India & It's Neigbours - Macroeconomic & Business Perspective

1

MUDRA INSTITUTE OF COMMUNICATIONS, AHMEDABAD

India and Its Neighbours Macroeconomic and Business Opportunities

Nikhil Saraf (124), Paarmi Modi (127), Surabhi Anand (152)

Under the guidance of Prof. Rasananda Panda

Acknowledgements

We are deeply indebted to our Professor Rasananda Panda for this opportunity to write a

comprehensive paper on ‘India and its neighbours: Macroeconomic perspective and business

opportunities’ and his constant guidance, patience and support. We also extend our gratitude to

Miss Maitreyi Purohit for her valuable suggestions and assistance.

We acknowledge the crucial role of Mr. Shailesh Yagnik in guiding us through the data mining

process and perusal of KEIC Library resources. We also thank the other staff members at KEIC Library

for ‘always being at our service’.

We extend a special ‘thank you’ to Mr. Mrinmoya Majumdar, Research Scholar at MICA for his

encouragement and expert insights on this topic that helped clarify our doubts.

We also thank our colleagues and peers for their support and exchange of ideas that helped in

facilitating an enjoyable environment for the completion of the term paper.

Contents

India and South Asia over the ages ......................................................................................................... 1

Table of Comparison ............................................................................................................................... 7

Periodical Analysis of India and Neighbours ......................................................................................... 13

India .................................................................................................................................................. 13

Discussion ...................................................................................................................................... 13

Economic Growth Rate ................................................................................................................. 13

Per-capita Income ......................................................................................................................... 15

Inflation Rate ................................................................................................................................. 16

China ................................................................................................................................................. 18

Discussion ...................................................................................................................................... 18

1970s ............................................................................................................................................. 18

1980s ............................................................................................................................................. 19

1990s – 2000s ............................................................................................................................... 19

2010s ............................................................................................................................................. 20

Pakistan ............................................................................................................................................. 22

Discussion ...................................................................................................................................... 22

The Bhutto Regime (1973-1977) ................................................................................................... 23

The Zia Regime (1977-1989) ......................................................................................................... 24

The Musharraf Regime (2001-2008) ............................................................................................. 26

The last five years ......................................................................................................................... 27

Sri Lanka ............................................................................................................................................ 29

Discussion ...................................................................................................................................... 29

1970s ............................................................................................................................................. 30

1980s ............................................................................................................................................. 30

1990s ............................................................................................................................................. 31

2000s - present ............................................................................................................................. 31

Bangladesh ........................................................................................................................................ 34

Discussion ...................................................................................................................................... 34

Nepal ................................................................................................................................................. 38

1960-1970s.................................................................................................................................... 38

1980s ............................................................................................................................................. 38

1990s ............................................................................................................................................. 40

2000s to Present ........................................................................................................................... 41

Myanmar ........................................................................................................................................... 42

Discussion ...................................................................................................................................... 42

Bhutan ............................................................................................................................................... 46

Discussion ...................................................................................................................................... 46

1985-95 ......................................................................................................................................... 46

Bilateral Trade between Countries ....................................................................................................... 49

India - China ...................................................................................................................................... 49

India – China Strategic and Economic Dialogue (SED) .................................................................. 49

Join Economic Group .................................................................................................................... 50

India – Pakistan ................................................................................................................................. 51

Formal and Informal Trade ........................................................................................................... 51

India - Sri Lanka ................................................................................................................................. 53

Free Trade Agreement .................................................................................................................. 53

India-Bangladesh ............................................................................................................................... 55

Informal Trade .............................................................................................................................. 55

Bilateral FTA .................................................................................................................................. 56

India-Nepal ........................................................................................................................................ 57

Indo-Nepal trade treaty ................................................................................................................ 57

India-Myanmar.................................................................................................................................. 59

India-Bhutan...................................................................................................................................... 61

Relationship with neighbours ............................................................................................................... 62

Pakistan ............................................................................................................................................. 62

China ................................................................................................................................................. 62

Sri Lanka ............................................................................................................................................ 63

Bangladesh ........................................................................................................................................ 63

Nepal ................................................................................................................................................. 63

Maldives ............................................................................................................................................ 64

Bhutan ............................................................................................................................................... 64

Future Business Opportunities ............................................................................................................. 65

References ............................................................................................................................................ 67

1

India and South Asia over the ages

"To understand the present and anticipate the future, one must know enough of the past, enough to

have a sense of the history of a people."

— Lee Kuan Yew, Prime Minister of Singapore

1India and its neighbours

Often commemorating the past leads to newer dimensions of rethinking the past and future. The

current scenario of the macroeconomics and business opportunities of India and its neighbours

brings together the myriad threads of South Asian History and Economy. India and South Asia are

mere geographical constructs; South Asia being the more recent one. Today, South Asia

encompasses diverse sovereign countries of India, Pakistan, Nepal, Sri Lanka, Bangladesh, Maldives,

China and the newest addition, Myanmar. This vast geographical region stretches from the

Himalayas in the north to Indian Ocean in the south and from the valley of Indus in the west to plains

of Brahmaputra in the east. The region not only has a diverse population but also a complex

historical and socio economic background.

The shared history and current diversity is essential to creating an amorphous identity based on a

number of parallel visions. This regionalism of the SAARC countries has always been a political

dilemma. Putting this idea into perspective, India as a part of the South Asian subcontinent is not

just geographically surrounded by neighbours but is also in a constant state of contestation with

them. This spectrum of South Asian History from the social, political and economic perspective is

sketched from the pre-modern history of the subcontinent to its present. (Bose & Jalal)

Indian History began in 3000 BC with the two cities of Mohenjodaro and Harrapa, alongside the

Indus which became the heart of the civilization rather than just a border differentiating factor.

Indus Valley civilization achieved a high level of urban culture with immaculateness of drainage,

street planning, and agriculture and literacy rate. The main occupation of the people was farming

along with occupations in art, craft, trade and seal making. Trade occurred with places as far as

Mesopotamia using bullock carts and boats for transportation. This trade existed primarily through

barter system of exquisite beads and ornaments, metal tools, pottery and agricultural products.

Later, the Aryans migrated from the Iranian plateau and consolidated the political organization of

the Gangetic Plain in North India. They established the core of Indo-European language which is

preserved in the Vedas. This led to a set of monarchies culminating in the Nanda Empire.

Chandragupta dethroned the Nanda Empire founding the Maurya Empire which enveloped the

entire subcontinent as a single political entity. A major reason why the Mauryan Empire became so

powerful and wealthy was trade and military strength. There was a centralized and hierarchical

government which regulated tax collection, trade and commerce, industrial arts, mining and welfare

of foreigners. Indian merchants traded in silk, cotton and elephants to Mesopotamia and the eastern

Roman Empire. The new emergence of Buddhism and Jainism also assisted in uniting the

subcontinent irrespective of the primitive means of communication. The fall of the Mauryan Empire

led to invasions by Greeks and Scythians resulting in re-divisions of regional dynasties. The Gupta

Empire restored the congruence of the subcontinent which was later disrupted by the influx of the

Huns from Central Asia. Despite the multiplicity of powers, there was plenty of trade by sea and

land with the Roman Empire and China and poetry, literature and arts flourished. In return for

spices, pearls, silk and ivory, Indian merchants received Roman gold and extended their influence to

Southeast Asia. (Bose & Jalal)

From the seventh to the sixteenth centuries, Arabs and Turks began invading and establishing their

control over India. Through this, the northwest geography of the subcontinent determined itself to

be an indeterminate series of gradation beginning from Iran and Afghanistan and ending in Delhi.

The integration of Mughal culture in India played a vital role in the formation of Indian society,

economy and politics. The expanding Mughal economy had weekly markets and trade centres where

people would congregate on a particular day. Transport facilities improved with the provision of

metalled highways, river transport and bridges. Agriculture still remained a major part of the

economy. Textile industry boomed and there was a great demand for cotton, silk and tobacco.

However one aspect of Mughal administration was that they did not provide assistance and facilities

for agricultural development. Currency also developed with the return of stable power in the form

of standardized gold, silver and copper coins. India also had flourishing foreign trade with countries.

Imports were raw silks, gold, ivory, horses and slaves and exports were textiles, spices, opium and

indigo.

The disintegration of the Mughal Empire, paved the way for the European presence in India. They

marked their rule by winning the conquest at the battlefield of Plassey and Buxar and introduced

Western language, culture, trade, methods of government and technology. The British Empire

changed the entire Indian economy into an import dependent and non self sustaining one. By the

end of the eighteenth century, Europe had growing industrial revolution and manufacturing industry

with grave demand for raw material. The price level in India remained low, thus the British were able

to dictate prices and increase profits. Export duties were fixed and internal duties were made

cheaper for people to buy British goods rather than local goods. Agriculture was reorganized and

British introduced land revenue reforms and policies to dominate over the peasants. The British

economic exploitation of India drained massive amounts of wealth out of the Indian economy.

In the early part of the twentieth century, a nationalist movement occurred with the emergence of

Mahatma Gandhi eventually leading to the Independence of India in 1947 and Partition of India and

Pakistan. Founded by Mohammad Ali Jinnah, Pakistan was founded on the premise of providing a

homeland for Muslims of the Indian Subcontinent. Though Pakistan seems to be the modern-day

remnant of Muslims rule over Medieval India, India still has the third largest Muslim population in

the world. Today, Pakistan is not just a nuclear armed adversary, but is a country breathing terrorism

and fear down the neck of India at the border. This same threat exists from Afghanistan as well. The

border existing between Pakistan and Afghanistan is largely a mirage in both history and the current

scenario. Throughout history several ethnic Pushtuns passed weekly without identity papers across

the Khyber Pass and thus the Achaemenid, Kushan, Mughal, Ghaznavid and other empires have

always posed a threat for the Indian Subcontinent. Afghanistan only emerged as a country with the

help of leader Ahmad Khan in the mid eighteenth century when he carved out a buffer zone

between Persia and the withering Mughal Empire in Indian Subcontinent. It is this geography that

makes Afghanistan a base and a pathway for terrorist activities. South Asia has experienced a

constant bipolar conflict between India and Pakistan with Afghanistan as the main battleground.

(Ludden)

Indian and Chinese civilizations are among the oldest human civilizations of the East. Fahien and

Huen Tsang, two monks of the Jin and Tang dynasties brought about religious and cultural

exchanges. However since 1962, Indo-China relations have been frosty. This was due to the 1962

war over a disputed Himalayan border in the combat region of Aksai Chin near Kashmir in the

northwest and Arunanchal Pradesh in the northeast. This war led to an uprising in Tibet that sent

Dalai Lama to exile in India and caused Chinese invasion of Tibet. The Indo-Chinese border is still a

matter of dispute because of the lack of a formal treaty or agreement. Today, both the countries

have complimentary power. China has more practical traditions with a lineage of inventions where

as India has a speculative tradition.

Relations between India and Nepal have been close because of geographical location and common

religious and cultural identities. This was initiated in 1950 by the Indo-Nepal Treaty of Peace and

Friendship. The increased involvement of Indians with the Nepalese economy led to tensions in the

relationship, however worsening economic relations resulted in quick restoration of amicable

relations. Today, the increasing dominance of Maoism in Nepal’s politics and the strengthening of

China have made the Nepalese government distance itself from India.

