India?s free trade agreement with the Association of South East Asian Nations (Asean), signed on August 13, 2009, is a landmark event. It signifies an important milestone in India?s ?Look East? policy and coincides with the period when trade flows are creating a new geo-political power structure exacerbated by the financial crisis. The GDP of developing Asia now equals the European and US GDP and will surpass them in 2010 with its share going up to 22.8% of World GDP compared to 21.4% and 18.7% by Europe and US. It?s a tectonic shift. What does it bring for micro, small & medium enterprises (MSMEs)? The Federation of Indian Micro and Small & Medium Enterprises (Fisme)?s view, which is argued here, is that India-Asean integration promises greater business opportunities for Indian MSMEs than now.

One reason is the large size of the Asean economy and the new market opportunities that it affords. The Association of Southeast Asian Nations or Asean, was established in 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore and Thailand, which were later joined by Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia. Now it is a group of 10 nations. Besides achieving social and cultural integration, economic cooperation has remained high on the agenda of Asean. As of 2006, the Asean region had a population of about 560 million and a combined GDP of almost $1,100 billion, and a total trade of about $1,400 billion.

Though India?s close civilisational links with the Asean region go back to more than a millennium, it was not until India embarked upon its ?Look East? policy at the start of the decade that the contours of the promise of a closer relationship with the region started emerging. Since then, Indo-Asean trade has been growing at a compounded annual growth rate of 27% and had reached at $38.37 billion in 2007-08. Today, Asean is India?s fourth-largest trading partner after the EU, US and China. With India-Asean Free Trade Agreement ready to be ratified soon, the economic integration of India with the Asean would be deepened. The bilateral trade may surpass $50 billion by 2010 or 2011.

The economies of Asean member countries have liberalised trade regimes and today the average trade-to-GDP ratio of the Asean nations stands above 145% in contrast to less than 45% for India. Whereas India has an average tariff rate of around 34% for agriculture and 11.5% for goods, the corresponding average tariff rates in the Asean region are 13% and 7.5%.

In 2003, India signed with Asean ?the framework agreement on comprehensive economic cooperation?, which envisages a free trade area (FTA) in goods between India and the Asean. The Indian government and the Asean have recently signed the free trade agreement, which will be effective from January 1, 2010. The FTA in essence aims towards a zero customs duty regime in ?substantially all trade? between India and the Asean. That is to say, India is expected to commit to a zero duty customs regime on substantially all imports from Asean member countries, and in turn, all Asean member countries are expected to commit to zero customs duty regime on substantially all imports from India, barring a small list of ?sensitive items?. Under the agreement, duties on 4,000 items will be brought down over six years.

Though India competes with Asean countries in many product categories, there are strong prospects for intra-industry trade (trading within one sectoral value chain such as electronics, automotive, garments etc). According to Fisme studies, these prospects are brought about by rising incomes in these countries, need for product differentiation and pressure for achieving economies of scale. This is true even if the overall trade structure is very similar between the two countries because the intra-industry trade in intermediate inputs enhances competitiveness of both participating countries and the region as a whole.

The accompanying figure explains the potential of exports for Indian goods in Asean. Though, India exported mineral fuels, oils, distillation products; bituminous substances; mineral waxes etc, mentioned under quadrant IV, to the tune of $5 billion in 2007-08, the rise in exports might be in response to a sudden surge in oil prices during the period. Similarly the goods under quadrant-III have limited scope in the Asean region.

The important quadrants are II and I. India exported goods worth over $6 billion mentioned in quadrant II, namely organic/inorganic chemicals; agriculture and dairy food, miscellaneous products of iron and steel, copper, aluminum, zinc and precious/ semi- stones; pearls all product categories where Indian companies have been able to penetrate Asean markets.

The most promising products for MSMEs are in quadrant-I. The goods under the quadrant are predominantly manufactured by MSMEs in India and have a low export base but a high growth rate of over 40%. The most promising Indian MSME product categories having potential for exports to the Asean are meat, coffee, tea, machinery, electric & electronics equipment, plastic & rubber products, parts & components of vehicles and aircraft, drugs & pharmaceuticals and leather products.

The India-Asean agreement augers well, at least from the perspective of export trade. The agreement is likely to lead to greater integration of supply chains in engineering, electrical and electronics fields because of complementarities of industries in India and the Asean. However, for such a mutually beneficial integration to take place involving MSMEs, strategic interventions may be needed in two areas. One is the participation in complex manufacturing supply chains that requires physical presence at nodal trade points in the Asean. Supportive policies may be needed to help set up offices at key places in the Asean. Secondly, harmonisation and mutual-recognition agreements on standards are urgently required. Without these two measures MSMEs will find it difficult to scale non-tariff barriers and realise the market access that the India-Asean agreement promises.

The writer is secretary-general, Federation of Indian Micro, Small & Medium Enterprises