India-Vietnam Bilateral Economic Ties: The Road Ahead
Photo Credit: The Indian Express
By Rashmi Singh

India-Vietnam Bilateral Economic Ties: The Road Ahead

Sep. 18, 2017  |     |  0 comments


Bilateral relations between India and Vietnam are guided both by their common historical experiences and their mutual concerns in the post-Cold War context. Both nations have suffered aggression from colonial powers; fought wars with China in the past; and had good relations with the former Soviet Union. India has had formal diplomatic relations with Vietnam since 1972,1 at the time when Vietnam was isolated by the Association of Southeast Asian Nations (ASEAN) countries due to the Vietnam War. In fact, India was the only non-communist country to recognize the unified Vietnam and ever since, they have had a friendly relationship that has stood the test of time. In addition to this, changing geostrategic dynamics have also forced Vietnam to foster greater strategic cooperation with India.


India and Vietnam signed a bilateral trade agreement in 1978, a revised version of which came into being on March 8, 1997. A Bilateral Investment Promotion and Protection Agreement was also signed between the two countries in 1997 in New Delhi and ratified during the visit of the Vietnamese President to India.2 When India began its Look East Policy in the early 1990s, its economic relations with Vietnam started developing further. Both nations went the extra mile to enhance investment and bilateral trade as a result of the era of economic liberalization for India and the internal development and restructuring needs of Vietnam during the Doi moi (Innovation) period.


While it is a fact that the economic cooperation between Vietnam and India was not glaringly evident in terms of trade and investment until the latter half of the 1990s, things are clearly changing with the Vietnamese economy expanding rapidly and becoming another tiger economy in East Asia. In Southeast Asia, Vietnam has emerged as the 2nd largest market, and there has been a steady increase in Indian investments as opposed to having been microscopic in the mid-1990s. If the present trend continues, there will be numerous opportunities for investment in Vietnam for India in numerous areas such as oil exploration, steel, minerals, railways, power projects, food processing, etc.


When Vietnam and India strengthened their relations to point of having established a strategic partnership in 2007, bilateral cooperation was promoted across five areas: political; defence and security; economic cooperation and commercial engagement; science and technology; culture and technology; and multilateral and regional cooperation. India is among the 16 biggest international trade partners of Vietnam, and Vietnam is the 19th largest foreign trade partner of India.3


The Government of India’s decisions to upgrade the Look East Policy to an Act East Policy, to endorse economic growth with Southeast and East Asian economies, and to magnify the place India has on a global platform, seem promising for the economic ties between Vietnam and India as well. Furthermore, with the progression of talks related to the Regional Comprehensive Economic Partnership Agreement (RCEP), which is scheduled to be finalized by the end of 2017, it is surmised that there will be an opportunity to open the untapped Vietnamese market which India can tap into, in order to further expand its economic relations.


In addition to having nurtured stronger economic relations, India and Vietnam share similar security interests, including issues in their respective regions with major powers, such as China. India’s affairs with Vietnam provide a foundation for a greater role that it can play in Southeast Asia in most respects. The defence cooperation India has with Vietnam is equally advantageous for both nations such that India benefits from the sale of military equipment, platforms, technology, and services to Vietnam, while Vietnam has profited from the increased capacity to modernize its defence forces and reinforce its ability to repair and maintain its naval and air platforms.


India and Vietnam elevated their relationship to a “comprehensive strategic partnership” when Indian Prime Minister Narendra Modi visited Hanoi in September 2016. India extended a USD 500 million line of credit to Vietnam in an attempt to assist Vietnam with its defense capabilities.4 Vietnam has also been promised Akash surface-to-air missile systems to prevent any conceivable threat. The two nations have been witness to an acceleration in their union in recent years as a consequence of their shared apprehensions over a rising China. The Vietnamese navy’s submariners have been trained by India for operating the country’s six Russian Kilo-class submarines. India has also been providing aid to Vietnam in the matter of the modernization of its Petya-class frigates (specifically for anti-submarine warfare). Moreover, India has deliberated offering Vietnam the substantially more cutting-edge BrahMos supersonic cruise missile to enhance its defence relations.


