Vietnam-India Trade: Current Relations and Prospects

Abstract

Purpose - In recent years, the bilateral political relationship between Vietnam and India was upgraded to strategic and comprehensive partnership. Thus, the purpose of this paper is to analyze current relations and prospects of the Vietnam-India trade. Research design, data and methodology - The data was mainly based on World Integrated Trade Solution (WITS) and Foreign Investment Agency of Vietnam Ministry of Planning and Investment (FIA) from 2010-2018. The relationship of the two countries has showed growth in all sectors, including trade cooperation. This paper focused on assessing the current relations of trade cooperation of the two countries and then andlyzed the prospects of trade cooperation in the next period. Result - The Indian Government's strategy shifted from "Look East" policy to "Look East" action by the end of 2015. Vietnam is a partner and a pillar of India's Look East policy (Muni, 2011). The governments of both countries should further strengthen exchanges and trade connections in order to provide cooperation opportunities for investors and businesses of the two countries. Conclusion - The paper discusses and gives an overview of the current status of the trade relations of Vietnam and India as well as lucidating the opportunities and challenges for two countries in the future.

1. Introduction

Based on common civilisational and cultural ties, India and Vietnam have shared sincere bonds of friendship and mutual trust. India-Vietnam relations have been exceptionally friendly and cordial since their foundations were laid by Prime Minister Nehru and President Ho Chi Minh more than 50 years ago. The traditionally close and cordial relations have their historical roots in the common struggle for liberation from foreign rule and the national struggle for independence. The legacy of the relationship has its roots in the common struggle for liberation from foreign rule and the national struggle for independence. In recent times, political contacts have strengthened as reflected in several highlevel visits by leaders from both sides.

It has been two decades since India executed a calibrated shift in its foreign policy orientation, by pronouncing its “Look East” policy. According to Chansoria (2011) that the year 1991 witnessed not only a new wave of economic reforms and liberalisation that underpinned India’s economic rise, but also a systemic shift in the overall geo-political international order. It would only be prudent to state here that India’s thrust toward its “Look East” policy has matched well with Vietnam’s growing engagement in the Asia-Pacific. Both Hanoi and New Delhi closely cooperate in various regional fora such as the ASEAN, East Asia Summit, Mekong-Ganga Cooperation and the Asia-Europe Meeting (ASEM). The Joint Commission Meeting at the foreign ministers’ level provides for the larger framework of bilateral cooperation while identifying concrete projects (Indian Ministry of External Affairs, 2011).

2. Trade cooperation between Vietnam-India

Indian Prime Minister Narendra Modi visited Vietnam in 2016, on his way to China for the G-20 summit. The visit, the first by an Indian prime minister in 15 years, made it clear that New Delhi was no longer hesitant to expand its presence in China’s periphery. The Modi government has made no secret of its desire to play a more assertive role in the Indo-Pacific region. Modi himself has argued that India can be an anchor for peace, prosperity, and stability in Asia and Africa. A more ambitious outreach to Vietnam, therefore, should not be surprising (Indian Ministry of External Affairs, 2011).

Bilateral ties between India and Vietnam have strengthened in recent years with a shared focus on regional security issues and trade. Traditionally, India has had a favourable presence in Vietnam owing to its support for Vietnamese independence from France and eventual unification of the country, as well as for its opposition to the US involvement during the Vietnam War (Pant, 2018). Vietnam and India have a rich history of diplomatic relations. During the most testing times in its independence movement, India supported the North Vietnamese regime steadfastly. India was also one of the first countries to recognise the Vietnamese government once the consolidation of the country was achieved in the mid-1970s. Both Vietnam and India were also close allies of the Soviet Union during the Cold War. However, both countries have a strong penchant for underlining strategic autonomy in their foreign and domestic policies, which has often lead to friction with the US. With the rise of China in recent years, their ties have become strategic in orientation. Bilateral trade has also grown since the liberalisation of the Indian and Vietnamese economies. Vietnam has backed a more prominent role for India in the Association of Southeast Asian Nations (ASEAN) as well as India’s bid for a permanent membership in the United Nations (UN) Security Council. Mutual trust, threats emerging from a rising China, and a convergence of strategic interests have contributed to the deepening of ties between the two nations to the extent that Vietnam now engages India as a comprehensive strategic partner, a clear indication that both nations value this critical partnership. The institutionalisation of this bilateral partnership has been rapid. The two states promulgated a Joint Declaration on Comprehensive Cooperation in 2003 in which they envisaged creating an “Arc of Advantage and Prosperity” in Southeast Asia and initiated strategic dialogue since 2009 (Pant, 2016).

