The Economic Cooperation and Trade Agreement (ECTA) between India and Australia will enter into force on December 29th. Despite ten years of negotiations, this is an interim agreement. To further deepen the relationship, the final terms of the agreement will address more controversial issues of investment, services, government procurement and digital trade, with further negotiations to transform the agreement into a comprehensive economic cooperation agreement. obligates governments to initiate
Both countries are celebrating the deal. Australia is now the fifth high-income country with which India has signed a free trade agreement (FTA), and the second country to do so in the past decade. For Australia, her ECTA means a deal with her one Asian power that has not signed an FTA, coming seven years after her FTA with China. China-Australia trade relations deteriorated after Covid-19, boosting India’s status as a friendlier trading partner and strategic ally in Quad, Supply Chain Resilience Initiative and Indo-Pacific Economic Framework .
Australia’s high-income status derives from its strength in primary industries such as minerals and animal products, education and financial services. Despite being a low-middle-income country, India has a more diverse and complex economic base supported by human skills, information technology (IT)-enabled services, pharmaceuticals, and diversified agriculture. It is also the fifth largest economy in the world.
In 2021-2022, around 2% of India’s merchandise exports will be destined for Australia, while 2.7% of India’s imports will originate from Australia. ECTA is trying to strengthen those shares, and the Federal Ministry of Commerce said (in a November statement) that total trade between the two countries would increase from the current $31 billion to $45-50 billion in five years. I am predicting.
Changes in trade caused by FTAs depend on three key factors. The initial tariff barrier, the degree of tariff reduction, and the size of the market. Tariffs in India are high and the market is large. Therefore, imports could increase if India cuts tariffs significantly.
The average duty rate to all Australian countries is only 2.5%, and half of the product line is duty free. India’s export growth could therefore be concentrated in sectors where current Australian tariffs are above average or where imports are price sensitive. Such gains can be seen, for example, in engineering products, labor-intensive products such as apparel and footwear, pharmaceuticals, and jewellery.
India’s average tariff rate is 15%. When ECTA comes into effect, tariffs on 85% of Australia’s current exports to India will be eliminated, with a further 5% within 10 years. This could lead to increased exports of many commodities and minerals for which Australia is very competitive, such as cotton, coal, LNG, alumina and important minerals. Australian wine imports will gradually become cheaper over the next decade. Notable exclusions from the agreement include dairy products, iron ore, cereals, sugar and sunflower oil.
A potential post-FTA increase in India’s bilateral trade deficit with Australia is a good thing for India. Australian exports provide important inputs for Indian companies, and cheap intermediates and raw materials enhance their competitiveness. Consumers also benefit. Moreover, some of the increase in Australian exports to India will come at the expense of third countries such as the United States, and by no means will it increase India’s total trade deficit.
Service and foreign investment commitments remain shallow at this intermediate stage of the deal. Under the interim agreement, income tax relief for remotely delivered software services for Australia is secured and a 30% “royalty” withholding tax exemption is granted. Tax savings for Indian IT companies are expected to range from $145 million to $200 million. Service suppliers in Australia’s 31 sectors and subsectors will be guaranteed the same treatment by India as his future FTA partners, including higher education and business services. Australia’s post-study work visa regulations do not discriminate based on the student’s country of origin and are not specific to Indian students.
The real promise of an FTA goes beyond trade in goods, work visas and avoidance of double taxation, but also leverages mutual strengths, technical cooperation and FDI. Australia ranks 25th out of 132 countries in the Global Innovation Index and India ranks her 40th. Australia needs skilled workers — the number of skills shortages will double from 2021 to 2022, according to the National Skills Board. About young Indians who aspire to educate themselves in Australia. Australia’s rare earth reserves and world-class mining technology can contribute to India’s green transition and semiconductor manufacturing ambitions. Indian agribusiness can be transformed with Australian know-how. Australia’s high cost pharmaceutical industry could greatly benefit from India’s globally competitive and innovative pharmaceutical sector. Joint his ventures in various fields can contribute to food security, climate change, diversification of his chain of supply, and overall technological advancement.
Sanjay Kathuria is a Senior Visiting Fellow at the Center for Policy Studies, Adjunct Professor at Georgetown University and Ashoka University, and a Global Fellow at the Wilson Center. TG Srinivasan is a Senior Visiting Fellow at the Center for Policy Studies. Views expressed are personal.