The India-Vietnam relationship, part of which is based on a set of historical commonalities, has been moving towards addressing shared strategic concerns of energy security and open Sea Lanes of Communication, capacity building, and technical assistance. On the other hand, Vietnam is all set to contribute significantly to the facilitation of India’s Act East policy for relations with Southeast Asia. It is anticipated that India’s new role would be accepted by ASEAN members since it will assist ASEAN in maintaining regional sovereignty in Southeast Asia and provide a multipolar equilibrium in ASEAN’s relations with external powers.


India is presently one of the principal trade partners of Vietnam. During Secretary General Nguyen Phu Trong’s visit to India in November 2013, the two countries set a bilateral trade target of USD 15 billion by 2020.5 Nonetheless, apart from having their share of achievements, economic relations between India and Vietnam have also confronted many complications and challenges. The chief factors deterring trade relations concerning the two are: similarity in the import/export structure of the two economies; geographical distance and difficulty in transportation; and differences in tastes, customs and business environment.


Geo-strategic interests between India and Vietnam are markedly converging. Both share similar concerns about maritime security and Chinese muscle flexing. Not only has India offered substantial support to Vietnam’s navy and air force but has also provided political-diplomatic support with respect to Vietnam’s South China Sea policy. Both India and Vietnam will benefit from the development of Vietnam’s offshore hydrocarbon resources. India is seeking new markets while Vietnam wants to enhance its economic heft.


Indian strategists have called for stepping up relations with Vietnam to exert pressure on China, as a response to China’s engagement with Pakistan. Recently, Indian strategists have had the same response to Chinese in-roads in the Indian Ocean region with China’s “string of pearls” and the Belt and Road Initiative, especially with Pakistan, Sri Lanka, Nepal and other countries. Deeper development partnerships between India and Vietnam are proving to be rewarding for both despite causes for mutual concern such as China’s growing investments in the vicinity of both nations and tensions in the South China Sea.


Trade


India and Vietnam’s bilateral trade relations are drastically enhancing with an increase in commercial and economic engagement. Bilateral trade between India and Vietnam reached USD 8037 million in 2015, up from USD 208.9 million in 2000. In spite of mounting bilateral trade, Vietnam’s share in India’s total trade is marked at a meagre 1.2 percent in 2015. In exports, Vietnam’s share in India’s total exports stands at 2 percent and in imports, only 0.7 percent. The two nations have set a goal of USD 15 billion for bilateral trade by 2020. Vietnam endorsed the India-ASEAN FTA in goods with effect from June 1, 2010.6 The suggested treaty on trade in investment and services, which was implemented in 2014, is expected to intensify bilateral trade and economic relations.


This Agreement of 24 articles is a roadmap for tariff reduction commitments made by ASEAN and India. Besides, on signing the ASEAN-India Trade in Goods (AITIG) Agreement on October 25, 2009, India also significantly recogzed Vietnam’s full market economy status. As a new member of ASEAN (Cambodia, Laos, Myanmar, Vietnam), Vietnam enjoys a tariff reduction roadmap of five years, longer than other ASEAN countries and India. Despite a longer route, Vietnam still enjoys full privileges from tariff reduction commitments of India and other ASEAN countries.


In addition, at the request of Vietnam, 80 percent of India’s tariff lines of goods to Vietnam will be reduced to 0 percent by the end of 2018. On “sensitive” goods, namely, those products in which both India and Vietnam compete such as tea, coffee, pepper, seafood and garments, the roadmap tax cuts will be implemented from 2019 with India agreeing to reduce the tax to 45 percent for coffee and black tea and 50 percent for pepper by 2018.7


India is exporting goods to Vietnam to serve its manufacturing and processing sectors, as well as to meet the needs of daily life. The prices and range of exported goods from the Indian market such as fish, cotton and pharmaceutical products are very competitive in the Vietnamese market as compared to imports from other markets around the world. Besides, India has strengths in information technology, biotechnology and nuclear energy while Vietnam is weak in these areas while having a great demand for software products, biological products and products with radioactive isotopes.


