ipcs specialreport57 pranav indo vietnam

8/11/2019 IPCS SpecialReport57 Pranav Indo Vietnam

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No. 57, July 2008

India-Vietnam Economic Relations

Opportunities & Challenges

IPCS

SPECIAL

REPORT

INSTITUTE OF PEACE AND CONFLICT STUDIES

B 7/3 Safdarjung Enclave, New Delhi110029, INDIATel: 91-1141652556-9; Fax: 91-11-41652560

Email: [email protected]; Web: www.ipcs.org

PRANAV KUMAR

IPCS Special Reports aim to flag issues of regional and global concern from a South Asian perspective. All IPCS Reports are peer reviewed.


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2008, Institute of Peace and Conflict Studies (IPCS)

The Institute of Peace and Conflict Studies is notresponsible for the facts, views or opinion expressedby the author.

The Institute of Peace and Conflict Studies (IPCS),established in August 1996, is an independent thinktank devoted to research on peace and security from aSouth Asian perspective.

Its aim is to develop a comprehensive andalternative framework for peace and security in theregion catering to the changing demands ofnational, regional and global security.

Address:B 7/3 Lower Ground FloorSafdarjung EnclaveNew Delhi 110029INDIA

Tel: 91-11-4100 1900, 4165 2556, 4165 2557,4165 2558, 4165 2559

Fax:(91-11) 4165 2560Email: [email protected]

Web: www.ipcs.org


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INDIA-VIETNAM ECONOMIC RELATIONS

OPPORTUNTIES & CHALLENGES

PRANAV KUMAR Research Officer, IPCS, New Delhi

The report provides an overview of India Vietnam economic relations. The economicrelations contain bilateral trade andinvestment relations. The institutionalmechanism and the bilateral treaties providethe framework for this relationship. Indiaand Vietnam share a cordial political andstrategic relation from a long time, howevertill now this was not translated in theeconomic and commercial areas.

In the wake of domestic changes occurringboth in India and Vietnam this situation isgradually changing. The bilateral tradebetween India and Vietnam crossed US$1billion mark in 2006-07. However this levelof trade remains very low given the potentialof both the emerging economies. India andVietnam are among top ten fastest growingeconomies of the world. Unfortunately, tradewith Vietnam is only 0.37 per cent of Indiastotal trade. The state of mutual investment

remains grim. There are only eight majorinvestments from Indian side in Vietnam.

The report identifies some specific areaswhere an opportunities lies for investmentand cooperation. Although the opportunitiesfor investment in oil and gas sector inVietnam is well known, but there are otherpotential sectors too, like, steel, knowledgebased industries, transportation and so on.Vietnam and India face the challenge ofconnecting both the countries through roadand rail linkages. Incidentally, both India

and Vietnam are part of Mekong GangaCooperation (MGC), which has a specialfocus on overland connectivity. The reportconcludes that India and Vietnam competeand cooperate simultaneously in economicfield, and it would be prudent if policymakers identify the respective strengths andwork accordingly.

An Overview

Driven by their cultural linkages,ideological similarity and a commonpolitical worldview, India and Vietnamhave shared a cordial bilateral relationsince their independence. But till the 1990sthe economic and commercial interactionsnever figured significantly in their bilateralrelations. The domestic economic setup,growth paradigm and foreign policy

preferences in both the countries, prevalentat that time, were the major reasonshindering the growth of bilateral economicrelations. In 1986 the virtually closedeconomy of Vietnam introduced the DoiMoi (renovation) policy. The Doi Moipolicy focused on market-orientedeconomic management1. After someyears, India started opening its importsubstitution-based economy with theintroduction of the structural adjustmentprogramme in the early 1990s. At thesame time, the changing dynamics of worldpolitics in the early 1990s led to arethinking both in terms of content andfocus in Indian foreign policy.

