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  • Xenia Dhar

India - Australia ECTA : A Breakthrough for India’s International Economic Prowess

This article is authored by Xenia Dhar, a Third Year Student of B.A. LLB (Hons.) at RGNUL, Patiala.


Introduction

After months, the deliberations leading to the India-Australia ECTA have finally come to a fruitful end. The Agreement entered into force on 29th December 2022. It removes trade barriers between the two economic giants by offering duty-free access to tariff lines. Under this deal, India gets duty-free access to 100% of Australia’s tariff lines. This, in short, means that Indian exports to Australia would not have any duty-fee attached to them. Hence, the Agreement opens up a brand new market for Indian exporters. In addition, it has provisions that simplify exportation for Indian manufacturers by allowing for transparency1 as well as simplification2 of custom procedures, making it more accessible to them.


Currently, Indian manufacturing is dominated by labour-intensive sectors. The sectors that benefit the most from this new-found access to the Australian market are the labour intensive sectors that include, but are not limited to textiles, leather, footwear etc. This is because of India’s high population which makes it easier to find a workforce at relatively cheaper costs. ECTA gives the goods produced by these labour-intensive industries immediate duty free access to Australian markets (currently subject to 4% to 5% import duty), hence, providing them with an incentive to manufacture more.


The Impact On Labour-Intensive Industries

It is not an unknown fact that India has surpassed China as the most populated country in the world. The country’s population, according to Bloomberg’s report, stands at a whopping 1.417 billion. In a highly populated India, the manufacturing sector is the largest institutional employer. In the manufacturing sector, the labour intensive industries account for more than 50% of the employment. Hence, in an industry that already employs millions, the introduction of ECTA has the potential to have a two-fold impact.


Firstly, the introduction of ECTA will put India’s labour intensive manufacturing industries on the global map. It is to be noted that, according to data from UN Comtrade, India’s exports in the case of textiles, footwear and leather remain significantly lower than that of China. The data states that in 2020, while the volume of China's exports in these industries was more than 300 billion, India was staggering behind at less than 100 billion. The problem is exacerbated by India’s under-utilisation of its labour force in the manufacturing sector. ECTA enables India’s slumping labour-intensive manufacturing industries to compete with other developing economies such as China and Vietnam. It gives India’s labour intensive manufacturing to move past the domestic market without negatively affecting profits. Secondly, the export boost facilitated by ECTA would also entail ramping up of production which is ultimately bound to lead to job creation. This will strengthen the government’s Make In India policy. The policy is aimed to increase the growth of the manufacturing sector in terms of share in employment as well as national income.


Challenges to market Access for Indian labour-intensive manufacturing Industries:

Undoubtedly, ECTA would enable India to use its comparative advantage (on a global level, the term refers to a country’s ability to carry out a particular economic activity more efficiently than another country) over Australia with regard to labour-intensive manufacturing. However, in 2021, India’s imports to Australia only accounted for 2.4% of the total imports in comparison to China’s 27%. India’s share of imports was also lower than that of Thailand & Malaysia, both of which, up until now, have remained primarily labour-intensive economies. It must also be noted that Australia has signed the China - Australia Free Trade Agreement (ChAFTA) in 2017 which offers a similar duty-free access to Australia’s markets to China. Similarly, Thailand and Malaysia also have FTAs with Australia. Other countries that have FTAs with Australia include Peru, Indonesia, Chile etc. Thus, it becomes clear that India will also have to compete with other developing countries to capture the maximum market-share of imports into Australia. However, signing of ECTA provides India with a level playing-field.


After India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019, ECTA also provides India with an excellent opportunity to resume bilateral trade relations with Australia. Fear of an unfavourable balance of trade against participating countries was a major reason for India’s withdrawal from the RCEP. The provisional bilateral safety measures3 provided under the ECTA also ensure that India’s domestic industries are protected against an import surge or an unfavourable balance of trade against Australia. Hence, the benefits derived by exporting goods manufactured by the labour-intensive manufacturing industries would not be diluted by excessive imports that would lead to a trade deficit.


The Way Forward For India

The signing of ECTA is a significant win for India. As mentioned earlier, after its withdrawal from the RCEP, this agreement is India’s first major trade agreement in the Indo-Pacific region. ECTA along with CEPA (Comprehensive Economic Partnership Agreement) signed between India & UAE are two of the latest new-age bilateral trade agreements signed by India with two major trade partners. Currently, talks are also on going for an India - EU FTA. With India’s strengthening global economic position, these trade agreements are better negotiated to suit India’s needs. Furthermore, they lay down the blue-print for future Free-Trade Agreements that the country might sign with its more developed counterparts. Signing of stand-alone FTAs in the Indo-pacific also provides a lucrative alternative to the RCEP where the provisions may be customised according to special needs. Furthermore, India also has the opportunity to re-negotiate older FTAs in the same vein to make them mutually beneficial.


Additionally, the zero-tariff access that ECTA and similar FTAs provide to the labour intensive manufacturing industries are likely to impact exports positively. The economic growth of many Asian countries, in the past, has been driven by the export of goods manufactured in the labour-intensive sector. One needs to look no further than our own neighbour Bangladesh. The reason for Bangladesh’s booming economy is the export of textiles. Today, the country is the second largest exporter of the same. In a similar manner, China’s current economic prosperity is a result of its long drawn history of labour-intensive exports. Other major examples of labour intensive manufacturing exports leading to economic prosperity include the development stories of South Korea & Japan. Given India’s high population and younger demographic it is high time for India to develop its labour intensive industries and get access to developed markets. Looking at previous examples, the same is bound to give a sure-shot boost to India’s economic prowess while simultaneously providing jobs to India’s young population


Endnotes

1. Article 5.4, India-Australia Economic Cooperation & Trade Agreement

2. Article 5.5, India-Australia Economic Cooperation & Trade Agreement

3. Article 3.8, India-Australia Economic Cooperation & Trade Agreement

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