The main commodities that constituted India’s exports to Vietnam in 2015 comprised of fish and crustaceans, molluscs and other aquatic invertebrates (12.1 percent), cotton (10.6 percent), pharmaceutical products (10.2 percent), machinery, mechanical appliances, nuclear reactors, boilers; parts thereof (9.8 percent) & vehicles (other than railway or tramway rolling stock), and parts and accessories thereof (5.3 percent). In the year 2015, India’s top fifteen exports to Vietnam constituted about 80 percent of its total exports to Vietnam rising almost two-fold from 45 percent in the FY 2003.


Indian exports to Vietnam have registered perceptible change during the past 10 years. In 2015, India’s exports to the world markets constituted about 50 percent share of the same top 15 products which it exports to Vietnam. The main commodities that constituted India’s exports to the world were natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with a share of 14.6 percent, vehicles other than railway or tramway rolling stock with a share of 5.3 percent, machinery and mechanical appliances with a share of 5 percent, etc.


However, if we analyze India’s export share to Vietnam in those products, it is greater in all the commodities except for one commodity, i.e., natural or cultured pearls. This implies that India is enjoying tariff concessions or less of non-tariff barriers with Vietnam than with the world economies. India’s key imports from Vietnam during the same period comprised electrical machinery equipment; parts thereof (36.6 percent), machinery, mechanical appliances, nuclear reactors, boilers; parts thereof (11.5 percent), coffee, tea, mati and spices (6.7 percent), inorganic chemicals (6.1 percent), rubber and articles (5.8 percent) etc. In the year 2015, India’s top fifteen imports from Vietnam constitute about 80 percent share in its total imports from Vietnam.



Vietnam encourages investment from India in specific areas of expertise such as infrastructure (rail), power generation and distribution, information technology, education, research and production of pharmaceuticals, and agricultural products.

Indian imports from Vietnam have also registered a major change during the past 10 years. In 2015, India’s imports from the world constituted about 65 percent share of the same products which it imports from Vietnam and the main commodities that constituted India’s imports from the world are coffee, tea, mati and spices with a share of 24 percent; man-made filaments, strip and the like of man-made textile materials with a share of 11 percent; essential oils and resinoids, perfumery, cosmetic or toilet preparations with a share of 10 percent; etc. However, if we analyze India’s share of imports from Vietnam in the top 15 products, it is greater in all the commodities than India’s share of world imports (in the same commodities) except for four commodities. This implies that Vietnamese products are more competitive in Indian markets than the products from the world markets.


Over the last twenty years, Vietnam’s changing export patterns have been characterized by growing economic interdependence with the United States and China specifically, and East Asia more broadly. In 2015, the United States was the biggest exporting partner of Vietnam with USD 33.4 billion of exports having an export share of above 21 percent. China stood at 2nd rank with USD 16.5 billion in total trade and a share of 10.2 percent.


However, if we see India’s ranking in Vietnam’s trade, it is at 17th place with a miniscule trade, worth USD 2.4 billion. Conversely, over the last twenty years, Vietnam’s changing import patterns have been characterized by growing economic interdependence with China and the Republic of Korea specifically, and — broadly — East Asia. In 2015, China was the biggest trading partner of Vietnam with USD 49.4 billion of imports and import share of above 29.8 percent in Vietnam’s imports from the world. Korea was Vietnam’s 2nd most important trading partner with USD 27.5 billion in total imports and a share of 16.6 percent. However, if we see India’s ranking in Vietnam’s imports, it stood at 11th place with a value of USD 2.6 billion.


