How the India-Aus FTA will boost trade

Bilateral trade between India and Australia faces a significant boost, thanks to the newly signed Australia-India Economic Cooperation and Trade Agreement (AIECTA).

The deal, secured in April and likely to come into force within four months, is expected to give a welcome push to bilateral trade between the two nations – primarily by eliminating or lowering tariffs and non-tariff barriers.

India’s Ministry of Commerce and Industry estimates the agreement will expand bilateral trade by more than 60 per cent over the next five years. ANZ Research believes there are opportunities in both goods and services, albeit in select categories.

Merchandise exports from India registered a record high in 2021-22 at $US418 billion, exceeding the government’s target by about 5 per cent. India’s Department of Commerce aims to expand goods exports further to $US470 billion in 2022-23.

The AIECTA, in this scenario, can help boost bilateral trade between India and Australia significantly, as current trade levels are relatively small.

Apart from trade, AIECTA will likely boost Indian migration to Australia, as the deal also includes several provisions to promote Indian participation in Australian higher education and workforce.

AIECTA is India’s first trade agreement with a developed country since the Comprehensive Economic Partnership Agreement (CEPA) with Japan in 2011. India has also recently signed FTAs with the UAE and negotiations with the UK and Canada are underway.

Given India’s competitiveness in exports of products like pharmaceuticals, textiles and clothing, Information Technology and related services, more export opportunities are expected to bolster foreign direct investment as well.

Expanding scope

India’s trade with Australia has so far been limited in scope and volume. Bilateral trade totalled $US17.6 billion in 2021, rising modestly since 2011 at a compound annual rate of 2.8 per cent.

India has always incurred a trade deficit with Australia, though it has been declining since 2011. The share of Indian imports from Australia has been decreasing from the peak of 3.4 per cent in 2009 to 2.1 per cent in 2021. India’s export share to Australia has been on a modest upward trend.

India’s Ministry of Commerce and Industry data show the country’s exports to Australia are dominated by refined petroleum, pharmaceutical products, and gems and jewellery. These constitute roughly 43 per cent of the total goods exports to Australia.

In services trade, India is a major global player in information technology services exports, with revenues reaching $US134 billion in 2021. According to the Reserve Bank of India (RBI), the share of exports to Australia and New Zealand combined was, however, small at 3.1 per cent.

Under AIECTA, the Australian government has decided to stop taxing the offshore income of Indian firms which provide technical services. This, in our view, opens scope for services trade to flourish.

Australia’s education services exports to India were valued at $US4.5 billion in 2020. This is quite significant as it represents 88 per cent of Australia’s total services exports to India, 20 per cent of its total education exports, and 9 per cent of its total services exports.

Indian students make up over 18 per cent of all international students in Australia, the second largest share after China. Over one million Indian students were enrolled in universities abroad in 2021 of which nearly 130,000 were in Australia. The scope for expansion of education services exports to Indian students is therefore quite significant.

ANZ Research is projecting goods exports and imports to grow around 10 per cent annually under the new deal. Services trade has greater potential, with exports and imports each expected to grow roughly 15 per cent annually.

This will likely take the total bilateral trade to $US32 billion by 2025, and to $US52 billion by 2030. However, these estimates also show that for such a large trade opportunity to be realised, the efforts to enhance trade relations will need to be significantly scaled up.

Areas to watch

India’s export mix to Australia is dominated by low-to-medium technology intensive products, save for pharmaceuticals.

India’s growing competitiveness in pharmaceuticals is reflected in the World Bank’s comparative advantage index, which has risen from 1.3 to 2.6 between 2010 and 2020. Textiles and clothing have a reasonably high RCA value of around 3.

Given India’s exports of these products still form a relatively small share of Australia’s overall imports, ANZ Research believes there is significant potential for growth in this area in terms of goods trade.

India’s imports from Australia are dominated by commodities. The elimination of tariff lines will help increase the size of these imports, however, there are a few points to note.

Supportive factors include expectations of India’s rapid growth over the next decade, including an increase in its urbanisation rate, which stands at less than 40 per cent. As the economy grows, commodity demand will rise. However, an offsetting factor could be the ongoing thrust to cleaner energy, with India pledging to reach net-zero carbon by 2070.

Arindam Chakraborty is a Junior Economist, Dhiraj Nim is an Economist/FX Strategist, Sanjay Mathur is Chief Economist, Southeast Asia and India, and David Plank is Head of Australian Economics at ANZ

This story is an edited version of the ANZ Research report “Australia-India free trade agreement: expanding scope”, published April 26, 2022.