The adoption of the Look East Policy,imbued with the economic element, markedan important turn in IndiaVietnameconomic relations. The need for economicdevelopment increased the importance ofbilateral economic and commerciallinkages between both the countries.Hence, both the countries made conscious

efforts to expand the areas of economiccooperation and increase the volume oftrade and investment. These effortsreceived fillip from regional arrangements,for example, ASEANIndia cooperation

1Vietnam : A guide for Business and Investment,November 2006, PriceWaterHouseCoopers.


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IPCS SPECIAL REPORTNo 57, July 2008

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and Mekong Ganga Cooperation.However, a study of economic relationsbetween the two countries reveals that it isstill in its budding stage. Due to severalfactors the economic relations are yet toachieve their potential. This paper seeks to

examine the current level of economicinteractions, identify the challenges andhighlight the possible areas of cooperation.

I

BILATERAL TRADE

Over the past five years there has been asteady increase in the trade volumebetween India and Vietnam. Eventually, itcrossed the US$1 billion mark in year2006-2007. This is a major achievement, inlight of the fact that one decade ago, in1994, thetotal tradewas US$102.6million. In thelast fiveyears therehas been acontinuousgrowth in thebilateraltrade. While

in 2005-06the bilateraltrade wasUS$ 822.06million, itgrew by39.81 percent and reached US$ 1,149.36 million(see Table 1). However, the noticeable factis that despite the growth in bilateral tradevolume, its share in Indias total traderemains miniscule. Even the yearly increasein percentage growth remains insignificant.As over the past five years, the yearlypercentage growth in total trade hasincreased from 0.32 to 0.37. This indicatesthat although India-Vietnam trade isincreasing, this increase is not exceptionalin light of Indias overall trade growth. Onthe other side in 2003-04 Indiaconstituted around 1.6 per cent of

Vietnams total export2. Despite theincrease in Indias share in Vietnamesetrade, India still does not figure among thetop ten trading partners of Vietnam.3

An important highlight of the India-Vietnam

trade is that the Balance of Trade (BoT)has continuously been in favour of India. In2006-2007 Indias Exports to Vietnamwere US$ 981.84 million, while for thesame period the imports were US$167.52million. So the Indian exports are almostfive times higher than the imports. And thisphenomenon has continued over a longperiod of time, as it is evident from figure2.

The major factor behind the favourableBoT for India and rather slow expansion of

bilateraltrade is thesimilarity ofexport itemsof both thecountries. Astudy of the

exportbaskets ofIndia and

Vietnamsuggests that

garments,tea, rice,

cashew,footwear,

pepper, andmarine

productsfigure in the export lists of both India andVietnam. However, in the case of Indiasexports, there is further scope forexpansion in sectors like modern electronicmachinery and computer software; andmainly crude oil and natural gas in thecase of Vietnamese exports to India.

2 Rajesh Mehta, India Vietnam Trade: CurrentRelations and Prospects RIS Discussion Papers,www.ris.org.in.

3Vietnam ImportExport Statistics,http//www.vietpartners.com/statistics.

Table 1

Bilateral Total Trade between India and Vietnam

Source: Export Import Data Bank, Department of Commerce, Ministryof Commerce and Industry, Government of India,http://commerce.nic.in/eidb/default.asp

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

BilateralTotal Tradevolume(InUS $million)

366.57 448.56 642.46 822.06 1,149.36

Per centgrowth

22.39 43.20 27.96 39.81

Per cent

share inIndiasTotal Tradevolume

0.32 0.32 0.33 0.33 0.37


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Major items of Indias export to Vietnaminclude food ingredients, ordinary metals,plasticmaterials,pharmaceutic

als, steel ofall kinds,leather andtextilematerials andpesticides.Indias importbasket fromVietnamcontainscrude oil,pepper, tea,rubber,

cinnamon,coal,computer andelectroniccomponents.

SoutheastAsia hasgrown in importance in Indias economicinteractions with the world. And even incomparison to other ASEAN members,Indias trade volume with Vietnam is not

satisfactory, as Vietnam is the 4th

largesttrading partner of India in Southeast Asia..

