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Australia-India FTA Feasibility Study - Industry Consultations Background Paper

3 March 2008

Executive Summary

Background Paper

Joint Study into the Merits of an Australia-India FTA

Australia and India agreed in August 2007 to undertake a feasibility study into the merits of a bilateral free trade agreement (FTA). The study is being conducted jointly by the Australian Department of Foreign Affairs and Trade and the Indian Department of Commerce. It is expected that the study will be completed by early 2009.

The study will focus on the likely economic impact of an FTA, including the benefits that India and Australia could derive from trade and investment liberalisation. Coverage for the study will be comprehensive, including all goods and services trade, investment, and a number of other issues which cut across sectors, including but not limited to intellectual property, competition policy, government procurement, sanitary and phytosanitary (SPS) measures, technical barriers to trade (TBT), mutual recognition agreements (MRAs), and labour mobility associated with trade in services.

The Australian Government requires any FTA it enters into to be consistent with World Trade Organization (WTO) rules, specifically Article XXIV of the General Agreement on Tariffs and Trade (GATT) and Article V of the General Agreement on Trade in Services (GATS). FTAs should also contribute to the momentum for multilateral liberalisation. Under GATT Article XXIV, any FTA must among other things, provide for the elimination of duties and other restrictive regulations on commerce on substantially all trade in goods between the parties. With respect to services, GATS Article V requires liberalisation that has substantial sectoral coverage and the absence or elimination of substantially all discrimination between the FTA partners through the elimination of existing discriminatory measures and/or the prohibition of new or more discriminatory measures.

An FTA would enable both Australia and India to benefit economically by taking full advantage of each other’s relative competitive strengths. This would be achieved by removing barriers to trade and investment which impose additional costs on producers and consumers, thereby impeding economic efficiency and growth potential. Given the considerable complementarity between the Australian and Indian economies, a high-quality FTA should produce significant benefits for both economies. It will be important to be ambitious in approaching any future FTA, while acknowledging the particular complexity of such a negotiation.

In assessing the possible benefits of an FTA, consideration must also be given to the adjustment costs which may be borne by certain sectors of both economies, and how the impact on individuals could be ameliorated during any transition period.

The Government attaches high priority to seeking the expertise and views of stakeholders in the bilateral economic relationship. Such views will provide an important input into the feasibility study. This paper seeks to draw together some baseline information for those making written submissions and/or participating in the direct consultations in State/Territory capitals.

Indian Economic and Trade Environment

The Indian Economy

The Indian economy is growing rapidly, at 9.4 per cent in 2006-07 and averaging

7.6 per cent per year between 2002-03 and 2006-07. This growth has been driven by wide-ranging reforms to the economy since 1991, including progressive liberalisation of international trade, deregulation in the financial sector and the removal of licensing requirements and other government controls over many areas of private sector activity. The ongoing process of reform suggests India’s economic prospects over the medium and longer terms are very positive. The Economist Intelligence Unit has forecast that India will be the fastest‑growing economy in the world between 2007 and 2030, with growth averaging 6 per cent per year.

Indian companies are becoming increasingly sophisticated and global in their outlook. India’s rapid growth in recent years has been associated with surging export growth, averaging 24 per cent over the last 5 years, especially in the services and manufacturing sectors. The strong growth in India’s services exports has been led by the information technology, business process outsourcing (BPO), tourism and transportation sectors. Software services and BPO services, in particular, account for a substantial proportion of recent services exports growth. This has been possible at least in part due to the availability of skilled labour, the openness of the information technology sector to foreign investment and favourable taxation treatment.

India’s reforms have also led to a substantial increase in imports. Goods import growth has averaged 23 per cent per year since 2000, similar to the growth in exports. The majority of India’s imported goods have been raw resources (including petroleum products) and metals, as well as electronic goods. Imports of machinery and transport equipment have grown very strongly in recent years, reporting 45 and 40 per cent growth rates respectively per annum since 2003. Growth of particular note has been witnessed in ferrous ores, and iron and steel imports, which have grown into $7.4 billion and $5.6 billion markets respectively from $1.2 billion each in 2003.

