A slump in Australia’s trade with India undercuts the government’s hopes that the country might become a democratic counterweight to our economic dependence on authoritarian China.

While the headline coverage of last week’s official trade report seized on China’s share of Australia’s exports rising to an astonishing 46%, the fall in sales to India was overlooked. India’s share of Australia’s exports dropped below 2% in June, the lowest level since 2003.

It’s two years since the Department of Foreign Affairs and Trade released an impressive strategy ^[1] for building Australia’s economic relationship with India. The strategy review, led by former DFAT secretary Peter Varghese, set ambitious targets, including that Australia should lift its annual merchandise exports to India from the 2017 level of $15 billion to $45 billion by 2035, arguing that India should become Australia’s third largest export market.

At the time, this seemed plausible. The Indian market had been growing rapidly and it had already overtaken the United States to become Australia’s fourth most important market behind China, Japan and South Korea.

The review spelled out the geopolitical argument for building the economic relationship. ‘If we can count India in our top three export destinations and if we can tap more two-way investment between our countries, Australia’s exposure to global risk is reduced.

‘As partners in the Indo-Pacific, we are each grappling with the implications of the fading US strategic predominance and the sharpening ambition of China to become the predominant power in the region.’

But the latest Australian Bureau of Statistics report ^[2] shows that in the year to June, India’s ranking among our export markets had slipped to seventh, surpassed by the US, the UK and Taiwan while China, Japan and South Korea forged further ahead. Merchandise exports to India of $11 billion over the last year were 26% below the 2017 level when the Varghese strategy was penned.

While the pandemic has depressed many export markets, the main reason for the slump in sales to India is its government’s nationalist ‘self-reliant India’ economic strategy which includes a target of eliminating coal imports by 2023–24. Coal accounts for around 70% of Australia’s exports to India.

The trade picture is no more encouraging on the import side, where India’s share of Australia’s purchases is down to 1.6%, having peaked at just 1.8% two years ago.

As well as setting a target for exports, the Varghese review also spelled out goals for investment, urging that India should become the third largest destination for Australian investment abroad in the Asian region by 2035.

Here, too, the data has been disappointing. Australian companies invested a paltry $114 million in India last year, while it accounts for a bare 0.2% of total Australian direct investment abroad. Within Asia, India ranks behind Singapore, China, Hong Kong, Malaysia, Indonesia and Vietnam as a destination for Australian direct investment.

Portfolio investment in Indian share and bond markets is higher, but still a microscopic proportion of the total, and it is really direct investment by businesses that matters for economic relationships. The stock of Indian direct investment in Australia is no higher now than it was in 2012.

Last week’s ABS trade report didn’t cover individual country markets for services, and India has been an important market for our higher education and tourism sectors. The latest figures for the export of services, which are a year out of date, show India ranking third behind China and the United States with exports of $6.6 billion.

When the pandemic subsides sufficiently for global travel to resume, India will be important for the recovery of Australia’s university sector, particularly if China delivers on its threat to cut back enrolments.

However, the ambition of building mutual economic bonds to underpin a geopolitical realignment with India is not realistic amid rising economic nationalism.

At the joint media conference with Indian Prime Minister Narendra Modi following their video meeting in June, Prime Minister Scott Morrison commented, ‘The trade and investment flows between our countries are not where [we] would both like them to be, but they are growing and they can grow a lot faster.’

As the latest trade reports show, they are contracting, not growing as the prime minister claimed, and it’s difficult to identify what might trigger a turnaround.

India’s economy was faltering ahead of the pandemic. Estimates of purchasing power by the International Monetary Fund show the economy rose by only 2.9% last year, which was only marginally better than during the depths of the global financial crisis and well below the 6% to 8% growth rates it had been accustomed to.

Modi argues that his economic strategy of self-reliance is not about isolating India from the world but is intended to strengthen the resilience of the domestic economy. He says his economic policy is consistent with greater foreign investment and India is pitching to global businesses to relocate their supply chains from China.

However, the self-reliance strategy, developed as a response to the slowdown, will be seen by Indian businesses as a licence to seek favoured treatment and protection. In the case of coal, the ambition is to build the state-owned Coal India as the dominant supplier to the exclusion of imports.

Morrison and Modi announced that they would restart negotiations on a bilateral free trade agreement which were abandoned in 2015. But the liberalisation of agricultural markets, which is always at the top of Australian negotiators’ priorities, is unlikely to make headway in India where the farm sector is highly inefficient but a vast source of employment. Australian tariffs are already so low that it has little to offer India in return for any concessions.

India has long been the most reticent participant in world trade liberalisation, and earlier this year withdrew at the eleventh hour from the Regional Comprehensive Economic Partnership—a trade deal that would have drawn India into the Asian economic community.

The period ahead is likely to be marked across the world by poor business investment and slow growth of trade, with many countries acting in the same spirit as India: doing what they can to support domestic business and employment by adding protection against global competition. In this environment, there’s little likelihood of Australian exporters cracking any new markets of sufficient size to diversify our export profile away from China.