In recent years, India has joined the ranks of Australia’s leading trade partners. India’s high-speed growth has already seen it become the fifth largest economy in the world, with aspirations to become the third largest by 2027. As one of the world’s fastest-growing economies, and with considerable areas of complementarity with Australia, its importance as a trade partner will only grow in coming years.
India’s economic heft means it simply cannot be ignored. The IMF forecasts its real GDP will rise by 7.0% in 2024, by a wide margin the fastest rate for any major economy. Urbanisation and industrialisation are the primary drivers, with notable 9.9% increase in manufacturing output in 2023-24. And as India’s economy grows so too does its trade footprint, with USD 1.1 trillion of two-way trade in 2023, 38% higher than before the pandemic.
India is a natural and attractive trade partner for Australia. For many years bilateral trade has been narrow, limited to a range of mineral commodities (such as coal) with relatively fewer links across the industrial ecosystem.
But the signing of the India-Australia Economic Cooperation and Trade Agreement (ECTA) in 2022 promises to change the game. One of India’s few free trade agreements with a leading trade partner, it offers a potential platform to put Australia at the front of the queue as India’s trade profile continues to expand.
Strengthening trade relations with India would benefit Australia in many ways: diversifying export destinations, developing new supply chain partners, reducing dependence on our traditional trade partners, as well as promoting stronger social and political bonds.
This research note explores how the Australia-India trade relationship is developing. What has driven our trade in the past, and where are we most likely to seize the next opportunities?
We find that bilateral trade has increased significantly since the pandemic, in part because of supply chain disruptions and in part because of the ECTA. As the Indian and Australian governments look toward an upgrade of ECTA in coming months, there is a significant opportunity to make industrial trade a centrepiece of the next phase of bilateral economic engagement.
Until very recently, Australia-India trade ties were relatively modest. Bilateral trade has grown relatively slowly over the last two decades, largely driven by India’s demand for three mineral imports from Australia: coal, gold and natural gas. In 2019, bilateral trade was valued at $18.9 billion, accounting for only 2.7% of Australia’s total trade.
However, since the pandemic trade relations have acquired a new impetus. Bilateral goods flows started increasingly dramatically, more than doubling to $39.3 billion in 2022. While some of this growth was due to rising prices for Australia’s energy exports, there was also a doubling in India’s exports – primarily of chemical products, machinery and pharmaceuticals – back to Australia. For perhaps the first time, there was finally momentum in the bilateral trade relationship.
This sudden increase in bilateral trade is particularly significant given India’s trade policy setting. One of the Indian government’s main trade concerns is managing trade deficits with other countries. For example, India’s withdrawal from the blockbuster Regional Comprehensive Economic Partnership (RCEP) trade bloc in 2019 was widely understood to be due to concerns about a flood of imports into the local market.
Indian trade policy makers have a long tradition of being hesitant to allowing more imports, and are sceptical regarding trade’s benefits for export capabilities and productivity.
Why has Australia managed to boost its trade with India despite these policy settings? Australia would seemingly not be a preferred partner, given the $16.1 billion trade surplus it runs with India. The answer lies in Australia’s size and economy complementarity with India.
Firstly, many Australia goods do not directly compete with Indian producers, and vice versa. Australia’s coal, gold and gas all support India’s ambitions to foster industrialisation, and so do not attract many protectionist barriers. Reciprocally, India’s exports of chemicals and machinery to Australia provide much needed inputs for Australian industry, and add diversification and resilience through an additional supply chain partner.
Second, Australia is a relatively small economy, and its limited scale means it won’t significantly disrupt Indian producers. This is especially in agriculture, which is a highly sensitive and protected industry in India. Many Australian agricultural exports are aimed at the high-end market in India, and do not compete with the production of Indian farmers.
And third, Australia and Indian trade has been boosted by a landmark free trade agreement, which promises to greatly improve the prospects for accelerating bilateral trade flows.
In May 2011, Australia and India started talks for a free trade agreement – one of India’s very first. After many years of negotiations, the Economic Cooperation and Trade Agreement (ECTA) agreement was completed in late 2022. ECTA was considered a ‘preliminary’ agreement and serves as a foundation for continuing discussions for subsequent liberalisation. The agreement entered into force in late 2022 and had an immediate impact on trade.
Australian exports fell by 14% in 2023, ECTA’s first full year in-force. However, this headline figure fails to properly read the real impact of ECTA. It removes tariffs on more than 90% of Australia’s goods exports to India by value. This includes immediate tariff elimination for primary products like sheep meat, wool, rock lobster, and coal. Tariffs on over 85% of these exports have already been eliminated. Additionally, tariffs on another 5% of exports will be gradually phased out over the next 2, 4, or 6 years.
This means that ECTA should be evaluated in terms of the results for the products which it covers, not all products. Analysing it this way shows a much stronger performance:
Additionally, Australia also benefits from cheaper prices for Indian imports. Businesses and households saved over $145 million in duties, including for automotive, electrical components, household goods and textiles.
