The main game in India-Australia trade

Prime Minister Tony Abbott surprised pundits last week when he put a free trade agreement between Australian and India on the table at a gathering in New Delhi. Among those most surprised was India itself, given that an FTA was barely mentioned in talks at that point, as the two U's - uranium and university students - dominated proceedings.

So what was the motivation for Abbott's surprise announcement? Was it to breath fresh life into the Indian relationship beyond the current staples of cricket, curry and call centres? Or was it a non-subtle hint to Beijing that we have more than one fish to fry in the great trade stakes?

"India is now Australia’s fifth most important export destination, with 1908 Australian businesses exporting goods to India, along with a vibrant two-way services trade."
Tim Harcourt, Fellow in Economics, UNSW Business School

I suspect it has nothing to do with Australia’s marathon FTA talks with China, but more a focus on the Australia‘s relationship with India.

Mind you, even if an India FTA reduces trade barriers and grants Australia exporters market access,  the non-tariff barriers and the enormous challenge of doing business in India itself will be where the main game starts.

Twenty years ago, India wasn’t even in our top ten trading partners, and there was a view that India was a closed economy that was naturally hostile to foreign investment and had economic nationalist tendencies (after a long battle to win independence from the British Raj). In short, India was considered to be a no-go zone for Australian business.

But the, times are a-changing. Thanks to long serving Finance Minister and Prime Minister Dr Manmahon Singh (who only just retired as an octogenarian recently), India has opened its economy and become more aggressive internationally in terms of trade and investment.

Despite recent slumps in economic growth, (now at just over 5.4 per cent, compared to 10.3 per cent in 2010 at the beginning of the decade) Singh handed the new Prime Minister Narendra Modi this year a much more successful India than the one he had inherited back in 1991.

India is now Australia’s fifth most important export destination, with 1908 Australian businesses exporting goods to India, along with a vibrant, two-way services trade.

Globally, cricketers now regard India as the place to tour thanks to the Indian Premier League (IPL), which dominates world cricket.

When I was in New Delhi recently, South Australian Premier Jay Weatherill launched a cricketing scholarship between South Australia and the Rajasthan Royals. Everywhere you go in India, you see retired Australian cricketers like Brett Lee singing Bollywood songs, Matthew Hayden cooking curries like a celebrity chef and Adam Gilchrist supporting education.

So now India means much more to Australia now than the thee C’s. It has been the two U’s that has dominated diplomatic relations in recent years, and now both countries have fresh governments.

In India, Prime Minister Narendra Modi’s BJP broke the shackles of the Congress Party and the Nehru-Gandhi dynasty earlier this year, winning a spectacular 51 per cent of all seats in Parliament.

Modi has announced an aggressive ‘Made in India’ push, but commentators say that doesn’t apply strictly to foreign ownership. India Defence companies like Pipavav, which have strong ties to the Swedish company SAAB , explained to me that Modi is keen to build Indian capability in key sectors like defence.

In Australia, Prime Minister Abbott also leads a (relatively) new government, now just a year old. The Abbott Government’s trade and investment focus has been more on East Asia with an aggressive agenda led by Trade and Investment Minister Andrew Robb winning free trade agreements (FTAs) with South Korea and Japan and one with China on the cards (Clive Palmer notwithstanding). 

The Abbott Government’s trade agenda has been more East Asia – focussing on the big three FTA nations South Korea, Japan and China – much more than South Asia,

Abbott’s visit to India was more than welcome in New Delhi, especially given the time and resources already spent by Australia in Beijing. But whilst India does not necessarily focus on Beijing (Japan is a big investor in Indian infrastructure), how does India compare to China?

In Australian export terms, it’s like comparing a test match to a Twenty-20 game. As China opened up its economy early (Deng Xiaoping said ‘let a 1000 flowers bloom’ in 1979 and Dr Manmahon Singh didn’t get economic reform going until 1991), China has moved up our export ranks steadily.

India, though, has just burst on the scene – largely on the back of education, tourism, professional services and the IT sector. It’s said that India may improve its relative trade position when compared to China because of both democracy and demography.

Our shared British democratic institutions, rule of law and language can help grow trade ties and India’s relatively young population – 50 per cent of the nation are under 25 – will give India a demographic dividend. China’s ageing population and one child policy means that it will grow old before it gets rich.

However, Australia and India do share some institutional frustrations, as well as strengths. The system of federalism and overlapping regulations affects business in both countries and the ‘licence Raj’ has left a red tape legacy in India, despite recent improvements.

Demography too can be an issue, as many of India’s young are in the east of the country, while many jobs in the south and in the west.

There’s also an issue of raised expectations in the labour market, as not everybody can be a rocket scientist or IT entrepreneur. But India certainly wants to move its way up the value change in education, beyond call centres.

So collaboration with Australian institutions in post graduate research and R & D is the name of the game. With less of an open- cut mining approach to education and an explosion of young men from the Punjab being forced to enrol in hairdressing, when what they wanted to do agricultural science or engineering.

One advantage India has over China is its success in building global brands. Companies that I visited in Mumbai, New Delhi and Bangalore, include Tata, Mahindra & Mahindra, JSW Steel and Aditya Birla along with the well-known Infosys and Dr Reddy’s Labs.

All these companies now have interests in Australia and will play an important role in Australian corporate life as joint venture players and investors.

But how do we lure more Indian companies to Australia? Despite the sophistication of the new India, it still comes down to cricket.

At next year’s world Cup, India will be based in Adelaide and will play Pakistan at Adelaide Oval.

Naturally the South Australian Government will make the most of the influx of high-profile Indian business visitors and will be arranging an India-Pakistan networking event that day.

Cricket will be the event, but business will be the name of the game. Because nowadays, Australia - in both cricket and in business - takes India very seriously indeed.

And as Raju Narayanan, South Australia’s India business guru says: “To succeed in business in India, you first have to prepare the pitch well.” That preparation could well be the key to future investment.

Tim Harcourt is the JW Nevile Fellow in Economics at UNSW Business School

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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