In 1971, Bangladesh emerged as an independent nation from the eastern Indian Subcontinent in the

Bangladesh Liberation War. After independence, the new state faced difficult famines, natural

disasters, widespread poverty and political and military turmoil. Since 1975, India and Bangladesh

have maintained diplomatic relations in field of policy from economic trade, border security and

sharing of boundary lines, common and trans-boundary waters. They offer natural markets for each

other’s export products because of reduced costs, quicker delivery due to geographical proximity,

common language and infrastructure.

Early history of India with Sri Lanka dates back to 4th century BC by Mahinda, the son of Asoka to

spread Buddhism. Later in the 1970-1980s, India directly intervened in the conflict after the Sri

Lankan government tried to regain control by economic blockade and military assaults. India and Sri

Lanka eventually entered into a peace keeping agreement. Economic relations began with a formal

joint committee aimed at increasing cooperation in trade, industry, agriculture and tourism.

(Ludden)

SAARC

International trade between neighbours helps in improving welfare by increasing levels if investment

and consumption. It also generates higher employment and higher wage rates with positive effects

on poverty and income distribution, thus bringing out social welfare. This intra-regional trade

expansion brings about the most regional cooperation through better utilization of production

capabilities and economies of scale.

South Asia in recent times is popularly known as SAARC – The South Asian Association for Regional

Cooperation. Established on 8th December 1985, it is an economic organization of eight countries;

namely India, Pakistan, Bangladesh, Bhutan, Sri Lanka, Nepal, Maldives and Afghanistan. The SAARC

countries occupy one of most densely populated regions in the world with 1.4 billion people. It has

the lowest GDP per capita and poverty is commonly spread in the countries. India and its

neighbours share various similarities. Thus, trade liberalization and regional economic integration

have increased efficiency and economies of scale by the initiation of South Asian Free Trade Area

(SAFTA) in 2004.

Currently, SAARC continues to face several risks in development and progress in macroeconomic

stability, investment climate and infrastructure bottlenecks. The overall outlook for South Asia

remains cautiously positive in the direction of increased exports and foreign investors. At the same

time, risks in terms of financial sector vulnerabilities and weakness in revenue collection are closely

monitored. Despite the macroeconomic stability, the top priority for South Asia is to tackle its

poverty challenge by tightening fiscal, monetary and political policies and improving quality of

regulations and governance. (Vadra, 2012)

Table of Comparison

INDIA BANGLADESH CHINA PAKISTAN SRI

LANKA NEPAL BHUTAN MALDIVES MYANMAR

POPULATION

Total population million; as of 1 July 2013 1213 152.5 1354.0 180.7 20.3 26.85 720.679

thousands 419.99779 thousands

61.0

Population density persons per square kilometre 370 1054 141 227 323 182 19 2557 90

NATIONAL ACCOUNTS

At Current Prices

billion Rupees; fiscal

year beginning 1

April

billion Taka; fiscal year ending 30

June

billion Yuan;

calendar year

billion Rupees;

fiscal year ending 30

June

million Rupees; calendar

year

million Rupees;

fiscal year

ending 15 July

million Ngultrum; calendar

year

million Rufiyaa; calendar

year

billion Kyats; fiscal year

beginning 1 April

GDP by industrial origin at current market prices 100206.2 9181.4 51932.2 20090.9 7582375

Net factor income from abroad -999.0 893.0 -266.0 1035.7 -148422 1536000 97527.1 34147.5 51727.5

GNI 99207.2 10074.4 51666.2 21126.6 7433953 14785 -5574.5

1550785 91952.6

-Structure of Output percent of GDP at current prices

Agriculture 17.4 17.7 10.1 24.4 11.1 35.7 16.2 3.8 30.5

Industry 25.8 28.5 45.3 22.0 31.5 14.9 41.3 20.5 32.1

Services 56.9 53.8 44.6 53.6 57.5 49.4 42.5 75.7 37.5

-Structure of Demand percent of GDP at current prices

Private consumption 56.8 75.2 36.3 82.5 69.6 77.8 46.4

70.9

Government consumption 11.8 5.6 13.7 10.5 13.5 10.7 18.7

Gross domestic capital formation 35.6 26.5 48.8 14.9 30.3 34.9 56.7 30.3

Exports of goods and services 23.8 23.2 27.2 12.3 22.8 10.0 37.1 14.6

Imports of goods and services 31.5 32.1 24.4 20.3 36.5 33.4 60.7 14.9

At Constant Prices

GDP by industrial origin at market prices 58136.6 4090.5 47287.9 9785.3 3047277 670735 53911.5 998.0 45209.6

Net factor income from abroad -563.3 397.9 386.6 -59649

GNI 57573.3 4488.4 10171.9 2987628

-Growth of Output annual change, percent

GDP 5.0 6.2 7.8 4.4 6.4 4.9 9.4 3.4 7.6

Agriculture 1.9 3.1 4.5 3.5 5.8 5.0 3.1 4.8 2.0

Industry 2.1 8.9 8.1 2.7 10.3 3.0 8.8 14.0 8.0

Services 7.1 5.9 8.1 5.3 4.6 4.5 12.2 1.4 12.6

-Growth of Demand annual change, percent

Private consumption 4.0 4.5 5.8 6.8 5.2

6.1

Government consumption 3.9 4.1 7.3 -0.6 15.9

Gross domestic capital formation 5.1 11.2 1.7 7.4 0.5 11.5

Exports of goods and services 3.0 7.8 -15.3 0.2 1.9 6.5

Imports of goods and services 6.8 7.5 -3.6 0.5 3.4 3.7

Investing Financing at Current Prices

Gross domestic capital formation

Gross national saving 35689.4 2436.9 25352.4 2996.7 2296147 535545 55275.0 15667.5

Gross domestic saving 32990.6 2679.5 25727.9 4077.8 1819773 614018 41403.1

Net factor income from abroad 31395.0 1768.5 25972.2 1403.6 1286481 176461 33979.7

Net current transfers from abroad -999.0 893.0 -266.0 1035.7 -148422 14785 -5574.5

2594.6 17.9 21.7 1638.5 681714 422772 12997.9

At Current Market Prices Rupees Taka Yuan Rupees Rupees Rupees Ngultrum Rufiyaa Kyat

Per capita GDP 82339 60571 38449 111184 373002 57202 135327 848325 81304

Per capita GNI 81518 66463 38252 116915 365700 57753 127592

PRODUCTION INDEXES period averages

Agriculture ... … … …

Mining 123.4 479 206.7 479

Manufacturing 181.1 570 264.3 570

MONEY AND BANKING

billion Rupees; fiscal

year beginning 1

April

billion Taka; as of end of

period

billion Yuan; as of end of

period

billion Rupees;

as of end of period

million Rupees;

as of end of period

billion Rupees;

as of end of period

million Ngultrum; as

of end of period

million Rufiyaa; as of end of

period

billion Kyats; as of end of

period

Money supply (M1) 18898.2 1097.2 30866.4 6050.7 450049 264.4 31960.2 8436.1 7635.0

Currency in circulation 11445.3 584.2 5466.0 1826.7 251539 170.5 6390.7 2116.7 5856.8

Demand deposits 7452.8 513.0 25400.4 4223.9 198510 93.9 25569.5 6319.4 1778.2

Quasi-money 64546.7 4073.9 66548.5 1968.5 2143136 866.6 18162.0 11574.5 11323.4

Money supply (M2) 83444.9 5171.1 100702.3 8019.3 2593185 1131.0 50122.2 20010.6 18958.4

Foreign assets (net) 15991.4 788.2 25885.1 943.3 112395 383.8 35168.6 5094.0 2966.6

Domestic credit 83402.0 5183.3 80559.4 8790.1 3176184 994.5 46465.3 24055.0 11545.2

Claims on government sector (net) 26996.4 920.3 5068.4 4833.3 912850 162.9 1245.0 7710.8 4427.1

Claims on private sector

56405.5

4079.0 69435.2 3802.8 2172076 809.8 43734.6 14625.5 4772.4

Claims on other financial institutions 184.0 6055.9 154.0 91258 21.8 1485.7 1718.7 2345.8

Other items -15948.5 -800.4 -5742.2 -1714.1 -695395 -247.4 -31511.7 -9138.4 4446.5

Money supply (M2) annual change, percent 13.3 17.7 18.3 17.0 18.3 22.7 -1.0 5.0 55.0

M2 percent of GDP at current market prices 83.3 56.3 193.9 39.9 34.2 73.6 51.4 58.6 36.7

Deposit Money Banks

Demand deposits 6619.2 510.6 4223.9

243735

91.1 25569.5

6318.7

1778.2

Savings deposits ... … 304.7 11323.4

Time deposits 60895.0 4073.9 1968.5 2554485 297.6 16641.8 11574.6

Domestic credits outstanding 52628.3 4755.1 8790.1 2305613 967.7 ... 21067.1

Interest Rates percent per annum; period averages

On deposits

Savings 4 0.42 5.69 5 4.28 5 1.88

Time (12 months) 8.85 3.23 8.2 12.5 8.91 8 3.13

Lending Interest Rate 10.6 13 6 12.75 13.28 13 8.67 13

Domestic Credit provided by Banking Sector (% of GDP) 76.6 69.2 155.1 44.5 48.4 67 50.4 70.5

Stock Market Capitalization (% of GDP) 67.4 15.6 44.9 20.3 28.7 23.1 18.1

GOVERNMENT FINANCE percent of GDP

Fiscal Balance -5.2 -4.6 -1.8 -6.6 -6.4 -1.5 -1.1 -12.6 -3.2

Tax Revenue 7.4 10.5 19.4 10.2 11.1 13.8 15.0 19.7 3.8

Total Government Revenue 9.1 12.5 22.6 12.8 13.0 15.9 20.7 27.4 22.7

Total Governemnt Expenditure 14.3 16.0 24.2 19.2 19.4 20.8 35.7 41.6 27.4

Government Expenditure on Education 4.1 … 1.8 4.0 6.9 6.0

Government Expenditure on Health 1.4 1.3 1.5 3.0 0.4

Government Expenditure on Social Security and Welfare 0.4 1.7 0.7 2.2 5.9

PRICE INDEXES annual change, percent

Consumer price index 10.5 7.3 2.6 11.0 7.5 7.4 10.9 10.8 1.5

Food price index 11.0 8.5 -1.7 11.0 4.7 7.4 ... -1.5

Wholesale price index 7.4 ... 10.4 3.5 6.4

Implicit GDP deflator 8.2 6.5 1.9 5.6 8.9 6.7 4.1 5.0 3.7

EXTERNAL TRADE annual change, percent

Exports 11.5 17.3 7.9 -1.0 6.7 15.4 -0.9 -9.2

Imports 14.0 17.0 4.3 16.0 8.9 16.5 0.3 6.1

BALANCE OF PAYMENTS as % of GDP at current market prices

Exports 11.6 21.4 25.0 11.5 16.4 5.6 32.6 14.8 14.4

Imports -19.7 -28.5 -21.1 -18.8 -32.3 -31.1 -58.7 -80.0 13.9

Balance on goods -8.0 -7.1 3.9 -7.3 -15.8 -25.5 -26.1 -65.2 0.5

Current account balance -3.8 1.5 2.3 -2.2 -6.6 5.2 -19.2 -27.0 -2.9

Overall balance 0.1 0.4 1.2 -1.5 0.3 9.3 -5.9 -1.7 1.9

Foreign Direct Investment ($ million) 253475 854 92

International Reserves end of year; $ milliion 297807 12751 3340935 13797 318

INTERNATIONAL RESERVES million US Dollars; as of end of period

Total 297807 12751.1 13797 6748.1 3630.8 789.6 318.3 7016.5

Gold, national valuation 27220 719.9 3555 500.2 – … – 12.6

Foreign exchange 261656 11393.3 9320 6170.0 3541.8 778.2 304.6 7003.0

Reserve position in the Fund 4494 0.8 0 73.5 0.0 1.6 3.1 –

SDRs 4436 637.2 921 4.4 78.6 9.9 10.6 1.0

Periodical Analysis of India and Neighbours

India

Subject Descriptor Units Scale 1980s 1990s 2000s 2010 2011 2012

Gross domestic product, current

prices U.S. dollars Billions 240.5847 360.0273 844.0158 1,711.00 1,872.85 1,841.72

