Tom Yam Swamp

When the India-Thailand Free Trade Agreement (FTA) came into effect in September, Indian businesses suddenly found a much cheaper manufacturing option. From electronics to textiles, products can be produced in Thailand and re-imported to the Indian consumer market at more competitive prices. India's domestic industries, threatened by this outsourcing loophole, question whether such agreements are good for the long-term development of the Indian economy. Yet shipping through Thailand may be a global trend of the future: Thailand’s government has already signed free trade agreements with the United States and Europe, and is aggressively pursuing similar agreements with China and Japan. – YaleGlobal

Tom Yam Swamp

The Indo-Thai FTA is great news but who will it benefit?
Arindam Mukherjee
Tuesday, October 12, 2004

For Surinder Kapoor, chairman, Sona Koyo Steerings, Thailand has suddenly emerged as a low-cost base to import both components and finished products (steering assemblies). He plans to set up a representative office in Bangkok to explore investment and import opportunities. "We're looking at Thailand for sourcing products," he says. In future, Sona Steerings' Thai base may also become the export hub for selling products across the globe. Kapoor is not the only one chasing the "look east" dream.

Several Indian auto and auto component majors are looking in the same direction. While Rico Industries has plans to set up a $4-million facility in Thailand which will begin production by end-2005, TVS Motors too is aiming in the same direction. Explains Sugata Sen of the Society of Indian Automobile Manufacturers (SIAM): "We expected deepening of investment in the component sector. But that may now go to Thailand and the Indian market will grow through imports."

Why Thailand? What's happening there? Nothing much, except that the India-Thailand Free Trade Agreement (FTA) came into effect from this September. That has changed the dynamics of doing business in several sectors like auto, consumer durables, consumer electronics and textiles. Since the FTA envisages minimal (even zero) import duty on Thai products, it's cheaper for Indian firms to either procure goods from that country or, even better, to produce them there and export to India. Asks an angry Rahul Bajaj, chairman, Bajaj Auto, "The question is: do we need industrial development, employment and technology in India or not? Japan and South Korea have put their new investments (in India) on the backburner and may put it in Thailand. India can't stay and prosper on trade alone. What will happen to employment then?"

Here's how the calculations work. Import duties on raw materials in Thailand are lower than IndiaSometimes the difference is 200-300 per cent; operational costs are similar although Indian labour may be cheaper. Now with the FTA, duties on finished products made in Thailand will hit rock-bottom. Agrees Suresh Khanna, secretary general, Consumer Electronics and TV Manufacturers Association: "There's no doubt we're apprehensive about the negative fallout of the FTA." Adds a worried Rajeev Karwal, CEO, Electrolux Kelvinator, "The Indo-Thai FTA could result in huge imports of large-format consumer electronics into India."

At the same time, Thailand seems like an ideal export base for Indian firms that are thinking global or unable to thrive locally. At one end of the spectrum, you have the auto component makers which think they can be global leaders in the near future. Hence, they wish to make fresh investments in markets that can help cut costs and improve quality. Says Vishnu Mathur, executive director, Auto Components Manufacturers' Association: "Every OEM in India is seeking a base in Thailand because of the advantages."

At the other end of the spectrum, there're the Indian firms in the consumer electronics segment, which have failed to compete with the Koreans in the domestic market and are forced to make inroads in other southeast Asian markets in a bid to survive. For them, setting up production bases in Thailand is a lucrative option. In fact, the Thai government is wooing Indian investors by offering attractive incentives and promising access to huge markets like China and Japan (with whom it plans to sign FTAs) and the US and Europe (with whom it has already signed such agreements). Just an indicator of how serious Thailand is in becoming a global export base: it exports 90 per cent of its auto components and over 80 per cent of the colour TVs it makes.

Obviously, foreign MNCs are working out similar strategies. Instead of making goods in India, they now wish to make them in Thailand and import them at a cheaper cost into India. Industry sources hint that several Japanese electronics majors are hiking their production capacities in Thailand. A few of them, which are already present in India, have reduced their activities to increase capacity utilisation of their Thailand-based units. A bigger worry for India is that the FTAs can easily be misused by traders. Taking advantage of the low import duties, they can re-route third-country imports through Thailand or other nations with whom India has signed FTAs. Say, Indian buyers can purchase goods from China or South Korea but show them as Thai imports. Explains a Delhi-based trader involved in this dubious practice: "The goods directly come from a third country but the shipping bills show the origin of goods from Thailand." Or, at a more general level, they can merely import cheaper Thai goods and kill the domestic industry.

Take the case of the Indo-Sri Lanka FTA signed in December 1998. In the last four years, India's exports to Sri Lanka increased by 113 per cent while Lankan exports to India saw a whopping 342 per cent jump. More importantly, textile producers in Kerala, coffee planters in Karnataka, and tea producers in the northeastern states have started protesting against duty-free imports from Sri Lanka.

Indian authorities have also alleged huge loss of customs revenues on account of rules of origin of goods not being drafted properly, leading to third-country imports. The finance ministry has found cases where Chinese and European brands are being pushed into the Indian market by repackaging them in Sri Lanka. In some cases, goods have arrived directly from east Asian nations but shown as having originated from Sri Lanka.

However, despite these problems, FTAs can provide opportunities to Indian firms to globalise and become full-fledged MNCs. T.K. Bhaumik, an advisor with CII, says that over 70 per cent of the global trade is through FTAs and India's share is minuscule. Thus, India has little option but to cope with the FTA route. Moreover, he thinks FTAs will trigger Indian firms to look overseas even if it means that fresh investments will go to countries other than India. In this tussle between economic diplomacy, domestic concerns and the urge to transform Indian firms into global players, some firms (and sectors) are definitely going to get hit. Is it all worth it? That's something that the two great Indian reformers need to ponder upon.

©Outlook Publishing (India) Private Limited 2004. Reprinted from the Outlook Magazine, 18 October 2004 edition.