Australian Spotlight - April 2024

For many, India is the new China, and Australia has a head start. Two years ago, on April 2, 2022,  Australia and India signed the India-Australia Economic Cooperation and Trade Agreement (ECTA). This was India’s first trade agreement with a developed country in over a decade. A more comprehensive agreement will follow.

Australia has already enjoyed over 20 years of economic prosperity thanks to the rise of China. Now, along comes India. India is already the fifth largest economy in the world and is expected to overtake Germany and Japan by 2030. It has grown rapidly over the last decade and a potential demographic dividend promises a burgeoning middle class.

But for Australia, India is not just a new China. The relationship is built on more than just economic interest..

Cucumber sandwiches

Australia and India have a lot in common. From ancient cultures with deep spirituality to the influence of British colonisation. For example, they both have parliamentary democracies, a common law system, and most importantly a love of tea and cricket.

Along with Bollywood movies, cricket is India's favourite pastime. Cricket is also Australia’s favourite sport and the cultural links this creates between the two countries is embraced by both countries and should not be underestimated. In 2024, Australians were the largest group of foreigners playing in India’s top cricket competition, the Indian Premier League. Australianns also comprise 3 of the top 6 highest-paid players in the IPL, including the top 2 highest-paid players: Mitchell Starc and Pat Cummins. Test match cricket matches between the two nations are national events.

Family ties

There are also strong personal ties between the two countries, something which Indian prime minister Narendra Modi called out in his visit to Australia last year:

“Our positive cooperation is growing … It hasn't grown through diplomacy. The real strength is the Indians living in Australia,".

India is the leading source of migrants for Australia (see chart below). As a result, the percentage of Australians who were born in India has increased from 1.6% in 2012 to 2.9% in 2022. India has now overtaken China and is second only to the UK in terms of Australians born overseas.

Australia ranked tenth by the size of its Indian diaspora in 2020. Suburbs like Parramatta in Sydney actively promote Indian festivals such as Diwali and Australian television shows feature Indian characters. India now has the largest diaspora in the world.

Indian students have also become an important part of Australia’s educational industry. Over the last 20 years, the annual number of Indian students studying in Australia has increased by nearly six-fold and is now only second to Chinese students. Both countries now dominate international student numbers in Australia (see chart below).

These numbers will only continue to grow in the future with a new two-way migration deal signed by the countries in 2023. It allows students, graduates, researchers, and business people to move more easily move between the two countries.

Indians are also the fifth-largest source country for overseas short-term visitors to Australia with around 400,000 in 2023. Going in the other direction, Australia ranked fourth as a source country for overseas tourists to India.

Tension in the water

The relationship, however, goes beyond cricket and personal ties with Australia and India aligned on key strategic interests in the Indian Ocean. China is the watchword here. 

While anti-authoritarian Australia bristles against Chinese “bullying”, disagreements have only resulted in trade spats and a ratcheting up of rhetoric. For India however, there is direct conflict in the Himalayas and encroaching naval bases and ports in the Indian Ocean (see chart below).  

It is thus no surprise that as Australia has pulled closer to the strategic embrace of the US, both countries have also welcomed warming interest from India. Japan also recognises a natural friend.

This growing alignment in strategic interests has been formalised in recent years through several agreements and bodies. This includes the “Quad” (the Quadrilateral Security Dialogue) in 2021 (Australia, India, Japan, and the US), the 2021 Supply Chain Resilience Initiative Australia, India, and Japan), and the 2022 Indo-Pacific Economic Framework for Prosperity (IPEF) (14 countries including Australia, India, Japan, and the US).

Both countries are also increasing their naval presence in the Indian Ocean, Australia is upgrading the airport in the Cocos (Keeling) Islands (midway between Australia and Sri Lanka) to handle new surveillance aircraft. It also wants to base the majority of its planned nuclear submarine fleet in Perth. India is upgrading its facilities, ships, and aircrafts throughout the Andaman and Nicobar Islands. It has also established new bases on North Andaman Island and Agalega Island in Mauritius.   

“The geography of Australia and India makes us stewards of the Indian Ocean region,” Richard Marles, deputy prime minister of Australia.

Black and Gold

When it comes to trade between the two countries, one commodity dominates: high-quality-black coal used for steel making.

In 2022, 85.6% of Australia’s USD 31.5 billion exports to India was metallurgical coal. Coal was Australia’s largest-overall export in 2022 with India being its second-largest customer after Japan. The value of Australian coal exports to India was only slightly smaller than its total wheat and gold exports to the entire world.

