India and Australia signed an economic cooperation and trade agreement on Saturday to ensure barrier free trade in several commodities between the two countries. The agreement was signed by Commerce and Industry Minister Piyush Goyal and Australian Minister for Trade, Tourism and Investment Dan Tehan in a virtual ceremony, in the presence of PM Narendra Modi and Australian PM Scott Morrison.
According to Goyal, the agreement will almost double the trade between India and Australia in the next five years, from $27 billion to $45-50 billion. Under the agreement, Australia is offering zero duty access to India for about 96% of exports from the beginning. At present, most of these products attract 4%-5% customs duty in India. Several sectors in India, including textiles and apparel, agricultural and fish products, leather, footwear, furniture, sports goods, jewellery, machinery, electrical goods etc are expected to benefit from this agreement. Here is a brief analysis of how the agreement will be beneficial for Indian economy.
Current bilateral trade
At present Australia is the 17th largest trading partner of India, and India is Australia’s 9th largest trading partner. India-Australia bilateral trade for both merchandise and services was valued at US$ 27.5 billion in 2021. India’s merchandise exports to Australia grew 135% between 2019 and 2021. India’s exports primarily consist largely of finished products, and were valued at US$ 6.9 billion in 2021.
India’s merchandise imports from Australia were valued around US$ 15.1 billion in 2021, consisting largely of raw materials, minerals and intermediate goods. Three-fourths of India’s imports from Australia consist of coal.
While India has a surplus in trade in services with Australia, it has a deficit in merchandise trade, largely due to coal import.
| Trade ( US $ Billion) | Goods | Services | Total |
|---|---|---|---|
| India’s Exports to Australia | 6.9 | 3.6 | 10.5 |
| India’s Imports from Australia | 15.1 | 1.9 | 17.0 |
| Total | 22.0 | 5.5 | 27.5 |
| Deficit(-)/Surplus(+) | -8.2 | +1.7 | -6.5 |
The Agreement
The India Australia Economic Cooperation and Trade Agreement (IndAus ECTA) is the first trade agreement with a developed nation India has signed after more than a decade. According to gove sources, this agreement will be a message for other developed countries agreements such as UK, Canada and EU, with whom India is currently negotiating for FTA. The Indo-Australia agreement is expected to increase bilateral trade from the existing US$ 27.5 billion to US$ 45 billion in 5 years. As a result of the agreement, market share of Indian goods and services in Australia will increase. India’s export is expected to increase from US$ 10.5 billion in 2021 to US$ 20 billion by 2026-27 and will cross US$ 35 billion by 2035.
As both India and Australia are large economies, these is scope for significant enhancement in bilateral trade if both have better access to the other’s markets. At present Indian exports to Australia attract 4-5% import duty, due to which India faces disadvantage compared to other countries having free trade agreements with the country, such as China, Thailand, Vietnam, South Korea, Indonesia, Malaysia and Japan. The agreement will allow India exports to compete with these countries in Australia.
Moreover, the agreement will also open up the Australian market for products and services not currently exported to the country. Similarly, the IndAus ECTA will enable Indian businesses to procure materials from Australia, providing a good sourcing alternative. The agreement will specifically benefit the Indian pharma sector due to easing of Australian regulatory processes.
The India Australia Economic Cooperation and Trade Agreement is expected to generate around ten lakh jobs in the next 5-7 years, because several labour-intensive sectors are going to benefit from it. On the other hand, it is also expected to enhance employment opportunities for Indians in Australia.
Apart from economic significance, the agreement will also have strategic importance, as India has entered into the trilateral Supply Chain Resilience Initiative (SCRI) arrangement with Australia and Japan. It seeks to enhance the resilience of supply chains in the Indo-Pacific Region and develop dependable sources of supply and attract investment including diversification of supply sources and to increase competitiveness of sectors, identification of sectors for cooperation, explore other countries who could join in the initiative, capacity building, promotion of domestic manufacturing.
It also aims to attract FDI in the region and strengthen mutually complementary relationship among the participants. US, Australia, India and Japan also have formed Quad, to further enhance cooperation and develop partnership across several issues of common concerns.
Benefits to trade in goods
Indian exports to Australia primarily consist of consumer and manufactured goods. India will mainly benefit from tariff liberalisation by the Australia, along with fast-track approval for Pharma products. Australia is offering zero duty access to 100% tariff lines from India, and Zero duty on 96.4% value of Indian exports will be offered immediately. These means, for those items, Indian exports will have immediate market access at zero duty from the day the Agreement comes into force.
At present most of these items attract 4-5% import duty in Australia, which includes, most textiles and apparel, a few agricultural and fish products, leather, footwear, furniture and sport goods, jewelry, machinery, electrical goods, railway wagons, selected pharmaceutical products and medical devices, furniture etc. For 113 tariff items comprising 3.6% of exports, the duty will be brought down to zero in the next five years.
