Economic policy

Rethinking India’s economic policy towards Vietnam

Author: Kannan Reghunathan Nair, NTU and Phan Xuan Dung, Pacific Forum

Since the upgrade of bilateral relations to a “comprehensive strategic partnership” in 2016, the strategic coordination between India and Vietnam has steadily deepened, as evidenced by the strengthening of maritime defense and security. . Cooperation. But economic ties between New Delhi and Hanoi are lagging behind, limiting their ability to respond to shared strategic and security concerns raised by China’s economic rise in India’s backyard and the maritime assertion in the South China Sea.

Vietnam’s efforts to accelerate integration into the global market offer many opportunities for India-Vietnam economic cooperation. In 2019, Vietnam signed a landmark Free Trade Agreement (FTA) and Investment Protection Agreement with the European Union. Vietnam is also a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the signing and negotiation of which are actively led by Hanoi. ease. During Vietnam’s ASEAN Chairmanship in 2020, the 10 ASEAN member states signed the Regional Comprehensive Economic Partnership (RCEP) – the largest free trade pact in the world.

Part of the reason Vietnam is seeking to diversify its trade and investment profile is to reduce its economic dependence on China. China is Vietnam’s largest trading partner with import-export turnover reaching US$133 billion in 2020. Beijing is also Hanoi’s largest foreign investor with a total investment capital of US$2.4 billion as of November 2020. Meanwhile, the two countries have long been embroiled in territorial and maritime disputes in the South China Sea.

Growing Anti-China feelings fueled by tensions in the South China Sea and the strategic implications of overreliance on China have prompted Hanoi to reach out to alternative economic partners, including India. During a recent meeting with Indian Ambassador to Vietnam Pranay Verma, Vietnamese President Nguyen Xuan Phuc encouraged India welcomes imports of Vietnamese agricultural products and stimulates investment in Vietnam.

But Vietnam’s two-way trade figures with India were only US$11.1 billion in the 2020-21 fiscal year, 12 times less than those with China. India’s imports from Vietnam increases from US$2.5 billion in 2015-2016 to US$6.1 billion in 2020-2021, but the growth rate is insignificant compared to Hanoi’s trade ties with major ASEAN countries. Conversely, Indian exports to Vietnam have not seen consistent growth over the past five years, to reach only US$5 billion in 2020-21.

The scale of Indian investment in Vietnam is smaller than that of investment not only from China, but also from other Asian countries like Japan, South Korea and Singapore. Protectionism is also on the rise in India, hampering the prospect of closer economic ties. India was not a party to CPTPP and withdrew from RCEP at the last minute due to concerns on its trade deficit with other RCEP countries.

Meanwhile, through its own institutions – notably the Belt and Road Initiative and the Lancang-Mekong Cooperation – Beijing has reinforced its economic presence not only in Vietnam but also in the wider Mekong region. Through these mechanisms, China consolidates its dominant position as the main supplier of economic goods for the region. It could undermine India and Vietnam share strategic vision for a rules-based South China Sea. More and more Relying on Chinese aid and investment to fuel their internal development, Laos and Cambodia have been reluctant to support Vietnam’s position on the South China Sea.

While India has taken several steps to promote economic integration with CLMV countries (Cambodia, Laos, Myanmar and Vietnam) through projects such as India-CLMV Business Conclave and Mekong Cooperation Initiative -Ganga, global economic ties remain weak. This is mainly due to underutilization of credit lines and lack of physical connectivity. To better compete with China, India needs to rethink its economic policy vis-à-vis Vietnam, as well as mainland Southeast Asia.

India should start by accelerating its review of the ASEAN-India FTA through multilateral dialogues, which will in turn help address the unequal access of Indian traders to ASEAN countries. Since its inception in 2010, the ASEAN-India FTA has shown few results due to the failure of both parties to reduce non-tariff barriers. In 2018, Vietnam’s Ambassador to India Ton Sinh Thanh recommended for updating and revising the ASEAN-India FTA to deepen its economic engagement with India.

In the case of Indian foreign direct investment in Vietnam, India should try to develop faculties to reduce information asymmetry between Indian companies on opportunities in Vietnam. With land and maritime connectivity projects nearing completion coupled with strong political ties, Vietnam is a reliable investment destination for Indian companies among its eastern neighbours.

India should also work with Vietnam to promote aid diversification in mainland Southeast Asia. Vietnam is not only a close strategic partner of India, but also a proactive ASEAN intermediary state. Vietnam plays a vital role in facilitating the socio-economic progress of mainland Southeast Asia through the platforms of ASEAN and the Cambodia-Laos-Vietnam development triangle area. Hanoi is also keen to tangle extra-regional actors in the Mekong region to foster regional growth and economic diversification. For these reasons, Vietnam can act as an important bridge between India and CLMV countries in the field of connectivity and economic cooperation.

Kannan Reghunathan Nair is a Graduate Research Assistant and MA student in Asian Studies at S Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

Phan Xuan Dung is a member of the Young Leaders Program at Pacific Forum, Hawaii.