II

MUTUAL INVESTMENTS &

INSITITUTIONAL MECHANISMS

To date there has not been any majorinvestment from Vietnam in India. From theIndian side there have been someinvestments in Vietnam. In recent timesVietnam has introduced favourable policiesfor investors and has implemented the one

stop shop policy in licensing. At the sametime Indian companies are venturing out inthe world market. So there are eight majorinvestments from the Indian side in Vietnam,with a total registered capital of US$583million. The major Indian investments are insugar production, oil and gas exploration,edible oil, pharmaceuticals, officefurniture-making and plastic industries.

ONGC Videsh has invested US$162 millionin offshore oil and natural gas exploration.Esaar Group,Godrej Limited and Ranbaxy

are some ofthe important

Indian

companies inVietnam.

The UnitedNations

Conferenceon Trade and

Investment(UNCTAD)

has rankedVietnam sixthamong the

attractive

destinationsfor FDI. Puttogether withthe fact thatin 2006

Indiasoutward FDI

wasUS$9,676 million, Indias current investmentin Vietnam seems to be below its potential.

On a government-to-government level, the

India-Vietnam Joint Commission forEconomic, Scientific and Technicalcooperation, established in 1982, serves asa platform to discuss various issues ofbilateral economic importance. Themeetings of this commission take placealternatively in New Delhi and Hanoi. In2007, the 13th meeting of the JointCommission took place in Delhi. The foreignministers of the two countries are the jointco-chairmen of this commission. On theother hand the Indo-Vietnam Joint BusinessCouncil is a platform to discuss business

issues by the corporate people. It is abody of the private business sectors in thetwo countries, coordinated by the FICCI onthe Indian side and Vietnam Chambers ofCommerce and Industry on the Vietnamese

Table 2

Export Import Data of Bilateral Trade between India and

Vietnam

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

IndiasExport toVietnam(In US $million)

337.39 410.43 555.96 690.68 981.84

Percentageincrease inExport

21.65 35.64 24.23 42.16

IndiasImportfrom

Vietnam(In US $million)

29.18 38.21 86.50 131.39 167.52

PercentageIncrease inImports

30.95 126.35 51.89 27.50

Source: Export Import Data Bank, Department of Commerce,Ministry of Commerce and Industry, Government of India,http://commerce.nic.in/eidb/default.asp


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side.4 The first meeting of Indo-Vietnamese joint business council took placein Hanoi on 6 September 1993. Thesemeetings facilitate various trade-relatedagreements between the companies of thetwo countries. Outlining a future map for

the growth of India-Vietnam relations, boththe countries issued a join declaration in2003 on Comprehensive Cooperation inthe 21stcentury.

III

OPPORTUNITIES

There are a number of other areas whereIndia and Vietnam can share theirexperiences and benefit through mutualcooperation. In light of the fact thatVietnam is very rich in mineral resources, anumber of sectors where Indian companiescan invest in Vietnam might be identified.

Oil and gas

Vietnam has 600 million barrels of provenoil reserves. While it is a major oilproducer in Southeast Asia; it still has toimport oil to meet its domestic needs. This islargely due to the fact that Vietnam lacksthe technical know-how of exploration andthere is a lack of refineries. In both theseareas, Indian companies can be major

players. Till date, only ONGC Videsh andESSAR Group have invested in Vietnam.There are reports that the Reliance Groupis also interested in the Vietnamese oil andgas sector. Vietnam is estimated to havenatural gas reserves up to 10 Trillion CubicFeet (TCF). Vietnam is emerging as apotential natural gas exporter in SoutheastAsia. Here, India can enter into jointventures with an added benefit of gettingnatural gas supply from Vietnam.

