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Indian Trade Pacts Will Contribute to Economic Integration of Region

Two trade pacts signed recently between India and the Association of Southeast Asian Nations and India and South Korea are expected to promote economic integration of one of the world's fastest growing regions. The pacts also signal that India is keen to attract more investment from East Asia.

It took six years of hard negotiations before New Delhi could seal a free trade pact with the Association of South East Asian Nations (ASEAN) this month.

The pact with the ten ASEAN countries (Indonesia, Malaysia, Singapore, Vietnam, Philippines, Myanmar, Brunei, Cambodia, Thailand, Laos) was signed a week after India and South Korea concluded a separate agreement to scrap or reduce tariffs, in the coming years.

Greater economic access

Economists say the benefits which will eventually flow from these pacts will be worth the wait, as India gains easier access to an economically dynamic region of more than 600 million people. In turn, India offers South East Asian countries a market of over a billion people.

The pacts are seen as a significant step in a process that has seen India gradually look beyond its traditional trading partners in the West towards the faster growing economies of several East Asian countries, which are lie closer to its shores.

Rajiv Kumar, head of the Indian Council of Research in International Economic Relations in New Delhi, points out that Asia's share in India's exports has risen steadily in the last four years. He says that the free trade associations or FTAs have been signed at a crucial time, when global economic patterns are changing.

"We know the global economic gravity is slowly but steadily shifting toward the Pacific basin and to Asia and it will be good for India to be connected and integrated with that," said Kumar. "And, these two FTAs will be key for India to explore the Asian markets, make better use of it, and it will be key to India's interest in joining and strengthening the Asian economic community, which is in an incipient stage."

High expectations

Hopes are high that trade between India and ASEAN, which totaled $47 billion last year, will jump by at least 20 percent in the coming years.

Under the pact, tariffs on textiles, electronics, chemicals and machinery will be reduced and eventually eliminated. However imports which could affect India's crucial farm sector, such as rubber, have been excluded.

India is hoping the pact will give a push to exports in it pharmaceuticals, chemicals and auto sectors.

S.K. Mohanty is a senior fellow at the think tank, Research and Information System for Developing Countries, in New Delhi. He says that India's rapidly growing economy has been getting much of its momentum from a huge domestic market. But he says higher exports could contribute to higher growth.

"Export is becoming a very important factor for India, in terms of having a very high level of economic growth and, therefore, export sector has been given high priority," said Mohanty. "So, India's persistent strategy is to ensure that its external sector is growing much faster than the rest of the economy."

Looking beyond trade

Indian policy makers also hope that the benefits of the pact will extend beyond trade and make it easier for India to attract investors from East Asian countries. India is looking for billions of dollars in foreign investment in sectors such as infrastructure. But investment has been slow to flow, as many investors worry about regulations which make it difficult to do business in the country.

Rajiv Kumar says the free trade pacts may reassure investors that India is changing as its economic profile grows.

"These FTA's would also signal to the investors in South Korea and ASEAN that India is now, as it were, much more open to business," he said. "So we can expect more investment and technology flows. We need as much investment as we can get in infrastructure, in energy, in roads, in buildings and, even more important, we will need investment in our housing sector."

However, economists point out that India will have to compete with China, whose goods have already flooded Southeast Asian countries. India and East Asia will also need to build better transport and communication links to realize the full benefits of growing trade.