Despite the considerable progress made in reforming India’s economy, there remains much to be done. A recent survey of India by the OECD found that the overall level of regulation in Indian goods markets is still quite high. Services industries are also often affected by high regulatory burdens, governance issues and infrastructure deficiencies. The positive impact on India’s economic growth of reforms to date, however, is a strong argument for continuing the process.

India’s economy is similar in size to Australia’s when compared using market exchange rates (India’s GDP was US$874 billion in 2006, compared to Australia’s GDP of US$756 billion), but India’s population of 1.1 billion is the second largest in the world, over 50 times larger than Australia’s. As a result, Australia’s GDP per capita in 2006 was almost US$37,000, compared to US$790 in India.

In contrast to Australia, the proportion of young people in India’s population is expanding and the proportion of people of working age is expected to continue growing as a result.

Around 70 per cent of India’s population live in rural areas and rely on agriculture to support them. Agricultural incomes are very low, however, and the sector accounts for less than 20 per cent of India’s total economic output. Growth in agricultural productivity has been low relative to other sectors of the economy.

India’s rapid growth in recent years has produced an expanding middle class. This middle class has significant disposable income by Indian standards and is increasingly open to the purchase of discretionary and/or imported products. However, India is still a developing country with a low GDP per capita by world standards. Based on India’s national measure of poverty, some 28 per cent of the population was living in poverty in 2004.

Table 1: Australia and India (2006)

Australia

India

Average annual GDP growth, 2001-06 (%)

3.3

7.6

GDP (US$ billion)

756

874

GDP per capita (US$)

36,594

785

Contribution to GDP (%)

Agriculture

3.3

18

Industry

27.0

27

of which manufacturing

12

16

Services

70

54

Trade - imports + exports / goods + services (% GDP)

43

48

Exports - goods + services (% GDP)

21

23

Imports - goods + services (% GDP)

22

25

Exports (US$ billion)

Goods and services

158

196

Goods

125

121

Services

33

75

Imports (US$ billion)

Goods and services

167

218

Goods

135

173

Services

32

45

Population (million)

21

1,113

of which rural (%)

12

71

Life expectancy at birth (years)

81

64

Educational enrolment - tertiary (%)

72

11

Sources: IMF World Economic Outlook, World Bank World Tables on dX Data, Economist Intelligence Unit, DFAT STARS, CEIC database

The Indian economy was ranked as the 48th most competitive economy in the world by the World Economic Forum’s 2007 Global Competitiveness Report. This ranks India just below Italy, but 14 places below China and 29 places below Australia. Business sophistication, innovation and business competitiveness were identified as India’s strengths. Insufficient infrastructure was nominated as the most significant factor impeding India’s international competitiveness. Restrictive labour regulations and relative inefficiencies in government administration were also identified as areas for improvement.

India’s Trade

Liberalisation of a range of constraints on trade has led to an opening of the economy, enabling India to begin taking advantage of its competitive strengths in the global market place. Trade has expanded markedly. The combined value of imports and exports rose from 13 per cent of GDP in 1985 to 48 per cent in 2006.

Despite its size and population, and the recent rapid expansion of trade in both directions, India accounts for only 0.9 per cent of global merchandise exports (2005), and its share of total goods/services trade is around 1.2 per cent.

In 2006 India’s exports were valued at US$196 billion, comprising US$121 billion in goods and US$75 billion in services. Both goods and services exports have contributed to the growth.

