1. Introduction
India and Malaysia have strong civilizational links that date back to history. In the contemporary period, India established diplomatic relations with Malaysia in 1957, soon after Malaysia’s independence. Both were under the same colonial ruler and very intensive freedom struggle. During India’s independence movement, Malaysia extended solidarity and support and played a very effective catalytic role. Malaysia has a strong Indian Diaspora, one of the largest communities of Persons of Indian Origin (PIOs) in the world. Malaysia became one of India’s important partners in prosperity and vice versa. In 2022, India and Malaysia celebrate the 65th anniversary of diplomatic relations along with 30 years of the ASEAN-India Dialogue Partnership. While relations between India and Southeast and East Asia have strengthened considerably over the past two decades, the partnership requires new momentum at a time when uncertainties are looming large in the world economy.
Bilateral economic relations between the two countries have crossed several milestones in the past. At present, India and Malaysia had a bilateral trade of US$ 19.2 billion in 2021-22, sharing almost 1/5th of the total trade between India and ASEAN. India’s investment relation with Malaysia is having long-standing economic links. Indian industry has been associated for over three decades with the transformation of Malaysia from an exporter of primary products into an industrialized and technology-based economy. Bilateral investment between India and Malaysia has been growing steadily. Malaysia’s FDI flows in India are close to about US$ 1 billion (between 2000 and 2020), whereas India’s FDI is about US$ 1.70 billion (between 2008 and 2020) in Malaysia. Over time, India-Malaysia economic relations have moved faster than expected amidst uncertainties. However, there remain several challenges in trade and investment areas and unaccomplished tasks. Given Malaysia’s technological prowess in manufacturing and India’s in services, there could be many new economic opportunities. A healthy relationship between them can not only drive the ASEAN-India relations but also strengthen the Indo-Pacific. In view of the above, the prime objective of this essay is to briefly review the trade relations between India and Malaysia and discuss the challenges and prospects.
2. India and Malaysia Bilateral Trade Relations
Among ASEAN countries, Malaysia is India’s third largest trading partner, next to Indonesia and Singapore in 2021-22, whereas India is Malaysia’s largest trading partner in South Asia. Bilateral trade increased by 17 times from the US $0.6 billion in 1992 to US$ 10 billion in 2008 before it declined to the US $ 8.4 billion in 2009 during the global financial crisis and rebounded to US$ 9.55 billion in 2010. With the AIFTA coming into force in January 2010 and the MICECA in 2011, India’s bilateral trade with Malaysia increased from US$ 10 billion in 2010 to about US$ 19.4 billion in 2021, with an annualised growth rate of about 7.2 per cent (see Table 1).
Table 1: India’s Exports to and Imports from ASEAN
Another important development is that bilateral trade remains significantly imbalanced. The balance of trade is in favour of Malaysia. For instance, in 2021-22, India’s export to Malaysia was about US$ 6.9 billion, whereas India’s import from Malaysia was about US$ 12.4 billion, respectively. In particular, India’s trade imbalance with Malaysia has further widened during post-AIFTA and CECA, witnessing an almost US$ 6 billion trade deficit with Malaysia in 2021-22 (see Figure 1). India has drawn the attention of the Malaysian government to the importance of more balanced trade.
Figure 1: India’s Exports to and Imports from Malaysia (US$ billion)
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| Source: Authors’ calculation based on DOTS, IMF |
India’s major exports items to Malaysia are minerals fuels, mineral oils; aluminium and articles thereof, meat and edible meat offal, iron and steel, copper and articles thereof, organic chemicals, nuclear reactors, boilers, machinery and mechanical appliances; copper and articles thereof, wood; wood charcoal, aluminium, organic chemicals, iron and steel and miscellaneous chemical products. Change in India’s export items to Malaysia is also noticeable. In terms of India’s major exports to Malaysia, compared to 2005-06, India’s exports have increased significantly in terms of share of total India’s export to Malaysia in 2021-22: base metals (27.16 per cent), mineral products (23.7 per cent), arts and antiques (10.15 per cent) and chemical products (9.25 per cent) (Table 2).