Pharmaceuticals

Vietnam imports a major portion of itspharmaceutical needs. The demand fordrugs is growing, with the availability ofan additional amount of income to be

4http://www.ficci.com/international/countries/Vietnam/vietnamcommerce.

spent on health needs. The Indian company,Ranbaxy, has invested in Vietnam. But thescope for further investment in this sector isvery wide. India being a major player inAsia in the pharmaceuticals sector, can helpVietnam strengthen the pharmaceutical

industry in Vietnam.

Steel

The boom in the real estate sector isdriving the demand for steel in Vietnam.Despite being rich in natural resources,Vietnam imports crude steel. The proposedinvestment of TATA in the Vietnamese steelsector has shown the potential of indo-Vietnamese cooperation in this sector. Sothe rich Indian experience in the steelsector can be valuable for Vietnam.

Knowledge-based Industries

India is a world leader in knowledge-based industries. Vietnam being a newentrant in this field can benefit from theIndian experience. Vietnam has invitedIndian companies to invest in theeducational sector. With the growth of theeconomy, the demand for human resourceis continuously increasing in Vietnam andthis provides an opportunity for India toexplore the human resource developmentsector. There are a number of private

education providers who can invest in theVietnamese educational sector. The scienceand technology field provides immenseopportunities for economic growth of boththe countries. Especially in the InformationTechnology sector, India and Vietnam canestablish join ventures in Vietnam. Further,given Indias expertise in these areas, itcan train Vietnamese manpower to cater tothe market needs of high-skilled labour.

Transportation

The easy movement of goods and peoplethroughout the country remains animportant imperative for economicdevelopment. Both India and Vietnam arebuilding their transportation sector to meetthe challenges of infrastructuredevelopment. In Vietnam, the rail networkconsists of only 2,600 kilometers of singletrack line. There is a major plan to extendthe length and improve the condition of


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tracks. India has shown its interest in theVietnamese Railway sector. RITES Ltd hassupplied 20 electrical locomotives toVietnam Railways under lines of credit,extended by the Government of India.Indian Railways operate the second-

longest railway network in the world.Indian Railways has proved its expertiseby taking on projects in various countriesand in varied geographical terrains.Therefore, it has a rich experience andcompetent technical expertise to helpVietnam in strengthening and expanding itsrailway network.

Both India and Vietnam are involved in theupgradation and expansion (in length) oftheir national highways. Here, bothcountries can share their respective

experiences. One special area of mutualinterest can be the building of bridges overrivers, since both countries need to build alarge number of bridges, considering theirgeographical conditions.

Inland waterways are widely used fordomestic use in Vietnam. However, in India,despite its potential, it remains largelyuntapped. Here, India can learn from theVietnamese experience in developinginland waterways and managing them as a

sustainable mode of transport.

With the globalization of their economies,the civil aviation sector is growing inimportance in both the countries. Theupgradation and building of new airportsare major activities in this direction, andtherefore, this can also be an importantarea of mutual cooperation to benefitfrom.

Agricultural techniques, research and

biotechnology

India and Vietnam produce a largenumber of agricultural products which arecommon to both the countries. India canlearn some novel agricultural techniques toincrease productivity. Especially India canlearn from Vietnamese in marine productsand rice cultivation. Vietnamese firms haveshown interest in learning the techniques ofsoya cultivation and making various soya-

based products. India being a majorproducer of soya products can helpVietnam in this direction. At the same time,both the countries can cooperate toundertake further research in theagricultural sector. The benefits of newer

technologies like bio-technology can bejointly harnessed to increase agriculturalproductivity and improve the livingstandards of farmers.

