Can India fill the China-shaped hole in Australia's economy?

Australia and India's free-trade negotiations dragged on for years, but amid frail trade and political relations with China, the deal - albeit one with training wheels - recently turned around quickly.

The Australia-India Economic Cooperation Trade Agreement (AI ECTA) was struck last month, ahead of Australia's federal elections, and after more than 10 years of talks. The prolonged negotiations faced numerous setbacks, including in 2015 when agreements on certain market accesses could not be reached.

Hailed as a means of increasing Australian exports through the reduction of tariffs, Canberra said it marked the opening of "one of the biggest economic doors there is to open in the world today".

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"The Indian economy is worth billions and billions and billions all around the world," Australian Prime Minister Scott Morrison said last month, adding that the agreement would benefit a wide range of exports, including wool, crayfish and mining resources.

Morrison also told voters how his government's establishment of new trade pacts was key to keeping the Australian economy buoyant, although the Indian deal kicked off when the opposition Labor party was in power.

Canberra has stepped up new free-trade negotiations after its largest trading partner China informally placed trade restrictions on some Australian exports such as coal, barley and wine in late 2020, amid spiralling tensions.

Among others, Australia cut a free-trade deal with Britain late last year only after a year of negotiations.

But, while similar in population, India will not be Australia's "new China" for trade following the historic agreement, analysts say. It will however serve as a means to deepening Australia's much-needed trade diversification and relations with its security ally India amid shifting geopolitics.

The China-Australia Free Trade Agreement (Chafta) has been largely responsible for cultivating the roughly A$250 billion (US$178 billion) in bilateral trade.

Similar results should not be expected from the agreement with New Delhi.

Unlike the Chafta, Australia's deal with India is a precursor to a fully-fledged free-trade pact. Such "early harvest" deals help countries warm up over trade and tariff liberalisation before a full commitment.

The Chafta was comprehensive, with reviews built into it.

It had a high standard of comprehensiveness when compared with other free-trade agreements China had signed up to that point, said Jeanne Huang, a member of the China Studies Centre at the University of Sydney and an expert on the Chafta.

While the deal with India is still steps away from that level, on its own it is a great achievement as it is the first deal New Delhi has concluded with a developed economy in the region that "expands the geographic and economic coverage of Indian trade agreements", Huang said.

Indeed, the Indian deal was structured as an "early harvest" to "make it more palatable to the Indian parliament", said Industry Professor and Chief Economist at University of Technology Sydney Tim Harcourt. "India has always been traditionally protectionist, particularly in agriculture," he said.

It was India's reluctance to give Australia agricultural market access that stalled talks in the ninth round of discussions in 2015.

So while many tariffs in the Chafta sank to zero almost instantly, many tariff reductions between Australia and India will be staggered over a number of years.

Indian tariffs of about 30 per cent on agricultural exports like vegetables, and grains like oils and seeds, will be phased out over seven years. Tariffs on fish and mollusc exports, as well as dairy products like infant formula, will also be eased over that time frame.

Some products, like wool and meat from sheep, will enjoy instant tariff removal.

For Australian wine exports, levies will be reduced in stages over the next decade - from 150 per cent to 50 per cent and then 25 per cent - for bottles priced between US$5-10.

The staged reduction will ultimately pave the way for Australian goods to be "guaranteed the best market access by India in future final trade agreements", the Export Council of Australia said.

Tariffs over the next decade will be eliminated on almost 91 per cent of Australian exports to India - currently the eighth-largest trading partner. Australia's service exports and people-to-people links with India will also increase, Australian trade minister Dan Tehan said.

Sonia Arakkal, Australia-India relations expert and Policy Fellow at the Perth USAsia Centre, said the interim deal was the best instrument for freer trade given existing policy asymmetries between the two countries.

Morrison has said the deal sends a clear message that democracies are working together to build security around their supply chains, a necessity that has become more pointed since the pandemic wreaked havoc on many supply networks centred in China.

These events have galvanised nations like Australia and India, such that even the issue of New Delhi's refusal to condemn Russia for the Ukraine conflict did not get in the way of the interim trade deal.

When asked why he was soft on India, Morrison said Canberra's relationship with New Delhi allowed it to "pursue those issues within that relationship respectfully".

"The changed geopolitical context of the economic challenges of trade between the two countries has created an impetus for compromise that didn't exist in previous negotiation rounds," Arakkal said.

Harcourt said the deal was "more geopolitics than economics" as Canberra needed to show voters it had more than one major trading partner.

"Australia has learned that it cannot blindly privilege one trade partner, be it India or China, and must pursue a diversification strategy," Arakkal said.

But founding director of Australian think tank China Matters, Linda Jakobson, warned Australia should not try to deepen its relationship with India as a means of countering China.

"Currently everything is viewed through a PRC [People's Republic of China] prism," she said. "But Canberra should deepen its relationship with India because of the importance of India, not because of mitigating a risk that the PRC poses."

Even with a full trade deal, India cannot replace China for Australia as they are very different countries, said Peter Draper, executive director of the Institute for International Trade at the University of Adelaide.

India suffers from domestic institutional frailties, be it corruption or other problems. China has the same problems, but with a more intrusive institution through the Chinese government, it contains these issues quicker, he added.

India's many "institutional voids" also make it harder for entrepreneurs used to more regulated playing fields to do business there, he said.

New Delhi is less focused and driven than Beijing when it comes to development, and lacks the centralising mechanisms that can direct development the way Beijing has over the past two decades, said Grant Wyeth, a Melbourne-based political analyst and columnist for The Diplomat.

"There's no way India can be the new China," Harcourt said. "But Australia can build a number of partnerships with like-minded nations in the region."

Natasha Jha Bhaskar, Australia-India trade relations expert at Newland Global Group, said both sides had found "substantial reasons to proactively engage".

"China is no longer Australia's best trading friend, while the pandemic has exposed all countries to global supply chain risks, the dangers of reliance on highly-concentrated trade flows, and the need for economic diversification," she said.

"In India, there is growing awareness domestically that the extent to which India opens itself for global trade will determine the degree to which it can attract investments, drive exports, make domestic industries competitive, incentivise other countries to manufacture in India, create jobs, and boost economic output."

The growing middle- and upper-middle classes in India might even offer Australia the opportunity to replicate another large wine market like it had in China, Jha Bhaskar said. The Australian wine market shrank rapidly after China imposed import restrictions in 2020.

This article originally appeared on the South China Morning Post (SCMP).

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