India has attempted to boost economic relations with Vietnam. Modi’s policy navigation from “Look East” to “Act East”, which essentially aims to strengthen ties with the extended neighbourhood of the Asia Pacific region and to expand ties between India and Vietnam to the level of “Comprehensive Strategic Partnership”, makes Vietnam extremely critical in India’s eastward outreach (Goswami, 2016). Vietnam on its part has actively supported the Act East policy as it facilitates India’s larger role in the region. Also, Vietnam is ASEAN’s Coordinator for ASEAN-India Dialogue Relations from 2015 to 2018, which can be utilised to further increase the cooperation. India is now among Vietnam’s top ten trading partners and during Modi’s 2016 visit, the two nations have agreed to explore substantive and practical measures, like the Joint Sub-Commission on Trade, to achieve the trade target of US\(\$\)15 billion by 2020 (Thayer, 2012). They have also signed a civil nuclear agreement in 2016, which is expected to further boost bilateral trade between them. India-Vietnam economic ties date back to 1978 when both countries signed a bilateral trade agreement (Singh, 2007). By 1982, the India-Vietnam joint commission was set up for economic, technical, and scientific cooperation. The initial years saw limited trade between the two countries whereby India facilitated a line of credit worth \(\$\)400 million to Vietnam. The first major Indian investment came from OVL in 1989 off the coast of Vung Tau, located east of Ho Chi Minh City (Srivastav, 2013). Bilateral trade in the early years suffered due to the 1997 Asian financial crisis, which was marked by a slowdown in Vietnam’s economy.

By 1999, Indian exports had contributed to 90% of the total bilateral trade of \(\$\)150 million with Indian private sectors companies like Ranbaxy and Godrej expanding their footprint in Vietnam (Pant, 2018). A major breakthrough came with the establishment of the Indian Business Chamber, which was formally licensed in February 1999. Bilateral trade touched \(\$\)1 billion in 2006, crossed the \(\$\)2 billion mark in 2009, and reached \(\$\)7.8 billion in 2016. A major impetus to economic ties came with the signing of the India ASEAN Free Trade Agreement in August 2009 (Srivastav, 2013). From 2010 to 2016, imports from India to Vietnam increased by \(\$\)1 billion (\(\$\)1.7-\(\$\)2.7 billion) and exports from Vietnam to India nearly tripled to \(\$\)2.6 billion (Figure 1). India began exporting pharmaceuticals, plastics, metals, and chemicals to Vietnam, while Vietnam exported steel, rubber, and electronic items to India. Vietnam continues to be an attractive investment destination for Indian companies (Appendix 1, 2). As of June 2013, according to the figures from Vietnam's Foreign Investment Agency, India has 73 investment projects with total registered capital of US\(\$\) 252.21 million. If investments by Indian companies from third countries are included as well, India has 68 valid projects with an estimated total investment capital of US\(\$\) 936.23 million. Indian companies are investing in oil and gas exploration, mineral exploration and processing, sugar manufacturing, agro-chemicals, IT, and agricultural processing. Vietnam has three investment projects in India with total investment of US\(\$\) 23.6 million (Srivastav, 2013)

Figure 1: Vietnam’s imports and exports from/to India (2010-2016)

Source: World Integrated Trade Solution (WITS)