Table 2: India’s principal goods and services exports (2006)

Value

Share

(US$ bn)

Miscellaneous services

57.4

29.3%

of which: software services

28.8

14.7%

Oil (not crude)

13.0

6.6%

Non-industrial diamonds, worked

10.0

5.1%

Travel services

8.9

4.5%

Transportation services

7.6

3.9%

Jewellery

4.5

2.3%

Iron Ore

3.7

1.9%

Light Oils

3.3

1.7%

Organic compounds

1.8

0.9%

Medicaments

1.7

0.9%

Refined copper cathodes

1.6

0.8%

Rice

1.4

0.7%

Flat-rolled iron or steel, zinc-plated

1.3

0.7%

T-Shirts, singlets, tank tops etc

1.3

0.7%

Insurance services

1.1

0.6%

Total exports

196

Source: GTIS World Trade Atlas, CEIC database

The rise in services exports, particularly computer/software services and business process outsourcing (BPO) has been remarkable. As a result, services exports rose by over 30 per cent per year during the five years from 2001 to 2006, during which time they also rose from 29 per cent to 38 per cent of total exports.

Figure 1

Source: CEIC database

India’s total goods and services imports were valued at US$218 billion in 2006, up an average of 25 per cent per year over the last five years. Goods imports totalled US$173 billion, while services imports were worth US$45 billion. Three of India’s largest five imports were services. Transportation services amounted to US$8.7 billion and imports of travel services were valued at US$7.4 billion.

Crude oil was far and away the biggest goods import item, valued at US$48 billion or 22 per cent of total goods and services imports. Imports of non‑monetary gold were worth US$13.3 billion, reflecting the large amount of gold fabricated into jewellery in India. The third‑most imported item was rough diamonds, valued at US$5.8 billion.

Table 3: India’s principal goods and services imports (2006)

Value

Share

(US$ bn)

Crude Oil

47.7

21.9%

Miscellaneous services

27.8

12.8%

Transportation services

8.7

4.0%

Non-monetary gold, unwrought

7.8

3.6%

Travel services

7.4

3.4%

Non-industrial diamonds, unworked

5.8

2.7%

Non-monetary gold, semi-manufactured

5.5

2.5%

Copper ore

4.4

2.0%

Transmission and reception apparatus

4.3

2.0%

Coal

3.4

1.6%

Oil (not crude)

2.5

1.2%

Light oils

2.4

1.1%

Non-industrial diamonds, worked

1.6

0.7%

Parts & accessories for computer equipment

1.4

0.6%

Total imports

218

Source: GTIS World Trade Atlas, CEIC database

India’s Trade Policy

In recent years India has moved further in the direction of a market-based economy, and, to some degree, away from its former state-directed economic framework and policies aimed at self-sufficiency. The reform in trade regulation, in particular, has been remarkable. In the late 1970s, only 79 products could be imported without a licence. Import licensing was abandoned during the 1980s, but as recently as the late 1980s, 92 per cent of internationally tradeable domestic production remained protected by import quotas. Trade reform in the 1990s saw the steady removal of such restrictions and a decline in tariffs, with the proportion of tariff revenue to the value of imported goods dropping from around 50 per cent in 1990 to 22 per cent at the end of the decade. Tariffs have continued to fall since 2000.

The Government announced in 2007 it would lower the highest standard (non-agricultural) tariff rate to 12.5 per cent, down from 35 per cent in 2001. Numerous non-standard rates apply, however, and agricultural tariffs are not included in the broad reduction process. As a result, the average applied tariff was still 19.2 per cent in 2005. Within this, agricultural tariffs are much higher, averaging 37.6 per cent. The average tariff on non-agricultural goods is 16.4 per cent. India’s tariffs consequently remain high by international standards. Moreover, the maximum levels at which India has capped its tariffs in the WTO (known as “bound” tariff rates) are typically considerably higher than the current applied rate. This leaves open the possibility that applied rates could be increased at any time, reducing certainty for business.

Tariff revenue is an important, but decreasing source of income for the Indian Government, accounting for around 16 per cent of total revenue. The Indian government has committed to further reducing tariffs to the average level of ASEAN countries by 2010.