IV

CHALLENGES

In international trade and commerce,companies and countries compete andcooperate at the same time. This also holdstrue for IndiaVietnam bilateral trade andcommerce. Due to the complementarities of

their major export items, they compete, butat the same time cooperate, to benefitfrom mutual trade and commercialrelations. As noted earlier, India andVietnam export similar types of goods,which inhibits the rapid growth of trade.However, given the vast growth of themarket in both countries, the space forbilateral trade is expanding. And thegrowth pattern of bilateral trade in lastdecade verifies this statement. In recenttimes, there have been some talks about

the possibility of Free Trade Area (FTA), toincrease the volume of bilateral trade andinvestment. This view was echoed byVietnamese Prime Minister Nguyen TanDung during his visit to India in July 2007.He stated that We are ready to sign anFTA with India.5But both the countries aretaking a cautious approach towards FTA,as any move towards it, without properliberalization and building of thecompetitive strengths of various sectors isunlikely to benefit the economies. It seemsthat past autarkic policies have also

contributed significantly to low levels oftrade; and, as both economies open up, thevolume of trade will increase. Further, inview of the hindrances faced by India-Thailand and India-ASEAN, FTA, the Indian

5http://www.bilaterals.org/articles.php3?id-article=8930.


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side wants to go step by step in thisdirection rather than take long strides. TheVietnamese are also concerned that giventhe trade structure between both thecountries, in case of an FTA, India will beable to capture a large number of

commodities in the Vietnamese market. In anutshell, although both the countries arewilling to work towards an FTA for the freeflow of goods, services and investment;they are not in a hurry and want toconsider its pros and cons.

For the consistent development of bilateralcommercial relations, connectivity is amajor issue. This is an area India andVietnam need to work on, since thehindrances posed by distance can beturned into opportunities through the meansof connectivity. Although there is anagreement between India and Vietnamregarding civil aviation, there is still nodirect flight available between India andHanoi, on a regular basis. It is mainly theThai and Malaysian carriers that operatebetween New Delhi and Hanoi. And it isunfortunate that it takes ten to twenty fourhours to reach Hanoi from New Delhi,largely due to connecting flights. Theproblem is that Airlines operate on thebasis of commercial viability, and this route

offers fewer incentives to them. There is anurgent need therefore, for both countries todiscuss this issue within the broaderframework of tourism-promotion andincreased economic interaction.

There are obvious benefits of a rail androad link between the two countries. Roadlinkages facilitate further growth ofeconomic and cultural linkages. Apart fromits obvious benefits related to themovement of goods, it also promotesoverall equitable development in variousregions, which is a major developmentalgoal for both the countries. Additionally,the flow of tourists will also increasephenomenally. Both India and Vietnam arepart of the Mekong Ganga Cooperation(MGC), which has a special focus onoverland connectivity. The New Delhi-Hanoi rail link was proposed at theministerial meeting at Phnom Penh in June

2003. Even though rail networks exist inIndia, Myanmar, Thailand, Cambodia andVietnam, there are certain missing links thatneed to be laid out for the completion andoperationalization of the rail link from NewDelhi to Hanoi.6Some five years after its

official announcement, there seems to beno further ground work on this proposal.Although there are other countries involvedin this scheme, the issue of overlandconnectivity between India and SoutheastAsia must be accorded the highest priority.Such a step will be a landmark initiativethat will bring multifarious benefits to allstakeholders, especially to India-Vietnameconomic linkages.

The tourism sector has emerged as animportant component in the India-ASEANsummit discussions, given its potential infacilitating mutual development. Both Indiaand Vietnam have actively participated inthese discussions both at the regional andbilateral levels. In recent times, both thecountries have emerged as top touristdestinations in the world. Despite this, themutual tourist inflow between the twocountries has remained very low. During2006, Vietnam received 3.6 million foreigntourists, of which only 1,463.0 thousandswere Indians. While in 2006 India received

4 million tourists, the number of tourists toIndia from Vietnam was negligible incomparison to other ASEAN countries. Sinceboth countries are gearing up to make thetourism sector a magnet for foreignexchange earnings, it is imperative thatboth cooperate in this area. Vietnam has alarge Buddhist population, and being thebirth place of Lord Buddha, India canattract a large number of tourists fromVietnam to visit the holy places associatedwith Buddhism. The concept of the Buddhistcircuit is a welcome initiative in this

6 Rajya Sabha question and answers: Rail Linkbetween New Delhi and Hanoi, 11 December2003,http://meaindia.nic.in/parliament/rs/2003/12.htm.


