A Way For­ward

In­dia is a boom­ing global econ­omy but in­ter-saarc trade is at a dis­mal level. What are the dy­nam­ics of SAARC trade with In­dia and how can it be im­proved?

Southasia - - Cover story - By M.r.si­vara­man

There is a hope that the grant­ing of the MFN sta­tus by Pak­istan to In­dia af­ter 16 years will open a new chap­ter in trade re­la­tions amongst the SAARC coun­tries, which rep­re­sent close to one-fifth of the world pop­u­la­tion.

The South Asian Agree­ment on Free Trade Area that came into force in 2008, pi­ously states: “The Con­tract­ing States hereby es­tab­lish the South Asian Free Trade Area (SAFTA) to pro­mote and en­hance mu­tual trade and eco­nomic co­op­er­a­tion among the Con­tract­ing States, through ex­chang­ing con­ces­sions in ac­cor­dance with this Agree­ment.”

Yet the trade amongst the group is not worth men­tion­ing in a global con­text. In­dia has an am­bigu­ous free trad­ing ar­range­ment with Nepal, Bhutan and Sri Lanka and mod­estly with Bangladesh. Yet the growth in In­dia’s imports from the SAARC coun­tries is in­fin­itely small and does not show any pos­i­tive trend growth. If any, it is way­wardly.

In­dia’s imports from the SAARC re­gion ac­count for only 0.574% of its to­tal imports ex­ceed­ing $360 bil­lion in 2009/2010. An anal­y­sis of the com­po­si­tion of imports by In­dia from SAARC coun­tries shows that imports are largely of agri­cul­tural com­modi­ties and some tex­tile prod­ucts. From Pak­istan, a few in­dus­trial goods and chem­i­cals are also im­ported.

Trade ex­pands with in­ter-re­gional in­vest­ments in in­dus­tries that may be of mu­tual ad­van­tage. In­dia has in­vested over $45 bil­lion across the globe in di­verse ar­eas rang­ing from min­ing to man­u­fac­tur­ing of so­phis­ti­cated cars as well as steel and alu­minum. In­dia’s in­vest­ments in the SAARC re­gion are hardly $350 mil­lion with the bulk of it cen­tered in Sri Lanka. There has been no in­vest­ment in Pak­istan. Bangladesh has seen In­dian pri­vate sec­tor in­ter­est in­clud­ing that of Tatas, Es­sar and other large groups but noth­ing has ma­te­ri­al­ized. A state-of-the-art modern hos­pi­tal has re­cently opened in Dhaka, in col­lab­o­ra­tion with In­dia’s Apollo Group. Sun Pharma has also set up a unit in Bangladesh.

Ad­di­tion­ally, Sheikh Hasina and the Com­merce Min­is­ter of Pak­istan have called for in­creas­ing in­vest­ment from In­dia. Pak­istan ex­tend­ing MFN sta­tus to In­dia may per­haps trig­ger this de­vel­op­ment. Where trade and eco­nomics are con­cerned how­ever, Bangladesh and Pak­istan should wel- come In­dian in­vest­ments and guar­an­tee se­cu­rity to them. In the case of Bangladesh, it has to be rec­og­nized that in­vest­ment would fol­low set­tle­ment of other is­sues re­lated to trans­port, se­cu­rity, arms smug­gled across the bor­der and con­trol over us­ing ter­ri­tory for hos­tile ac­tiv­i­ties against In­dia.

How­ever, In­dia’s neigh­bors should un­der­stand what In­dia wants and work to strengthen ar­eas where they can in­crease their exports. In­dia has se­vere sup­ply con­straints in the agri­cul­tural sec­tor as the per capita in­comes have risen more rapidly than the sup­plies of daily con­sump­tion re­quire­ments. SAARC should con­sider al­low­ing com­plete free trade of agri­cul­tural pro­duce. This will ben­e­fit Nepal, Sri Lanka, Bangladesh and even Pak­istan. Sim­i­larly, medicines for hu­man and an­i­mal care should be traded freely with­out re­stric­tions. In­dia is strong in this area and the SAARC coun­tries would greatly ben­e­fit if given free ac­cess to these prod­ucts while en­cour­ag­ing In­dian in­vest­ments in their phar­ma­ceu­ti­cal sec­tor. An­other area of mu­tual ben­e­fit would be to al­low the In­dian Hos­pi­tal sec­tor to in­vest in hos­pi­tals as In­dia’s Medi­care ca­pa­bil­i­ties are in­ter­na­tion­ally well es­tab­lished.

As far as trans­porta­tion is con­cerned, ex­cept for Mal­dives all other mem­bers could eas­ily con­nect by road and rail net­works in­clud­ing Sri Lanka. When the EU can have a sim­i­lar struc­ture con­nect­ing all its mem­ber states then there is lit­tle rea­son why it would be un­achiev­able in the SAARC re­gion. The 1970s saw nu­mer­ous Eu-

ro­pean tourist buses make their way to In­dia. How­ever, it is only a pipe dream that this will be re­stored so long as the Tal­iban pres­ence is not ad­dressed.

A re­li­able and wide trans­port net­work could eas­ily fa­cil­i­tate rapid move­ment of goods. Hundreds of trucks wait­ing on ei­ther side of the In­dia-bangladesh bor­der are un­able to trade due to in­com­plete for­mal­i­ties. The In­dian Govern­ment is only now up­grad­ing land cus­tom points to speed up the pro­cess­ing of doc­u­ments. The In­dian side has to ease the pro­ce­dures, which sim­ply re­quire pre­reg­is­ter­ing truck com­pa­nies based on their risk pro­file and con­vinc­ing both sides to al­low free move­ment and checks on a ran­dom ba­sis.

For the in­tra SAARC trade and in­vest­ments to grow, their re­spec- tive gov­ern­ments should agree to set aside com­plex po­lit­i­cal is­sues that of­ten par­a­lyze the coun­tries in the group. A stand­ing ex­am­ple is that of the Euro­pean Union, which con­sti­tutes coun­tries that are cul­tur­ally and lin­guis­ti­cally di­verse and had pre­vi­ously fought wars or were anx­ious to go to war against each other.

In­dia may not be averse to im­port­ing from its neigh­bors and the free trade agree­ments with many SAARC coun­tries could yield co­pi­ous ben­e­fits for all. How­ever, free trade agree­ments by them­selves will not be suf­fi­cient and in all prob­a­bil­ity, In­dia may ben­e­fit more in terms of exports. Fur­ther­more, it is im­por­tant for neigh­bor­ing coun­tries to not feel in­tim­i­dated or threat­ened by In­dia’s ris­ing in­ter­na­tional clout. Many ques­tion its ca­pac­ity to ex­ploit its dis­tinct trade ad­van­tages of so­phis­ti­cated prod­ucts and to in­flu­ence lo­cal pol­i­tics. In Europe, one does not hear of Ger­many in­flu­enc­ing elec­tions in Poland or in Bel­gium. There are also laws and reg­u­la­tions of the EU to which they all ad­here to avoid harm­ing other EU mem­bers.

It is for In­dia to as­sure its neigh­bors that it will not in­flu­ence their in­ter­nal po­lit­i­cal dy­nam­ics so long as it does not af­fect the se­cu­rity of In­dia. When such is­sues arise, bi­lat­eral talks must usher in cor­rec­tive ac­tion. When trust and con­fi­dence is built amongst neigh­bors there is no rea­son why trade can­not flour­ish to mu­tual ad­van­tage. The writer is a former Ex­ec­u­tive Di­rec­tor of IMF for Bhutan, Bangladesh and Sri Lanka.

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