Gross domestic product per capita,

current prices U.S. dollars Units 316.1784 385.6371 753.3226 1,432.25 1,546.55 1,500.76

Total investment Percent of

GDP 22.6545 24.8637 31.3365 36.837 35.002 35.616

Gross national savings

Percent of GDP

20.874 23.6622 30.8102 34.152 30.829 30.829

Inflation, average consumer prices

Index 27.7561 66.0171 120.2805 179.75 194.833 215.167

Volume of imports of goods and

services

Percent change

6.1385 9.1701 11.6105 14.858 8.146 1.788

Volume of exports of goods and

services

Percent change

5.4467 9.1813 13.1786 26.826 8.956 1.448

Current account balance

U.S. dollars Billions -4.418 -4.3676 -8.2606 -45.946 -78.154 -88.163

Current account balance

Percent of GDP

-1.7822 -1.2013 -0.5267 -2.685 -4.173 -4.787

India Macroeconomic Indicators 1980 - 2012

Discussion

Economic Growth Rate

The annual variation in the growth rate of GDP was highly unstable till the 1980s. The relative

stability 1980s onwards is due to reduced level of dependence of the economy on weather changes.

The following five major economic crisis are highlighted in the figure below:

1. Crisis of 1965 and 1966 followed by heavy droughts

2. First oil crisis of 1973

3. Second oil crisis of 1979

4. Crisis of 1991 triggered by the Gulf War

5. Asian Currency crisis from the mid-1997 to 1999 (Sato, 2010)

The upward pointing arrows show development strategy which were aimed at economic

liberalization, while in the case of strengthened development the arrows are downward sloping.

In mid-1960s during the crisis, economic liberalization was given a try but the practice failed. After

the failure, the strategy was changed to a radical constriction of economic regulations from late

1960s to early 1970s. There was partial liberalization in 1980s, which followed from the growth crisis

in 1979.

The economic crisis of 1991 enthused the globalization in 1990s onwards. There has been an

increase in the economic growth and per-capita income has increased.

2Economic Growth Rate (Sato, 2010)

Per-capita Income

The above figure shows per-capita income from 1950 to 2009. As seen in the figure, the indian

economy had entered the high growth phase around 1980. The low growth rate period from 1950 to

1980, was referred to as ‘Hindu rate of growth’. Further, there has been an acceleration in the

growth rate since 2003.

It is worth noting that rapid growth in Indian economy had started well before the Liberalization

policy of 1991, as discussed earlier it was during partial economic liberalization period of 1980s itself

that India had started showing signs of hig growth rate.

In comparsion to other South Asian countries, India’s gowth rate hass been significantly moderate,

but India has also exhibited a stable per-capita growth, without any sporadic changes.

3Per-capita Income at Constant (1999-2000) Price (Sato, 2010)

This stable and steady increase has been effective in alleviating India’s absolute poverty problems

since 1970s. As shown in the below figure, the absolute poverty has decreased from 55% in 1973 to

22% in 2004. Although absolute poverty is still a major problem in India, steady economic growth

has majorly helped in championing absolute poverty reduction.

Inflation Rate

India hasmaintained parliamentary democracy since independence. In this respect, there is a

tentative law of politics that the incumbent government will be defeated in the next election when

the rate of inflation the year before the general election is more than two digits. This ‘law’ can be

used to consider the economic influencesof democracy in India.

The poor who are are heavily hit by increase in price of food, which subsequently means short term

decrease in real income, are politically sensitive to inflation. Politicians are unabel to ignore their

voices and thus restrictive macroeconomics policies for moderate inflation are politically supported.

4Poverty Rate (%)(Sato, 2010)

In the figure above, there is noticeable fluctuations of inflation rate aroound 1980. After that, there

is decrease in fluctuation of inflation. This is in tandem with stability in annual growth rate observed

from 1980s onwards.

There are three observable phases in the indian history of inflation as follows:

1. Low level of inflation with high variability from 1950 to 1980

2. High level of inflation with low variability fro m 1980s to late 1990s

3. Low level of inflation with low variablity from late 1990s onwards

The third phase can be considered as a moderate inflation phase, the bacdrop to this is the

institutional independence gained by Reserve Bank of India since the late 1990s.

5Inflation Rate of GDP Deflator (%)(Sato, 2010)

China

Subject Descriptor Units Scale 1980s 1990s 2000s 2010s

Gross domestic product, current prices U.S. dollars Billions 326.8153 709.9557 2552.428 7157.798

Gross domestic product per capita, current prices

U.S. dollars Units 308.9243 584.4748 1944.892 5309.499


GDP 35.878 39.0544 41.2817 48.446

Gross national savings Percent of

GDP 35.2321 40.7082 46.3169 51.18533

Inflation, average consumer prices Percent change 0 7.77 1.8693 3.797333

Volume of imports of goods and services Percent change 10.8165 15.0424 15.1199 12.14167

Volume of exports of goods and services Percent change 8.6315 16.5487 15.5688 13.98367

Unemployment rate Percent of total labor

force 2.65 2.77 4 4.1

Current account balance U.S. dollars Billions -1.2312 12.0389 156.6569 189.0153

Current account balance Percent of

GDP -0.3107 1.6538 5.0353 2.739333

1China Macroeconomic indicators 1980 – 2012 (Source: IMF, Calculation done by averaging out the entries in each decade, done by author)

Discussion

Analysts often describe the exceptional rise of China as a major economic power within a period of

three decades as one of the greatest economic success stories of the modern age.

1970s

The first phase of economic reforms was introduced in 1978 when Den Xiaoping came into power.

These reforms provided liberalization to an otherwise closed economy. Before the economic

reforms, Chinese economy was centrally controlled and the government had control of the major

chunk of the economic output. The production goal, resource allocation, price control were all in the

hands of the central government. Almost 3/4th of the industrial production output came from state

owned enterprises (SOEs), the targets being decided by the central government. Since not much

deliberation was put on profitability, the country’s economy remained stagnant and inefficient for a

long period of time. This subsequently resulted in the Chinese standard of living being lower than

many other developing countries. (Morrison, September 2013)

The core of the reform movement was based on agricultural production system in the rural areas.

Farmers were given price and ownership incentives and hence for the first time, farmers were

allowed to sell a share of the output in free market.

Some of the other features of the reforms were to increase exports, increase import of high

technology products, attract foreign investment and decentralise economic policymaking in several

sectors including trade.

1980s

The wonders of the reforms continued and the government selected new coastal regions and cities

as open cities and development zones to test more free market reforms. Trade incentives were also

offered to attract investment from foreign. Additionally, price controls were gradually eliminated on

a variety of products. Agricultural output doubled from the previous decade. Industries especially in

coastal regions close to Hong Kong gained majorly , where foreign investment played a crucial role in

stimulating both domestic and export goods. (Morrison, September 2013)

1990s – 2000s

In late 1993 even more reforms were introduced by the Chinese leadership in the form of long-term

reforms. These reforms allowed the continued domination of the state enterprises in many sectors.

The new market scenario was called ‘a socialist market economy’. This transition of the economic

system to a market based economy led to high average growth.

In the period between 1978 and 1995, the GDP growth was at an average of 8% per fiscal year.

In 1999, china was declared the second largest economy in the world. Although there was a huge

difference between the GDP per capita as compared to USA, which was the world’s largest economy.

Chinese GDP per capita stood at USD 3,800.

The trade and investment reforms and incentives resulted in an exponential increase in Foreign

Direct Investment (FDI). Increase in FDI was considered one of the major contributors to the increase

in China’s growth.

Utilized FDI in a year grew from USD 636 million in 1983 to USD 45.6 billion in 1998. Though there

was a drop in 1999, when the figure came down to USD 40.5 billion. This overall increase in this

indicator made China the second largest FDI destination in the late 1990s.

Two-thirds of the FDI came from Hong Kong and Taiwan. USA came at third position with 8% of total

FDI in China from 1979 to 1999 with a total investment of USD 24.6 billion.

Poverty and saving had doubled, while the poverty rate had declined. This was majorly due to the

big measures in improving the social welfare of the country. According to the World Bank, around

200 million were raised from below the poverty line. And only approximately 10% of the entire

population were illiterate. (Morrison, September 2013)

Some of the major hurdles in the path were the difficulties faced in collection of revenues from

provinces, businesses, individuals. Struggle in reduction of corruption, other economic crimes and

maintaining the day-to-day activities of large state owned enterprises. As majority of these state

owned enterprises had not participated in this expansion plan and some of them had lost the

capacity to pay full wages and pensions.

2010s

In 2012, the real GDP grew at annual rate of approximately 10%. The figure of people who have

been uplifted from poverty has increased to 500 million. China is the world’s largest manufacturer,

exporter and foreign exchange reserves holder.

6Chinese Real GDP Growth: 1979-2013 (in percent) (Morrison, September 2013) Note: * Data for 20013 is the IMF’s projection made in July 2013

Pakistan

Subject Descriptor Units Scale 1980 1990 2000 2010 2011

Gross domestic product, current prices U.S. dollars Billions 38.0823 71.7477 118.1315 177.622 213.725

Gross domestic product per capita,

current prices U.S. dollars Units 404.4892 587.6277 767.8236 1,034.31 1,219.16

Total investment Percent of GDP 16.1622 16.1878 16.4558 15.805 14.115

Gross national savings Percent of GDP 15.1333 13.2846 15.7665 13.583 14.215

Inflation, average consumer prices Index 18.0465 41.059 79.6336 128.849 146.451

Volume of imports of goods and services Percent change 2.792 3.0646 6.785 -1.887 2.794

Volume of exports of goods and services Percent change 8.9715 6.539 7.107 0.641 7.751


force 2.3904 5.5253 6.8797 5.55 5.95

Current account balance U.S. dollars Billions -0.912 -2.268 -2.7713 -3.946 0.214

Current account balance Percent of GDP -2.3616 -3.1118 -1.2983 -2.222 0.1

2Pakistan Macroeconomic indicators 1980 – 2012

Discussion

The economy of Pakistan is very intricately related to the political scenario of the country. Therefore,

it is unavoidable to discuss the economy of the country independent from the influence of the ruling

party.

The Bhutto Regime (1973-1977)

Before the Bhutto Regime is discussed, the premise of policymaking in this era needs to be

established, for this reason the Ayub Khan regime is discussed first.