Moreover, as India imports largely imports raw materials and intermediates from Australia, many industries in India will get cheaper raw materials and make them competitive, in particular for sectors like steel, aluminium, fabric/ garments etc.
India is also offering concessions on tariff to Australia on import of goods, which are mainly raw materials and intermediates in the form of tariff elimination or tariff reduction, with or without a tariff-rate quota. India is immediately eliminating tariff on 40% of its tariff lines comprising of 85% of Australia’s exports in value terms to India. Tariff will be eliminated or reduced on 30.3% of its tariff lines 3/5/7/10 years, as per the agreement. Only a few agricultural products such as oranges, mandarins, almonds, pears and cotton among others have been allowed with limited quota.
India has kept many sensitive products in the exclusion category without offering any concession, comprising 29.8% of tariff lines. Some of these products are milk and other dairy products, chickpeas, walnut, pistachio nut, wheat, rice, bajra, apple, sunflowers seed oil, sugar, oil cake, gold, silver, platinum, jewellery, iron ore and most medical devices. This is a major gain for India in this Agreement
Sector Specific Benefits – Products
Pharmaceuticals
Market size of Pharma products in Australia is currently estimated at $12 Billion, and Indian exports are around $345 million, which means these is scope for significant growth in Indian exports.
Australia has agreed to Annex on Pharmaceutical products, giving benefits to Indian pharma exports. This includes fast track approval for patented, generic and biosimilar medicines using the Comparable Overseas Regulator pathway, and fast track quality assessment/inspections of manufacturing facilities.
This will benefit all Indian Pharmaceutical manufacturers / medicines which have EU/ Canada FDA approvals.
Textiles
The Australian market has good potential for exports of home textiles like bed & bath linen, toilet & kitchen linen, curtains, pillow covers, quilts & comforters, cotton bags; Readymade Garments; Carpets & Floorings etc. At present, Indian exports of around 70% textile products and 90% apparel products attract 5% duty in Australia. As a result, Indian exports face disadvantage compared to exports from other countries having FTA with Australia.
With the IndAus ECTA, this disadvantage will be eliminated, and India’s exports of textiles and apparels are expected to go up from US$ 392 million to US$ 1100 million in the next 3 years. Due to additional capacity creation and investment for this increased export, additional employment of 40,000 persons per year is expected to be created.
Moreover, many of the new manufacturing units are likely to be set up in Tier 2 & Tier 3 cities & rural areas, creating an industrial eco system in these areas and generating employment
Engineering Products
India’s engineering export to Australia was US$ 801 million in 2020-21 which is likely to be US$ 1215 million 2021-22, thereby showing a growth of 51%. At present, most of Indian exports of engineering goods to Australia suffer from 5% customs tariff disadvantage. These products include flat and value-added iron and steel products, scientific and medical instruments, parts, transport equipment, non-electrical and electrical machinery etc.
With the elimination of tariffs under the agreement, it is expected that Engineering products exports may grow by around 15% per year, increasing by around 1.5 billion in 5 years to reach at 2.7 billion in 5 years.
Gems and Jewellery
Jewellery items also attract customs duty of 5% in Australia. With elimination this duty, there is likelihood of increase in Indian exports of jewellery to Australia. India’s Gems and Jewellery export to Australia was US$ 275 million in 2020-21, and it is likely to reach US$ 347 million 2021-22, showing a growth rate of 26%.
Leather & Footwear
Around 94% of India’s exports of leather products to Australia attract the duty of 5%. With the elimination of duty, Indian exports will show further growth and likely to reach US$ 100 million in next 2 years.
India’s Leather and Footwear exports to Australia was US$ 62.2 million in 2020-21 which is likely to be US$ 71.6 million 2021-22, thereby showing a growth of 15%.
Sector Specific Benefits – Services
Quota for chefs and yoga teachers
Australia has given an annual quota of 1800 for qualified, professional Indian traditional chefs and yoga teachers who can enter the country as Contractual Service Suppliers. Under this temporary entry, stay is permissible for a period up to 4 years with a possibility of further stay. Quota for chefs and Yoga teachers will facilitate movement of these professionals in Australia subject to meeting relevant eligibility conditions.
Post study work visa
Post study work visa will provide extended options to eligible Indian graduates, post graduates and STEM specialists for working in Australia. Australia has agreed to provide some opportunities for students to live, study and work in Australia temporarily after finishing their studies.
The benefits include, stays of up to 18 months after completion of diploma or trade qualifications, stays of up to 2 years upon completion of bachelor degree, stays of up to 3 years after completion of master degree, and stays of up to 4 years after completion of doctoral degrees.