In addition to import tariffs, the Indian Government also applies an education “cess”, or duty, which applies to sales of certain goods, whether imported or domestic. Similarly an “additional duty” applies to many imports, which the Government advises is equivalent to domestic excise duties. To the extent that any cesses and additional duties apply to both domestic production and imports alike they are not discriminatory trade barriers.

Deregulation of services industries during the reform period has been mixed. Telecommunications and domestic air travel have been substantially opened up to competition. Other, newer sectors such as Information Technology-IT Enabled Services (IT-ITES) have not been subject to significant regulation and are largely open. Knowledge-based industries have been prominent among the faster growing services sectors, assisted by a low-cost educated workforce with good English language capabilities and technological advances. Significant changes have occurred in the financial sector, although foreign investment in banking and insurance remains heavily constrained. Major problems remain in the transport and power sectors which handicap growth potential elsewhere in the economy. In addition, a range of business services such as accountancy and legal services remain protected from foreign competition, as does the retail sector.

WTO

India is an active participant in the WTO and is a key member of the G20 group of developing countries in the Doha Round pushing for agricultural trade liberalisation. It is also a leading member of the G33 group of developing countries advocating special treatment on some agricultural products. India’s priorities in the Round reflect its position as a developing economy and the fact that over two-thirds of the population remains dependent on agriculture, much of it subsistence in nature.

India has a leading role in the non-agricultural market access (NAMA), or industrial products, group of developing countries (the so-called NAMA-11) that seeks to ensure that trade liberalisation in the industrials sector does not compromise their ability to develop industries. Australia has urged India to use its leading role among developing countries in both agricultural and NAMA negotiations to help find a constructive way forward.

In services negotiations, India has interests in expanding market access to developed country markets for its service suppliers, including through what is known as Mode 4 service delivery - or the temporary movement across national borders of the individuals who perform those services.

In intellectual property negotiations, India advocates extending the higher level of protection currently afforded to wine and spirit geographical indications (GIs) to other products. India is also part of a group of countries seeking to link outcomes on discussions regarding the relationship between the Convention on Biological Diversity (CBD) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (the “TRIPS Agreement”) with an outcome on GIs.

FTAs

In recent years India has embraced an active program of FTA studies and negotiations, with the following agreements/studies either completed or under way:

FTAs or similar signed with: Chile (goods only) – 2006; Mercosur (Argentina, Brazil, Paraguay and Uruguay) goods only – 2005; Singapore – 2005; South Asian Association for Regional Cooperation (SAARC – Bhutan, Bangladesh, India, Pakistan, Maldives, Nepal and Sri Lanka) goods only – 2006; Sri Lanka –1999

FTA negotiations underway: ASEAN; European Commission; Japan; Thailand; ROK; Gulf Cooperation Council (GCC – Bahrain, Kuwait, Saudi Arabia, Oman, Qatar, and the United Arab Emirates)

FTA study undertaken or in process: Australia; China; European Free Trade Association (EFTA - Iceland, Liechtenstein, Norway, Switzerland); Indonesia; Malaysia; New Zealand.

Investment

Investment has enjoyed significant deregulation throughout India’s reform period, though sustaining economic growth will require substantially higher levels of investment across the board. With that in mind, the central government has enacted policies designed to encourage foreign direct investment (FDI). Foreign ownership of up to 100 per cent is now permitted in many sectors. A number of states have pursued similarly reformist approaches. An OECD Economic Survey of India published in 2007 noted the lowering of regulatory barriers to investment to international best practice in a number of areas, particularly in manufacturing. This has created new opportunities. Inflows of FDI increased to 2 per cent of GDP by 2006, up from

0.1 per cent of GDP in 1990, though this is still not high by comparison with other high-growth economies.

The increased receptivity to foreign investment is far from even throughout India, despite analysis cited by the OECD identifying a strong correlation between the openness of the investment climate and productivity growth in Indian states. The OECD Survey pointed to a range of ongoing weaknesses in India’s business environment which have inhibited foreign as well as domestic investment, including red tape generally, the delays in acquiring approvals, labour regulation and exit policies among others. In some sectors, such as mining, even where investment is possible a large number of approvals at many levels must be obtained before a major project can proceed. Governance issues remain of concern to business. Many potential investors also report local infrastructure and utility deficiencies as negative factors in their considerations.

