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India’s trade pact with Australia will click: It ticks the right boxes

04 Apr 2022

The India-Australia Economic Cooperation and Trade Agreement (ECTA), signed on 2 April, is in many aspects a path-breaking trade agreement for both countries. For India, the ECTA with Australia is the first agreement with a large developed economy of the world after more than a decade. Australia is also the third OECD country after Japan and Korea with which India has signed a free trade agreement (FTA). This agreement has strategic significance too, as both India and Australia are part of the Quad and partners in the Supply Chain Resilience Initiative (SCRI).

India negotiated some important trade pacts in the past that involved large economies such as those of the Association of South East Asian Nations (ASEAN), Japan, Korea, Singapore and Malaysia. Indian Industry, however, hadn’t shown the kind of enthusiasm it is expressing for recent trade deals, first with the UAE and now with Australia. One of the major factors behind this new FTA confidence and support shown by Indian Industry is that the government has identified the right set of countries for such trade and aggressively ensured meaningful market access for Indian exports.

Industry is being consulted at every stage of negotiations, which has helped industry members articulate their overseas market-access interests. In previous FTAs, India bargained mainly for market access for business professionals under Mode 4 (Movement of Natural Persons), but now the focus is increasingly on foreign-market access for all our merchandise exports.

Over the past one-and-a-half decade, there has been remarkable growth in bilateral trade between India and Australia, aided by huge complementarities between the two economies. Two-way trade in goods and services grew in value from $13.6 billion in 2007 to $24.3 billion in 2020. Now, with a trade deal in place, bilateral trade in goods and services for both countries is expected to touch $45 billion in five years. There will be consolidation and growth of the market share of Indian products and services, and India’s exports of goods and services is expected to increase from $10.5 billion in 2021 to $20 billion by 2026-27 and then cross $35 billion by 2035.

Currently, Indian exports face a tariff disadvantage of 4-5% in many labour-intensive sectors vis-à-vis competitors in the Australian market such as China, Thailand, Vietnam, South Korea, Japan, Indonesia and Malaysia. Removing these barriers under the ECTA can enhance our merchandise exports significantly. Australia is offering zero-duty access on 100% tariff lines from India. There will be zero duty on 96.4% value of Indian exports immediately (98% of tariff lines); that is, for these items, Indian exports will have immediate market access at zero duty from day one of the deal coming into force. All the major traditional Indian exports, such as textiles and apparel, select agriculture and marine products, leather, footwear, furniture, gems and jewellery, pharma and engineering products, etc, stand to gain immensely.

At its end, India would immediately eliminate tariffs on 40% of its tariff lines, comprising 85% of Australia’s exports in value terms to India, and then programme another 30.3% of its tariff lines for either elimination or reduction in tariffs over time spans of 3/5/7/10 years. Indian industry needs to use this arrangement smartly, as Australian exports to India are more concentrated in raw materials and intermediate products. Many industries in India will get cheaper raw materials and thus become more competitive, particularly in sectors like steel, aluminium, power, engineering and so on.

We are aware that because of our diversified industrial base, which includes businesses of all sizes and multiple sectors/products, Indian industry does have certain sensitivities. We are thankful to the government for having kept many sensitive products in the exclusion category (29.8% of tariff lines) without offering any concession. These products include milk and dairy, chickpeas, walnut, pistachio nuts, wheat, rice, bajra, apple, sunflowers seed oil, sugar, oil cake, gold, silver, platinum, jewellery, iron ore and most medical devices. This is a major gain for India under the ECTA.

Besides ensuring meaningful gains in the goods sector, India managed to get commercially meaningful offers from Australia in several service sectors too. An annual quota of 1,800 Indian traditional chefs and yoga teachers entering Australia as contractual service suppliers, post-study work visas for Indian students, the pursuit of a mutual recognition agreement on professional qualifications, and an enhanced commitment on the movement of professionals as intra-corporate transferees are some of the key gains for Indian service sectors.

One of the breakthroughs achieved under the ECTA is that the Australian government has agreed to amend its domestic tax law to stop taxation of the offshore income of Indian firms providing technical services to Australia. This was a long-pending demand of the Indian IT industry. Once the amendment is made, the Indian tech companies would no longer be required to pay taxes on offshore revenues in Australia, which would enhance their competitiveness in the international market.

Lastly, a point to note for industry colleagues. While the government has successfully negotiated an excellent trade deal for businesses, given the fact that Australia has currently 16 FTAs under operation, accessing the Australian market wouldn’t be a cakewalk. We would still have to work on improving our competitiveness, as in most trade sectors, India would be competing with the likes of China, ASEAN, Chile, Japan, Korea and New Zealand, which have already-functional FTAs with Australia.

The article first appeared in the Mint, 4 April 2022.

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