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Is the Australia-India relationship gaining momentum? An observerís view

By Dillip Dutta - posted Monday, 15 March 2004


Recently, Michael Nash, Hobart’s leading marine heritage expert, revealed that Australia’s trade with India goes back to 1791, when a government store ship, Sydney Cove, was sent to Calcutta in British India for additional food supply. While returning with rice, sugar, tobacco, salted meat, soap, candles, textiles, leather wear, livestock, etc., the ship sank off the coast of Tasmania in 1797. Perhaps this ominous incident was the reason it took almost two centuries, until the early 1990s, to reinvent trade links between two Commonwealth member countries with common colonial legacies.

After India had launched its policy of economic liberalisation in 1991, the Australian government established the Australia-India Council (AIC) in 1992 to broaden the relationship between the two countries by increasing levels of knowledge and understanding between their peoples. Almost all areas of the Indian economy have been gradually opened to both domestic and foreign private investment: import licensing restrictions on intermediates and capital goods have been virtually eliminated; tariffs have been significantly reduced; full convertibility of foreign-exchange earnings has been established for current account transactions; financial markets have been liberalised to a greater extent; and international standards of regulation have also been introduced in the financial sector.

Over the past decade there has been slow but steady increase in bilateral trade between India and Australia. Although Australia’s outrage over India’s nuclear tests at the Pokhran range in Rajasthan’s Thar desert in May 1998 had greatly hampered ties with India, it did not have any major lasting impact on this trade relation. Trade grew by about 42 per cent over the past five years to A$3.55 billion in 2002-03 from A$2.5 billion in 1998-99 and Australia has maintained a trade surplus with India. Although these figures are, in percentage terms, a very small part of the total trade figures of both the countries, there is a vast potential for substantial growth in bilateral trade. Each government is involved in pressing its case directly with the other.

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While Australian Foreign Minister Alexander Downer visited India in April 2002, India’s then Commerce and Industry Minister Murasoli Maran had urged greater market access especially for Indian agro products in Australia. In his recent visit to India in February 2003, Australia’s Trade Minister, Mark Vaile, had similarly sought further reductions in tariffs on wool, coal, wheat, apples, macadamia nuts, sultanas, wine, and specialized drying oils.

One of the main reasons there has not been substantial growth in bilateral trade between the two countries is certainly the lack of governmental support, especially during this early stage of their economic engagement. Prime Minister John Howard’s failure to mention India even once in an important speech on Australia’s foreign policy in late August 2001 stunned political experts and Indo-Australians. This failure had also provoked an editorial note in The Sydney Morning Herald. Two months later, negative comments from the media on the publication of INDIA: New Economy, Old Economy by the Economic Analytical Unit (EAU) in the Department of Foreign Affairs and Trade were also a setback for the Indo-Australia trade and investment relationship. In fact, the EAU’s suggestion that significant opportunities exist for Australian firms to enhance competitiveness through direct investment in and outsourcing to the Indian IT sector was blown out of proportion by the media. The media blamed DFAT for shifting jobs to India.

Similarly, in an article in the Herald on 2 October 2003, Alan Kohler's picture of America’s jobless recovery linking different low-cost countries’ comparative advantage including India’s, was entitled "Blame India for the jobless recovery". It seems he opted for a soft target and shows typical commentator’s shortsightedness, especially because it appeared in an Australian newspaper.

It would, however, be unfair not to mention other columnists and commentators in Australian newspapers who have been trying more to give a balanced picture on India vis-à-vis other Asian countries, particularly China. Recent reports by Paul Sheehan, Brian Robins, Hamish McDonald in the Herald show both the strengths and the weaknesses of India, and these are what potential investors and entrepreneurs would like to see when making investment and trade decisions.

India is a classic example of dualistic society, where an informal traditional segment coexists with a formal modern segment. Generally speaking, the development of India’s social sector (health, education, family and labour welfare, etc.) and infrastructure (from roads and highways to ports and power supply) is not up to the mark and therefore is its major weakness. Because of economic growth around 5-6 per cent on average over the past decade and around 8.4 per cent during 2002-03, and steady upturn in India’s foreign-exchange reserves (more than $US100 billion), the government has recently been able to take appropriate initiatives to overcome the above-mentioned structural weaknesses of the Indian economy.

The major strengths of India include its democratic political system and relatively developed industrial and service sectors, although the agricultural sector is still dependent mostly on the monsoon. It also has a well developed banking sector and capital markets. Its sophistication of accountants, lawyers and financial analysts is also recognised world-wide. In the recent years, India’s software services sector (including high-end technology consulting, back-office and call centre work) has been one of the main sources of export earnings. A Dow Jones reporter recently added that foreign investors have begun crediting India’s better corporate disclosure, stronger system of property rights and more investor-friendly legal system than those of China.

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In a recent interview with Paul Sheehan in the Herald, the Governor-General, Major General Michael Jeffery, singled out India as a nation Australia should make a greater priority, and considered the possibility of making an official visit to fly the flag of Australian interest in India. The same tone is reflected in Reserve Bank governor Ian Macfarlane’s address to the guests at an Asialink dinner in Sydney in October 2003. Being greatly disappointed by Australia’s exclusion from newly formed free-trade zones involving China, India, Japan and the 10 south-east Asian countries of ASEAN, Mr Macfarlane warned that Australians had lost sight of the importance of Asia to the nation’s economic future. He also gave notice that India was set to rise in economic importance, providing Australian with opportunities and challenges.

It seems that the above sentiments have been working over the past couple of years as the major forces beneath the new high of Indo-Australian trade ties. As a result of several recent bilateral visits at the ministerial and official levels, cooperation between the two countries has expanded to include security dialogues, strategic talks and several memoranda of understanding (MOUs) have been signed on information technology, telecommunications, science and technology, tourism, etc.

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About the Author

Dr. Dilip Dutta is Director of the Centre for South Asian Studies in the School of Economics and Political Science, University of Sydney. He is editor of the International Journal of Development Issues.

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