India & Australia: room to grow

The reality is while Australia’s trade with India has grown in recent years it remains below potential. Official efforts to conclude a free-trade agreement between the countries could help enhance the trade relationship but more needs to be done to boost investment flows.

" The trade and investment relationship [between Australia and India] should flourish over the coming years.”

There is a concentration factor with the resources sector accounting for a significant share of trade flows with Australia. More recently agricultural exports from Australia to India have picked up but the resources sector is expected to remain the defining feature of the trade relationship given India’s low steel intensity ratio and strong prospects for catch-up in the next few years.

A successful conclusion to the India-Australia Comprehensive Economic Cooperation Agreement (CECA) negotiations could help lift India’s trade with Australia.

Almost double

India is currently Australia’s fifth-largest trading partner. In the last 15 years bilateral trade between Australia and India has grown by almost double the rate of Australia’s overall trade with the rest of the world.

India’s fast growing economy, with its relatively young population, growing middle class and rising urbanisation which requires large infrastructure investment, will provide tremendous opportunities for Australian businesses.

India is the world’s seventh-largest economy with nominal gross domestic product of $US2.8 trillion and the second-most populous country at 1.3 billion. If current growth trends continue India could be the third-largest economy in the world in the next 10 years, behind the US and China.

In its latest economic assessment the International Monetary Fund (IMF) likened the Indian economy to “an elephant starting to run.”

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By 2025, 20 per cent of the world’s working-age population will be Indian. By the same year nearly half of its population will still be under 30. Nearly 600 million people will be in the middle class category.

India is expected grow above 7 per cent in real terms on a consistent basis. Not only will it grow at a faster rate, but also consistently. The figure below plots the bivariate time series of GDP growth rates and the GDP variance of countries with similar sovereign credit rating as India through 2023, based on IMF projections.

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India’s formidable demographic dividend is well recognised. It will account for more than half of the rise in Asia’s workforce in the coming decade. The median age of India’s population is well below those in other large economies like China and South Korea, which are grappling with an increasingly older population.

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Over the next decade India’s working age population will rise by 115 million. This large labour supply will be a major source of growth for India's economy.

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A growing urban population and a thriving middle class can feed through into higher economic growth. With India expected to become a formidable middle class cohort, there will likely be assimilation of new skills, better technology and a growing need for new investment.

Where are we now

Australia’s total goods and services trade with India stood at $US21.4 billion in 2017. Total trade between the two countries in $US terms has been climbing at a compound annual growth rate of nearly 16 per cent over the last 15 years, nearly twice the rate of Australia’s total trade with the rest of the world.

This reflects a high level of Australian exports to India relative to imports. The total value of goods and services exports from Australia to India totalled $US15.7 billion in 2017 while imports were $US5.7 billion. Accordingly Australia ran a large surplus with India worth $US10.1 billion in 2017.

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Australia’s goods exports to India rose more than 11 per cent a year on average since 2005. Still, India’s share of Australia’s total goods exports has fallen from the peak of 7.5 per cent in 2010 to its current level of 5.5 per cent.

Trade intensity between Australia and India had been rising since the early 1990s but started to fall following the global financial crisis. In 2009, Australia had higher trade intensity with India than China and South Korea, and similar to ASEAN’s.

Though the trade intensity with India has been recovering since 2014, it is well below its historical high. In comparison, Australia’s trade intensity with China continues to rise.

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Skewed

Australia’s exports to India are skewed towards commodities so fluctuations in commodity prices have an effect on the value of Australia’s exports to India.

Resources exports to India account for 64 per cent of Australia’s total goods exports to the latter, of which hard commodities such as coal account for as high as 59 per cent. Other key resource exports include copper and iron ore.

While the main exports from Australia to India are commodities, agricultural exports have also picked up recently. They now constitute 20 per cent of Australia’s goods exports to India, compared with only 3.5 per cent between 2005 and 2012.

Meanwhile, 24 per cent of the value of total goods Australia imported from India pertains to refined petroleum in 2017. This is followed by textiles and related items at 13 per cent, jewellery at 9.9 per cent, and medicaments (substances used for medical treatment) at 7.7 per cent.

ANZ Research expects resource exports will continue to remain an important component of the Australia-India trade relationship in the future. There is a link between per capita incomes and per capita consumption of hard commodities.

This link is especially strong when per capita income reaches levels between $US5,000 and $US10,000, which have historically been associated with rapid urbanisation and industrial development.

By 2030, 90 per cent of India’s metallurgical coal demand will be met by imports. At 80 per cent of the total, Australia already dominates India’s metallurgical coal imports. This relationship is expected to strengthen in the next few years due to strong demand and low landed cost of Australian coal.

The structural gap between domestic supply of agricultural commodity and India demand for agricultural commodities is expected to widen in the next few years.

As income levels rise in India, diet habits are expected to tilt in favour of higher-value products such as proteins and packaged goods. The growth potential for Australian exports is thus in soft commodities such as pulses, grains, and oilseeds.

Besides direct exports, Australia can also offer technical expertise to improve productivity in India’s agriculture sector. This will open the door for collaboration between the two countries to beyond trade in agricultural commodities.

It is interesting to note the bilateral trade relationship between Australia and India is to a significant extent characterised by India’s imports from Australia of raw materials and intermediate products which are used by India to produce final goods for exports, part of which are shipped to Australia.

Services

India is Australia’s sixth-largest trade partner in the world and the third largest in Asia (behind China and Singapore) in terms of services trade. The total services trade between the two countries was valued at $US5.1 billion in 2017. This accounted for about 24 per cent of total two-way trade between the two countries.

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Australia’s travel services exports to India in 2017 included education exports valued at $US2.7 billion. Education accounts for over 75 per cent of Australia’s exports of services with India in 2017.

Australia’s services imports from India increased by an average rate of 12.9 per cent a year over the past 10 years. However at $US1.1 billion in 2017 India’s share in Australian services imports is small at about 2.5 per cent of total services imports.

Australian exports of financial and insurance services to India have increased by an average of 32 per cent a year over the past 10 years, reaching $US47 million in 2017. There was a spike from $US12 million in 2014 to $US59 million in 2016, which then edged lower to $US47 million but it is still high relative to historical attainments.

Australia’s excellent reputation for top quality education helped drive export earnings in the education sector to a record USD31bn in 2017. This is the fastest annual growth rate since 2009. Australia is already the second-most popular market for Indian students after the US.

A large part of India’s diaspora are students. However, the share of international students from India has fallen in recent years from its peak in 2009. According to government estimates, if Australia can recapture its share of Indian students from the 2009 peak, the revenue from education exports to India could be greater than $US12 billon over the next 20 years.

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India’s rapid urbanisation and increasing middle class population also create immense opportunities for Australia. There has been an emphasis by the government on the development of 100 smart cities in India. As urbanisation rates improve and growth picks up, infrastructure demand is expected to see an increase in India.

Australia’s expertise in this segment is valuable. Australian cities regularly achieve high rankings in world liveability surveys.

The below figure shows India’s infrastructure investment needs through 2040. Assuming an annual average GDP growth of approximately 5.0 per cent, India will require investment of around $US4.7 trillion through 2040.

Based on the current trends, infrastructure spending is likely to remain inadequate in three important sectors: energy, telecommunications and transport. 

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Shashank Mendiratta is an Economist & Khoon Goh is Head of Asia Research at ANZ