India's relations with Vietnam are marked by growing economic and commercial engagement. India is now among the top ten trading partners of Vietnam. During former Prime Minister Nguyen Tan Dung’s visit to India in October 2014, the two sides decided to make economic cooperation a strategic thrust in the India-Vietnam Strategic Partnership. Thereafter, during the 2nd meeting of the Joint Sub-Committee, held on 20th January 2015, five key sectors were identified as thrust areas including garment and textile, pharmaceuticals, agro-commodities, leather & footwear and engineering (Government of India - GOI, 2017). The 3rd meeting of the JCM was held in New Delhi on 15 March 2016. Bilateral trade between India and Vietnam has seen continuous growth over the past many years. India is now among the top ten trading partners of Vietnam. According to Government of India (GOI) data, total trade between the two countries during April – Nov of fiscal year 2016-2017 was US\(\$\) 6244.92 million. The two sides agreed to set the target of bilateral trade at USD 15 billion by 2020. Major export commodities from India are machinery and equipment, seafood, pharmaceuticals, cottons of all kinds, automobiles, textiles and leather accessories, cattle feed ingredient, chemicals, plastic resins, products of chemicals, fibres of all kinds, steel of all kinds, fabrics of all kinds, ordinary metals and jewellery & precious stones (Ministry of External Affairs, 2016).

Main items of imports from Vietnam are mobile phones & accessories, computers and electronics hardware, machinery and equipments, chemicals, rubber, ordinary metals, wood and wooden products, fibres of all kinds, pepper, means of transport, products of steels, coffee, footwear, products of chemicals and polymers and resins.

Indian investments in Vietnam have remained constant at around US\(\$\) 1 billion but are expected to rise in the coming years. During 2016, according to figures from the Foreign Investment Agency of Vietnam, Indian companies registered 17 new projects with a total capital of US\(\$\)98.12 million in the areas of food processing, fertilizers, auto components, textile accessories etc. With these projects, India now has 131 major projects with total investments of about US\(\$\)707.95, ranking 25th among 110 countries and territories investing in Vietnam. The figure from Vietnam does not include Indian investment from third countries. Major sectors of investment are energy, mineral exploration, agroprocessing, sugar manufacturing, agro-chemicals, IT and auto components (Figure 2 and 3).

Figure 2: Vietnam’s products exports to India

Source: tradingeconomics.com

Figure 3: Vietnam’s products imports to India

Source: tradingeconomics.com

The two countries also expanded cooperation in areas such as space exploration and cybersecurity. New Delhi and Hanoi signed the Inter Governmental Framework Agreement for the Exploration of Outer Space for Peaceful Purposes, and agreed to conclude the Implementing Arrangement between the Indian Space Research Organisation and the Vietnam Ministry of Natural Resources and Environment on the establishment of a Tracking and Data Reception Station and a Data Processing Facility in Vietnam under the India-ASEAN Space Cooperation (Ministry of External Affairs, 2016). A Memorandum of Understanding on cybersecurity was also signed between Vietnam’s Ministry of Public Security and India’s Ministry of Electronics and Information Technology; and the two countries also facilitated the transfer of equipment to the Indian-funded Indira Gandhi High-Tech Crime Laboratory (Ministry of External Affairs, 2016). India has also established a satellite tracking facility in Ho Chi Minh City. Although termed a civilian facility, it could provide strategic benefits such as the tracking of Chinese movement in the sea, in case of a threat. It has been planned and implemented by the Indian Space Research Organisation.

Vietnam and India have a long traditional friendship. Historical milestones in the relationship between the two countries are the establishment of the formal diplomatic relationship (07/01/1972), the upgrade to Strategic Partnership (07/2007) and Comprehensive Strategic Partnership (09/2016). Moreover, India and Vietnam have signed Agreements for the Avoidance of Double Taxation, Agreements on Promotion and Protection of Investments… Within the framework of ASEAN-India Free Trade Area (AIFTA), there are also important agreements such as The ASEAN-India Trade in Goods (AITIG) Agreement (came into force in 2010), The Services and Investment Agreements (became effective in 2015).

By 2018, India is Vietnam’s largest FDI partner in Central and West Asian region with 208 projects with a total registered investment capital** of over USD 878 million***, mainly in manufacturing industry, information technology and mining sectors (FIA, 2019). India ranks 26th among the 129 countries and territories which have invested in Vietnam (FIA, 2019). However, the average registered capital of an Indian project in Vietnam is only about USD 4.5 million, much lower than the average amount of a FDI project in Vietnam (around USD 13.5 million).