During the Ayub Regime from 1958-69, there was deliberate attempt to concentrate the wealth in

the hands of the upper income group. The assumption behind this policy was that the rich save a

higher proportion of their income and therefore a higher national saving could be achieved through

this unequal distribution of income. Savings were targeted to be 25% of the GDP. Though the policy

was affective in distributing income to the elite, the second phase based on the assumption that

would lead to increase in domestic savings did not materialize. (Hussain, 2012)

There was direct impact on the requirement of debt saving as a measure to counter the failure of

the policy. There was a seven fold increase in the requirement of foreign aid, this led to rise of debt-

servicing burden. Debt-servicing increased from 4.2% of foreign exchange earnings in 1960-61 to

34.5% in 1971-72. The repercussion of policy failure were seen for the next three decades..

While there was a mass accumulation of wealth by one section of the society, the majority of the

population was suffering from an absolute decline in its living standards.

By the time Mr. Z.A. Bhutto came to power, there was a radical shift in the ideology of the

government. The latent aspirations of a democratic society based on equity and justice were

unleashed during his mass movement against Ayub Khan.

The nationalisation of 43 large industrial units in 1972 was one of the most important initiatives

carried out by the PPP government. These were largely in the capital and intermediate goods sector

such as cement, fertilizers, oil refining, engineering and chemicals. Three years later, second phase

of nationalisation was initiated by the government, in this phase cooking oil industry, flour milling

cotton ginning and rice husking mills were nationalised. There was a diabolical contrast in the

impacts of the two phases, while the first set of nationalizations impacted the ‘monopoly capitalists’,

the second phase hit the medium and small sized businesses. Therefore, the goal of greater equality

was lost to rapid increase in the size of the public sector, this served as a base for the government to

wield power through traditional form of power by amassing resources.

There was an overall increase in the investment to GDP ratio which reached to 15.5% and was higher

than in previous regime. Yet there was decline in the GDP growth rate to 5% in 1973-77 as compared

to 6.3% in 1960-73. The decline in the GDP is indicative of the drop in productivity of investment,

this in turn was caused by the following factors:

Public sector investment was majorly focused on less productive sectors like defence and

administration.

Investment decisions in public sector industries were not economically efficient, in reference

to technology choice, geographic location and production management.

The decrease in productivity of investment due to the aforementioned points, the fiscal deficit of the

government increased even further from where the Ayub Khan government had left it. This caused a

two-fold burden on the common people as:

There was a slowdown in employment due to a reduction in development expenditure

Inflation rates exponentially increased which restrained the real income of the middle

class household.

The distortion of the real income due to nationalisation led to widespread resentment among the

urban petit bourgeois and this led to widespread demonstration against Bhutto by the same people

who had fuelled anti-Ayub agitation. The demonstrations led to the downfall of Bhutto’s regime in

1977.

The Zia Regime (1977-1989)

The new government, in complete opposition to the traditional Pakistani society ideology decided to

institutionalize military rule. New mosque schools (madrasas) were opened in small towns and rural

areas through financing received from the government. Many of these schools were linked with

militant religious organisations which were engaged in the Afghan war. These organisations would

later surface to cause extremist violence and challenge the writ rules of the state in the subsequent

years.

The economic condition in which the Bhutto regime had left power would have put crippling fiscal

and political pressures on the newly instated Zia ul Haq’s government, but they were saved because

of the following two factors:

The financial support received from the US following agreement to play a front line role in

US financed under cover war against Soviet troops stationed at Afghanistan

The foreign remittances received from the Middle East increased from USD 0.5 billion in

1978 to USD 3.2 billion in 1984. These financial gifts eased the balance of payment

pressures and also benefitted about 10 million people particularly from the lower middle

class. The increase in inflow of foreign aid helped increase the GDP growth rate from 4.9%

in the previous regime to 6.6% in the present regime. (Hussain, 2012)

The increase in GDP growth however, was not meant to be a long lived phenomena, this was mainly

due to continued poor performance in the following three strategic factors:

Domestic savings rate continued to be below 10%, far below the required rate of 20% or

above.

Export as percentage of GDP continued to be below 10% without any concrete increase

Lack of investment in social and development program as a result of increased expenditure

on defence and debt servicing programs.

It is not surprising that at the culmination of the Afghan War, when the inflow of foreign aid was

withdrawn, the constraints to GDP growth began to be highlighted. The factors mentioned earlier

came into play and the economy was pulled into recession in the 1990s.

The Democratic Interlude (1989-1999): the 1990s were marked by democratically elected regimes

who wanted to carry out practices of authoritarian form of governance in an apparently democratic

order. The public office was also used to store private wealth. These characteristics intensified as the

years progressed, the three main threats to the state were:

The economy was crumpling

The advent of militant groups supported and funded by religious extremists caused

widespread threat to lives and properties of citizens

Many institutions of effective governance were demolished

During the 1990s, there was an adverse effect on the GDP growth rate and private investment due

to political unpredictability, unprecedented amount of corruption and the deterioration of the law

and order scenario.

The government adopted a Structural Adjustment Program under the IMF, under this scheme the

government reduced the expenditure on development projects. There was a marked decrease in

Development expenditure as a percentage of GDP from 7.4% in 1970s to 3.5% in 1990s. At the same

time the government’s unproductive expenditure remained at the same high level. These factors

merely added to the declining growth which was present even in the 1980s. The severe cutback in

investment in infrastructure and poverty alleviation projects further added to the woes.

The Musharraf Regime (2001-2008)

The crisis which affected the economy, society, and state reached its pinnacle by the end of the

1990s. This led to the downfall of the democratic system of governance and contention for power

between military and elected leadership had been conducted in 1990s. Soon after coming into

power, President Musharraf’s government became pro-active in comprehensive set of reforms

which were aimed at revitalising the economy and improving the state of governance on an

institutional level. Parallely, the political system was being restructured through constitutional

amendments.

During the regime of President Musharraf, there was a considerable improvement in

macroeconomic indicators which was a result of changes in economic policies and the international

turbulence after the 9/11 attack in the US. In the period the GDP had grown to over 6%, the debt

servicing burden had come within manageable range, the budget deficit had reduced significantly

and the State Bank reserves had reached record levels. Despite the rise in the GDP there was

continued widespread poverty and shortage of basic services. The GDP grew more than double to

$144 billion since 1999.

The sustainability of the GDP growth was contested due to the following factors:

The investment rate requirement (28%) to sustain a GDP growth rate of 7% was still

much higher than the prevalent investment rate which stood at 20%.

The pressure on balance of payments was intensified due to slow growth of export

earnings

Severe shortage of infrastructure and trained man power.

The expenditure on defence reduced from 7% of GDP in early 1990s to 3.8% in 2003-04.

The last five years

The economy continues to face a number of challenges on multiple fronts like energy shortages,

floods, poor law and order situation and a plethora of administrative impairments; that have kept

the investment and growth in the country at low.

The economy has an average growth rate of 2.9% per year for the past five years.

Power shortage, due to crumbling of the power sector has been a detriment in the annual GDP

growth, where it has resulted in a decline of GDP by 2%, which accounts for about half of Pakistan’s

long-term trend of GDP of 6.5%.

Pakistan has completed the re-basing process 2005-06 is now the base year replacing the old 1999-

2000 base year.

The re-basing has resulted in the estimates of GDP for 2005-06 to improve from Rs. 7159 billion to

Rs. 7716 billion, leading to an increase of 7.8% over the old base estimates.

Further results have been improvement in agriculture sector by 21.8%, industrial sector by -16% and

the services sector by 14.5% over the old base. (Highlights of the Pakistan Economic Survey 2012-13)

Real GDP growth for the fiscal year 2012-13 has been estimated to be 3.6% as compared to 4.4% in

2011-12, after re-basing National Accounts at constant prices of 2005-06. (Highlights of the Pakistan

Economic Survey 2012-13)

Sri Lanka


Gross domestic product, current prices

U.S. dollars

Billions 5.9558 12.4315 25.7681 49.552 59.164 59.408


U.S. dollars

Units 385.5686 718.2352 1313.3239 2,428.87 2,880.34 2,875.80

Total investment Percent of GDP

27.9716 26.0299 25.266 27.578 29.954 30.633

Gross national savings Percent of GDP

18.0083 20.5515 21.8199 25.409 22.154 24.043


Index 10.936 32.9266 85.5555 141.933 151.467 162.892

Volume of imports of goods and services

Percent change

2.0821 8.7844 2.3457 16.52 35.263 -19.591

Volume of exports of goods and services

Percent change

3.9873 7.0902 1.9955 13.785 -11.017 -9.573

Unemployment rate

Percent of total labor force

0 12.4125 7.3373 5 4.1 4

Current account balance U.S.

dollars Billions -0.5563 -0.6564 -0.9807 -1.075 -4.615 -3.915

Current account balance Percent of GDP

-9.9632 -5.4784 -3.4462 -2.169 -7.8 -6.59

3Sri Lanka Macroeconomic indicators 1980 – 2012 [Source: IMF (decade wise average taken out by averaging out the entries in each decade, done by author)]

Discussion

After attaining independence in 1948 the main focus of development policy was on achieving equity

and economic growth. To achieve this, the government restricted import of goods from foreign

countries and domestic production was highly encouraged. In order to achieve equity, numerous

welfare programs were instated, the welfare programs comprised of price subsidies on food,

statutory price controls on consumer goods and the facility of free education and health services.

The welfare programs were successful in bringing about significant improvements in the field of

human development. However, the down side of this was the restriction on capital growth and

reduced ability of investment, which consequently resulted in slowing of the economic growth and,

high unemployment and low wages. (Economy - Sri Lanka info, 2013)

One contributing factor for Sri Lanka has been that the growth has been higher that all of its South

Asian neighbours with the exceptions of Pakistan. This however, is not true if the comparison is done

with East Asian and Southeast Asian countries.

Between the period of 1951 and 1976, the average per capita GDP growth rate was 0.2% per year.

During this period, the trade balance was also in bad shape and the newly created industries

operated well below the capacity due to shortage of imported goods.

There have been previous records of unusually high growth rates on two accounts, in 1968 and

1978, in both years the GDP was 8.2%.

For the period from 1960s – 1980s, the growth rate remained constant at 4%, while the lowest

growth rate was recorded in 1950s at 3.4%.

1970s

The diversification of the economy in the late 1960s and early 1970s, were mainly in the form of

import substitution producing for local markets, the goods that the country could no longer afford to

import. There was slight success in exports.

In 1978, the government decided to open the country for foreign investment, this step was in

contrast to the earlier practice of social orientation of the economy. JR Jayawardene made the

change in an attempt to match Singapore’s model of open economy. Policies were designed to

accelerate the economic growth by stimulating private investments and also attempted to increase

foreign earnings by promoting economic activities which were export oriented. (Economy - Sri Lanka

info, 2013)

The neo-liberal policies which were introduced in 1977 aimed to accelerate long-run growth.

“Contrary to expectation”, it not facilitate high growth performance in the following decade (Cooray,

2011) (Lakshman, 2010).

1980s

The policies introduced in 1970s were met with initial success. There was an enhanced inflow of

foreign aid and investment. The real growth rate was about 6% per year until 1986. However, during

the following five years there was a marked deceleration in growth, which was mainly caused by the

disruptions of ethnic conflicts. The average annual GDP growth rate was 2.7% between1986-1989.

There was however marked increase in the export of textile from 0.7% in 1974 to 28% in 1986. In

comparison, agriculture, forestry and fishing together made up 27.7% of GNP down from 39.4% in

1975. (Economy - Sri Lanka info, 2013)

1990s

The annual average of GDP was 5 % from 1990 to 2000. The per capita gross domestic product

increased from US$382 in 1975 to US$802 by 2000.

