By Dylan Kean & Rasika Gynedi

Shipbuilding factory in Indonesia. Source: John Payne’s flickr photostream, used under a creative commons license.

Indian prime minister Narendra Modi has made boosting manufacturing one of his top priorities with the recently announced “Make in India” program aimed at employing millions of Indians in labor-intensive manufacturing. By loosening regulations and attracting investors, India hopes to become a global manufacturing hub. Boosting trade ties with ASEAN is an important step in this direction, as India’s exports to ASEAN have increased roughly 10-fold over the past decade, making it a key export market for Indian goods.

Most trade between India and ASEAN consists of raw materials, while automobiles, ships and its parts are also important components of two-way trade. In the years ahead, Thailand and Indonesia in particular could become larger markets for Indian exports. The former is a regional hub for auto-manufacturing and the latter a potential nerve center for regional shipping, However, challenges in both sectors need to be addressed in order to achieve greater manufacturing integration.

The Thai auto industry is the largest in Southeast Asia, while India is the sixth largest automobile producer in the world. Both countries are cost-competitive in the manufacturing sector owing to relatively low wages and a high working-age to general population ratio. Substantial two-way trade in automobiles and auto components between the two countries suggests there is already integration in the supply chain. Companies such as Toyota have manufacturing bases in both nations, and Volkswagen and Hyundai, both of whom have plants in India, are planning new manufacturing bases in Thailand. Since India specializes in producing passenger cars and Thailand in commercial vehicles, there is immense potential for mutual gains from increased connectivity.

Ships and components are an important component in bilateral trade between India and Indonesia thanks to huge demand in both countries. They have two of the largest carrier fleets in Asia and both rank among the world’s top 10 countries in shipping tonnage. Indonesia, the world’s largest coal exporter, ships large amounts of it to India, which relies on coal for close to 70 percent of its power generation. And in an example of backward integration, Indian shipping conglomerates Mercator Limited and Essar Shipping have diversified their activities in Indonesia into coal mining and oil exploration, respectively. Other shipping firms have announced joint ventures with Indonesian companies to transport sea-based cargo.

Despite positive signs for manufacturing and trade, cooperation between India and ASEAN is not without its challenges, especially given the regulatory environment and policy uncertainty on both sides. In Thailand, due in part to prolonged political instability, business sentiment across different sectors of the economy has remained poor, including in vehicle production. Auto sector growth plunged by 30 percent in the second quarter of this year versus 2013. Similarly, in India the regulatory environment for auto manufacturers has been problematic due to the complicated process of obtaining business permits, the convoluted tax system that varies from state to state, and frequent run-ins with labor unions. By reducing policy uncertainty, easing regulatory bottlenecks, and promoting physical connectivity between India and Thailand, both countries could significantly gain from greater trade linkages.

One such initiative is the Mekong-India Economic Corridor, a project designed to physically connect Cambodia, Laos, Myanmar, and Thailand to India. Connecting deep-water ports in India to Thailand through intermodal infrastructure projects — a proposal that has interested U.S. firms –would allow both nations to exploit their specialization in auto production and reduce transit time for auto component trade.

Indonesia also faces a unique set of challenges that could impede growing trade with India. Despite plans for improving port infrastructure aimed at easing congestion, Indonesia like India, still ranks far below regional competitors in ease of cross-border cargo trade. And despite its large domestic shipping fleet, Indonesia’s strict limit on the operations of foreign ships has hurt its export competitiveness. Easing this restriction could pave the way for increased trade with India. By investing in Indonesian transportation infrastructure, U.S. companies could also benefit from a more efficient trading hub in Southeast Asia.

These challenges are not insurmountable, but they require a concerted effort on the part of India and regional trading partners to support mutually beneficial opportunities. With ASEAN set to launch the ASEAN Economic Community – which it hopes will one day evolve into a single market – at the end of 2015, it is important for stakeholders to invest in infrastructure and modern regulatory frameworks now, rather than allow them to impede future growth.

Mr. Dylan Kean is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS. Ms. Rasika Gynedi is a researcher with the Wadhwani Chair in US-India Policy Studies at CSIS.