The growth in coal exports to India has helped Australian producers overcome the Chinese ban on Australian coal exports between late 2020 and March 2023 (see chart below).

On the Indian side, coal was its second-largest import in 2022 at 8.11%, with Australia’s its biggest supplier at 46%. Indonesia is the next largest supplier at 19.9% but unlike Australia, most of Indonesia’s coal is used for generating electricity. India itself is a large coal producer but nearly all of its coal is used for generating electricity. It lacks the high-quality metallurgical coal that Australia excels in.

The recent growth in Australian coal exports to India is explained by the meteoric rise in Indian steel production (see chart below). India is now the second-largest steel producer in the world (behind China). Steel is helping fuel India’s recent economic growth and has been essential to Modi's investment in national infrastructure. The goal is self-reliance. Indian steel consumption is expected to nearly double by 2030 according to the secretary of the Indian Ministry of Steel.

Indian steel production chart

After coal, there is a large step down to the next largest trade items. These are refined petroleum exports from India to Australia at USD 3.11 billion (mostly diesel), and Australian gold exports to India at USD 1.26 billion. The rise of refined petroleum exports to Australia reflects the growth in India’s refining capacity. This has helped Australia to diversify away from its reliance on Singapore for refined petroleum.

Transition to green

Despite the good relations between Australia and India, India would naturally  prefer not to be so reliant on just one country for metallurgical coal. It is looking towards some other countries but this requires some long-term development.

Another alternative is the replacing of metallurgical coal with green hydrogen in the steelmaking process. Using green hydrogen can reduce carbon emission in steel making by as much as 95%. The technology is nascent but the green steel market is expected to grow from 2.7 billion in 2023 to around 100 billion by 2030.

Unsurprisingly, Australia is keen to be a leader in green hydrogen and green steelmaking. The vision is for Australia to become a wind and solar superpower and to leverage that and its rich iron ore deposits to move into green hydrogen and green steelmaking. India has a similar vision.

Cooperation in green hydrogen and green technologies more generally has been a big discussion point between the two countries in recent years. It was a big focus when Modi visited Australia in 2023; he met with CEO and founder of Fortescue Andew Forrest who is a big champion of Australian green hydrogen. Indian industrial giant Reliance Industries has also considered building a green hydrogen plant in Australia.

In May 2023, the two governments announced the creation of the “India-Australia Green Hydrogen Taskforce” to explore the commercial and research opportunities for the two countries with green hydrogen.

If the potential of green hydrogen is realised, India will wean itself off Australian coal. Australia will hope that the development of its green hydrogen and green steel making industry will more than make up for the loss.

Trading grace

Canberra will also be hoping that other opportunities created by the 2022 trade agreement (and eventual comprehensive agreement) will lessen the relative importance of Australian coal exports to India.

85% of Australian exports to India by value are now tariff-free, including for coal, lamb, wool, barley, oats, and copper. While 96% of Indian exports to Australia are now tariff-free.

India’s Commerce and Industry minister expects trade with Australia to more than triple in value,  from around USD 30 billion today to USD 100 billion by 2030.

 In particular, Australia is eyeing increased agricultural exports and cross-country research while India is enthusiastic on the export of services to Australia.

The early returns from the trade agreement have been highlighted by both countries. However, given the political strength of Indian farmers. Australian farmers will be holding their breath; dairy is currently excluded.

“Australia and India are natural trading partners – this agreement will unlock the enormous potential in our trading relationship.” Don Farrell, Australian minister for Trade and Tourism.

Final thoughts

Currently, trade between Australia and India is very complementary, like two pieces of a global jigsaw puzzle that fit snugly together. Trade with a growing India also provides Australia with another “once-in-a generation” growth opportunity. It also has the bonus of lessening Australia’s export dependence on China.

In addition to trade, the value of the relationship is increased by the strategic and (to a lesser degree) cultural alignment between the two countries. This also makes the trade relationship more secure. This strategic alignment is a marked difference to the relationship between Australia and China.     

However, in the future, Australia may have to face difficult questions over political changes within “New India” and its bold behaviour abroad. But as the world's largest democracy continues to evolve, Australia may find itself navigating new dynamics with optimism for the future.  

But as the world's largest democracy continues to evolve, Australia may find itself navigating new dynamics with optimism for the future.