2000s - present

In the decade from 2000-2009, recorded a 5% GDP growth rate in comparison to 5.3% in the 1990s.

In 2009 the growth was 3,5% despite global recession.

Sri Lankan economy stood at USD 50 billion in 2011, which grew by 8% from the previous year. This

growth rate has been the highest in three decades. This number far exceeds the average growth rate

of 4.9%, which has been very much constant since the liberal economic policies which were

introduced in 1977.

The growth rate of 2000s would have been much higher at 5.7% if it weren’t for the dismal

performance in 2001, when a negative growth of 1.5% was recorded. This negative growth was an

effect of several factors including the political unrest, in particular the Katunayaka International

Airport. Other factors included prolonged drought, power shortage, 9/11 US terror attack, and the

global recession. After the economy recovered in 2002, it continued to grow slowly and steadily and

reached 7.7% in 2007. The situation, however took a downturn since then, because of the

unfavourable commodity and oil prices that began in 2007 and the global recession from September

2008. The second half of the last exhibited a pattern of increased growth, implying that the country

was heading towards a high growth era. (Cooray, 2011) There has been an increase in the per capita

income, in nominal terms. The per capita income has increased from Rs. 68,102 (USD 899) in 2000 to

Rs. 271,259 (USD 2,399) in 2010. The per capita income in 1948 was (USD 120).

To put things in better perspective, Sri Lanka was upgraded middle-income status on the list of

Poverty Reduction and Growth Trust (PRGT) eligible countries, in January 2010 by the International

Monetary Fund (IMF).

The structural transformation of Sri Lanka in the past six decades has led to change in sectoral

contributions to GDP.

The figures of growth contribution, in 2010 are as follows, agriculture accounts for 10.5% (11.9% of

GDP), industry accounts for 30.1% (28.7% of GDP) and services account for 59.4% (59.3% of GDP).

The data reveals that while service and industy sector have experienced an upward growth trend

over the decades, the agricultural sector has undergone a lower growth, which implies lower

productivity.

4Doubling Per Capita Income, 1960-2014 (Cooray, 2011)

5Annual average GDP growth and sectoral shares, 1950-2010 (%)(Cooray, 2011)

Bangladesh



U.S. dollars

Billions 21.9277 37.7894 63.7034 106.216 114.079 122.98


U.S. dollars

Units 233.6877 316.7119 446.4993 702.83 747.12 797.159


16.4778 19.4378 23.9637 24.808 25.896 26.701


16.1932 20.3078 26.488 29.356 28.996 29.357


Index 44.7031 95.3082 160.2512 229.784 254.378 276.612


Percent change

7.2993 7.9728 6.3272 12.91 4.997 6.537


Percent change

13.0551 13.2132 9.1669 16.494 9.125 9.94


dollars Billions -0.6878 -0.532 0.4278 0.507 -1.553 0.823


-3.0694 -1.4059 0.4209 0.477 -1.361 0.669


-9.9632 -5.4784 -3.4462 -2.169 -7.8 -6.59

6Bangladesh Macroeconomic indicators 1980 – 2012 Source: IMF Data (Calculation done by averaging out the entries in each decade, done by author)

Discussion

The macroeconomic tends of the country over the span of five decades have been discussed in the

following paragraphs.

The country had suffered major economic downfall during the Liberation War of 1971. Before the

war, the economy was growing at a rate of 4% per annum, but the growth was reduced to one-fifth

of the original during the war. People were dislocated on a large scale, which further led to

economic slowdown, which lasted for about two decades and then there was a rapid acceleration in

the GDP growth rate from 1990 onwards.

As can be seen in the figure, had the GDP grown at the forecasted growth rate in 1960s, the GDP

would have been 10% higher in 2009. On the other hand, if it were not for the acceleration post-

1990, the GDP in 2009 would have been 29% lower than the actual.

As discussed earlier, Bangladesh economy had suffered a major setback in the Liberation War. The

economy had started showing progress in the 1980s. Steadily, the economic growth also became

less volatile over time. GDP per capita also increased steadily in the recent decades and was

stabilised over time. In 2009, GDP per capita was 21,000 taka (in 1995 prices). If it were not for the

acceleration in growth rate of 1990s, the average Bangladeshi would have been 7,100 takas worse

off in 2009.

7Bangladesh Real GDP The solid grey line shows actual path of GDP. Dotted lines are hypothetical trend paths based on:

1960s trend (green); 1970s/1980s trend (red). (Rahman, 2010)

8Bangladesh growth in Real GDP The columns represent annual growth; the black dotted lines represent annual average growth

over the 1960s, 1972-90, and since 1990; the red line represents annualised growth over the previous five years.

(Rahman, 2010)

The sectoral composition has also changed significantly from 1960 to present. The share of

agriculture sector in the economy has nearly halved from about two-fifths in the early 1960s. While

the share of industries has more than doubled to 30% in comparison to 1970s. Since 1970s, services

have accounted for about half of the share of economy. The acceleration in the economic growth of

industry and services has been nearly even over the past couple of decades.

There has been a rise in investment, exports and imports relative to nominal GDP in the recent

decades, which have had a positive impact on the economy.

9Bangladesh growth in real GDP per capita The IMF data are for calendar years. The ‘consolidated measure’ is derived by dividing the

GDP series presented in Charts 1 and 2 above by the United Nations population estimates. (Rahman,

2010)

10Bangladesh Sectoral composition of the economy (Rahman, 2010)

The share of investment in GDP rose sharply after the Liberation War till it stagnated in the 1980s.

The rise of investment has been steady relative to GDP since the start of the 1990s, and it is only in

the last few years of the last decade that the pace has slowed down a little. The significance of

higher investment to GDP ratio is that there is more capital in the economy.

In the case of exports, there was a continuous fall in the pre-war period, relative to GDP. While after

the war, the ratio of exports to GDP stagnated at a very low level up to the late 1980s. There has

been a steady increase in the ratio of the two values since then. There has also been an increase in

imports since 1980s. Rise in these two indicators, with all else remaining same resulted in a higher

economic growth. This is true because:

Exporting industries face competition from abroad

Imports from abroad open domestic market for foreign competition

These two factors lead to higher efficiency which translates into faster productivity growth.

11Bangladesh Share of nominal GDP (Rahman, 2010)

Nepal


Gross domestic product, current

prices U.S. dollars Billions 2.8477 4.6047 8.4149 16.002 19.123 18.958

Gross domestic product per

capita, current prices U.S. dollars Units 176.5906 225.5306 333.0313 596.058 704.165 690.038


GDP 15.5841 21.1568 25.4 36.991 33.17 33.782


GDP 15.5666 17.4686 28.2856 34.629 32.224 38.576

Inflation, average consumer

prices Index 19.546 51.6185 94.8356 139.339 152.733 165.425

Current account balance U.S. dollars Billions -0.1804 -0.1531 0.2619 -0.378 -0.181 0.909


GDP -6.3678 -3.6883 3.3935 -2.362 -0.946 4.794

7Nepal Macroeconomic indicators 1980 – 2012 Source: IMF

(Calculation done by averaging out the entries in each decade, done by author)

1960-1970s

This was a period of low level of physical infrastructure, human capital and development.

1980s

Nepal experienced remarkable acceleration in growth based on unsustainable expansion of

aggregate demand due to expansionary monetary and fiscal policies. The following changes were

observed:

- Sharp rise in Public expenditure and Public revenue which resulted in rise of budget deficits

- Development expenditure rose from 8.7% to 12.4% of GDP

- Government revenue rose slightly from 7.7% to 8.7% of GDP

- Budget deficit doubled from 3.1% to 6.7% of GDP

- Money supply increased with the rise in broad money from 16.2% to 27.2%

- Rate of Inflation increased from 7.5% to 10.6% which resulted in appreciation of real

exchange rate and depreciation of balance of payments

These changes led to the formulation of evolving reforms over the decade. The four distinct reforms

include:

- Standard Stabilization Programme(1985-86)

This reform focussed on standard stabilizing measures, however it wasn’t very successful.

Real exchange rate depreciated, irrespective of rising inflation, which raised exports and

imports but resulted in worsening of current account. At the fiscal front, the

macroeconomic condition remained grim with slight rise in budget deficit from 6.7 to 7.8%.

- Steady Tax Reduction Programme(1990)

This reform was introduced on the advent of power of popular democratic government.

This phase broadened the tax base, improved revenue administration, liberalized industrial

policies and interest rates, unified foreign exchange by making current account convertible

and facilitated banking sector entry.

- Liberalization of Agricultural Sector(1997)

Introduction of neutral VAT and strengthening of local governments was brought about by

the third reform.

- Governance Reform(2000)

Government worked towards improving tax policies, administration, financial sector and

corruption through medium-term expenditure. (Osmani & Bajracharya)

1990s

These reforms resulted in trade liberalization and incentives to exporters. The following changes

were observed:

- Cut in average tariff rates from 32% to 14% (2000) and peak basic tariff rate reduced from

200 to 110%.

- Fall in effective rate of protection in manufacturing from 114%(1989) to 8.5%(1996). Low

agricultural tariffs and reconstructed exchange rate system.

- Attract foreign direct investment by allowing 100% foreign ownership in most sectors. Trade

Treaty with India (1996) eliminated non-tariff barriers with 25% permitted ownership,

liberalizing Indian investment.

- More private sector participation under joint ventures in banking, energy and agricultural

sectors. Share of private sector investment surged to 14% and public sector investment

stagnated at around 7%.

- Exports doubled from 5 to 10% of GDP and trade ratio increased from 23% to 38%.

- Trade Deficit increased from 13 to 21% of GDP and current account deficit decreased from

6.2 to 4.5% of GDP. Higher export earnings, remittances and tourism earnings led to increase

in import of capital goods at 10% per annum.

These improvements were analyzed in the long term trend by putting the economy on a higher

growth path in the pre-reform period (1965-1985) and post reform period (1985-2000).

Manufacturing growth in post reform period averaged around 14% which improved from the 5%

rate of pre-reform period. This growth was neutralized by the poor performance of agriculture

which improved only in the latter half of 1990s. These effects were a result of the Trade Treaty

signed with India and rapidly rising remittances. The macroeconomic indicators like budget

deficits, inflation and balance of payments improved in the post-reform period. This

sustainability of growth is also analyzed from the total factor productivity which experienced a

positive growth of 0.51% per annum in 1990s as compared to the negative growth of -0.76% per

annum in 1980s. (Osmani & Bajracharya)

2000s to Present

In recent times, political developments in Nepal have led to economic development. Political

instability led to a dip in economic growth by 3.6%. The current account remained in surplus

because of remittances and on the fiscal front, the combination of low spending and continued

revenue growth led to decrease of government’s stock of debt.

The following changes over the years include:

- Industrial growth in 2013 decreased from 4.3% (2011) and 3.0 % (2012) to 1.6%.

Manufacturing growth reduced to 1.8% from 3.6% of 2012 and construction activity

increased to 1.65 from previous year’s 0.2%.

- Growth in services sector to 6% from preceding years 4.5% and 3.4%.

- Rise in Inflation to 9.9% reversing a trend since 2009. ‘Cost-push’ factors resulted in high

prices of food which rose by 9.7% from 7.6% and non food which increased to 10% from 9%.

- Deterioration of trade balance to 27.1% with adverse effects on exports and imports. Export

growth decreased to 3.6% from 15.4% and imports rose to 20.6% from 16.5%.