Investment


India has had some significant investments in Vietnam with the year 2007 marking a major shift in the pattern. Although Indian investments in Vietnam have remained constant at around USD 1 billion as of now, they are expected to rise in the coming years. In 2015, Indian companies registered 23 new projects with a total capital of USD 138.99 million in the areas of food processing, fertilizers, auto components, textile accessories, etc. With these projects, India now has 132 projects with total investments of about USD 1.07 billion. This includes Indian investment from third countries as well. Major sectors of investment are energy, mineral exploration, agro-processing, sugar manufacturing, agro-chemicals, IT, and auto components. Some of the major Indian investors in Vietnam are OVL, Essar Exploration and Production Ltd, Nagarjuna Ltd, KCP Industries Limited, Ngon Coffee Manufacturing, Venkateswara Hatcheries, Philips Carbon and McLeod Russell and CGL.


Tata Power plans to develop the USD 1.8 billion Long Phu-II Thermal Power Plant in Soc Trang. An MOU was signed between Tata Power and Vietnamese Ministry of Industry and Trade despite strong competi­tion from Korean and Russian companies.8 More recently in March 2015, Tata Power announced plans to continue to invest more with the project Long Phu 3 thermal power plant under BOT (Build–Operate–Transfer), and expressed a desire to invest in wind power projects in the province.


One of the biggest Indian companies named ONGC, in fact, is one of the first foreign oil and gas companies that invested in Vietnam beginning in 1988, by securing a licence of investment because of the open policy in the economy and the passing of the Foreign Investment Law in Vietnam in September 1987. On October 28, 2014, ONGC Videsh Limited of India and PetroVietnam, in the presence of the Indian Prime Minister Narendra Modi and his Vietnamese counterpart Nguyen Tan Dung, signed a cooperation agreement on the exploration of two blocks off the coast of Vietnam. These are two of the five petroleum blocks for which Vietnam invited Indian partners to take part in the exploration process.9


In recent years, Vietnam has introduced favorable policies for investors and has implemented the policy of “one stop shop” for licensing. Vietnam encourages investment from India in specific areas of expertise such as infrastructure (rail), power generation and distribution, information technology, education, research and production of pharmaceuticals, and agricultural products. Vietnam also supports Indian presence in national projects focused on oil exploration, power, science and technology and agriculture. In the field of IT training, NIIT, APTECH and Tata Infotech have so far opened more than 80 franchised centers spread across Vietnam.10


India’s investments in Vietnam reached its highest level at USD 76.11 million in 2010 and the lowest level in the year 2012 at USD 2.39 million due to lower GDP growth rate and macroeconomic instability which led the outward foreign investments down. Indian investments started reviving from 2013 before coming down to USD 9.44 million in the year 2015 respectively. Indian projects are mostly from the field of industrial processing and manufacturing with 41 projects amounting to a total investment of USD 211.62 million, account for 55.8 percent of invested capital. The mining sector has three projects with a total investment of USD 86 million, accounting for 22.67 percent of the total invested capital. This is followed by the wholesale and retail trade sector with 19 projects with a total investment of USD 51.08 million, accounting for 13.73 percent of the invested capital respectively.11


Most Indian investment is in the form of wholly owned subsidiaries while the rest are in Joint Ventures. During the year 2015, around 67 percent of the investments, based on the control and business structure were in wholly owned subsidiary while 33 percent were in Joint Ventures. The form of Joint Venture investment has undergone a significant shift from 63 percent in the year 2008 to 33 percent in the year 2015, whereas there has been a substantial growth in the wholly owned subsidiaries from 37 percent in the year 2008 to 67 percent in the year 2015 respectively.


India has invested in 22 local areas over 63 provinces (including five municipalities) of Vietnam, in which Ho Chi Minh city has 36 projects with a total investment of USD 54.9 million, followed by Tuyen Quang province with three projects and a total investment of USD 45 million, and Bac Ninh province with two projects with a total investment of USD 40.5 million. While Hanoi and Ho Chi Mihn City offer infrastructure and agglomeration advantages, a secondary option for Indian investors lies in Vietnam’s specialized economic zones of which Industrial Zones (IZs) are usually located next to ports, and benefit from tax incentives, improved infrastructure, and streamlined registration procedures.


