Almost 30 years ago the South Asian Association for Regional Cooperation (SAARC) was formed to bring together the South Asian nations, but South Asia still remains the least integrated regions in the world. A strong evidence to support this fact is that the intra-regional trade among the South Asian countries is just 4-5 per cent ($28 billion) of their total trade with the world. Less than 4 per cent of the FDI in each of the South Asian countries is from the member countries in the region. Currently, 95 per cent of India’s FDI goes to markets well beyond South Asia. While some countries like Nepal, Bangladesh and Sri Lanka have received a reasonable level of Indian investments, these are insignificant in relation to the large volumes invested outside South Asia by Indian firms.
South Asia is one of the fastest growing regional economies with a potential for intra-regional trade to peg at $100 billion in the coming 1-2 years. At an impressive 6.7 per cent year-on-year growth in GDP in 2016, it outstripped East Asia, which notched at 6.3 per cent. Notwithstanding subregional variation, most countries have registered growth, Bhutan, Bangladesh and India being the fastest growing economies.
The current trade scenario in the region is rather polarised with South Asian countries trading more with China than with each other. Enhanced trade in the region is constrained by a number of factors including tariff and non-tariff barriers, weak infrastructure, poor awareness among stakeholders, a lack of political will, and low levels of investment. Though tariffs continue to be reduced bilaterally, regionally, and even globally, the burden of non-tariff barriers remains a serious challenge in South Asia.
South Asia has one of the most restrictive trade regimes of any region, with relatively high and dispersed tariff rates, and this keeps overall trade volumes lower than they would have been otherwise. Tariff rates range between 5-50 per cent among the countries.
Key challenges to integration among South Asian nations High costs of trading within the region: A key obstacle to regional trade is the high cost (it currently costs more to trade within South Asia than with countries in Latin America). Poor trade and transport infrastructure and restrictive rules and regulations for border trade are key reasons for high trading costs and resultant low levels of trade in South Asia.
Absence of a Regional Value Chain (RVC): A major reason why the region has not kept up with the rest of the world in terms of regional and global trade is the lack of a RVC network. The absence of value chains has prevented the region from generating stronger gains in terms of exports and employment generation.
Regional value chains (RVCs) can play an important step towards fulfilling the untapped intra-regional trade potential of South Asia. The region should first target the formation of an RVC and then aim for linking up to a Global Value Chain.
Non-tariff barriers (NTBs): The presence of non-tariff barriers in South Asia decreases trade by nearly 8 per cent and if NTBs and tariffs were to be removed altogether, intra-regional trade may increase by 12 per cent. There are primarily three types of NTBs; first, export barriers which include export subsidies, prohibitions, and quotas; second, import barriers which include import licensing, import bans and customs procedures; third, rules and regulations, like restrictive product standards, quality specifications, and labor and environmental standards, etc. In South Asia, most of the concerns center around the last category.
Lack of intra-regional Foreign Direct Investment (FDI): Trade and investment go hand in hand. While there are general constraints to investment in South Asia, there are also non-economic undertones that restrict intra-regional investment, which have held back major as well as small and medium size companies from investing in the region.
While FDI inflows to South Asia increased from $36 billion in 2013 to $50 billion in 2015, it is significantly less compared to East and Southeast Asia where these numbers stand at $350 billion and $448 billion for 2013 and 2015, respectively. South Asia’s share in world FDI inflows in 2015 stood at a meagre 2.9 per cent whereas East and Southeast Asia attracted 25 per cent of world FDI flows.
Regulatory and other constraints: These constraints include licensing requirements, visa procedures and other regulations.
There is large trade potential in products included in the sensitive lists of South Asian countries – this is the reason why they have been protected. Hence, to be meaningful, the sensitive lists would need to be reduced as a priority, in a phased and time-bound manner.
Logistics challenges
Due to lack of integration of the transport system in South Asia, the logistic costs are very high and ranges between 13–14 per cent of GDP, compared to 8 per cent in USA. This means that the region has not been able to use its proximity advantage to create regional value chains or regionally-based platforms for exports.
