Australia is belatedly waking up to the potential of India as a key investment and commercial behemoth, by appointing the former Prime Minister Tony Abbott as special trade envoy who completed a a packed visit to India from 2–6 August.
I thought it is a timely option to review my own article I wrote as President, Australia India Business Council as part of our path breaking IndiaWatch series almost exactly 5 years ago. Please note some of the numbers are 5 years old but the basic premise hasn’t changed in the intervening 5 years!
I spent some time (& putting on my earlier hat of a banker), to analyse the impact of FTA between India, ASEAN / Singapore. A few key trends emerged in the article I authored in 2016:
1. CECA & FTA — will increase trade volatility. For example, it is possible (with the Singapore — India CECA example), that gems and jewellery exports from India will become more competitive while textiles may become less so. This could lead to unforeseen consequences, for example India-Singapore exports in December 2014 were worth $25.4 billion, down 3.8% from $26.4 billion in the same month in 2013;
2. Despite significant issues & minor variances like in the India-Singapore case, any FTA is expected to dramatically grow two-way trade — to point: Trade between ASEAN and India has seen strong growth over recent years. In 2014, total trade amounted to US$77 billion, a significant increase over the US$44 billion seen during 2009–10. Over the past decade, bilateral trade has increased at an average annual rate of a blistering 23 percent; and
3. The proposed CECA between India and Australia is designed to avoid possible concerns around free movement of services unlike for example in the case of the India-ASEAN FTA. Consequently, India is taking a tough stance — to inform member countries of the Regional Comprehensive Economic Partnership that it is not interested in negotiating any further on goods till there is progress around liberalizing movement of professionals. New Delhi’s tough stance follows the disappointment with ASEAN, with which it had agreed to a deal in goods before finalizing a pact in services. India got a disappointing deal in services as it had lost its bargaining chip.
More than anything else it is the sheer potential and a dynamic new democratically elected government that is fuelling interest and investment in India. According to Department of Industrial Policy and Promotion (DIPP), the total FDI inflows soared by 24.5 per cent to US$ 44.9 billion during FY2015, as compared to US$ 36.0 billion in FY2014. FDI into India through the Foreign Investment Promotion Board (FIPB) route shot up by 26 per cent to US$ 31.9 billion in the year FY2015 as against US$ 25.3 billion in the previous year, indicating that government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results. According to the data released by Grant Thornton India, the total merger and acquisitions (M&A) and private equity (PE) deals in the month of August 2015 were valued at US$ 2.6 billion (151 deals), which is 62 per cent higher in volume as compared to August 2014.
Over the past decade, despite FTA; ASEAN business ties extending west into India have never enjoyed the same cachet as trade with China to the north. That’s partly because access to India was blocked by Myanmar’s isolation and partly because a two-decade economic boom in China soaked-up as much capital as ASEAN investors could spare. But that equation is changing as China’s economy slowdown under debt while India reappraises its relationship with ASEAN. This optimism was underpinned with the release of a report from Standard Chartered forecasting that Indian exports into ASEAN would rise dramatically over the next 10 years to $280 billion a year, up from $33.13 billion in the 2013/14 financial year. Two-way trade is currently locked in at around $80 billion a year. Some of the areas for further growth, as per this report; include apparel and clothing accessories, auto parts and pharma products.
Australia is one of the few success stories in the economic front over the past decade. Not many are aware that Australia’s per-capita GDP is higher than that of the UK, Germany, and France in terms of purchasing power parity. The country was ranked second in the United Nations 2011 Human Development Index and consistently remained in the top few in the quality-of-life index. Australia’s sovereign credit rating is “AAA”, higher than the United States of America. The Bank of America has issued an encouraging outlook for the Australian economy in 2016. Against the backdrop of steadying global growth, the bank is forecasting a positive, if modest, year ahead. I think this growth may get accelerated if the A$ falls further — I had predicted 3 years back that A$ will fall to about 70 cents vis-à-vis the US$ by 2016 and possibly further in 2017. I am keen to see if my old banker instincts still hold good!
I have dwelt at length on the implications of a Comprehensive Economic Cooperation Agreement between Australia and India (CECA) after the shockwaves caused by BREXIT. At the time of writing this Editorial, it seems evident that some elements may need to be fundamentally reconsidered in view of the significant macro-economic and political ramifications.
Many financial analysts are debating the potential fall of the Australian Dollar (AUD) as an immediate effect. I personally think the reverse is more likely. Traditionally, the AUD has punched above its weight in global currency futures, and I think this trend will continue with the increased volatility BREXIT is obviously bringing with currency and commodity trades. Traditionally, macroeconomic volatility drives down stock markets and we have already seen plenty of this in the ASX since BREXIT, I think this will continue soon unless the Reserve Bank cuts interest rates — which by the way, I think is more than possible!
During the BREXIT discussion, many of us are guilty of missing what is probably a more existential threat to the Eurozone, the banking system in Italy and its constant battles with Brussels. The unwillingness of the European Central Bank (ECB) to bail out Italy’s fourth largest bank is a case in point.
India stands as a beacon amongst this global uncertainty even during Covid — primarily because of two factors in my opinion.
First, there is a strong banking system with significant checks and balances aided by an independent Reserve Bank management focused on fighting inflation and allocating capital to NPAs. And secondly, there is an innovative, demographically rich population with a significant consumption appetite. At a time when China is sitting atop a substantial and growing mountain of debt (in the manner of USD25 trillion, with a GDP of USD 10 trillion — 2016 and now China’s debt is more than 250 percent of GDP, higher than the United States. It remains only lower than Japan, the world’s most indebted leading economy, but the concern is that China’s debt has surged at the sort of pace that usually leads to a financial bust and economic slump), it makes sense for two democracies with strong ties to engage further with each other.
In terms of trading, the way I see it there are a few factors are at play.
India is the second largest source of foreign direct investment (FDI) to the UK, primarily due to a long and shared heritage, but also due to the UK being a convenient entry point into EURO zone. Further, the British pound (GBP) is in the midst of a serious fall in global currencies. There could be renewed interest in Indian firms investing in UK. How that pans out with regards to the need to focus on additional investments in the European Union (EU) remains to be seen. Let us not forget, for example, that the Netherlands is one of the primary FDI destinations for Indians.
During all this, the Indian Bond yields have been consistently giving opportunities for FDIs into India. Indian 10-year G-Secs remained stable at 7.48 per cent post-Brexit, while yields of 10-year US Treasury bills stand at a four-year low of 1.47 per cent. Yields of German ‘bunds’ and Japanese Government Bonds (JGBs) touched record lows of -0.17 per cent and -0.19 per cent respectively.
Since the fall in yields in these advanced economies is greater than that of India, Indian bonds look set to be more attractive to foreign investors in the medium-term.
Thus, the opportunity for bilateral trade and investment between Australia and India increases. India could be a great destination for some of the Australian Superannuation funds while Australian investments into infrastructure, real estate and services could be a potential source for Indian investments.
Finally, more than anything else, for me; Australia has been a nation of innovators — with the dual button cistern saving millions of gallons of water in a water starved continent to Wifi making communication easy and immediate.
In summary, I believe India and Australia have significant miles to go — especially considering the serious potential following the two Prime Ministerial visits in 2014 and several high-level delegations later — including those by Tony Abbott last week!
It was fun revisiting my musings 5 years back and ruminating how little has changed despite a pandemic and life / business disruption.
And I thought its time for the Australian Prime Minister, Scott Morrison, to perhaps pay a visit to India and accelerate the engagement!
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