India could become one of Australia’s largest trading partners

Home to the world’s fastest-growing major economy and a recently ratified free-trade agreement, India promises tremendous growth opportunities for local business. However, HSBC’s Hitendra Dave and Antony Shaw say corporate Australia is showing reluctance. 

India appears poised for an economic transformation of tectonic proportions.

Not only has the South Asian giant surpassed China to become the world’s most populous nation, economists forecast it will skip ahead of Japan and Germany to become the world’s third-largest economy by the end of the decade.

And while it was once defined by lower-skilled manufacturing, the country is now moving up the value chain — it has registered droves of fintech firms in numbers second only to the United States.

The nation’s ambition to become a global consumer superpower will be fully realised when it further opens its capital account to more international trade and investment.

This is starting to happen with the recently ratified Australia-India Economic Cooperation and Trade Agreement (ECTA) — the first such agreement India has signed with a developed market for more than 10 years.

Herein lies a great opportunity for Australian companies seeking to tap a market of more than 1.4 billion people whose personal incomes are rapidly rising.

ECTA is expected to enhance the robust trade relationship between the two countries, boosting bilateral trade from the current US$31b to US$45b in the next five years, according to both governments.

At HSBC, we feel these estimates could even be on the conservative side given the potential linkages and, if the agreement is executed to its full potential, India could become one of Australia’s most significant trading partners within a relatively short period.

But the potential won’t be realised unless more Australian boardrooms commit to exploring the opportunity.

Among the benefits, the deal makes it easier for companies to do business in India by eliminating or reducing tariffs on more than 90 per cent of Australian goods exports to India by value, phased over 10 years, including a range of agricultural products, pharmaceuticals and wine.

It also guarantees preferential treatment for Australian service suppliers in sectors such as construction, engineering, business services and research and development.

HSBC has supported numerous Australian clients that have been expanding in India over an extended period.

Some of these clients have long viewed India as a potential growth avenue and established a presence there many years ago, while others are evaluating the opportunity and seek to partner with Indian corporates to improve market access and develop relations between the two countries.

Many of our clients now see the trade agreement as a starting pistol, giving them the impetus to finally and fully pivot to a stronger commitment in India.

This has been further bolstered by two-way delegations, including Prime Minister Anthony Albanese’s trip to India in March and Prime Minister Narendra Modi’s Australian visit in May.

But we think more Australian corporates need to head in this direction.

Investment in Australia

On the flipside, the contribution India and its population makes to Australia is already of a considerable magnitude and will be further enhanced by the trade deal.

India recently moved ahead of other nations to become the second-most common country of birth for overseas-born Australian residents (England retains the top spot).

Around 710,000 Australian residents were born in India, including approximately 90,000 international students, according to Australian Bureau of Statistics data.

India has been the third-largest source of international visitors since Australia’s borders reopened, with only New Zealand and the United Kingdom offering more support for the country’s recovering tourism industry.

Importantly, the deal allows more Indians to work and study in Australia, providing a fillip for tourism and a much-needed boost to the country’s drained pool of workers.

Every year, 1000 young Indians will be able to enter Australia for a working holiday and students who graduate from an Australian university with a first class honours bachelor degree in STEM or IT can stay in the country for three years after their studies — up from two years.

Another avenue for inbound investment will be support for Australia’s green agenda, which received a massive boost late last year with the acceleration of the country’s net zero commitment, which aims to reduce emissions from 2005 levels by 43 per cent by 2030.

The Australian government has touted that its climate ambitions will require $76b in investment by 2030, with less than a third of this to come from the public purse. Indeed, the government’s modelling estimates that for every public dollar spent, the plan will require $2.13 in private investment.

A greater connection with India will lay the groundwork for more two-way investment in the green space, particularly in hydrogen and renewables. Timing is everything.

India is a fast-growing major economy and the already strong relationship it has with Australia will only be strengthened by the freshly inked free trade agreement.

If Australian corporates take full advantage of ECTA, it will prove a significant avenue for organisations to tap the commercial opportunities offered by India’s rapidly expanding middle class.

Hitendra Dave is CEO of HSBC India, and Antony Shaw MAICD is CEO of HSBC Australia.

This article first appeared under the headline ‘Passage to India’ in the July 2023 issue of Company Director magazine.