‘The future of the Australia–India Economic Relationship’
An address by the Australian High Commissioner, H.E. Harinder Sidhu, to mark the release of ‘An India Economic Strategy to 2035: Navigating from Potential to Delivery’
8 August 2018
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Thank you, Rajat [Kathuria, Director ICRIER], for your kind introduction.
Your Excellencies, Distinguished Guests, Ladies and Gentlemen
I’m delighted to be here today to talk about the future of the economic relationship between Australia and India.
On 12 July 2018, Peter Varghese AO, former Secretary of the Department of Foreign Affairs and Trade and former High Commissioner to India submitted his report, An India Economic Strategy to 2035: Navigating from Potential to Delivery to the Australian Prime Minister
It is an independent report to Government that charts a course to a deeper economic partnership between Australia and India over the next two decades.
The India Economic Strategy was commissioned by Prime Minister Turnbull during his visit to India in April last year.
- The report is a product of one year of work and hundreds of consultations in Australia, India and across the world.
- Peter Varghese, the author, is an eminent Australian who brings a deep understanding of both Australia and India to the report.
- It is the most comprehensive report of its kind on the Australia–India relationship—it’s ambitious, future-focused and its 90 recommendations seek to bring about a step-change in the way Australia engages with India.
The report recognises the strides taken by the Indian economy since 1991. It speaks to an Australian audience about India’s growth trajectory; and it calls on the Australian Government, and Australian business, to take an ambitious and active role in building the economic relationship.
The India Economic Strategy is a clear sighted and evidence-based assessment of our current and future economic policy toward India.
It demonstrates the seriousness of our intent; that we are willing to work with India to ensure we realise the relationship’s full potential.
Today, I am pleased to launch the India Economic Strategy here in India.
Why an India Economic Strategy?
It is worth asking why we went to the trouble of commissioning a study such as this.
The short answer is simple: it’s because India matters to Australia.
A key conclusion of the Strategy is that there is no market over the next 20 years that offers more opportunity to Australia.
India’s economy is already the world’s third largest in PPP terms and, if we use the Strategy’s assumption that India will grow at between 6-8% annually over the next 20 years, then the potential is enormous.
Let me be clear – the Australia-India economic relationship is in very good shape.
Today, India is Australia’s 5th largest trading partner. Total two-way trade grew by 27.7% between 2016 and 2017 alone. That is a remarkable statistic.
Education is our largest single services export to India ($A3.4 billion in 2017), and continues to grow at double-digit rates (16.5% from 2016- 2017). Over 68,000 Indian students undertook courses in Australia in 2017 - a recognition of the high quality and cost competitiveness of our education services.
But while the relationship is doing well, our judgment is that it will need a significant step change to get closer to its full potential.
India still represents only 3.6 per cent ($A27.4 billion two-way) of our global trade. China, by comparison, is at 24 per cent ($A183 bn – nearly 7 times our trade with India). [Japan 9.4 per cent ($A72 billion) and Korea 7.2 per cent ($A55 billion)]
If we drill down into the numbers a little further, Australian goods exports to India in 2017 were relatively narrowly based, dominated by resources or agricultural products.
Coal – mostly metallurgical coal for steel – comprised nearly half our exports to India in 2017 ($A9.2 billion), followed by other resources such as LNG ($A829 million) and copper ores ($A688 million). Agricultural products such as vegetables (mostly pulses $A1.4 billion) and wheat ($A491 million) were also prominent, but as we have seen this year, prone to considerable volatility in the Indian market.
In commissioning the Strategy, we also wanted to start a conversation about an economic relationship that went beyond discussion of negotiations toward a Comprehensive Economic Cooperation Agreement (CECA).
I want to stress that Australia remains committed to concluding a high-quality FTA with India. However, the bandwidth for contemplating a three-dimensional economic relationship between Australia and India has often been overtaken by the intense focus on FTA negotiations. This strategy takes a deliberately long-term approach out to 2035.
Finally, perhaps the most important reason for the Strategy is the recognition of the vital importance that economic relationships play in developing and cementing international relationships; in bringing countries together; in building understanding and connecting people.
