Two-way trade with the fast-growing grouping is bound to grow manifold as a consequence

India is reviewing its free trade agreement with the 10-member Association of Southeast Asian Nations that was inked 13 years ago as part of its Look East policy. Despite a two-fold rise in trade in goods since then, to $131.6 billion in 2022-23, India has deep misgivings over this deal as it resulted in a nine-fold increase in its trade deficit with ASEAN (to $43.6 billion). India’s concerns are similar to what it had in opting out of the Sino-centric Regional Comprehensive Economic Partnership—ASEAN with China, Japan, South Korea, Australia and New Zealand—notably, of leading partners inundating the domestic market with cheaper goods while importing less of India’ s goods, resulting in huge deficits.

To kick-start greater trading volumes, India Inc must invest more in ASEAN, especially in manufacturing and services—more than it is currently doing. ASEAN receives more foreign investments as a share of GDP than any other region. FDI inflows to ASEAN have burgeoned to $224.2 billion in 2022, up from $108.4 billion in 2010. The member-states are also investing in one another; the value of such investments has risen to $27.7 billion from $15.5 billion. In contrast, India has a receding FDI imprint with inflows of only $680.9 million from $4.4 billion in 2010, according to ASEAN’s data portal. India’s FDI in manufacturing are also negligible, at $49 million in 2022 from $109 million in 2012.

India Inc’s declining investments in ASEAN sharply contrast to the late 1960s and 1970s when the Aditya Birla Group made its pioneering forays into Thailand with the setting up of Indo Thai Synthetics Company. Analysts consider this as part of a first wave of investments by Indian industry in ASEAN during the pre- liberalisation period. In Indonesia, the Group’s first venture was in the form of PT Elegant Textiles in 1973. PT Indo Bharat Rayon pioneered viscose stable production in Indonesia in 1982. In the Philippines, it had a joint venture for spun yarn in 1975. The Group also built the world’s largest single-location palm oil refinery in Malaysia in 1977, to name a few examples.

To be sure, Indian companies have sought to set up outposts like the Aditya Birla Group but have faced serious challenges in succeeding. The biggest bets in the region have been made by the Tata Group when it took over NatSteel in Singapore in 2004 and two years later Millennium Steel in Thailand. To sell its pick-up trucks in the region, Tata Motors chose Thailand for its entry point in 2008. Seventeen years later, it has sold its stake in NatSteel while retaining the wire business. In July 2018, Tata decided to stop assembly operations in Thailand as the business was sub-scale and unsustainable. It has now partnered with a leading automotive distributor, Inchcape Plc, to distribute its vehicles in the region.

The Tata Group’s nodal hub for the ASEAN region is Singapore whose role as a global financial centre creates challenges in tracing the ultimate destination of FDI to and from the city-state. Tata Motors made India’s largest equity investments in Singapore from March 2008 to October 2011 in its wholly-owned subsidiary TML Holding Pte Ltd following its take-over of UK’s Jaguar Land Rover. Jaguar Land Rover is a step-down subsidiary of TML Holding. A bridge loan of $3 billion was taken to part-finance this acquisition. Tata Motors’ investments pre-paid a part of this bridge loan and were invested in its UK subsidiary.

India Inc’s investments in ASEAN are in fact concentrated in the city-state of Singapore and very little goes to other member countries to seize the opportunities of a $3.9 trillion entity. With its enabling environment for business, there are 9,000-odd Indian companies registered in Singapore. Two-way FDI flows between Singapore and India are also substantial and fast-growing. The city-state is not just a major recipient of Indian FDI but is also a source of the largest equity inflows into India. But is all of this related to Singapore being a tax haven? There is need for detailed research on whether these two-way flows entail round-tripping or leaving India and returning as FDI.

If reviewing the India-ASEAN FTA is to work to India’s advantage, it must step up its investments in that region like the Aditya Birla Group did in the yesteryears. India Inc’s FDI inflows in ASEAN are declining just when Japan and the US are ramping up their investments manifold and benefitting with booming trade. India Inc’s most formidable rival in the region is the Chinese diaspora. To seize the bustling business opportunities in ASEAN, India Inc must better understand the competitive implications arising from this dominance by overseas Chinese businessmen whose entrenched presence provide a strategic advantage to the mainland. There are over 20 million of them living in this region, and their networks serve as a valuable bridge for China’s integration and trade with ASEAN.

ASEAN is also the region where global supply chains are relocating due to Sino-US tensions. There is no alternative to investing more in the region for a substantial uptick in two-way trade with ASEAN which is also less imbalanced.

https://www.financialexpress.com/opinion/india-inc-must-step-up-fdi-in-asean/3234124/