Bureaucratic challenges and excessive paperwork make cross-border trading cumbersome. Vineet Agarwal, Joint Managing Director, Transport Corporation of India (TCI) points at time-consuming document verification process and security checks at the border and too many restrictions for trucks crossing the border. For instance, it takes 21 days for processing of documents for movement of cross border trade between India and Bangladesh through the Benapole-Petrapole border. Further, it takes 35 days for a container to go from Delhi to Dhaka because it has to go via Colombo or even Singapore whereas it can reach in five days if there is direct connectivity between New Delhi and Dhaka through rail. “South Asian countries need to find a way for free transportation of goods across borders. Trans-shipment is not available at the borders and drivers lack facilities and support. The best possible way to overcome this challenge is by creating a regional rail network,” opines Vineet. Trade also has to pay the price for border conflicts among the countries that complicate logistics. Goods move from Lahore to Dhaka via a 7,200 km sea route that circumvents India, whereas they could be moved by land over a 2,300 km stretch cutting across India, thereby reducing cost and time of trade.
Swarnim Wagle, Former Vice Chairman of the National Planning Commission, Government of Nepal says, intra-regional trade and investments will grow if the governments pro-actively promote FDI, regional connectivity, regional value chains, and demonstrate openness to experiment. He called on South Asian countries to adopt ‘Make in South Asia’ initiative. Focusing on regional connectivity, Nitin Gadkari, Minister for Road Transport, Highways and Shipping had recently announced plans for setting up of two subsidiaries of NHAI – NHAI Express Highways and NHAI International. NHAI International would execute projects in Sri Lanka, Nepal, Bangladesh, Iran and African nations.
Need to facilitate trade
Lack of economic integration in South Asia is due to lack of progress in trade facilitation measures (customs, transport, checkpoint procedures, logistical bottlenecks etc.). Particular focus should be given to easing trade through existing land routes and opening new routes. A recent study reveals that under an India-Bangladesh FTA and improved connectivity between the two countries, Bangladesh’s exports to India would increase by almost 300 per cent.
High transport costs are one of the major reasons holding back economic cooperation in the region – it currently costs more to trade within the region than with Latin America. During 2006- 14, South Asian import costs rose more than 50 per cent for all countries except for India, where the cost of imports declined. Similarly, export costs rose for all countries except Pakistan and Sri Lanka. The landlocked countries (Afghanistan, Bhutan, and Nepal) face the highest trade costs in the region. There is also increasing divergence in trade costs among South Asian countries.
The region can reduce trade costs through four elements of trade facilitation: (i) simplification and harmonisation of rules and procedures; (ii) modernisation and harmonisation of trade compliance systems; (iii) harmonised standards; and (iv) monitoring trade costs through institutional mechanisms. Joint border posts with neighbouring countries where customs and other clearance functions of both countries are co-located in the same facility need to be established. This will allow joint clearances or enable mutual recognition of clearances conducted by the other country, and allow data to be shared across the border avoiding duplication.
Develop economic corridors
The most obvious and important corridor that can be developed is the SAARC Road Corridor 1, going from Lahore, Delhi, Lucknow, Kolkata, Dhaka to Akhaura/Agartala. This corridor encompasses the heaviest economic activity in the region.
Promote Services Trade
South Asia has a vibrant services sector that contributes to more than 50 per cent of the region’s GDP, and is growing faster than manufacturing and agriculture. Yet, trade in services remains very low. To redress this, SAARC formed the SAARC Agreement on Trade and Services (SATIS), which came into effect in 2012.
India taking the lead
India’s trade and business relationship with its immediate South Asian neighbours is enjoying a period of revival, in large part due to the endorsement by the Modi government’s ‘Neighbourhood First’ policy. Since 2014, the Indian government has announced several massive infrastructure projects in the north eastern border states. These projects will improve transport and logistics for traders and businesses in the region.
Indo-Bangla trade Bangladesh plays a key role in India’s sub-regional connectivity plans, which include the Bangladesh, Bhutan, India and Nepal (BBIN) Motor Vehicles Agreement (MVA). Bilateral trade between India and Bangladesh accounted for $7 billion in 2016-17. The two countries have signed a bilateral trade agreement, which is renewed every five years.
Bangladesh has excellent rail connectivity with India at 5 locations: Ranaghat – Dhaka; Bongaon – Khulna; Old Malda – Ishurdih; Barsoi – Parbatipur; Karimgunj – Kulaura. Planning is in progress for rail connectivity at Badarpur and Bhairab. Dhaka-Ishurdih- Darsana-Gede is a main trans-Asia route that can be extended beyond Dhaka to Imphal.