Regarding investment sector, as of 5/2018, Indian investors had invested in 16 among 21 economic sectors in Vietnam. Manufacturing and processing industry ranks first with 52 projects having total registered capital of approximately USD 478.81 million (accounts for 58,5% of India's investment in Vietnam). The second ranking sector is wholesale, retail and repairing automobiles, motorcycles, motorbikes with 51 projects with registered capital of USD 9.67 million (make up 1,18% of India's investment in Vietnam). Howerver, production and distribution of electricity, gas, water, air conditioning sector with only 4 projects but registered capital of USD 179.04 millions (accounts for 21,9% of India's investment in Vietnam) (FIA, 2018) (Table 1).

Table 1: Investment sectors of Indian Enterprises in Vietnam (as of May, 2018)

Source: FIA (2018)

By 2018, regarding the form of investment: India's projects are mainly in the form of 100% Indian enterprises’ capital, with 148 projects and USD 579.21 million of registered capital (account for 70,87% of India’s investment in Vietnam). The second form of investment is Joint Venture which had attracted 30 projects with total registered capital of nearly USD 107.53 million (account for 13.2% of India's investment in Vietnam). The remaining form is Business Cooperation Contract (BCC) with 6 projects and USD 130.18 million of registered capital (make up 15,9% of India's investment in Vietnam) (FIA, 2018) (Table 2).

Table 2: Form of Indian Investment in Vietnam (2018)

Source: FIA, 2018.

India's investment is allocated in 25/63 provinces and cities in Vietnam (including offshore oil and gas area). Phu Yen ranks the first destination having 8 projects with total registered capital of USD 189.64 million (23.2% of India's investment in Vietnam). The second destination is Ninh Thuan, attracting 3 projects with total registered capital of USD 137.83 million (accounting for 16.86% of India's investment in Vietnam). Binh Duong with 11 projects and USD 111.36 million (accounts for 13.62% of India's investment in Vietnam) ranks the third in terms of India’s FDI attraction (FIA, 2018) (Table 3).

Table 3: India's investment in provinces of Vietnam in 2018

Source: FIA, 2018

From 2010 to 2016, the amount of FDI from India to Vietnam had increased continuously. After the ASEAN-India Investment and Services Agreement came into force on July 1^st 2015, India’s FDI inflows to Vietnam have soared. The ASEAN-India Investment and Services Agreement mainly focuses on ensuring equity and fair treatment for investors. Indian FDI inflows increased significantly in 2015 at 281%. Despite the decline in 2016, FDI inflows from India have generally been higher than before the signing of the Agreement. In addition, within the framework of the Look East Policy of Indian goverment, Prime Minister N.Modi has also prioritized India’s investment in Vietnam, Laos, Cambodia and Myanmar. As a result, the proportion of Indian investment in Vietnam comparing to Indian investment in ASEAN countries gradually increased from 1.55% in 2014 to 5.07% in 2016, compared to 0.1% in the previous years (Table 4).

Table 4: India’s FDI inflows in Vietnam

Source: ASEAN secretariat– data updated on 31/10/2017

3. Prospects for Vietnam and India cooperation in trade sector

India is a large market and expected to be one of the most powerful economies with numerous comparative advantages, a scientific and technological power, particularly in information technology. Meanwhile, Vietnam possesses abundant natural resources, industrious dynamics and well-educated labor force and is also a promising market. So the potential for bilateral cooperation is still vast and needed to be further exploited. Vietnam’s current process of integration into the world economy and reforms in India are creating new opportunities to strengthen bilateral ties.

India has paid special attention to comprehensive economic cooperation with the entire ASEAN as a part of ‘Look-East’ policy as well as with individual ASEAN countries, particularly, Vietnam which is key market for India’s exports.

In the memorandum of cooperation during the visit to India by President Tran Dai Quang in 2016 and the visit of the President of India in Vietnam in November 2018, both leaders emphasized the prospects of long-term cooperation of the two countries between India and Vietnam as follows:

▪ Enhancing strong trade and economic engagement is a strategic objective, a core element of the Comprehensive Strategic Partnership and are esential for strengthening bilateral ties.