A healthy economic relationship not only drives economic development in both countries, but it also is the foundation stone for an enduring, positive, bilateral relationship.
India Economic Strategy – a Summary
Let us turn to focus in more detail on the content of the Strategy.
I should clarify at the outset that is a report to government, not a report by government and the Australian Government will look to respond to it in coming weeks.
It is primarily aimed at an Australian audience, recognising that the levels of understanding about contemporary India in Australia – particularly among the business community – is relatively low. This is a situation, of course, that prevails in both directions.
The Strategy charts a course to bringing India into the top tier of Australia’s economic partners.
It makes the case for a long-term investment in the relationship led at the highest levels of the Australian Government.
It sets a number of ambitious goals for Australian Government and business:
- to lift India into Australia’s top three export markets;
- to make India the third largest destination in Asia for Australian outward investment; and
- to bring India into the inner circle of Australia’s strategic partnerships, with people-to-people ties as close as any in Asia.
India’s size, diversity and complexity can make it a daunting place to do business. The report does not shy away from discussing the challenges many face in India. But rather than dwell on these, it provides a practical roadmap for how Australians might approach doing business in India.
At the Strategy’s core is a ‘sectors and states framework’ that takes into account India’s diversity and maps out regions—and sectors—where Australian businesses could focus their efforts.
The report identifies ten sectors where Indian demand and Australian supply can come together. I will just step through these briefly.
Education is a ‘flagship’ sector. This is not just because of the extent of our existing education engagement, but because education (including skills training) weaves its way through every sector of the Indian economy. If India’s greatest asset is its people, then education and skilling are vital to its economic success. Beyond this, education builds connections and engagement - it functions as a bridge between our two communities.
Resources, agribusiness, and tourism are ‘lead sectors’.
Resources are already a critical component of the relationship. Beyond the export of Australia’s resources, Australia can also help with the development of India’s mining sector. We are world leaders in mine safety, training and in mining equipment, technology and services. Australia’s existing Mining Partnership with the Indian School of Mines in Dhanbad is a practical example of these complementarities at work.
Australia can meaningfully contribute to India’s food security. Supply and price volatility will continue to be a feature of India’s food market for some time to come. We can continue to meet supply gaps in the Indian agricultural market, including for premium products.
- This is not just about selling more food products to India. There is also an opportunity to partner with India to address productivity challenges, to increase predictability of supply, and better manage food waste. This will help raise farmers’ incomes in India and make trade more predictable for Australian exports.
The tourism sector is recognised as one which holds great promise for the bilateral relationship. Like education, tourism can build bridges between our two countries and improve cultural literacy. India is now our fastest growing inbound tourism market. We are also seeing more Australians travelling to India to explore its fascinating culture.
The report identifies a further six sectors where there are complementarities between the two economies: infrastructure, health, financial services, sport, and science and innovation.
The focus on states reflects the reality that India is an aggregation of state economies each with different business conditions, strengths, and varying investment in social and physical infrastructure. At a practical level, seeing India as a collection of states rather than a single monolith makes it easier for businesses to contemplate entering the market.
The ten states identified as the most prospective for Australia’s engagement are: Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh, Telangana, West Bengal, Punjab, Uttar Pradesh and the National Capital Region of Delhi (not a state, obviously).
These 10 states and regions were selected based on their economic size, commitment to reform, relevance to Australia’s comparative advantages and ease of doing business.
- And while these are the states where we see the most opportunity for Australia, the report does not suggest confining our engagement to these states alone.
Thinking Differently about India
While this approach is very sensible and logical, what makes the Strategy interesting and unique, to my mind, is how it departs from what I could call the ‘standard model’ of Australia’s economic engagement with Asian partners.
From the 1950s onward, this model worked on a near-perfect complementarity of Australia’s advantages and the demands of developing countries in Asia at the time, particularly in North and East Asia – Japan, Korea and, more recently, China.
Australia’s natural resources, technological expertise and innovation supported the rapid industrialisation of Asian countries which were manufacturing-led and export driven.