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direction. India needs to showcase itspotential destinations to potential tourists.To this end, a massive tourism-promotioncampaign in Vietnam could prove to beproductive. On the other hand, Vietnamneeds to focus on Indian tourists traveling

to other countries for nature-based tourism.There is a lack of knowledge amongpotential Indian tourists about the possibledestinations in Vietnam. Thereby, Indiantourists mainly go to Malaysia andThailand. With a more intensive tourism-promotion campaign therefore, Vietnamcan attract a large number of tourists fromIndia. Vietnam will also need to informpotential Indian tourists that it offers awide variety of choices, ranging from seabeaches to tropical forests. Given the factthat tourism is one of the four focus areas

in MGC, it makes it even more vital forboth countries to cooperate in this areaand strengthen the regional setup.

V

CONCLUSION

Despite the fact that India is an economicpowerhouse and Vietnam, Asias fastest-growing economy, bilateral trade andinvestment are far below the level ofactual potential. Given that Vietnams

bilateral trade with both china and US hascrossed the US $ 10 billion mark, the India-Vietnam trade volume of US $ One billionseems quite low. But the growth pattern inthe economic relations is encouraging. Boththe countries has resolved to cross the US $2 billion mark in bilateral trade by 2010.To achieve this target, some prudent stepsneeds to be taken. First, the VietnameseDeputy Trade Minister has asked forsetting up a forum for trade andinvestment policy exchange between thetwo countries. Although India has agreed to

this proposal in principle, some immediatesteps are needed to fructify this forum.Such forums provide an institutionalframework for the key actors to engage indiscussion. Here, both the countries canthink of a bilateral forum for knowledge-based industries along similar lines, with amore focused approach.

Second, a Vietnam-India Trade PromotionProgramme, which calls for theparticipation of all sectors and branchesand is phased out in various stages suitablewith human and financial capacities of boththe countries7 will be of immense help to

expand the commercial relations betweenthe two countries. Third, in India, states likeWest Bengal share a number of similaritieswith Vietnam in terms of their agriculturalproducts, Here, a more decentralizedeffort could prove immensely productive.So in the agricultural field, individual statesin India can devise a specific product-based strategy for mutual cooperation.Fourth, the knowledge in both countriesconcerning the available economicopportunities on the one hand, andattractive tourist destinations on the other,

is minimal. So, a mechanism for informationdissemination will be of great value. In thisdirection, an increase in bilateral visits,involving key economic players can be afruitful step.

Finally, both the countries need tounderstand their strengths andopportunities in their bilateral economicrelations and act accordingly. In a shortperiod of time, it will be impossible forVietnam to bridge the trade balance,

which is currently in Indias favour.Vietnams attention therefore, must befocused on attracting investment fromIndia, which Vietnam needs, to fuel itsgrowing economy. At the same time, Indiain its endeavor to become a globaleconomic player, needs to strengthen itseconomic relations with Vietnam throughincreased interaction with physical,commercial, investment, and trade linkagesto venture into the larger Asia-Pacific.

7An assessment of Trade and Investmentcooperation between India and Vietnam, Instituteof World Economics and Politics, October 2005.


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Important Bilateral Treaties and

Agreements related to Economic

Relations

Bilateral investment Promotion and ProtectionAgreement (BIPPA) signed in March 1997

Avoidance of Double Taxation Agreement,signed in September 1994

Consular Agreement signed in September1994

Agreement on Cooperation in Science &Technology, signed in 1976 and renewed inFebruary 1996

Joint Declaration on the framework ofComprehensive Cooperation - 1 May 2003

Agreements signed during the state visit ofPrime Minister of Vietnam to India on 6 July2007:

MoU on Cooperation in the field ofFisheries and Aquaculture.Work Plan in the field of Agriculture2007-2009.MoU on Cooperation between VietnamSteel Corporation and Tata Steel Ltd.

ipcs specialreport57 pranav indo vietnam

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