Table
2: India’s Major Exports to Malaysia
In 2021-22, India’s imports from Malaysia were mineral products (29.7 per cent), fats and oil (28.02 per cent), base metals (25.47 per cent), machinery and electrical (20.11 per cent), arts and antiques (19.97 per cent), chemical products (13.1 per cent) (Table 3). Key items of Malaysia’s interest to which India has offered market access are fruits, cocoa, palm oil products and synthetic textiles. For refined palm oil (RPO) exports by Malaysia into India, as compared to the concessions under the India-ASEAN Trade in Goods (AIFTA) Agreement, only advancement of the timeline from 2019 to 2018 is offered by India, retaining the end-tariff rate of 45 per cent.
Table
3: India’s Major Imports from Malaysia
Despite AIFTA and CECA in place to promote bilateral trade between India and Malaysia, still, most of the trade items are traded under the exclusion list (EL) and sensitive list (SL) in addition to the normal track with reduced tariff rates up to zero for most of the trade items. There is a significant increase in the number of traded goods during pre- and post- trade agreements. For instance, India’s export items increased from 2124 in 2005 to 2373 in 2010 and remained stable closer to 2339 items in 2021 for the normal track (NT). The trade under EL and SL are also continuing to trade during pre- and post- trade agreements (Figure 2). However, compared to India’s value of exports to Malaysia, India’s value of imports from Malaysia is much higher under the sensitive listed products (Figure 3). For instance, about 50 per cent of India’s imports from Malaysia are listed under sensitive lists, which are majorly palm oil and so on.
Figure 2: Trade in Goods between India and Malaysia Number of Products (at HS 8-digit level)
Figure 3: Trade in Goods between India and Malaysia Trade Values (US$ billion)
Source: Authors’ calculation based on Export-Import Databank, Department of Commerce, India
The utilization rate of trade agreements is lower than the expectation. Based on the AIC survey, many of the Indian traders reported that about 22 per cent of the firms used ASEAN-India FTA and APTA routes, followed by bilateral CEPA with Malaysia (16 per cent) and other CEPA with Japan, Singapore and South Korea, respectively (Figure 4).
Figure 4: Utilized FTA Routes to Trade between ASEAN and India
Non-tariff measures (NTMs) have been used to restrict market access in the selected sectors or products.4 Several studies have found that falling tariffs have exposed the importance of other obstacles to trade, particularly NTMs, which are increasingly considered as most significant for trade.5 However, it could also have an adverse effect on trade and increase the cost of trading across borders. The UNESCAP (2017) has reported that new trade-restrictive measures introduced globally accounted for 56 per cent, whereas it was about 55 per cent at the Asia-Pacific level. Therefore, in addition to tariffs, an increase in NTMs would cause a serious impact on bilateral trade between India and Malaysia.
Figure 5: NTMs between India and Malaysia (till 2018) (Number of products at HS 6–digit level)
Figure 5 shows the number of NTMs imposed against each other at the sectoral level by India and Malaysia. India faces NTMs in Malaysia while exporting in chemical products, machinery and electrical, live animals, vegetable products and processed foods, among others. Malaysia, on the other, faces NTMs in India in chemical products, textiles, base metals, machinery and electrical equipment, and processed food, among others (Figure 7). This tells us that the spread of NTMs on each other’s exports is quite extensive, which nonetheless not only affects the trade but also weakens the strength of production linkages at bilateral as well as ASEAN-level.
3. Conclusions
India is the fastest growing economy and has developed a comparative advantage in services, particularly IT services. India is presently attempting to foster manufacturing development and linkages to global value chains through the ‘Make in India’ Programme. About 25 per cent of India’s global trade has been conducted with Southeast and East Asia. With Indo-Pacific in prominence along with a simultaneous rise in trade restrictiveness across countries, both India and Malaysia should strengthen the economic and investment relations by easing the burdens of NTMs, mutual recognition and harmonisation of standards, process simplification, e-trade, transparency, among others.