Irrespective of the current scenario, Nepalese rupee depreciation does not threaten

macroeconomic stability because of the buffers against currency shocks. Also, the future

macroeconomic progress will depend on political transition. (South Asia Focus: A Wake Up Call ,

2013)

Myanmar

Subject Descriptor Units Scale 1990s 2000s 2010 2011 2012


U.S. dollars Billions 1.7248 17.6322 49.628 56.17 55.273


U.S. dollars Units 35.4129 312.772 811.084 899.916 868.086


GDP 2.5816 12.6681 16.013 14.907 20.07


GDP 1.7776 12.8532 23.143 27.48 15.634

Inflation, average consumer prices Index 50.522 867.7884 1,627.33 1,672.34 1,719.67


Percent change

-0.7141 10.3656 14.559 21.995 17.329


Percent change

2.5454 12.4525 6.001 11.748 4.875


force 0.812 4.02 4.02 4.02 4.02

Current account balance U.S. dollars Billions -0.1763 -0.0458 -0.952 -1.338 -2.452


GDP -2.1527 0.1778 -1.918 -2.382 -4.436

8Myanmar Macroeconomic indicators 1980 – 2012 Source: IMF

(Calculation done by averaging out the entries in each decade, done by author)

Discussion

Myanmar’s post war history of economic development is divided into the following categories:

Parliamentary democracy period 1948-62

Socialist period under military rule 1962-88

Market-oriented period under military rule: 1988-present

12Chronology of Developments in Myanmar

After independence, a mixture of nationalism, socialism and market system emerged. The

government took over the rice trade by nationalization of agricultural land and redistribution to the

cultivators. This was followed by the nationalization of the timber industry. These two sectors were

previously under monopoly of foreign firms. Then came the nationalization of Irrawaddy Flotilla

Company which was also previously owned by foreigners and finally the reorganisation of the Burma

Corporation and Burma Oil Company into a joint venture. (Thein, 2004)

Simultaneously, on the one hand the government also decided to develop certain industries on a

state-owned basis. On the other it also gave room for some private sector participation and free

market in many economic activities, including foreign trade.

Just as the economy was picking up pace, the ruling Anti-Fascist Peoples’ Freedom League party split

into smaller pieces in 1958. The Myanmar army took over the political power through a military coup

in 1962. “The Burmese Way to Socialism” was declared as a self-reliant policy of isolation and as a

standard for future progress. Under this policy, all enterprises under foreign trade, domestic

wholesale, and retail trade were nationalized. Where nationalization was not applicable, the sector

was subjected to price controls, example agriculture. In practice, not only were the cultivators

commanded to plant planned cops in areas chosen by the government but also had to sell the crops

to the state at the prices fixed by the government, at prices far below market prices. Foreign loans

were majorly rejected.

There was some relaxation in the policy stance in the mid -1970s due to deteriorating economic

conditions, this was done by the introduction of the 1974 bicarmel constitution. For example,

foreign aid was welcomed after being rejected for long including loans official development

Assistance Loans (ODA). There was defined change in the operation of the state-owned economic

enterprises (SEEs), wherein they were made to operate along commercial guidelines to improve

efficiency. (Thein, 2004)

As a result of the aforementioned efforts, the economy improved but could not be sustained over a

long time as there was no change in the basic policy favouring state-led industrial development.

The government tried to make the situation of import dependence better by cutting down imports

and public investment, while at the same time increasing money supply by printing money. These

measures took place in mid-1980s. The eventual result of these policy changes were that while

cutting imports and public investment slowed down economy, printing money increased inflation.

The government had to finally demonetize kyat in 1985 and 1987, and the socialist regime finally

collapsed in 1988.

The State law and Order Restoration Council (SLORC), a new military group took over power in

September in 1988. One of the first steps taken were the introduction of the Foreign Investment Law

along with removal of restrictions in private sector in domestic and foreign trade. The market-

oriented policy was officially adopted in March 1989, upon retraction of the Law of Establishment of

the Socialist Economic System.

There was immediate gratification in many of the economic reforms introduced in the early 1990s.

The involvement of the private sector in the economy as a measure of ratio of GDP increased from

68.6% in 1991-92 to 76.4% in 1997-98. With the notable growth of the agricultural sector led to a

real GDP growth of over 7% per year during the period 1992-93 to 1996-97.

However, this spurt of growth was also not long lasting. One of the major factors was the Asian

Currency crisis in the mid-1997, which had negative impact on Myanmar’s economy, while similar

effects were not observed in other economies in the region. There has been extreme criticism of the

path the economy took, with many of the opinion that the economy took a U-turn to command

economy. For example, tax imposition on export goods and regulation on the type of goods

imported. In terms of permits granted by the government to conduct business, some companies

such as Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings (MEHL) were

treated more favourably. (Thein, 2004)

These practices by the government therefore put a question mark on the intention of the

government, as for the evolution of market oriented economy, providing a level playing field is one

of utmost importance.

In the recent past, growth has reached an aprroximate average of 6.5% per year, majorly driven by

gas production, construction and services. Inflation reached 4.7% in March 2013. The current

account deficit has reached 4.5% of GDP in 2012-13. (Chhor, Dobbs, & Hansen, 2013)

There has been a recent decline in the exchange rate. State bank held international reserves have

increased to USD 4.6 billion at end of March 2013. The fiscal deficit is said to have declined to 3.75%

of GDP recently. This is on account of higher tax revenues and lower than anticipated capital

expenditure.

Bhutan



U.S. dollars

Billions 0.1981 0.3218 0.8334 1.497 1.872 2.166


U.S. dollars

Units 400.266 598.1505 1260.6476 2,062.60 2,535.17 2,913.86


37.385 41.308 50.1984 52.255 44.549 46.274


12.0058 28.2761 33.4766 33.683 29.178 29.056


Index 155.2245 393.4671 710.8776 958.46 1,043.34 1,157.11


Percent change

5.4362 -3.0804 10.6651 29.229 28.657 -13.779


Percent change

5.042 -4.3401 14.1891 1.108 12.489 -13.749

Unemployment rate

Percent of total labor force

0 0 1.97 3.3 3.1 3.2


dollars Billions -0.0607 -0.0041 -0.0602 -0.142 -0.41 -0.35


-30.0852 -3.0926 -9.628 -9.498 -21.921 -16.149

9Bhutan Macroeconomic indicators 1980 – 2012

Discussion

Government exhibits prudent macro-economic management with fiscal and monetary stability

planning and evolution of the tax base and financial sector. The Bhutanese currency, ‘Ngultrum’,

fixed to the Indian Rupee is meant for free circulation with administratively determined interest

rates. Though Bhutan is considered among the world’s poorest countries in terms of GDP per capita,

it has a medium human development index rating of 0.510.

1985-95

Economic structure was predominantly agricultural with economic growth due to hydropower

potential and natural resource based industries. Average growth rate was 6.8%. Bhutan has received

$248.27 million in loans and $51.37 million in technical assistance.

10Sectoral Breakdown of GDP (Lhamu, Rhodes, & Rai)

Several initiatives for development of private sector and privatization of public sector to maintain

macroeconomic stability and growth have been implemented. Development of Infrastructure,

cottage and small industries have been set up.

2000s to Present

12Bhutan Development Indicators (South Asia Economic Focus, 2013)(Asian Development Bank & Bhutan, 2012)

11Bhutan GDP at Factor Cost by kind of activity in 1980 (Lhamu, Rhodes, & Rai)

13Bhutan Economic Indicators 2008-2013 (Asian Development Bank & Bhutan, 2012)

Since 2006, Bhutan has increased its hydropower and renewable energy to support economic

growth. This contributes to about one-third of the GDP and one-fifth of economic growth, averaging

over 8% annually. These construction and hydropower projects have anticipated growth of the

industry sector to 6.2% in 2014.Growth in service sector is new investments in tourism, finance

sector and transport and communications.

Bhutan in 2011 experienced overheating episode with effects that still prevail currently. Rapid

private sector credit growth was crippled by a credit crunch caused by government to halt personal

loans and thus reduce demand for rupees.

Presently, a higher budget deficit of 3.7% with an off-budget stimulus plan of 4% of GDP is

experienced. This was facilitated by projects and grants with India. Inflation reduced to 5.5% (y-o-y)

because of higher fuel prices imported from India. Fiscal Deficit reduced to 0.9% of GDP and over-

performance of tax collection particularly corporate tax and excise duties is also experienced.

Current expenditures remain below the fiscal anchor of staying with the constitutional requirement.

Bhutan has high debt but public debt has mitigated the risk of debt distress.

Long term development challenges have been faced by Bhutan since the 2000s because of economic

volatility with most of the revenues coming from grants and sales to India. Revenues and risk

management depend on the timing and seasonality of hydropower developments, lack of economies

of scale in several industries and frequent natural disasters.

Bilateral Trade between Countries

India - China

China is India’s largest trading partner overtaking the United States of America back in 2008. India

China signed the Most Favoured Nation (MFN) Agreement in 1984, after officially resuming trade in

1978. Before the comprehensive reforms introduced by India in 1991, trade levels were insignificant

but it has grown exceptionally well since. However, India’s present trade deficits of USD 26.3 Billion

pose a huge threat to the bilateral trade asymmetry between the two nations. Some trade statistics

between the two nations are as follows:

- USD 66.7 Billion was the total value of India China trade in good at the end of 2012, down by

almost 10% mainly because of India’s export to and import from China (Embassy of India

Beijing, China)

- India stands at the 15th position with respect to China’s trading partners with a share of

1.72%, 7th in export destination and 19th in imports in China’s overall trade

- Exports (mainly fabric, copper, stone, salt, sulphur, organic chemicals, boilers, cotton, yarn

etc.)stand at USD 18.8 Billion, down by 20% YoY. (Embassy of India Beijing, China)

- Imports (mainly nuclear reactors, electric machinery, chemicals, boilers, iron etc.) stand at

USD 47.75 Billion, down by 5% YoY.

- China’s non-financial direct investment in India stand at a cumulative figure of USD 657

Million till October 2012 while India’s investment in China stands at USD 470 Million

(Embassy of India Beijing, China)

India – China Strategic and Economic Dialogue (SED)

This dialogue was set up in 2010 when Chinese premier Wen Jiabao visited India. It’s meant to be a

forum to discuss issues and solves problems regarding the macroeconomic factors impacting both

countries due to changing financial and economic landscape internationally, exchange ideas on the

best practices for handling domestic economic issues and specifically to find areas of improvement

to further enhance learning and cooperation between the two nations. The first meeting took place

in Beijing in September 2011 and issues related to fiscal and monetary policy of the countries,

investment climate and policies on conservation of energy etc. While in the second SED meet held in

New Delhi in November 2012, they signed 7 businesses and 4 government to government MoU’s on

better cooperation in various fields and strengthening macroeconomic communication. (Embassy of

India Beijing, China)

Join Economic Group

The Join Economic Group is a ministerial level dialogue between India China on Economic Relations

and Trade, Science and Technology. It was set up by Rajiv Gandhi when he visited China in 1988. So

far 10 JEG’s have taken place. (Embassy of India Beijing, China)

With the growing bilateral trade a number of Indian companies have set up office in China and

around 100 Chinese firms have established operations in India. They are presently resorting to rapid

trade liberalization given the potential and the global trade environment and the regional disparity

in having international trade access. A trade target of USD 100 Billion by 2015 has been set up by

both the countries (Mohanty, May, 2013). Given the conditions it seems achievable, especially since

India has great export potential in China based on how it has fared globally and the fact it hasn’t

introduced a number of globally competitive products. However, a cause of concern is that the

Chinese economy is five times as large as India and China’s export to India beat India’s export to

China by three is to one at present.