For decades we reliably supplied well-priced, high quality commodities such as coal, LNG and iron ore in vast quantities. We helped fuel manufacturing and infrastructure development; we supplied foodstuffs for urbanising populations. In turn, these countries added value to imports of Australian goods, exported to the world and built their economies on stunning rates of growth.
This brought tremendous benefits to both sides as well as to global growth. So much so, that Australia has enjoyed 27 years of uninterrupted economic growth.
An important insight from the Strategy is to remind Australians that India will not likely follow the same model. Put simply, India is not China.
This makes sense. For one, the advent of technology today – artificial intelligence,3D printing, robotics – has changed the face of manufacturing as well as the comparative advantages of lower-cost labour. And it is raising the premium on skilled and knowledge workers.
So India is developing in a different global economic environment compared to that of other Asian giants. The shape of its economy will be different. It is now on the road to meeting this challenge – Indian Government policy already recognises the importance of skilling and of supporting digital industries and startups.
Second, India is itself different. It is already a large agricultural producer with substantial mineral resources. It will still need Australian products, but not in the quantities we might expect of an economy of this size. India’s diversity means that it will host a wide range of economic activities, and will rely on individual entrepreneurship more than centralised, state-directed activity.
The Strategy therefore concludes that India’s economic development will be driven by consumption and services.
There are two key ways in which this conclusion makes a material difference to how Australia has to approach India. One is to recognise the central role of people-to-people links; and the second is to elevate investment links to a higher priority.
People-to-People links: the Indian Diaspora in Australia
When we say that services will be a driver of the Indian economy, we are really talking about people, what they do and the skills they have.
It is no surprise that education and tourism are among the top 4 sectors in this report. It has long been my conviction that the connections between people will be the defining feature of the Australia-India relationship.
Australia’s Indian diaspora will be a significant link between the two countries.
Indian migration to Australia has increased dramatically over the last decade. At almost 700,000 strong (or nearly 3% of our population), the Indian diaspora already makes a significant contribution to Australia’s economy and society.
This diaspora can build relationships where governments cannot. It creates personal links, in business, the arts, education, and civil society, which help anchor the relationship. It helps to sustain effort and engagement in each other over time, and help overcome difficulties which we might face because members of the diaspora hold deep understanding of both countries.
Over time, the Indian diaspora might prove the most significant asset of all.
Perhaps the most ambitious goal of the Strategy is to have Australian investment in India rise to over $A100 billion.
Current Australian investment levels in India are valued at $A14 billion, so this goal represents a seven-fold increase.
While this target is ambitious, it is achievable. Australia has the world’s 6th largest pool of investment funds under management (US$2.1 trillion).
There are good reasons for Australia to invest more. A strong investment presence is an important element of building a long-term partnership which also supports India’s economic development. And India’s prospects offer promising returns to investors.
However, when you look at where Australia’s investment funds go, it is to our established markets and trusted partners. The top countries are the United States ($127.3 billion in 2017), the United Kingdom ($83.9 billion), New Zealand ($62.1 billion), and Singapore ($20.2 billion).
There is a strong correlation between the level of trade and the level of investment. As a rule, our largest investments go to our largest trading partners.
It is also the case that sound regulatory settings which support, for example, the timely enforcement of contracts, repatriation of profits, and FTA or investment treaty protections, are essential to giving confidence to investors that their funds will be secure.
Most of Australia’s funds available for investment are held by superannuation funds. These represent the pension savings of millions of individual Australians. For obvious reasons, fund managers will be careful about the risks they take with these savings.
So, while Australia has the investment capital, India just needs to provide the right environment to attract it.
And India seems to have heeded this message. The Macquarie Group recently won a bid to invest over $A2 billion to manage almost 700 km of Indian national highways over the next 30 years under India’s new asset recycling model. This is an encouraging sign and shows it can be done. I look forward to further positive developments in India’s investment regime.
An Open Trading Regime
A focus on investment or services or consumption-led growth does not mean that trade doesn’t matter. Trade – and open trade – is central to this story.