Malaysia has trade surplus with India consistently for over a decade or so. Barring crude petroleum and palm oil and palm-based products, which are Malaysia’s traditional major exports to India, India’s rising manufacturing sector depends very much on Malaysia’s exports such as electrical and electronic products, saw logs, chemicals and chemical products, etc. India, on the other, exports petroleum products, manufacturers of metal, live animals and meat, chemicals and chemical products, machinery, equipment and parts, and iron and steel products. Malaysia is the potential market for India’s market to the rest of Southeast and East Asia. Both have the presence of a private sector and supportive institutional mechanisms, which are needed to strengthen value chains between ASEAN and India. A stronger economic relationship with Malaysia promotes a stronger India-ASEAN partnership and vice versa.
Both countries should utilize the synergy that exists between manufacturing and services trade. Malaysia has a trade surplus in goods and has a stronghold in electrical, electronics and machinery related in addition to being a major supplier of palm oil to India, whereas India has a stronghold in services sectors in the areas of logistics, finance, IT and business professionals. Promote the areas which offer maximum gains for India, Malaysia and the rest of ASEAN.
There is a need to promote sectoral and issue-based cooperation such as ICT, energy, R&D, health, digital technology, e-commerce, SMEs, GVC participation, etc. to maximize the trade and economic potential among them. Reduce further tariffs and remove items from exclusion and sensitive lists for those products that are supporting regional value chain processes. Need reforms in NTMs and maintain consistency in standards to help the firms to engage in the regional value chain. Harmonization of standards and convergence of testing and certification requirements would help the traders to ease the complex trade procedures. For example, the signing of the MRAs in higher education, tourism industries, electrical and machinery industries, pharmaceuticals, etc. will pave the way for higher trade, investment and value chains. This will also further deepen the ASEAN-India relations in the fourth decade.
Finally, India and Malaysia are partners in ASEAN-India FTA in goods, services and investment. Both of them signed and implemented a bilateral CECA. Presently, both are also partners in the US-led IPEF. India-Malaysia trade relations, therefore, have multidimensional potential. When the world is passing through economic and political uncertainties, deepening ASEAN-India regional partnership offers high dividends, economic and otherwise. The India-Malaysia partnership stands high on its own. The time has come that India and Malaysia must unlock these ever-changing multidimensional potentials for speeding up economic prosperity.
References
AIC-RIS (2020). ASEAN-India Development and Cooperation Report 2021: Avenues for Cooperation in Indo-Pacific, ASEAN-India Centre (AIC) - Research and Information System for Developing Countries (RIS), New Delhi.
AIC (2019) Non-Tariff Measures (NTMs): Evidence from ASEAN-India Trade. ASEAN-India Centre at RIS, New Delhi, 2020.
Indian High Commission (2022) “Commercial Relations between India and Malaysia”, Kuala Lumpur, accessed on 15 August 2022, available at https://hcikl.gov.in/Commerce/
UNCTAD (2014) Non- Tariff Measures to Trade: Economic and Policy Issues for Developing Countries. United Nations Conference on Trade and Development (UNCTAD), Geneva, United Nation. Available at: https://unctad.org/system/files/official-document/ditctab20121_en.pdf
UNESCAP (2017) Asia-Pacific Trade and Investment Report, 2017, Bangkok, https://www.unescap.org/publications/asia-pacifi-trade-and-investment-report-2017
WTO (2012) World Trade Report 2012: B. An Economic perspective on the use of non-tariff measures. World Trade Organization (WTO), Washington DC. Available at: https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr12-2b_e.pdf
Websites:
https://hcikl.gov.in/pdf/menu/KL_ivcc_23022022.pdf
https://hcikl.gov.in/
https://www.mida.gov.my/media-release/indian-investors-to-capitalise-on-business-opportunities-in-malaysia/
Dr Durairaj Kumarasamy is Associate Professor and Head, Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of Research and Studies (MRIIRS), Faridabad, Haryana. e-mail: durairaj.fbss@mriu.edu.in
