India-Australia Trade Agreement – Explained, pointwise

Introduction

India and Australia enjoy excellent bilateral relations that have undergone transformational evolution in the recent years. The countries have a special partnership characterized by shared values of pluralism, parliamentary democracies, commonwealth traditions, long standing people-to-people ties and increasing high level interaction. The Comprehensive Strategic Partnership initiated during the India-Australia Leaders’ Virtual Summit (2020) is the cornerstone of their multifaceted bilateral relations. The countries have added another feather to their cap by signing India-Australia Economic Cooperation and Trade Agreement (India Australia ECTA) on April 02 2022. It is a path-breaking trade agreement for both countries and is expected to enhance bilateral trade.

What is the current status of India Australia Trade Relations?

Australia is the 17th largest trading partner of India and India is Australia’s 9th largest trading partner. 

India-Australia bilateral trade (both merchandise and services) stood at US$ 27.5 billion in 2021. 

India’s merchandise exports to Australia grew by 135% between 2019 and 2021. India’s exports to Australia primarily consist of finished products like textiles and apparel, select agriculture and marine products, leather, footwear, furniture, gems and jewellery, pharmaceuticals etc. Indian exports to Australia were valued at US$ 6.9 billion in 2021. 

India’s merchandise imports from Australia were US$ 15.1 billion in 2021, consisting largely of raw materials, minerals and intermediate goods.

What is the background of the India Australia Trade Agreement?

Negotiations for the free trade agreement between India and Australia had started in May 2011. The talks gained momentum in 2013, but continued to run into roadblocks e.g., India wanted tariff-free access for Indian agricultural goods in Australia, and a liberal visa regime for Indian professionals. 

Australia, meanwhile, wanted duty free market access for its processed foods, wines, dairy products and critical minerals.

India walked out of the Regional Economic Partnership Agreement (RCEP) in November 2019. However, India and Australia ‘started to show some amount of flexibility’ as the COVID-19 pandemic struck, and both sides moved closer strategically. 

In June 2020, India and Australia upgraded ties to the level of ‘Comprehensive Strategic Partnership’, and signed a defense pact, the Mutual Logistics Support Agreement (MLSA).

The negotiations for India-Australia ECTA were formally re-launched on 30 September 2021 and concluded on a fast-track basis by the end of March 2022.

What are the key features of the agreement?

Source: Business Standard

It provides for an institutional mechanism to encourage and improve trade between the two countries.  The ECTA covers almost all the tariff lines dealt in by India and Australia respectively. 

Preferential Market Access

Australia’s PMA to India: India will benefit from preferential market access provided by Australia on 100% of its tariff lines. This includes all the labor-intensive sectors which are of interest to India such as Gems and Jewellery, Textiles, leather, footwear etc. 

India’s PMA to Australia: India will be offering preferential access to Australia on over 70% of its tariff lines. This includes lines of export interest to Australia which are primarily raw materials and intermediaries such as coal, mineral ores and wines etc.

Services Trade

As regards trade in services, some of the key offers from Australia in the services space include: Quota for chefs and yoga teachers; Post study work visa of 2-4 years for Indian students on reciprocal basis; mutual recognition of Professional Services and Other licensed/regulated Occupations etc.

India has offered market access to Australia in around 103 sub-sectors and Most Favored Nation in 31 sub-sectors from the 11 broad service sectors. This includes ‘business services’, ‘communication services’, ‘construction and related engineering services’, and so on. 

Both sides have also agreed to a separate Annexure on Pharmaceutical products under this agreement. This will enable fast track approval for patented, generic and bio-similar medicines.

Excluded Tariff Lines

India has kept many sensitive products in the exclusion category (29.8% of tariff lines) without offering any concession. These products include milk and dairy, chickpeas, walnut, pistachio nuts, wheat, rice, bajra, apple, sunflowers seed oil etc..

The agreement also includes strict rules of origin to prevent any routing of products from other countries and provides for a safeguard mechanism to address any sudden surges in imports of a product.

What is the significance of India Australia Trade Agreement?

Boosting Trade: Bilateral trade in goods and services for both countries is expected to touch US$ 45 billion in five years. India’s exports of goods and services are expected to increase from US$ 10.5 billion in 2021 to US$ 20 billion by 2026-27 and then cross US$ 35 billion by 2035.

Source: Economic Times

Parity with Competitors: Indian exports face a tariff disadvantage of 4-5% in many labor-intensive sectors vis-à-vis competitors in the Australian market such as China, Thailand, Vietnam, South Korea, Japan etc. This problem would be removed by the current agreement that offers parity treatment to Indian exporters. 

Engagement with a Developed Nation: The ECTA is the first agreement with a large developed economy of the world after more than a decade. Australia is also the third OECD country after Japan and Korea with which India has signed a free trade agreement (FTA).

Boost to Make in India: Many industries in India will get cheaper raw materials and thus become more competitive, particularly in sectors like steel, aluminum, power, engineering and so on. The agreement is expected to generate over one million jobs in India.

Strategic interest: This agreement has strategic significance too, as both India and Australia are part of the QUAD and partners in the Supply Chain Resilience Initiative (SCRI). Further, the agreement will be beneficial for reducing their reliance on China.

Industry Enthusiasm: Industry was consulted at every stage of negotiations, which has helped industry members articulate their overseas market-access interests. 

In previous FTAs, India bargained mainly for market access for business professionals under Mode 4 (Movement of Natural Persons). However in the current FTA, the focus is increasingly on foreign-market access for all our merchandise exports.

What lies ahead?

First, the government has successfully negotiated an excellent trade deal for businesses. However, Australia has 16 FTAs under operation which means accessing the Australian market wouldn’t be a cakewalk.

India would have to work on improving its competitiveness, as in most trade sectors, it would be competing with China, ASEAN, Chile, Japan, Korea and New Zealand, which have already-functional FTAs with Australia.

Second, active diplomatic engagement would be required to make Australia fulfil its promise to amend its domestic tax law in order to stop taxation of the offshore income of Indian firms providing technical services to Australia.

Once the amendment is made, the Indian tech companies would no longer be required to pay taxes on offshore revenues in Australia. This would enhance their competitiveness in the international market.

Third, India signed an FTA with the UAE in February 2022 and now an FTA has been negotiated with Australia. This success will be helpful in negotiating its future FTA deals with Israel, Canada, UK and the EU.

Conclusion

The India Australia ECTA will further cement the already deep, close and strategic relations between the two countries. It will significantly enhance bilateral trade in goods and services, create new employment opportunities, raise living standards, and improve the general welfare of the peoples of the two countries.

Source: Mint, PIB, Indian Express, Business Standard, Economic Times