There have also been positive impacts on bilateral services trade following the FTA, which is equally important as India ranks as Australia’s third largest market for services exports. Australian exporters gained full or partial access to over 85 Indian service sectors under ECTA. Education, business services, research and development, financial services and healthcare and tourism sectors all saw improved market access as a result.
Indeed, services trade also reports a significant uptick following ECTA. Australian services exports to India nearly doubled to $10 billion in 2023; while services imports also surged to $4.7 billion and are twice the level prior to the pandemic.
Given the nature of services trade commitments in FTAs – which are more challenging to match to industries than those for goods – it is not possible to identify which of these are in covered sectors. But the significant increase in one year points to impact ECTA potentially has across service sectors as well.
Despite being a relatively small economy, Australia sits in a good position within India’s trade partnership. Crude oil is also one of India’s largest imports, constituting approximately 20% of the total. Therefore, energy exporters like the Gulf Cooperation Council, Russia, Iraq and Indonesia dominate its top ten trade partnerships.
Despite this, Australia was India’s tenth largest source of imports in 2022-23 (contributing 2.8%). This is a very close share to other regional peers such as Japan and Korea, and ahead of most other Asian and European economies. Only the US and China – the two global industrial powerhouses – have a materially larger share of the Indian market than Australia.
Australia is also well placed for future growth as a result of ECTA. Only three other top-ten countries (Korea, Japan and Singapore) currently have a bilateral FTA with India, with the EU and UK both currently negotiating. Australia’s main FTA competitors in the Indian market are as follows:
India-EFTA TEPA: On March 10, 2024, the European Free Trade Association (Switzerland, Norway, Iceland, and Liechtenstein) and India signed a Trade and Economic Partnership Agreement. This agreement removes most customs duties on industrial products and improves market access for agricultural products.
Unlike other recent Indian trade agreements, TEPA has a detailed investment section, designed to connects trade and investment to address India’s domestic concerns. EFTA countries will invest $100 billion in India, which is expected to create 1 million new jobs over the next 15 years. The investment will focus on manufacturing in chemicals, pharmaceuticals, machinery, and food processing, which are key Indian export ambitions.
India-UK FTA: The India-UK talks for the proposed FTA began in January 2022. India is advocating for increased opportunities for its skilled workers and the elimination of tariffs on a range of products. Meanwhile, the UK aims to reduce import taxes on items like scotch whiskey and wants more access to India’s services market. The discussions also include a bilateral investment treaty and intellectual property rights.
India-EU FTA: The India and EU resumed the FTA talks since June 2022. Sustainability issues like CBAM and EUDR are the concerns for Indian officials who are viewing these regulations as protectionist measures that could disadvantage Indian exports by acting as non-tariff barriers.
Overall, Australia finds itself in a strong competitive position in India as a result of ECTA. Most of India’s major trade partners do not possess an FTA; while industry differences mean Australian firms are less likely to directly with European and British counterparts for exports or investment in the Indian market. Given India’s sensitivities over trade deficits, an FTA with either China or the US is exceedingly unlikely.
In September this year, the Australian Trade Minister and Indian Commerce Minister reaffirmed their commitment to negotiate for an additional trade agreement. Building on the success of ECTA, it would broaden coverage to a more comprehensive range of goods and services with strong prospects for growth.
What, however, might a second FTA include? Manufacturing would be a good place to start.
Despite not being included in ECTA, Australia-India manufacturing trade has also grown, rising from approximately $4.5 billion before the pandemic to around $7 billion annually. Much of this consists of Indian exports to Australia, but growth has also been seen in Australian exports to India.
This trade is driven by Australia’s manufacturing industry, known for its higher value advanced manufacturing capabilities, frequently relies on the import of intermediate components. India has become an increasingly valuable supplier of these intermediates, especially following the supply chain disruptions caused by the pandemic. As Australian industry seeks to diversify its supply chains, many businesses have looked to India’s manufacturing growth as a new source of secure and cost-effective inputs.
Incorporating the industrial sectors into the forthcoming Australia-India trade discussions would therefore make sense. It would align to India’s ambition and success in fostering manufacturing, while helping to provide greater resilience for Australian industrial supply chains. It would also open joint investment between Australian and Indian industrial firms.
India’s contribution to diversifying Australia’s trading portfolio highlights its role as a reliable and trusted partner. Taking the next step from primary products to industrial goods would help add depth, breadth and resilience to this burgeoning relationship.
Hnin Nwe Oo is Ai Group’s Economic Policy Analyst. She contributes to the broad work of the Research and Economics team, including overseeing the monthly economic newsletter. Hnin's professional experience includes working to facilitate international trade, most recently at Austrade. She is enthusiastic about economic development and collaborating with stakeholders from both the public and private sectors to achieve the best outcomes. Hnin holds a Master of Business Administration (Strategy) from the Asian Institute of Technology.