▪ Realizing potential to both increase the volume of trade and diversify its composition.

▪ Requesting the relevant ministries and agencies on both sides to explore substantive and practical measures to achieve the trade target of \(\$\)15 billion by 2020, including but not limited to utilising established mechanism, strengthening exchanges of trade delegations, business-to-business contacts, regular organization of trade fairs and events.

▪ Leaders of business and industry of both countries to explore new trade and investment opportunities in indentified priority areas of cooperation: hydrocarbons, power generation, renewable energy, energy, conservation, infrastructure, textiles, footwear, pharmaceuticals, machine tools, agriculture and agro-prodcuts, tourism, chemicals, ICT and other service sector industries.

▪ Cooperating to increase productivity, quantum and content of science and technology in agricultural products.

▪ Encouraging greater two-way investment between Vietnam and India. Two countries establish to concrete plans to effectively implement the signed agreements in order to promote bilateral trade, including measures for trade promotion.

▪ Promoting bilateral investmnent, including cooperation projects between Vietnam Oil and Gas Group (PVN) and Oil and Natural Gas Corporation Limited (ONGC) in oil and gas exploration on land, continental shelf and Exclusive Economic Zone (EEZ) of Vietnam, and encouraged the two sides to be more active in indentifying models for cooperation, including those involving third country. The Vietnamese side welcomed and agreed to create faciltating conditions for Indian companies to invest into new thermal energy and renewable energy projects in Vietnam.

▪ Referring to the Plan of Action 2018-2020 between the two Ministries of Agriculture request for market access for their agricultural, fruit and food products.

Besides the opportunities, the two countries still face many challenges in bilateral trade cooperation such as:

▪ The legal environment plays important role in two countries’ trade cooperation. However, the two governments have created a favorable legal environment for businesses of both sides recently. Some of the documents are still overlapping, conflicting and lack of feasibility.

▪ Next difficulty is that enterprises do not really know each other's market. Vietnamese enterprises, exporting to Indian market, are lack of understanding Indian market. For better implementation of their advantages, enterprises need to step up market research, timely grasp the needs and tastes of consumers, innovate designs and packages, and give competitive strategies on prices, application of scientific and technical advances in farming, agricultural and aquatic production, paying special attention to food hygiene and safety standards in order to improve the competitiveness of goods of the two countries.

▪ The development and consolidation of a national brand of products has begun to be of interest to Vietnamese and Indian businesses and registration for each type of product, especially the preparation of investment in resources for activities and registering brand and trademark protection in foreign countries. Therefore, to improve the quality of trade promotion activities, the image building strategy and business investment environment of the two countries are extremely necessary.

▪ The infrastructure system connecting trade development between the two countries has not really been paid attention. This is seen as a big resistance to the development of cooperation and trade between the two countries in the previous periods.

▪ Human resources of both countries are not suitable for the international labor market. Therefore, the two countries need to urgently train qualified international economic and business staff; attach special importance to training the contingent of foreign economic forces who are politically and steadfast in the environment of both cooperation and struggle.

4. Conclusion

Collaborating on trade engagements, India and Vietnam have managed to build a strong partnership over the last few years. Given their mutual convergence, it is likely that this relationship will only grow stronger. There remains much to do, for instance India can help Vietnam develop its defence sector by investing and working. Vietnam is also a prospective market for India’s defence exports, which still remains under-exploited. Beyond that, there is significant scope to explore in the economic realm on areas such as energy, mineral exploration, agro-processing, healthcare, IT, and education, among others, which will help to boost existing ties. Overall, this is a relationship that is poised to take off in the coming years, led by political leaderships in the two countries determined to make this relationship truly strategic in orientation. In order to gradually develop the trade cooperation relationship between Vietnam and India, the two countries should have effective solutions such as: (i) perfecting the legal system, creating a favorable legal environment for the two countries’ enterprises, (ii) strengthening market research in the two countries, (iii) promoting trade promotion activities and focus on introducing goods of the two countries, (iv) building and developing infrastructure systems and (v) developing human resources, especially high-quality human resources.

Appendix