Australia-India Bilateral Trade

Merchandise

Figure 2

Source: ABS

Australia’s goods exports to India have expanded at an annual average of 32 per cent over the five years to 2007, the fastest of all our major markets. In 2007, India was our sixth‑largest market, with goods exports up 5 per cent on the previous year to $9.3 billion. The latest available Indian data (2006) shows that Australia is India’s eighth‑largest supplier of goods imports.

Table 4 shows Australia’s top merchandise exports to India. Commodity exports dominate. Gold, coal and copper were Australia’s three principal exports, with wool, petroleum oils, lead and manganese also featuring prominently.

Table 4: Australia’s principal merchandise exports to India (2007)

Item

2006

2007

($ m)

($ m)

Semi-manufactured gold

3562

4155

Bituminous coal, whether or not pulverised, but not agglomerated

2544

2397

Copper ores and concentrates

1009

1113

Confidential Items (incl. wheat, natural gas, alumina, mineral ores and wool)

456

261

Greasy shorn wool (incl. fleece-washed wool) not carded or combed

131

136

Petroleum oils and oils obtained from bituminous minerals, crude

0

95

Unwrought refined lead

56

94

Manganese ores and concentrates

17

66

Copper bars, rods and profiles, refined

10

65

Aluminium waste and scrap

45

53

Zinc ores and concentrates

75

43

Semi-manufactured silver

23

42

Dried shelled chickpeas (garbanzos)

88

40

Stainless steel waste and scrap

7

38

Nickel bars, rods and profiles, not alloyed

18

36

Total merchandise exports

8,815

9,279

Source: ABS

In 2007 Australia’s imports from India were valued at $1.46 billion, making India Australia’s 24th largest source of merchandise imports.

Consistent with its global export profile, India exports significant amounts of worked diamonds and precious metal jewellery to Australia. Other items prominent in Australia’s imports from India reflect the strength of India’s manufacturing sector and its increasing competitiveness in this area.

Table 5: Australia’s principal merchandise imports from India (2007)

Item

2006

2007

($ m)

($ m)

Non-industrial diamonds, not mounted or set

102

106

Wind-powered generating sets

0

82

Articles of jewellery and parts thereof of precious metal (excl. silver)

31

54

Confidential Items

23

31

Medicaments for retail sale

30

30

Black tea (fermented) and partly fermented tea, packaged

26

29

Frozen shrimps and prawns

28

20

Towers and lattice masts of iron or steel

3

19

Toilet linen and kitchen linen, of cotton terry towelling or similar terry fabrics

16

19

Tractors

12

18

Static converters (inc. power supply units for ADP equipment)

13

15

Fresh or dry cashew nuts, shelled

7

13

Equipment for scaffolding, shuttering, propping or pit-propping of iron or steel

11

12

Tobacco, partly or wholly stemmed or stripped

9

11

Leather Handbags

10

11

Total merchandise imports

1,280

1,459

Source: ABS

Services

Bilateral trade in services between Australia and India is characterised by many complementarities. Australia’s services exports to India were valued at $1.7 billion in 2006-07, while imports of services from India amounted to $408 million.

Like merchandise exports, Australia’s services exports to India have grown rapidly since 2002-03. Australia’s dominant services export to India in 2006-07 was education‑related travel services ($1.3 billion), a reflection of the large increase in Indian students studying in Australia.

Figure 3

Source: Department of Education, Employment and Workplace Relations

Australia’s services imports from India have also grown solidly since 2002‑03, averaging growth of around 13 per cent per year. This reflects the competitiveness of Indian industry in the provision of a number of services, including IT, software and business process outsourcing (BPO).