India – Pakistan

India and Pakistan have been at loggerheads for most part after the partition and this reflects in

their trade relationship as well as it hasn’t materialized yet. There is tremendous scope for

improvement and if all goes well in the near future, the number could scale up to USD 10 Billion.

Some reasons why it hasn’t been the way it should be are:

- Pakistan hasn’t given India Most favoured Nation (MFN) status as of now and it is unlikely to

grant that before the 2014 Lok Sabha elections (Pakistan rules out most favored nation

status, 2013)

- India has complex tariff and non-tariff barriers which add to the woes

- Poor transport contributes heavily as it makes trade costly; this includes, road, railway and

port facilities all of which are inadequate and infused with bureaucratic regulations

A look at the statistics tells us that, at present (India-Pakistan Bilateral Trade: Past, Present & Future,

2013)

- The share of India-Pakistan trade in India’s total trade is around 0.34% (FY 2010-12) which is

a decline from the 0.48% (FY 2007-09 )

- India’s exports to Pakistan have reduced from 1.01% (FY2007 -09) to 0.73% (FY 2010-12)

- Similarly, India’s import to Pakistan have reduced from 0.14% (FY2007 -09) to 0.09% (FY

2010-12)

- While India’s foreign trade showed a CAGR of 17%, India’s trade with Pakistan expanded

only by a CAGR of 3%

Formal and Informal Trade

Informal trade between the two countries is rampant and takes place in the following ways, i) Trade

is routed through a third country, ii)A lot of illegal trading occurs through land across borders. This is

mainly due to the tariff barriers and the quota problems in the formal trading sphere. And this kind

of trading is showing no signs of slowing down owing to recent problems at the Line of Control.

If we take a look at the some aspects historical aspects of India and Pakistan’s trade relations, some

fact that draw your attention are. (India-Pakistan Bilateral Trade: Past, Present & Future, 2013)

- As compared to now, in 1948-49, almost 70% of Pakistan’s total trade happened with India

- A trade embargo was imposed on India and Pakistan between 1965 and 1974 after the war

- Trade finally improved when Pakistan agreed on importing 322 Indian items in 1989 and that

list has been increasing ever since

- India offered Pakistan the Most Favoured Nation status back in 1996, an act that hasn’t been

reciprocated till date though it has decided to grant it in November 2011

- Three agreements were initiated in 2011 namely, Redressal of Trade Grievances Agreement,

Mutual Recognition Agreement and Customs Cooperation Agreement

At this point in time, India and Pakistan should look towards strengthening their trade ties so as to

benefit each other to forge the spirit of common market. They should forget their past differences

and concentrate on the consumers who’ll in turn avail low cost good and services and enhanced

saving capacity.

India - Sri Lanka

Trade between India and Sri Lanka has been robust and both the countries share a good bilateral

trade relationship with trade growing rapidly over the last decade. The last decade also saw a

number of leading Indian companies from the private sector establishing their presence by making

investments in Sri Lanka. Sri Lanka went through comprehensive policy reforms in 1977 becoming

one the first countries in Southern Asia to adopt export growth strategies while India moved to a

liberalized economy since 1980; this led to both the economies opening up giving trade between the

two nations a major boost.

Sri Lanka is now accounted as India’s largest South Asian trade partner and India holds the position

of being Sri Lanka’s large global trade partner. India mainly exports pharmaceuticals, mineral fuel,

automobiles, iron and steel etc while it imports poultry feed, paper products and natural rubber

from Sri Lanka. Some statistics regarding the bilateral trade relation shared by both countries,

(Chakraborty & Sikdar, 2011)

In 2012, bilateral trade amounted to USD 4.002 Billion, down by 17.59% when compared to the

previous year. While it had amounted to USD 4.86 Billion in 2011, up by about 66% from 2010

India has a cumulative investment of over USD 1.75 Billion (mainly telecom, petroleum retail,

tourism, banking etc.) in Sri Lanka making it the fourth largest investor

India-Sri Lanka signed the Free Trade Agreement in 2000, which cause trade to quadruple trade by

2006 reaching USD 2.6 Billion

Free Trade Agreement

The India Sri Lanka Free Trade Agreement (ISFTA) was signed in March 2000 and bilateral trade

between the two nations haven’t been the same again, growing rapidly ever since. The agreement

eliminated import quotas, tariffs and preferences on most good and services that the two countries

dealt in. Exports from Sri Lanka to India rose from USD 68 Million to USD 548 Million while exports

from India to Sri Lanka increased from USD $638 Million in 2001 to USD $238 Million by 2008. Pre-

FTA period saw a growth of 14% per annum between 1993-200 while post that they experienced a

growth in trade of more than 47% (2001-2008). To deepen the FTA the two countries got into the

Comprehensive Economic Partnership Agreement (CEPA) (2005 – 2008) which provided additional

market access to both the nations. It enhanced economic cooperation, assessed the investment

climate and established trade in services agreements. Recently, they have resumed discussion on

CEPA and are taking steps to finalize it. (Chakraborty & Sikdar, 2011)

India-Sri Lanka plan to double their bilateral trade relationship to USD 10 Billion by the next three

years and are taking steps in that direction. India has made big investments in Sri Lanka in the recent

past. They’ll help in expanding the public transport framework along with construction of more than

50,000 houses in conflict ridden and plantation areas. Similarly, Sri Lankan investment into India has

also seen a rise in recent times. Example, Brandix is setting up a garment city in Vishakhapatnam ,

Ceylon Biscuits, Carlsberg, MAS holdings etc. Thus the future looks positive in terms of trade relation

for both the countries even though last year saw a decline in trade. (India Sri Lanka Relations, 2013)

India-Bangladesh

India and Bangladesh share a strong linguistic, cultural and religious bond along with 4096km of

border. It is in the best interest of both the countries to maintain amicable trade relations; more so

when both nations are fighting similar problems of infrastructure, governance, sustainability and

employment. Thus, it is good news that India trade with Bangladesh has seen rapid growth over the

last few years. Though at present, China is Bangladesh’s largest trading partner but this is set to

change in the coming years with the way trade with India is growing. Some statistics regarding

bilateral trade between the two nations are – (Acharya & Marwaha, 2012)

- Bilateral trade stands at USD 4.4 Billion in FY2012, up from USD 1 Billion back in FY2001 and

India contributes 86% of that number

- India’s exports to Bangladesh stand at USD 3.8 Billion, up by 17% from FY2011 while the

imports stand at USD 585 Million, growing by 31% over FY2011

- Between FY2001-2012 the exports increased at a CAGR of 13.75% and between FY2006-12

the imports increased by a CAGR of 29%

- India’s top five commodity exports and imports to and from Bangladesh include cotton,

vehicles, cereals, residues and waste from industries and nuclear reactors, boilers etc and

vegetable textile fibres, fish, textile articles, rags, edible fruits and nuts, clothing accessories

etc. respectively

Informal Trade

Just like Pakistan, there is massive informal trade between India and Bangladesh too. Huge volumes

of goods are illegally traded between or smuggled between the two countries. The long border

between the countries and the non-tariff barriers can be attributed as major reasons for this. The

trade amount is roughly estimated to be the same as the formal trade amount.

India has recently signed two major agreements on Prime Minister Manmohan Singh’s 2011 visit to

the country, namely: (Acharya & Marwaha, 2012)

i) Framework Agreement on Cooperation for Development

ii) Protocol to the Agreement Concerning the Demarcation of the Land Boundary between

India and Bangladesh and Related Matters

A USD 1 Billion credit line was offered by India to Bangladesh in 2010, the largest single time credit

line offered by India to any country. This goes on to show India’s commitment towards resolving

economic development issue in Bangladesh.

Bilateral FTA

India has proposed a bilateral Free Trade Agreement with Bangaldesh and it is under Bangladesh’s

consideration. Some of the advantages of having it would be that Bangladesh’s exports would

increase by 182% and India’s exports by 134% 1) It would make unilateral trade concessions much

more stable 2) Assured access to Indian Market 3) Greater foreign capital flow 4) Improve overall

competitiveness of the economy and allow for better division of labour etc. (Dubey, 2013)

Both the countries would gain by opening up trade. India would inturn be helping the north eastern

economy in helping Bangladesh’s economy grow. Some key problems that remain are non tariff

barriers, increasing bureaucracy, inefficient customs and bad trade facilitation. The proposed idea is

that trade not only include goods but also be prevalent in the field of services, investments,

technology and finance; all this keeping regional cooperation in mind.

India-Nepal

India and Nepal have had close relations since ancient times due to geographic proximities and other

common religious, cultural and linguistic factors. In terms of bilateral relations, India is Nepal’s

largest trade partner and accounts for almost two third of their trade; whereas in terms of trade

intensity with India, Nepal is second only to Bhutan. At the end of 2012, bilateral trade between the

two countries stood at Rs.21812.8 crores which accounted for 65.1% of Nepal’s external trade.

India’s exports amounted to NPR 360 Billion and imports amounted to NPR 52 Billion. Exports from

Nepal include the following materials, edible fruits, spics, coffee, residues, soaps, vegetable textile,

footwear, iron and steel, copper and articles, aluminium etc. This export basket contains mainly low

value products and shows how Nepal hasn’t been able to diversify production. As of now, Nepal is

close to exhausting its supply capacity but there exists great potential for intra – industry trade.

Some critical barriers to the growth are – (Adhikari, 2013)

- Non tariff barriers: Informal payments have to be made to Indian customs due to

unpredictable use of NTM’s. Moreover, the customs doesn’t accept test reports for foods by

Nepalese labs. Thus, they have either got a certification from the Bureau of Indian Standards

or get their product tested from an Indian laboratory.

- Para tariff barriers: Additional tariffs like the special additional duty, the education cess,

countervailing duty etc coupled with unpredictability on the imposition of such tariffs.

- Transport hassles: Nepalese trucks are not allowed beyond Indian border while it is not the

same for Indian trucks in Nepal. Moreover, due to this the goods have to be transhipped at

the borders to Indian trucks.

Indo-Nepal trade treaty

The Indo Nepal Trade treat was last signed in 1996 and allowed duty free access of agricultural

goods for both markets and for industrial products, India allowed duty free access to almost all good

barring a few exceptions. The treaty saw a revision in 2002 where rules regarding origin criteria and

quantitative restrictions were places on some items. It was again renewed in 2007 and then in 2009

when it underwent a few changes including, extension of duration, technical assistance

commitment, addition of items to the duty free list and annulment of duty refund procedure etc.

(Adhikari, 2013)

The problem with such treaties were that they covered only goods, there was fast track settlement

of disputes, no promise for mutual recognition were in place and the fact that they needed to be

periodically renewed thus placing Nepal in a vulnerable position.

Therefore, in conclusion though the bilateral relation seems amicable, India being the larger

economy should show some magnanimity. While Nepal needs to strengthen its supply side, the

treaties need to renewed based on some of the on ground problems affecting both the countries.

Also, these treaties should be implemented with greater vigour and care should be taken to overlook

other discriminatory practices.

