first time, Indian services could compete on an even playing field with Australia, Japan and New Zealand.

Fourth, the fallout from rising Japan–China tensions over the Senkaku/Diaoyu islands is forcing Japanese investors to diversify their investments away from China. Earlier, the natural choice to relocate labour-intensive operations would have been Thailand, but the vulnerability to periodic flooding there is now pointing the Japanese toward India. As a spokesman for prominent Japanese conglomerate Hitachi said: ‘Japan in the past, Thailand now, India in future’.

Fifth, Southeast Asia is also looking for alternatives to China. While economic integration with China has brought considerable benefits to countries in the region, it has curtailed independence in other spheres. So, just as Southeast Asia welcomed the US pivot, the region is now looking to India with fresh eyes as a possible economic hedge against the growing economic clout of China.

And finally, Myanmar’s own pivot away from autarky and toward the outside world has created new opportunities for India, opening a potential land bridge to Southeast Asia and southern China. Although it maintained commercial relations with Myanmar during the military junta’s rule, India’s reputation in the country is not tainted like China’s.

Still, India has to nurture this relationship. Myanmar is in a strategic location, and many other countries are beating a path to the country’s door — India enjoys an advantage, but it must act before it is too late.

Together, these trends present a remarkable opportunity for India to integrate further with East Asia. India’s trade growth with Southeast Asia over the last decade was a healthy 20 per cent per year. But New Delhi could double that because it comes off a low base — trade with India only constitutes 3 per cent of Southeast Asia’s total.

Now is the time for India to look east. And there is hope that the long-stalled reform process will once again move forward. Finance Minister Palaniappan Chidambaram has given India’s economic reformers renewed drive, as has the appointment of Raghuram Rajan as India’s new chief economic adviser. They recognise that the world — especially East Asia — is moving ahead rapidly and India cannot afford to be left behind.

Vikram Nehru is a senior associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace. Nadia Bulkin provided background research for this article.

An earlier version of this article was first published here by the Carnegie Endowment for International Peace.

 

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