Figure 4

Source: ABS

Table 6: Australia’s services exports to India

2005-06

2006-07

($ m)

($ m)

Transportation services

56

94

Travel services

1,146

1,513

Business

71

72

Personal

1,075

1,442

Education related

978

1,319

Other

97

123

Communication services

7

n/a

Construction services

n/a

n/a

Insurance services

0

0

Financial services

0

0

Computer & information services

n/a

7

Royalties & license fees

4

n/a

Other business services

np

77

Personal, cultural & recreational services

5

14

Government services

n/a

4

Total services exports

1,394

1,743

Source: ABS

Non-education related personal travel services (largely Australian tourists travelling in India) were Australia’s most significant import from India, valued at $228 million in 2006‑07.

Table 7: Australia’s services imports from India

2005-06

2006-07

($ m)

($ m)

Transportation services

n/a

n/a

Travel services

254

297

Business

48

56

Personal

206

241

Education related

11

14

Other

195

228

Communication services

n/a

n/a

Construction services

0

0

Insurance services

0

0

Financial services

0

0

Computer & information services

41

68

Royalties & license fees

0

0

Other business services

34

26

Personal, cultural & recreational services

1

2

Government services

0

0

Total services imports

348

408

Source: ABS

It is important to note that the above data does not take account of services delivered by companies with a commercial presence in the other country. Australian companies have established a presence in a range of services sectors such as engineering, infrastructure design, health, financial services and mining services industries.

Similarly, Indian information technology and business process outsourcing (BPO) service providers have a growing presence in Australia (see also The Investment Relationship).

Barriers to Bilateral Trade

Barriers to Australian Merchandise Exports

Both tariffs and non-tariff barriers present impediments to Australian goods exports, though overall tariff levels continue to decline. The average applied tariff in 2005 of 19.2 per cent (16.4 per cent for non-agricultural goods and 37.6 per cent for agricultural goods) remains high by global and regional standards. In addition, India’s high bound tariff rates mean that applied tariffs on many items can be raised at any time, reducing certainty for Australian companies trading with or investing in the Indian market.

Table 8: Indian tariff duties (2005)

Applied duties (%)

Product groups

Average

Max

Agricultural products

37.6

Animal products

33.0

100

Dairy products

35.0

60

Fruit, vegetables, plants

31.5

105

Coffee, tea

56.3

100

Cereals & preparations

37.3

160

Oilseeds, fats & oils

52.5

100

Sugars and confectionery

48.4

100

Beverages & tobacco

68.9

182

Cotton

17.0

30

Other agricultural products

27.1

70

Non-agricultural products

16.4

Fish & fish products

30.0

30

Minerals & metals

15.4

55

Petroleum

14.0

15

Chemicals

15.0

100

Wood, paper, etc.

13.5

15

Textiles

  

20.2

268

Clothing

  

22.4

103

Leather, footwear, etc.

  

15.4

70

Non-electrical machinery

  

14.3

15

Electrical machinery

  

12.3

15

Transport equipment

24.8

100

Manufactures, n.e.s.

13.9

15

Source: WTO statistics database

Non-tariff barriers remain a significant impediment to some Australian exports. Of particular concern to business are certain domestic price controls. Additionally, sanitary and phytosanitary measures which prevent access to the Indian market for a number of Australian agricultural exports, are the subject of continued bilateral discussions.

India has become the most active user of anti-dumping measures, both in terms of the initiation of cases and the application of measures, since the establishment of the WTO. However, there have been relatively few cases by India against Australian exports and only one case by Australia against Indian imports.

Barriers to Australian Services Exports

The reform of services industries is highly complex and India has only just begun to move down this path. Barriers face many Australian services providers seeking to export to India, principally affecting the cross-border supply of services, the establishment of businesses in India, licensing, the recognition of qualifications, and the movement of services professionals to the Indian market. Restrictive labour regulations and exit policies pose particular disincentives. Such barriers are made all the more complex by the combined regulatory roles of central and state governments, in addition to the de facto regulatory powers exerted by services industry and professional associations.

