Trade deal only one step in Australia’s plan to boost ties with India, officials say

View of Sydney Opera House under the Sydney Harbour Bridge in Sydney, Australia (Image: Reuters)

The need to reduce dependence on China and catch up with other developed countries in the race to tap the Indian market pushed Australia to quickly expand trade and investment ties with India.

The latest trade deal signed is only one among a series of steps planned to leverage good foreign relations and boost trade in a phased yet exponential manner, officials from both countries revealed.

After signing the India-Australia Economic Cooperation and Trade Agreement (ECTA), Australian Prime Minister Scott Morrison said it represented “one of the biggest economic doors there is to open in the world today” for Australia.

“That announcement makes sense not only because India is the biggest focus of Australian companies in multiple sectors, but also because bilateral relations are set to get stronger soon,” a senior Australian official told Moneycontrol from Canberra. Both governments are planning more economic, tech and strategic partnerships to enable closer cooperation, he said.

Discussions on a proposed trade deal had started in 2011 but faltered repeatedly due to disagreements over allowing Australia access to India’s agricultural and dairy markets. While those two areas remain off-limits in the ECTA, policymakers in both nations hailed the latest deal as a ground-breaking development.

They stress on this by pointing to the fast pace of talks since August 2020. India announced in late August 2021 its intention to begin renegotiations on a deal and sign an early-harvest pact by December 2021.

The fact that this target came to fruition just three months later is an unprecedented feat, given how complex negotiations are with developed nations, commerce ministry officials said. Apart from the quick negotiations, the mood in Australia favouring closer ties with India at a time of geopolitical upheavals gave the deal its biggest push, they said.

Long-term shift

An ‘India Economic Strategy to 2035,’ penned by former Australian High Commissioner to India Peter N Varghese, was the first to bat for greater economic linkage between the two nations. India, and not China, offers the best economic growth potential for Australia over the next 20 years, the 500-page report had emphasised.

India’s trade with Australia has been on a sticky wicket for a few years. After hitting a high of $18 billion in 2017-18, India’s overall trade with Australia slipped year after year till 2020-21, by when it had contracted to $12.2 billion.

There was a sharp recovery in the last financial year. In the first 10 months of 2021-22, trade surged to $19 billion, boosted mainly by higher coal prices. The Varghese report, subsequently accepted by the Australian Prime Minister’s Office, has been the cornerstone of growing relations now.

“Australia’s trade with Beijing is many multiples of our trade with New Delhi, so the report had not expected India to overtake China soon. But the vision in the report is to bring India up to the third position among Australia’s trade partners. Multiple policies are being planned, meanwhile, to quicken the rise in trade and engage with India more,” a senior Australian diplomat said.

Australia was India’s 12th-largest trading partner in 2021-22, having climbed up from being the 15th-largest trading partner in 2020-21 and the 17th-largest in 2019-20. Meanwhile, Australian investments in India are currently pegged at $15 billion, while India’s investment footprint in Australia is $12 billion.

“The tilt in both economic and political relations favouring India as opposed to China has been one of the most defining features of Australian foreign policy in the Asia-Pacific region in the past decade. Support for this tilt has continued to grow at a rapid pace not only due to economic tensions with China but also due to a sense that American and European businesses were beating Australian ones to the Indian market,” the diplomat added.

The shift had also come when Indian businesses were scouting for newer overseas markets, egged on by the government.

Mineral sector

This quick movement in key areas was evident during the second India-Australia Virtual Summit held last month, whereby a much closer convergence in critical minerals and investment, continuing engagement on migration and defence, and more cooperation in technology and digital sectors were at the forefront of the talks.

“Among these, the cooperation is expected to act as the fulcrum in relations, going forward. It would establish a framework for building partnerships in critical investment. This would enable us to both invest in Australia’s critical mineral sector as well as get Australian expertise in this area,” a senior commerce ministry official said. He was referring to an MoU signed on cooperation in the critical mining sector between Khanij Bidesh India Ltd. (KABIL) and Australia’s Critical Mineral Facilitation Office.

KABIL was set up in 2019 with the participation of three central public sector enterprises to ensure consistent supply of critical and strategic minerals to the domestic market when their supplies and prices fluctuate sharply.

There is a huge imbalance in India-Australia trade. At $13.5 billion, India’s imports from Australia are more than twice the $6.3 billion worth of exports. The yawning deficit is principally due to imports of Australian coal, pegged at over $10.1 billion in FY22, or 75 percent of all imports from the country.

This included coking coal ($7.4 billion), steam coal ($1.4 billion), and $1.1 billion worth of non-agglomerated coal, prices of which shot up in FY22. India’s largest export to Australia is automotive diesel fuel ($2.8 billion).

Duty reduction

The ECTA promises preferential, largely duty-free access to all Indian goods when exported to Australia in the next five years. About 96.4 percent of Indian exports would become duty-free immediately after the pact comes into effect. Meanwhile, 85 percent of Australian products would become duty-free in India in the next five years. Initially, 70 percent of Australian products would be duty-free.

However, the report by Varghese had named agri-business, along with the associated sectors of logistics and food processing, as the sectors with the most potential. The ECTA has seen mixed results in this area.

India has now allowed Australian wine that costs between US $5 and $15 per 750 ml a concessional duty of 100 percent now with promise of further reduction in the future. Currently, the duty is 150 percent.

“Australia had pushed hard to reduce this further immediately, arguing that it is the premier source of foreign wine for India. But the government had been cautious,” an official said. Currently, imports of wine from Australia stand at $8 million, up from $5 million in the previous year. This represents 40 percent of the total $20.3 million worth of wine imported by India.

In agriculture, Australia is ambitious about getting market access for grains, fruits and vegetables. The deal has proven positive for Australian lentils, for which India is the biggest market. But New Delhi has been careful not to include chickpeas, which have been one of the largest imports from Australia in the past.

“Australian growers believe that while production of chickpeas in India is currently strong, there have and will be again, periods where seasonal conditions can’t meet demand. They are perfectly positioned to be able to support the Indian population through these shortages although under this FTA, that won’t be an option,” an official said.