India’s main exports to Bangladesh include food and processed items, intermediate goods, textiles, small machinery and consumer goods. Under SAFTA, India provides Bangladesh with duty free access for all goods, except tobacco and alcohol. Bangladesh offers preferential tariffs to Indian traders, except for the 993 items on its sensitive list. The Protocol on Inland Waterways Trade and Transit (PIWTT) permits the movement of goods at eight specific points in the river system shared between India and Bangladesh. The Coastal Shipping Agreement enables direct sea movement of cargo between ports in the two countries, reducing shipping times from 40 days to just 5 days.
India-Bhutan trade
Both the countries enjoy a free trade regime since 2006, which was renewed again in 2017. Through the India-Bhutan Trade and Transit Agreement, India allows duty free transit of Bhutanese goods to third countries. However, Bhutan does not allow tariff concessions for about 150 items on its sensitive list under SAFTA. India imports about 82 per cent of Bhutan’s total exports. Electricity constitutes one-third of Bhutan’s exports to India. Bhutan also exports minerals such as ferro-silica, cement, and dolomite.
Bhutan has no rail connectivity. Nearest rail head is 18km away from its border point in India at Hashimara, from where both bilateral and thirdcountry cargo is transhipped for road carriage via Jaigon-Phuentsholing border post till Thimpu. Current movements are road based between Kolkata- Thimpu.
Indo-Nepal trade
The volume of bilateral trade between India and Nepal hit nearly $6 billion in 2016-17. India’s main exports to Nepal include petroleum products, motor vehicles and spare parts, paddy, machinery and spare parts, medicine, electrical equipment, cement and agricultural equipment. Nepal’s main exports to India include fruit concentrate, oil cakes, jute goods, handicrafts, noodles, wool and spices.
Nepal’s small enterprises enjoy similar benefits as Indian SME products. Under SAFTA, Nepal does not allow tariff concessions for about 1,295 items on its sensitive list. The two countries signed a Power Trade Agreement (PTA) in 2014 with the aim of strengthening cross-border electricity transmission, grid connectivity, and power trade.
Nepal has rail connectivity with India at two locations – Kolkata-Birgunj and Jayanagar-Janakpur. Nepal has 5 dry ports of which only Birgunj is rail connected, while Biratnagar, Bhairahawa and Kakarbhitta are connected by road.
Indo-Pak trade
India and Pakistan make up 90 per cent of South Asia’s GDP, more than 80 per cent of the region’s intraregional trade and 86 per cent of the population. Even though India’s trade with Pakistan is less than half a per cent of its total trade and Pakistan’s trade with India is about five per cent of its total trade, the potential is much higher. Various studies indicate that trade can increase by 10-27 times of the current level of $2.6 billion. Both trade policy as well as trade facilitation measures are needed in order to realise this potential. Pakistan has 13 dry ports most of which are rail connected.
Trade between the countries primarily occurs on land. Pakistan does not allow tariff concessions for 936 items on its sensitive list.
Informal trade between India and Pakistan is at $250 million to $4 billion. The main import items from India that come through informal channels are cloth, tires, pharmaceuticals, textile machinery, while Pakistan’s informal exports mostly include textiles. Most of this informal trade happens through third countries, i.e., Singapore, UAE, Iran and Afghanistan.
Lack of transit facility
There is also need for countries (India and Pakistan) to allow transit of goods. Due to the lack of transit, India’s exports to Afghanistan and Pakistan’s exports to Bangladesh and Nepal are very costly. The WTO Bali Package (2013) contains provisions that require countries to provide transit facilities to other countries. Under the agreement, countries including India and Pakistan would have to provide seamless transit facilities to each other. This would benefit both countries as India would gains access to Afghanistan and central Asia, whereas Pakistan gains access to Bangladesh, Bhutan and Nepal.
India-Sri Lanka trade
India is one of Sri Lanka’s biggest trading partners. In 2016-17, bilateral trade between the two countries stood at $4.65 billion. The India-Sri Lanka Free Trade Agreement came into effect in 2000. However, while Sri Lankan exports to India have greatly benefited from the FTA (by about 70 per cent), Indian imports remain mostly outside the agreement. Further, under SAFTA, Sri Lanka does not allow tariff concessions for about 1,042 items on its sensitive list.