The most notable source of capital flows in Vietnam is from ASEAN countries. Although Vietnam is a choice destination for all within the economic bloc, based on the Vietnamese economy’s low production costs, lowered trade barriers, in conjunction with the predictable government treatment and lucrative tax arrangements found within their respective home markets, the key investors in Vietnam are Malaysia and Singapore — accounting for 18 and 22 percent of Vietnam’s inward FDI inflows respectively. The investments in Vietnam from Singapore and Malaysia, however, contrast sharply with that of traditional investors within the region such as China, Hong Kong, and Korea which have witnessed a decelerating trend in recent years.


Keeping in mind the overall statistics, we find that Indian investors are only ranked 30th out of 101 countries and territories investing in Vietnam. This is not commensurate with the potential for eco­nomic cooperation between the two countries. Despite constituting a small portion of FDI within Vietnam, India will most likely become an increasingly important investor in Vietnam which is evidenced by strong growth in recent years. Companies based in India have been exponentially increasing investments over the past three years reaching a 4 percent share of FDI as of January 2016 which is up 400 percent over last year’s average. These investments have increased cooperation on issues of security as well as complimentary production of goods such as textiles and pharmaceuticals.


From the Vietnamese side, its investors have become stronger in recent years. Currently, Vietnam has five investment projects in India with a total investment of USD 1.81 million. However, Vietnamase investments in India have reached USD 4.60 million from April 2000 to March 2017, which constitutes less than 1 percent share in India’s FDI inflows.12 The areas in which Vietnamese investors are interested include distribution of products for animal feed, distribution and sale of building materials, import and export trade in cosmetics, computer products and small-scale hydropower projects.


Prospects


There is significant potential for development of India-Vietnam economic ties due to their traditional friendship and Vietnam’s central location in ASEAN and Greater Mekong Sub-region which is important for India’s relations with ASEAN and its Act East Policy. India and Vietnam are also expected to play a mutually beneficial role in one of the important upcoming regional economic frameworks, namely, the RCEP which was initiated in 2012 and is due to be signed in 2017.


RCEP is a high-quality free trade agreement, aiming to form a comprehensive economic partnership between ASEAN and six partner countries, including China, Japan, Korea, Australia, New Zealand and India. The signing of RCEP can bring benefits and challenges to both countries. For Vietnam, RCEP is expected to result in improv­ing investment and export markets of ASEAN and other partners. This will also enable Vietnam to participate in the regional production and value chains.


RCEP will bring about more opportunities to connect India more strongly with large economies such as Japan and Korea (the countries which have had trade agreements with ASEAN). Besides, RCEP will also facilitate favorable conditions for India to take part in the regional production chains of Asia. RCEP is expected to harmonize the rules of trade between India and ASEAN member countries, and attract FDI especially in export-oriented sectors. Moreover, India enjoys comparative advantages in areas of information technology, communications, activation services, professional services, healthcare and education. RCEP will also bring about opportunities for Indian companies to penetrate new markets of ASEAN and Vietnam in particular which will help India strengthen its position in the region.


Vietnam is seeking ties and economic cooperation with India more closely to reduce its economic dependence on China, especially in the fields of textiles, agrochemicals, machinery, finance, and information technology. However, it is a daunting task for India to take the place of China as it is the largest trade partner of Vietnam with a trade of over USD 50 billion in the year 2014. However, the ASEAN-India Free trade agreement has opened vistas of cooperation for both the countries not only in trade but also in industry, oil and gas extraction, minerals, investment, science and technology, human resource devel­opment, infrastructure development, agro-processing, tourism, aviation, healthcare, and education. Through this Agreement, Vietnam’s exports enjoy preferential import tax and in future it will be incumbent upon Vietnam to quickly take advantage of the reduction of import and export tariffs between Vietnam and India.