The FTA study will provide the opportunity to identify the key measures which are constraining trade, and how they might feasibly be ameliorated. Ultimately, free trade in services between two countries would be achieved when the service providers of each country have the same access to commercial opportunities and are treated no differently from the local providers in the other country, including in relation to the establishment of a commercial presence in the other market, and business mobility for fly-in/fly-out service contractors and professionals. There is substantial room for India to remove barriers and existing restrictions in a wide range of sectors, including professional, financial, vocational and higher education, environmental, telecommunications and mining and energy-related services. It will also be important to ensure that the development of robust disciplines on domestic regulation and transparency are adequately addressed in the FTA.

Barriers to India’s exports

Australia’s applied tariffs on imports from India are low by global standards. The trade-weighted average Most Favoured Nation (MFN) tariff on Australia’s imports from India was 3.9 per cent in 2006. However, some Indian exports to Australia qualify for a concessional tariff rate under Australia’s Developing Country Scheme and other concessional instruments, so the average tariff actually paid by Indian exporters would have been slightly less than 3.9 per cent.

Only two sectors in Australia have tariffs of more than 5 per cent, namely, the textiles, clothing and footwear (TCF) and passenger motor vehicle (PMV) sectors. Tariffs in the TCF sector, which range between 5 and 17.5 per cent, are scheduled to be reduced to 5 per cent in 2010, with the exception of tariffs for apparel and certain finished textile goods, where tariffs are scheduled to be reduced to 10 per cent in 2010 and then to 5 per cent in 2015. Tariffs in the PMV sector, currently 10 per cent, are scheduled to fall to 5 per cent in 2010. In 2006‑07 Australia’s imports of TCF products from India were valued at $228 million (4 per cent of Australia’s total imports of TCF products).

Barriers to India’s services exports

There are also a number of restrictions on the ability of Indian service providers to export to Australia, including requirements for qualifications to be recognised. However, these restrictions are limited and non-discriminatory.

Australia has made specific multilateral commitments covering a broad range of services under the General Agreement on Trade in Services (GATS), including for business and professional services; telecommunications; construction and engineering; distribution; education; financial services; computer services and environmental services.

Foreign ownership limits and restrictions apply in the aviation, maritime, financial, telecommunications and audio-visual services sectors. Australia’s temporary entry regime for skilled professionals is open and transparent. India raises business mobility issues in WTO and bilateral negotiations.

The Investment Relationship

Investment flows are increasing in both directions, though this is off a base which is low relative to the volume of bilateral trade and the potential for each side to contribute to the other’s economy through investment. This aspect of the relationship would also benefit from treatment in an FTA.

Figure 5

Source: ABS

Australian Investment in India

Total investment by Australians in India rose to $2.3 billion in 2006, though the great bulk of this comprises portfolio investment (equities and debt). The latest data available indicates the stock of Australian direct investment in India is very low, at $102 million (2006), though anecdotal evidence suggests this may have accelerated more recently. Nevertheless, overall levels of FDI in India are low by international standards, and Indian data ranks Australia as the 15th largest source of FDI over the period 1991-2006. The historical weakness in the bilateral investment relationship has occurred despite the interest of many Australian firms in investing in India, notably in the mining sector. If not for a range of impediments, Australian firms would be able to bring to India considerable new capacity and expertise in many fields, including in the energy, mining, agriculture, food production logistics, financial and professional services sectors.

Indian Investment in Australia

Indian investment in Australia is increasing, with a number of high-profile projects, notably in the hospitality and IT sectors, and more recently in relation to copper resources. The stock of inward investment (including portfolio investment) increased almost five-fold to over $600 million during the period 2002-2006.

The FTA feasibility study is an opportunity to identify measures which could lead to an increase in investment flows between the two countries.

