ASEAN-India: Economic Connectivity

Indian Prime Minister Narendra Modi at the Shangri La Dialogue, marking 25 years of partnership with ASEAN remarked “For thousands of years, Indians have turned to the East. Not just to see the sunrise, but also to pray for its light to spread over the entire world. The human-kind now looks to the Rising East, with the hope to see the promise that this 21st century beholds for the whole world because the destiny of the world will be deeply influenced by the course of developments in the Indo-Pacific region.” Soon after the opening remarks on the holistic importance of the region, the Prime Minister delved into the theme of connectivity and trade. Symbolic of the larger emphasis, most discussions and policies regarding India-ASEAN inevitably veer into the economics of connectivity.

It is rather fascinating that the genesis of the relationship was a sectoral dialogue that began in 1992, which has now transformed into a strategic partnership. Consequently, the recent trade figures are around USD 80 billion a year, implying an exponential growth of 25 times in 25 years. However, for any meaningful analysis, we need to define economic connectivity; which is any form of economic relations amongst states, or grouping of states including trade, business activities, financial relationships, human mobility, and state-sponsored economic relations. This is quite broad a definition, and unsuitable to work with. However, two key findings in a recent policy research paper of the World Bank leads to a workable model:

• countries benefit (in terms of economic growth) from multiple types of economic connections like trade, FDI, migration, information and communication technologies (ICT), air transport and portfolio financial flows and
• growth is further enhanced by complementarity in the multiple types of connections and, the quality of connections in terms of knowledge spillovers and the indirect connections made through partners that are well connected.

With this framework in place, it is prudent to evaluate the state of economic connectivity between India and ASEAN. An analysis is done with two most important economic connectors: trade and investment, however it can be extended to include other indices mentioned above.

Trade and Investment and Knowledge spillovers
After the free trade agreement (FTA) in goods in 2009 and FTA in services and investments in 2014, there seems to be an upsurge in trade ties. And in 2015, India established a separate mission to ASEAN in Jakarta with a dedicated ambassador to strengthen engagement with ASEAN centric processes. Consequently, two-way trade grew over 10% in 2016-17. There is now an ambitious target of USD 200 billion trade by 2022. This focus on trade is neither arbitrary nor is it accidental, trade connectivity is the most important of indices in economic connectivity; it highly influences overall growth and the income growth of the bottom 40 percent of the income distribution . This indeed can be construed as a poverty alleviation measure.

After trade, investments are considered to have a cogent influence on economic growth. India received around USD 14 billion as the foreign direct investment (FDI) from ASEAN economies in 2015-16. Over 99 per cent of total inflows is from Singapore, with other Southeast Asian countries accounting for less than one per cent. The Comprehensive Economic Cooperation Agreement between India and Singapore has toppled Mauritius as the single largest FDI contributor to India.

India and ASEAN have an active and fruitful cooperation in digital connectivity, and information and communication technologies (ICT). India proposed to establish digital villages in Cambodia, Laos, Myanmar, and Vietnam. While India has planned to build 100 smart cities, ASEAN has piloted to build 26 smart cities. Amongst the ASEAN countries, Singapore has the lead in contributing to digital connectivity . This has a direct impact on other economic connectors, including investments, where Singapore holds the pole position. Perhaps, Indian interest in embracing multidimensional connectivity to further digital connectivity, coupled with other physical connectivity networks in ASEAN countries will produce knowledge spillovers (one of the main engines of economic growth)

The need for Multidimensional Connectivity
The impact of multidimensional connectivity or economic connectivity across multiple channels put together is higher than the impact of each of the individual network indices, suggesting that overall connectivity is more important than each of the individual channels separately. Hence, policies to enhance connectivity across trade, FDI and Information flows are likely more beneficial than focusing on enhancing only one channel. The tradeoff is likely to be an outcome of a negative sum game, i.e., reducing connectivity in one dimension may reduce the impact of growth from other channels. The following is a case in point.

More than 400 flights ply the India and Singapore route in a week. The figure is around 200 flights a week with Thailand and Malaysia respectively. However, there are no direct flights between India and the largest and most populous country in ASEAN, Indonesia. Reducing connectivity in this dimension may have affected growth from other channels (like trade or FDI).

Focus on complementarity
With the focus now shifting to the mega-trade pact of Regional Comprehensive Economic Partnership Agreement (RCEP), and the concomitant fears to protect trade interests, it is also vital to understand that India-ASEAN has a robust complementarity in product sectors. Greater economic connectivity can increase our exposure to international shocks, but it may also mitigate shocks by enabling a country to increase its reliance on other links in its network. For example, the European Union has now imposed a restriction on importing palm oil from Indonesia and Malaysia, which constitute around 15% of their countries’ total exports . Such a shock readily finds a mitigating partner in India, whose palm oil consumption has increased from 3 million tonnes in 2001 to nearly 10 million tonnes at present — that is a growth of over 230 per cent.

Hence, greater multidimensional economic connectivity increases the likelihood that an economy will absorb new ideas and increase long‐run growth. Economic connectivity influences trade and investment, but it also results in exchange ideas, technology, and institutional arrangements, which are all potential sources for spillovers to growth and may indirectly influence shared prosperity. While addressing the Canadian Parliament, President John F. Kennedy exclaimed that “Geography has made us neighbors. History has made us friends. Economics has made us partners. And necessity has made us allies. Those whom nature hath so joined together, let no man put asunder. What unites us is far greater than what divides us”, perhaps the Act East policy could embrace this towards the ASEAN countries.

Bibliography

ERWIDA MAULIA and CK TAN, Nikkei Staff Writers. “Indonesia and Malaysia Fire Back at the EU over Palm Oil.” Nikkei Asian Review. November 23, 2017. Accessed January 18, 2019. https://asia.nikkei.com/Business/Markets/Commodities/Indonesia-and-Malaysia-fire-back-at-the-EU-over-palm-oil

Hao, Chan Jia. “ASEAN and India Set to Enhance ICT Cooperation.” The Business Times. Accessed January 21, 2019. https://www.businesstimes.com.sg/opinion/asean-and-india-set-to-enhance-ict-cooperation.

Gould, David Michael; Kenett, DrorYossef; Panterov, Georgi Lyudmilov. 2018. Multidimensional connectivity: benefits, risks, and policy implications for Europe and Central Asia (English). Policy Research working paper; no. WPS 8438. Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/580411526052786851/Multidimensional-connectivity-benefits-risks-and-policy-implications-for-Europe-and-Central-Asia

PM Interacts with Members of Self Help Groups across the Country through Video Bridge. http://pib.nic.in/newsite/PrintRelease.aspx?relid=179711.
Gould, David Michael; Kenett, Dror Yossef; Panterov, Georgi Lyudmilov. 2018. Multidimensional connectivity : benefits, risks, and policy implications for Europe and Central Asia (English). Policy Research working paper; no. WPS 8438. Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/580411526052786851/Multidimensional-connectivity-benefits-risks-and-policy-implications-for-Europe-and-Central-Asia
Ibid
Hao, Chan Jia. “ASEAN and India Set to Enhance ICT Cooperation.” The Business Times. Accessed January 21, 2019. https://www.businesstimes.com.sg/opinion/asean-and-india-set-to-enhance-ict-cooperation.
ERWIDA MAULIA and CK TAN, Nikkei Staff Writers. “Indonesia and Malaysia Fire Back at the EU over Palm Oil.” Nikkei Asian Review. November 23, 2017. Accessed January 18, 2019. https://asia.nikkei.com/Business/Markets/Commodities/Indonesia-and-Malaysia-fire-back-at-the-EU-over-palm-oil.

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