At a time when protectionist sentiment is rising, I would argue that it is more important than ever that we maintain a commitment to liberal trading regimes. Time and again, the experience of history is that keeping markets open to trade is strongly correlated with economic growth.
In a speech in Melbourne last week, the Australian Minister for Trade, Tourism and Investment, Steven Ciobo, described Australian economic history as having ‘a clear moral’.
He said that a medium sized economy like Australia can’t get rich selling to itself and that’s why Australia has traded with the world’s major economies and the economies across our region.
Further, he added that this international trade and investment has powered Australia’s economic growth.
The message is that no country can flourish in isolation.
No economy is so large that it can survive on the strength of its own market alone and India’s size and potential is no guarantee of long-term success. International trade and investment are critical for national development.
The point is perhaps even more salient today.
Strategic Relationships and Geo-Economics
This is because strategic competition among nations is increasingly taking an economic form.
It is often said that Australia and India are natural partners. We are democracies, we support the rule of law and multilateralism, we champion free and open relations between countries and freedom of action by sovereign states. These are values that are being challenged on many fronts.
Our shared objective is to build a future in the Indo–Pacific that is prosperous, stable and secure.
Prosperity won’t come out of thin air. We are launching this report at a worrisome time for international trade. The threat of a global trade war is becoming very real.
We welcome the comments so far this year from Prime Minister Modi, first at Davos and more recently at the Shangri-La Dialogue, on the importance of open markets.
Open markets allow participants to focus on their comparative advantage, strengthen their international competitiveness and build resilience
To achieve this, unilateral trade measures and having commercially meaningful bilateral free trade agreements matter. I have already confirmed Australia’s commitment to a CECA with India.
But a network of bilateral arrangements will only take us so far. We need to continue to work together to ensure the vital pieces of trade architecture are in place. In the Indo-Pacific, regional trading arrangements such as RCEP and the TPP will deepen economic integration and resilience and ensure fairness so that all members participate on an equal footing.
Strong, resilient economies which are well connected with others are important strategic assets in their own right.
I have spelled out all the reasons why Australia thinks we should invest in our economic relationship with India. It’s worth asking the opposite question – why should India do business with Australia?
In my interactions to date, I sometimes encounter a focus on size. The argument is made that Australia is a small market (only last night, our population reached 25 million) and so not worth the effort.
It only takes a minute’s thought to see that, of course, population size is not the only measure of the potential of an economic relationship.
There are many good reasons why India should look more closely at Australia.
For a start, Australia is a high-value market. According to Credit Suisse, Australia is the world’s second wealthiest nation in terms of wealth per adult, after Switzerland.
We have the 11th largest GDP per capita in the world, and Australia is ranked 14th on ease of doing business (2018).
On other measures, Australia has the 4th highest number of universities in the world’s top 100. And we have 3 cities in the world’s top 10 most liveable cities ranking.
These statistics speak to the sheer weight and capability that we bring to any economic partnership, be it in trade and investment, in urban development or in education and skilling.
They also suggest that India should consider Australia a partner of choice in supporting its reform agenda. There is much to share here—lessons learned from our respective reform journeys: GST implementation, competition policy and our experiences of privatisation, just to name a few.
So, where to from here? Having received Mr Varghese’s report, the Australian Government is considering its recommendations carefully and will respond to them in the near future.
Pleasingly, one of the key recommendations – that Australia consider establishing a Consulate-General in Kolkata – is already in train. The Australian Government announced our intention to do so in this year’s Budget.
The logic of the sectors and states strategy in the report is strong and I expect that it will frame how we approach our economic relationship with India from here on.
My aim since the start of my appointment as High Commissioner has been to build a strong, richly textured Australia-India relationship.
I am genuinely pleased and proud that, in commissioning the India Economic Strategy, my government has made the effort to get behind the India relationship in a serious and tangible way.
Any relationship, by definition, involves two parties committing equally to a common purpose.
This is why Mr Varghese in his report notes that, for the partnership to be complete, India also requires a strategy for Australia. I am pleased to hear that the Indian Government is now considering this.
The India Economic Strategy provides an excellent guide to support our efforts to build the relationship. I commend the document to you all.