Other Possible Areas for Strengthening Cooperation and Liberalisation

In addition to trade in goods and services, and investment, the study will need to consider a range of other cross-cutting issues, such as intellectual property, government procurement, competition policy, the movement of service providers, mutual recognition of qualifications, technical barriers to trade, and sanitary and phytosanitary measures.

Intellectual Property

The importance of the effective registration, protection and enforcement of intellectual property rights (IPR) continues to grow as global markets become more integrated and knowledge-based. The capacity of IP embedded products and services to deliver high returns is underpinned by IP protection. Greater consistency and transparency in IP protection between jurisdictions facilitates IP-related trade and investment. For example, greater consistency can be achieved through commitments to international IPR standards, such as those articulated in the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other core World Intellectual Property Organization (WIPO) treaties. FTAs also provide opportunities to build on these commitments and to address specific impediments to market access raised by stakeholders regarding the acquisition and enforcement of IP rights in partner countries. Cooperation between the parties on IP issues can also be facilitated through FTAs.

Government Procurement

Government procurement accounts for around 10 per cent of GDP in most economies. It represents a significant component of the market for a diverse range of internationally traded goods and services. For these reasons contemporary FTAs typically include provisions on government procurement, setting clear rules and improving transparency, ultimately providing for non-discriminatory access for suppliers and products of each party to the government procurement market of the other.

Competition Policy

Commitments to promote competition across the economy and prevent anti-competitive conduct help to lock in the trade and investment liberalisation gains achieved in other parts of FTAs. A competition chapter can play a role in supporting domestic competition policy reform, maximising the benefits flowing from trade liberalisation and strengthening bilateral cooperation and coordination on competition policy. Australia’s approach to competition policy will vary depending on the negotiating partner – from “best endeavours” clauses encouraging Parties to adopt, maintain and apply competition law to legally binding language that may require specific action.

What could an FTA achieve?

A high-quality FTA between Australia and India would remove impediments to bilateral trade and investment, allowing the two countries to take maximum advantage of the considerable complementarity between their two economies. The resulting economic partnership would benefit the producers and consumers of both countries. Econometric modelling as part of the FTA study will seek to quantify this impact on the Australian and Indian economies.

In addition to up-front liberalisation, an FTA could commit the parties to a timetable for ongoing trade and investment reform which is clear, ambitious and realistic - building upon and advancing the ongoing reform processes in each country.

The following provides a brief synopsis of the treatment of the core areas of trade in goods, services and investment under an FTA:

Under Article XXIV of the WTO General Agreement on Trade and Tariffs (GATT), an FTA is required to eliminate duties and other restrictive regulations with respect to substantially all trade in goods between the parties involved, with implementation to be within a reasonable length of time. There is, however, no agreement among WTO members on the meaning of “substantially all trade”. Australia’s view is that comprehensive liberalisation is in the economic self-interest of all countries - including developing countries.

Complete liberalisation of services trade would ensure that the providers of each country would have the same access to opportunities in each other’s market, and be treated no differently to the local providers in the other country. FTAs typically do not meet this standard in all sectors. In order to meet the requirements of Article V of the WTO General Agreement on Trade in Services (GATS), an FTA including services would need to have substantial sectoral coverage, ensure the absence or elimination of substantially all discrimination, and commence with no a priori exclusion of any mode of supply. The GATS does provide for some flexibility, however, when a developing country is party to such an FTA. Australia is committed to FTAs which are “GATS-plus”, by providing for commercially meaningful new, improved and expanded market access for Australian exports across a broad range of services sectors.

Coverage of investment within an FTA would aim broadly to create a more favourable investment environment in each other’s markets, reduce or eliminate barriers and restrictions where possible (including certain performance requirements such as a requirement to achieve a given level of domestic local content provisions) and provide for fair rights and remedies for each other’s investors (such as a right to fair compensation in the event of expropriation).

For further information:

Australia-India FTA Feasibility Study
Tel: (02) 6261 9696 or 6261 9693
Email: india.ftastudy@dfat.gov.au

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