The import-export ratio at present stands at 7:1, not a very favourable figure but Nepal’s working at

developing faster. Another area of economic development identified is the exploitation of water

resources. Although, India also remains Nepal’s biggest foreign investment source and the

investments amount to around Rs.2175.5 crores. (Bhattarai, 2013)

India-Myanmar

India started taking interest in bilateral trade with Myanmar after the Look East Policy that was

signed off in 1990. Myanmar is of extreme importance strategically as it is the only Gateway to the

ASEAN markets for India. The India Myanmar bilateral trade relation has seen exponential growth in

recent years. India is Myanmar’s fourth largest trade partner and the second largest export market.

Some statistics regarding the same are: (India Myanmar Relations, 2013)

- Bilateral trade has increased from USD 12.4 Million (1980-81) to USD 1.92 Billion in 2012-13

- India’s exports to Myanmar include pharmaceuticals, primary steel, semi finished steel,

cotton yarn, cement, motorcycles, cement soyabean meal etc. and have reached USD 544

Million

- India’s imports from Myanmar include mainly forest based products, pulses and beans,

plywood, ammonia, human hair etc. and stands at USD 1.4 Billion at present

Even though India and Myanmar share a long border but not much trade happens at the border. The

two countries signed the border trade agreement back in 1994 and have been upgrading the list of

items allowed ever since reaching around 62 in 2012. Trade mostly takes place mainly through the

ocean. Some problems with border trade include informal trade, smuggling, political problems, lack

of infrastructure, anomaly in exchange rates etc. Border trade now stands at USD 36.2 Million.

Even though the Trade Complimentarily Index is high showing good prospects of bilateral trade, the

overall trade intensity has been going down predicting a downward trend. Some agreements signed

between the two countries for better bilateral trade relations include the Bilateral Investment

Promotion Agreement (BIPA, 2008), Double Taxation Avoidance Agreement (DTAA, 2008), India-

ASEAN trade in Goods Agreement (2009). There was also a Joint Trade Committee (JTC) set up in

2003 to further help the bilateral relation between the two countries. (De, 2013)

Recently, India and Myanmar have set a bilateral trade target of USD 3 Billion by 2015. The two

countries hope to cooperate in fields like textiles, infrastructure, oil etc. Some of the present

infrastructure projects between the two countries include the India-Myanmar Shipping Services,

Myanmar Air Services, India-Myanmar Oil and Gas pipeline. (Sharma, 2013)

India-Bhutan

India and Bhutan have shared a relationship of mutual trust and understanding. This is even seen in

the economic relationship shared between both the nations with a lot of importance given to hydro

electric power. Some statistics regarding their bilateral trade are – (India Bhutan Trade Relation,

2013)

- Bilateral trade reached INR 56.24 Billion in 2011

- Exports stood at INR 35.2 Billion in 2011 and included petrol, mineral products, vegetables,

spices, nuts, chemicals, rubber etc.

- Imports from Bhutan stood at INR 26.3 Billion and included hydroelectric power, alcohol,

chemical, cement, timber etc.

India is Bhutan’s largest trade partner and there exists an India-Bhutan Trade and Commerce

Agreement that was initially signed in 1972. This was renewed in 2006 and provides duty free transit

for merchandise from Bhutan from sixteen entry points.

Apart from this, the India-Bhutan Friendship Treaty was signed in 2007 and promises better bilateral

trade relation between the two countries with free full cooperation from governments of both the

countries.

Bhutan is also looking for more direct investment from India and is doing its bit to create a

conducive environment for such investments by permitting Indian Rupee and allowing them to hold

majority shares in the company. The current trade of USD 400 million has also been termed below

potential as Indian investors can take advantage of the Greenfield projects in Bhutan. Furthermore,

Hydroelectric, Information technology, infrastructure and manufacturing have been identified as

areas where both the countries can mutually benefit. (Bhutan PM for strengthening bilateral trade

with India, 2013)

Relationship with neighbours

Pakistan

India and Pakistan have had estranged relationship ever since. The relationship hasn’t improved

drastically over the last 67 years. Problems of Kashmir, terrorism and infiltration through the border

remain rampant. Infact, this year alone has been said to be the worst in terms of violence in the last

10 years with both sides accusing each other of killing soldiers on border. The way forward as

proposed by the present Pakistan Prime Minister Nawaz Sharif has been peace while India is wants

to continue talks and pass resolutions for aggression shown. Kashmir also has been a cause of major

concern along with the allegation on Pakistan of housing and training insurgents. Recently, both

countries freed each other’s prisoners as an act of peace with Pakistan releasing 337 Indians. A

recent poll by BBC also suggested that as a nation almost half of the country had negative views

about Pakistan. (Sarkar, 2013) Another bone of contention with regards to macroeconomics is the

fact that Pakistan is yet to give India the Most Favoured Nation (MFN) status and this has been

postponed until next year.

China

India China both have shared a strange relationship ever since. Both of them are seen as to be

potential superpowers and the bilateral trade is also touted to touch USD 100 Billion by 2015. Some

of India’s biggest disputes with China have been over border relation issues, the Askai Chin region

which is claimed by India and Aruncachal Pradesh which is claimed by China. Temperatures were

running high earlier this year when China infiltrated Kashmir and Arunachal Pradesh both and

needed much persuasion from India for backing off. Another issue is that of maritime conflicts

where the Indian model of maintaining security is pitted against Chinese development model. Both

countries are at loggerheads with China taking over a number of ports in the region. (Sarkar, 2013)

Talks between both the countries is said to resume after three long years to settle the border

dispute. However, one can only be hopeful that an amicable solution is reached.

Sri Lanka

The countries are separated by a narrow distance and have come to share a good economic and

trade relation over the years. With the signing of the Free Trade Agreement and developmental

transactions due to SAARC, the future seems bright. However, a major cause of dispute has been the

shooting of Indian fish trawlers by Sri Lankans. This has been seen as a recurring act and Sri Lanka’s

defence remains that the fishermen crossed the International Maritime Boundary Line (Sarkar,

2013). Another area of concern though much more political is the Tamil sentiment towards Sri

Lankans. The use of torture by the government in the Civil War between Sri Lankan Army and the

Tamil Nationalists has been a bone of contention for quite a long time leading to major political

troubles even for the Central Government.

Bangladesh

For Bangladesh, India is the neighbour endowed with plenty of resources. They share a good

economic and trade relations and have an effective partnership even in the field of intelligence.

However, the only pressing issue as such is the border dispute. This is mainly due to the fact that at

the time of partition the borders weren’t properly defined leading to problems now. Sheikh Hasina

after becoming Prime Minister in 2010 has taken it up as first priority though India has faced

problems from Mamata Banerjee who is unwilling to give up the state border. Further negotiation

and brainstorming might be needed to solve this issue that has led to a breakdown of sorts in the

diplomatic relations.

Nepal

Nepal and India have come closer since the adoption of democracy by the state of Nepal. Recently a

lot of dignitaries including Prime Minister Sushil Koirala and former PM Madhav Kumar Nepal have

visited India and these visits have concluded in developmental talks for both countries (Sarkar,

2013). Points of discussion revolve around building productive relationships, Nepal needing help

with developmental projects, drawing up of the Nepali constitution and in general about the new

dawn of democracy for Nepal. These ties seem as a continuation to the already favourable socio,

cultural and religious bond shared between the two countries.

Maldives

Maldives is strategically very important for India as it is the only corridor for India to South East Asia

thus it’s eminent for India to maintain good relations with the country. However, in recent times

some border disputes have come to light due to ill defines borders leading to informal trade and

smuggling and the Indo Myanmar Border Fencing Committee is looking into it. India is also

Myanmar’s largest export country and the two nations have been seen to collaborate on a number

of bilateral treaties in recent times that promote well being and a better investment climate for both

(India & her Neighbours: Revisiting Relations, 2013). The fact that Myanmar recently converted to a

civilian government has also opened avenues for dialogue.

Bhutan

For Bhutan, India is its largest trade partner and is the source of most of its commodity supplies.

Both countries share a good relation cofounded on mutual trust and similar strategic interest

cooperating on security and borer issues. Bhutan has very high hydro electric power potential and

this forms the key dimension of India’s bilateral relation with the nation. It’s seen as win for both

parties as India gets much needed power and Bhutan a steady revenue stream. Moreover, Bhutan is

trying to cope up with the IT age and diversify beyond its traditional sectors thus bit countries are

moving towards a mutually beneficial business and economic relation. (India & her Neighbours:

Revisiting Relations, 2013)

Future Business Opportunities

India and its neighbours that form most of what constitutes South East Asia is more or less a

developing region. Owing to this fact, the region throws a plethora of business opportunities for new

business and investments for Indian firms to expand and set up operations elsewhere. Proof is the

growing bilateral trade between India and its neighbours over the years and the way it’s been

increasing.

Talking of China, it has grown to become a global super power and thus with its steady growth

trajectory has become a favourable destination for investment. Some sectors where Indians have

invested and are likely to keep investing in the future are 1) The Automobile sector – Mahindra and

Mahindra has already forayed into the Chinese market and growth is anticipated in areas of

Research and Development. The advent of electronic cars opens up another area of opportunity. 2)

Information Technology – Most of the big Indian IT firms already have presence in China including

Infosys, TCS, Genpact with Genpact recently completing 10 years of operations in China. A lot of

these companies consider China as an integral part of their global delivery model with a huge lot of

their workforce coming from fresh Chinese graduates. 3) Real Estate and Development – With the

rate at which China and its cities are growing, this is one sector that no one can afford to miss and

offers great opportunity. Lastly 4) Tourism – a sector that has received a lot of impetus due to

business travel. (Doing Business with China, 2011)

Pakistan is also seen as a favourable investment spot with India willing to invest more than USD 20

Billion in the field of infrastructure, mining, power, petroleum and energy projects. There is gas

pipeline underway. Opportunities are also exist in the space of information technology, agriculture,

education and similar fields. (India willing to invest atleast $20 Billion in Pakistan, 2012)

When talking of South East Asia as a whole, it is one of the most favourable places for business as it

offers skilled labour, economic development and increased consumer spending. Business

opportunities in the next five years can be tapped in the following sectors, transport, baking,

wholesale, and manufacturing, oil and gas. Moreover, the region offers scalability a much needed

factor when looking to set up business abroad. (The Time for Regional Expansion is Now, 2011)

On the other hand, infrastructure, agriculture and the services sector form the prime areas of

investment in terms of business when it comes to Sri Lanka, which is further augmented by the Sri

Lanka’s growing economy and decreasing inflation rates. Cross cultural exchange between the

Ramayana trail and the Buddhist centres in the two countries provides another window of

opportunity. (Reddy, 2013)

Thus, India’s neighbours provide it with a hoard of opportunities for setting up new business as well

as fuelling already set operations in these parts of the world as most of these economies are

growing. With some planning and strategic operations, India can firmly establish itself as a major

player and earn a considerable share in each of its neighbouring countries trade. Not that India

offers less opportunities itself but if companies coming out of India, can also factor in these business

opportunities provided by its neighbours and capitalise on them before others do, it’ll give the

country a lot of mileage in the coming times when it vies to become a super power. Keeping that in

mind, it is extremely important that these avenues not be neglected and India looks at solving petty

disputes with its neighbours to allow smoother facilitation of trade.

References

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India & It's Neigbours - Macroeconomic & Business Perspective

Economy & Finance

Transcript of India & It's Neigbours - Macroeconomic & Business Perspective