Australia has acknowledged the important contribution made by Science, Technology, Engineering or Mathematics (STEM) specialists, including Indian Information and Communications Technology (ICT) professionals. To enhance mobility in these fields, Australia will extend possible stays from two to three years for Indian students graduating in Australia with bachelor degrees in the STEM fields with First Class Honours, including ICT fields.
Mutual Reco gnition Agreements
Both countries have agreed for mutual recognition of Professional Services and Other licensed/regulated Occupations under the agreement. These obligations include elements such as coverage of all licenses and regulated occupations, allow for temporary/project specific license where feasible and establish a mechanism of Working Group to pursue on obligations related to this.
This will pave the way for initiating dialogues on Mutual Recognition Agreements in Nursing, Architecture and other professional services between the professional bodies of India and Australia, which in turn will facilitate the movement of professionals in each other’s territory.
Work & Holiday visa
Work and Holiday visa with multiple entry has been offered by Australia to 1000 young Indians, in the age group of 18-30 years, for a period of one year. Under this, they can undertake study or training for up to four months (17 weeks) or undertake paid or unpaid employment for the entire duration of their stay in Australia, generally for up to six months with any one employer.
Double Taxation Avoidance Agreement
The Government of Australia has agreed to amend Australian domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia. This would resolve the issue that the Indian Government has raised about the Double Taxation Avoidance Agreement between India and Australia for the avoidance of double taxation, and the prevention of fiscal evasion with respect to taxes on income.
This was a long pending request of Indian IT industry. Once the relevant amendment is made, the Indian Tech Companies would no longer be required to pay taxes on offshore revenues in Australia, thereby enhancing their competitiveness in the international market.
Technology & IT Services
Australia requires skilled tech staff, while India has a large tech resource pool. The Australian start-up environment requires specialized talent and India has the advantage of offering skilled personnel that can meet this requirement.
India/ Australia collaboration can develop niche skill sets, provide global digital solutions, further develop Fintech capabilities. Large Indian IT companies can increase their involvement in Australian Govt. projects.
India has several low-cost product-based Software as a Service (SaaS) offerings that can be offered to Australian SMEs. Australia can also serve as the ideal market for Indian start-ups to scale up before launch in USA.
Healthcare
Australians can access Indian secondary and tertiary care facilities at highly competitive rates, benefiting the Indian medical tourism sector. Apart from tertiary care, other procedures such as dental surgery, knee replacement, cataract, etc. can also be carried out economically in India.
Indian doctors can provide second opinions or expert consultation on medical through telemedicine, and India IT expertise can assist Australian healthcare providers with medical coding/ data analytics. Medical manufacturing partnerships between the two countries can leverage Australian medical technologies while providing low cost manufacturing solutions to their Australian counterparts.
Education
The agreement will help in increasing research collaboration between Indian and Australian universities. Under dual degree programs between India and Australia, students will be allowed to study in Australia for 2 years and in India for 2 years, subject to regulations discussed by both countries.
Overall gains
India Australia Economic Cooperation and Trade Agreement will create conducive environment to grow Indian services exports due to wide ranging commitments by Australia which will bring in certainty, predictability and transparency for the services exporters. It will enhance exports linked to movement of professionals, businesspersons, students due to strong temporary entry and stay commitments by Australia.
It will enable a more liberal, facilitative, transparent and competitive services regime in the two countries. Many sectors may attract new investments and industry will benefit from world class services in finance, logistics, business services, professional services, which will further enhance their competitiveness.
Access to best in class consumer services like health, education, tourism, hospitality and audio-visual services will enable greater consumer welfare for both the sides. It will strengthen further cooperation in the new service sectors of mutual interest.
Provisions to safeguard the interest of the domestic industry
With any free trade agreement, the question of the safeguard of the domestic industry remains, due to the concessions allowed for imports. The Indo-Australian agreement incorporates several provisions to protect the domestic industry and prevent any misuse of the agreement.
IndAus ECTA incorporates stringent rules of origin for goods, to prevent any routing of products of a third country. It will require a substantial processing in the territory of the Parties.
Product specific Rules of Origin (PSRs) have been agreed for 807 lines. Moreover, for a limited number of agricultural products being offered for import by India, the product should be grown in Australia or prepared from local inputs.
Further, grounds for denial of preferential tariff benefit, enabling temporary suspension of preferential treatment, time bound verification mechanism, specifying supporting information such as cost break up and profit/related elements to be made available at the time of verification, have been provided for.
Tight Value Addition norms of 35 % (under Build up formula) and 45% (under build down formula) have been fixed in the agreement. All these will help to ensure that only products /services from Australia will count for value addition, with no leakage of 3rd Country products. This is particularly relevant in view of Australia’s large number of FTAs.
For the first time, India has made a developed country like Australia to agree to the condition of “melt and pour” as Product Specific Rules for Steel products.
