India Reviews Trade Agreement With Malaysia

September 7, 2024

India is reviewing its trade agreement with Malaysia because the trade deficit has significantly increased over time. A trade deficit means India is buying more goods from Malaysia than it is selling to them. In 2011, this deficit was $2.6 billion, but by the fiscal year 2024 (FY24), it has grown to an estimated $5.5 billion. This has raised concerns about the balance of trade between the two countries.

What is the India-Malaysia Trade Agreement?

India and Malaysia signed the India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) in 2011. This agreement was designed to boost trade by making it easier for the two countries to buy and sell goods, services, and investments. It also includes provisions for the movement of people between the countries, especially for business and trade purposes. The goal was to strengthen economic ties and increase trade, but the growing trade deficit has led India to reconsider some of the terms. Both nations are important trading partners—India is Malaysia’s 10th largest, while Malaysia ranks 14th for India. The agreement also serves as a strategic counterbalance to China’s growing influence in the region.

Increasing Trade Deficit

India imports a lot more from Malaysia than it exports. India’s major exports to Malaysia include petroleum products, buffalo meat, and aluminium. However, the key things India imports from Malaysia include vegetable oils, electrical machinery, and chemicals. The large amount of imports, particularly essential items like vegetable oil, is a major reason for the growing trade deficit.

‘Rules of Origin’

As part of the trade review, India is focusing on something called ‘rules of origin’. These rules help determine where a product is made and whether it qualifies for certain tax benefits under the agreement. By adjusting these rules, India hopes to make it easier for Indian products to be integrated into global supply chains, which could help reduce the trade deficit by promoting more exports.

What are Non-Tariff Barriers?

Non-tariff barriers are rules or regulations that make it difficult for one country to export goods to another, even if there aren’t high taxes on those goods. India’s commerce department is identifying these barriers in Malaysia, such as strict sanitary and phytosanitary standards (rules for food safety and plant/animal health). By addressing these issues, India hopes to increase the competitiveness of its exporters.

The Indian government plans to talk with various industry stakeholders—businesses and exporters—about the challenges they face when trading with Malaysia. These consultations will help the government understand what changes are needed to improve the trade relationship and ensure that the agreement works better for Indian businesses.

The review of the trade agreement may open new opportunities for Indian exports, especially in sectors like petrochemicals, plastics, and pharmaceuticals. However, experts warn that changing the agreement might not significantly reduce India’s imports of essential goods like palm oil and electronics, which are key imports from Malaysia.

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