India and Australia close to signing a mini free trade agreement

Bengaluru, India–As Russia launched its invasion of Ukraine last month, Australian Prime Minister Scott Morrison faced tricky questions at a press conference about India’s reluctance to condemn the war.

Morrison quickly turned the subject to China and Beijing’s support for Moscow.

And India?

“All countries have different levels of engagement with Russia,” Morrison said, “and so I’m respectful of that.”

It was a telling moment, one that captured a growing convergence of interests that even the most contentious issue roiling the world — the war in Ukraine — isn’t disrupting.

India and Australia, democracies at two ends of the Indian Ocean, are expected to sign an interim free trade agreement this month, marking a major step towards consummating their economic relationship at a time when both nations are desperate to reduce their dependence on China.

They have declared their intent to ink the full pact, called the Comprehensive Economic Cooperation Agreement (CECA), later this year.

New Delhi and Canberra started negotiating the deal in 2011, but a failure to align their priorities meant that talks repeatedly stumbled. Political uncertainty in Australia — Morrison is the country’s fifth prime minister over the past decade — didn’t help, experts say. And for a period after the Narendra Modi government came to power in India in 2014, its commitment to free trade deals appeared suspect.

But as India and Australia have each witnessed a spike in tensions with China, they’ve been forced to confront a difficult reality: Beijing is Canberra’s biggest trading partner and the biggest source of New Delhi’s imports. A trade deal would help them both cut their reliance on China.

There is also growing complementarity between the economic priorities of the two nations: India needs critical Australian minerals for new sectors like the development of electric vehicles, while Australia requires skilled labour that India can offer.

For Morrison, there is a strong political incentive ahead of a federal election that must be called by May 21. After Australia called for an investigation into the origins of COVID-19, Beijing hit back with a wave of sanctions targeting 13 industries that exported $54bn to China, said Sonia Arakkal, a policy fellow at the Perth USAsia Centre, an Australian think-tank.

Canberra’s aggressive approach towards Beijing has sparked concerns among sections of Australia’s business community because of the potential implications for the economy, she said.

“A free trade agreement with India would help Morrison showcase that the government is developing alternatives to China,” Arakkal told Al Jazeera.

Natural trade partners

Not that India and Australia are waiting for the CECA to ramp up trade: Already, the latest data from the ministry of commerce in New Delhi suggests that at just less than $20bn, bilateral trade in 2021-2022 has already surpassed pre-pandemic levels.

But a free trade agreement (FTA) could help propel both nations down paths they have identified as central to their economic futures, said Natasha Jha Bhaskar, general manager at the Newland Global Group, a corporate advisory firm that focuses on India-Australia trade.

Under Modi, India has made the development of an export-oriented manufacturing sector a priority and is offering subsidies to foreign firms setting up production units in the country.

“Australia — a highly globalized economy where trade accounts for 44 percent of nominal GDP (gross domestic product) — is an excellent partner for this,” Bhaskar said to Al Jazeera. Australia’s expertise in biotech research and development also makes it a natural partner for India, a pharma giant, she said.

India has declared a goal of transitioning all new vehicles away from fossil fuels to electric by 2030. And Australia is home to the world’s second-biggest reserves of lithium, a key component of electric car batteries.

“There is a technological shift that the government of Narendra Modi is looking at, and Australia is an important element of that,” said Arakkal.

Australia has much to gain from the CECA too. China was by far the single biggest market for Australian wine, an industry that saw exports drop by 30 percent last year after Beijing imposed tariffs of up to 218 percent as a part of its retaliatory steps against Canberra.

As a part of the free trade agreement with Australia, India is expected to substantially reduce its own significant duties on imported wine, which can be as high as 150 percent. That could help Australian companies build a new market in place of China.

Don’t expect ‘dramatic growth’

To be sure, there remain challenges and limitations to the India-Australia economic partnership.

“We should not overstate the prospects for dramatic growth,” cautioned Ian Hall, a professor of international relations at Griffith University and the author of the book, Modi and the Reinvention of Indian Foreign Policy.

“India is not as hungry for Australian coal, iron ore, and grain as first Japan and South Korea and then China became,” Hall told Al Jazeera. “Similarly, Australia is not going to become as important to India as the US market is for services.”

In fact, India remains reluctant to open up agriculture under the trade deal, worried about domestic political pressure in a sensitive sector. While New Delhi has recently dropped tariffs on lentils, it is unlikely to do so on wheat, Hall said.

At the same time, Canberra’s notoriously strict border and migration policies have long frustrated New Delhi, which would like Australia to ease those up for Indian students and skilled professionals.

Some of that could be addressed in the “early harvest” deal, as interim trade pacts are called, and would help Australia too, said Bhaskar, at a time when government data shows that the country has nearly 400,000 job vacancies — a sharp rise from mid-2021.

An interim deal would also show “goodwill and momentum”, Hall said, though the upcoming election in Australia injects uncertainty over whether the two nations will realize a comprehensive pact if the government in Canberra changes. Bhaskar said she hoped the two countries would “just consider a full-fledged CECA instead of an interim deal” to eliminate that risk.

Indeed, both Australia and India have recently pressed the accelerator on free trade deals more broadly — beyond their bilateral negotiations. In December, Australia inked an FTA with the United Kingdom, while India and the United Arab Emirates signed a deal last month.

Unlike the trade negotiations with Australia that have taken 11 years, New Delhi began talks with Abu Dhabi on their FTA only last year. Yet the biggest strength of an India-Australia trade deal might ironically lie precisely in the long years it has taken the two sides to get to this point, experts say. It’s now a mature relationship, not love at first sight.

“Both sides understand each other’s constraints,” said Hall. China likely didn’t mean to play cupid, but India and Australia won’t mind.