Close economic cooperation between India and the Association of South East Asian Nations (Asean) is likely to prove a potent force in shaping the economic fortunes of South and Southeast Asia over the next decade. Standard & Poor's believes, however, that recent increases in Indo-Asean trade and investment flows are still falling well short of their full potential.
As seismic and compelling shifts in the global economic order unfold, in our opinion it is imperative that Asian policymakers and market players look for ways to capture the latent value of the Indo-Asean relationship and, in doing so, spark activity and sustain momentum in local markets.
The resilience of India and Asean (a 10-member alliance including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) during the recent global downturn -- and the robust long-term growth projections for these economies -- bode well for market expansion and accelerated trade and investment in the region. This requires freer capital flows and closer integration of regional capital markets, particularly while developed economies such as the US and Europe are experiencing slower growth.
The idea of Indo-Asean collaboration is not new. India became a sector-specific dialogue partner with Asean in 1992 and a full dialogue partner in 1995. The two have held annual summits since 2002. Between 2003 and 2009, trade volumes between India and Asean grew three-fold to $40 billion, from $12 billion. But while this is a promising start, we believe the full potential of Indo-Asean cooperation has yet to be unlocked.
India's signing of a free-trade agreement with Asean in October 2009 could well be the most important step so far. Under the agreement, which came into effect on January 1, 2010, Asean and India revised their trade target to $70 billion over the next two years, from the $50 billion set in 2007. And they will reduce import tariffs on 90% of traded products, while tariffs on 4,000 goods will disappear altogether by 2016. We believe these measures should help step up India-Asean trade quite considerably.
Free-trade agreements aside, the conditions for accelerated activity are ripe. For a start, India and large parts of Asean weathered the global crisis well. In 2010 India is expecting 7.5%-8% GDP growth (versus 6.4% in 2009) while Asean forecasts are for 4%, following 1.3% in 2009 -- the latter dragged down by negative growth in Singapore, Thailand and Malaysia. Significant per capita income growth has also been projected for the next three or so years, of about 7% annually for India and 5%-6% for Asean. Per capita income in the US and Europe in the same period will likely be lower than in 2007.
Population levels in the Indo-Asean region will also increase faster than anywhere else in the world over the next decade to fuel a rapidly-growing market for goods and services. And as incomes increase, it will take a significant step-up in intra-regional trade and capital flows to meet consumer demand.
In the context of Indo-Asean relations it's also worth noting that to better enable capital flows, and to provide investors with greater information transparency, good indicators of relative creditworthiness are needed. Standard & Poor's Asean ratings scale was established with this in mind; we saw the need for a scale that would facilitate investments within the region and we have assigned 44 of these ratings so far. The scale allows issuers to access a larger base of investors across Asean, while investors within the region can distinguish credit quality at a finer, more granular level, access a wider and deeper pool of investible securities, and access investment options in regional currencies.
Generally, the benefits of greater Indo-Asean trade are compelling. India and Asean are large, evenly-matched regions -- India is a $1.2 trillion economy, Asean is at $1.5 trillion -- that together represent a huge market in which suppliers can build scale and efficiency and investors can allocate capital most productively. Trade relations between the two have grown rapidly over the past two decades and Asean is now India's fourth-largest trading partner after the EU, the US, and China.
Asean's trade with India is actually now growing faster than its trade with China, albeit from a much lower base. India's share in Asean's trade has risen consistently over the years, to more than 2.5% in 2009, but there is clearly considerable scope for this figure to grow further.
There's also significant room for increased Indo-Asean investment. In this regard, Asean involvement in the partnership is uneven at present. Among the Asean countries, Singapore continues to be the single largest investor in India, accounting for about 92% of the $11.13 billion that flowed into India from Asean countries (about 9% of the total foreign direct investment, or FDI, into India) between January 2000 and March 2010.
Other Asean members have great untapped potential. Malaysia, for example, is already the second-largest Asean investor in India and there's much more scope for these two countries to collaborate in sectors such as automotives, pharmaceuticals, biotechnology, and engineering.
There has also been a revival of risk appetite globally, which could well lead to increased regional bond issuance and equities trading. About 30% of subscriptions to the recent bond issues of India's ICICI Bank and Axis Bank were from Asia and in 2009 the Singapore stock exchange saw an average of 600,000 derivative contracts traded every month on the S&P CRISIL NSE (National Stock Exchange of India) Index 50. There are also two exchange-traded funds in the Singapore market based on that same 50-stock index.
The full potential of the Indo-Asean partnership is a long way from being realised, but the foundations are in place. In our opinion the growing economic power of Asia -- particularly China, India, and Asean -- makes it paramount that Asia's leaders forge partnerships and seek synergies among various regional markets. For India and Asean, stronger trade links and more closely integrated capital markets will facilitate the sustainable growth momentum required to meet the needs of their growing populations.
Indo-Asean cooperation will continue to be a mutually beneficial relationship that improves the efficiency of capital markets, facilitates investment, and creates new growth opportunities for both. It will enable India to diversify from its services trade and emerge as a manufacturing hub, while Asean will benefit from access to a market as large as itself. The possibilities for employment generation alone have far-reaching implications for the region's prosperity. When India and Asean commemorate 20 years as dialogue partners in 2012, we expect the data will reveal an even more encouraging growth trajectory than at present. In Asia, potential doesn't tend to go unrealised for long.
Roopa Kudva, the author of this article, is a managing director and region head for South Asia at Standard & Poor's.
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