Despite having great potential and many opportunities, both the countries face many other challenges like similar import/export products which are hindering the growth of trade between them. The similar products include garments, tea, rice, cashew nuts, footwear, pepper, and sea products. While the AITIG in 2009 created favorable conditions for the development of bilateral cooperation, it also posed new challenges.


According to the Agreement, many export items “for which Vietnam has an advantage” belong to the list of India’s sensitive goods, that is, goods with slow tariff reduction roadmap, such as textiles, footwear, plastic products, machinery and spare parts. Some other items, such as seafood, vegetables, processed foods and vehicles belong to the list of India’s exclusive goods, that is, goods for which India has not committed to reducing tariffs. The other barriers are geographical distance, differences in customs, habits, tastes and business environments of both the countries.


Conclusion


Although bilateral trade between India and Vietnam has been growing at a fast rate, Vietnam’s share in India’s total trade stands at a meagre 1.2 percent in 2015. In exports, Vietnam’s share in India’s total exports stands at a meagre 2 percent and in imports it is only 0.7 percent. The majority of exportable goods from India to Vietnam are focused in the raw material goods segments, viz. nearly 60.6 percent. The rest, viz. consumer goods, intermediate goods, and capital goods, comprise only 39.4 percent of the share. This implies that Vietnam is majorly importing goods from India to serve its manufacturing and processing sectors, as well as to meet the needs of daily life.


Indian investments in Vietnam have also remained constant at around USD 1 billion as of now, but are expected to rise in the coming years. In 2015, Indian companies registered 23 new projects with a total capital of USD 138.99 million in the areas of food processing, fertilizers, auto components, textile accessories, etc. From the Vietnamese side, its investors have become stronger in recent years. Currently, Vietnam has five investment projects in India with a total investment of USD 1.81 million.


Despite having immense potential, India-Vietnam economic relations have also faced certain difficulties and challenges, such as the similarity in the structure of imports and exports of the two economies, geographical distance, difficulties in transport, and differences in tastes, habits and business environments. However, given that in any bilateral economic relation there are always both opportunities and challenges, the expectation is that the challenges will be overcome with the determination and strong political will of both the countries. Going ahead, it is essential for both the sides to open vistas for enhancement of economic relations by leveraging RCEP, become proactive by engaging Joint Business Councils in discussions related to mitigating bilateral trade issues and enhancing investments.


Notes


1. Institute of Peace and Conflict Studies (2016). India and Vietnam in changing East Asia. Retrieved from http://www.ipcs.org/article/southeast-asia/india-and-vietnam-in-changing-east-asia-2262.html


2. Federation of Indian Chambers of Commerce and Industry (2007). India-Vietnam economic and commercial relations. Retrieved from https://web.archive.org/web/20071210040001/http://ficci.com/international/countries/vietnam/

vietnamcommercialrelation.htm


3. Government of India (2017). Department of Commerce Statistics, Ministry of Commerce, New Delhi.


4. Government of India (2016). Outgoing visits, Ministry of External Affairs, New Delhi.


5. Govt. of India (2017). Incoming Visits, Ministry of External Affairs, New Delhi.


6. Govt. of India (2017). Foreign Relations, Ministry of External Affairs, New Delhi.


7. Vietnam Chamber of Commerce and Industry (2012).


8. Embassy of India (2017). India-Vietnam economic and Commercial relations, Hanoi.


9. Government of Vietnam (2014). Vietnam News Agency, Hanoi.


10. Government of India (2017). Brief of India’s bilateral relations with Vietnam, Ministry of External Affairs, New Delhi.


11. Ministry of Planning and Investment (2015). Foreign Investment Agency, Government of Vietnam, Hanoi.


12. Govt. of India (2017). Department of Industrial Policy and Promotion, FDI Statistics, Ministry of Commerce and Industry, New Delhi.


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