Promoting SAARC: India’s Roleicrier.org/pdf/10mar08/Rajiv Kumar.pdfLinking India to the World 15...

Linking India to the World 1

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Promoting SAARC: India’s Role

Rajiv Kumar

Presentation

To

ADB-ICRIER SEMINAR

Delhi10 March, 2008


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Outline

South Asia: Its Geo-Economic Features and Position in Global Economy.

Status of Regional Cooperation in South Asia

Factors Constraining Cooperation and a Review of Literature

India’s Role: (i) Measures Taken; (ii) Recommended


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South Asia: Features and Position in the World Economy


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South Asian Association for Regional Cooperation

Established : December 1985.

Member countries : Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, Afghanistan( joined in 2006)

Aim : To accelerate the process of economic and social development in Member States.

Areas of cooperation: Agriculture and Rural Development; Health and Population Activities; Women, Youth and Children; Environment and Forestry; Science and Technology and Meteorology; Human Resources Development; and Transport.


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Share in SAARC(Average over 2002-06)

Source: Calculated from data given by World Bank, IMF, UNCTAD

1.697.410.960.1387.620.312.06n. aTotal reserves minus gold

2.8217.900.080.1374.730.054.360.02FDI Inflow

3.016.260.780.8686.85n. a2.25n. aExport of Services

15.5613.177.991.0640.34n. a14.647.24Trade in Goods

2.128.420.970.0681.030.076.660.68GDP, PPP

1.3516.122.990.0162.180.982.7213.64Land area

1.3610.471.620.0275.560.0510.541.73Population

Sri LankaPakistanNepalMaldivesINDIABhutanBangladeshAfghanistan

% Share in SAARC

Indicator


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Participation in World Economy (2005)A Comparison

0.48.53.91.0FDI Inflow

0.219.87.13.6Total reserves minus gold

0.36.55.61.8Merchandise imports

0.47.76.31.2Merchandise exports

0.25.42.02.3GDP

1.021.38.622.8Population

4.311.53.33.8Surface area

CAREC (Excl. China)CARECASEANSAARCIndicator

Source: WDI, 2007


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Share in SAARC: Some Features

Striking heterogeneity.

India’s smaller land area compared to its population.

India’s relatively lower share in total SAARC trade.

Service sector dominated region


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Economic Structure (% of GDP)

Source: ADB, UNCTAD

3263n. a811932Total Reserves (months of imports)

63.064.235.632.140.539.034.829.940.636.0Trade

10.99.811.49.81.51.35.73.86.34.4FDI Stock

17.017.513.716.011.115.232.423.720.317.9Gross Domestic Savings

28.428.121.817.230.324.333.824.325.023.0Gross capital formation

56.552.853.450.751.538.954.650.554.351.0Services

12.215.119.514.77.59.216.315.616.514.7Manufacturing

27.127.327.223.320.321.527.926.227.024.4Industry

16.519.919.425.938.139.617.523.418.724.6Agriculture

2006200020062000200620002006200020062000

Sri LankaPakistanNepalIndiaBangladesh

Contd..


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Economic Structure (% of GDP)

341721n. an. aTotal Reserves(months of imports)

124.2120.9n. a77.0n. a41.7Trade

21.419.02.81.00.30.6FDI Stock

47.644.236.830.5-24.8-19.4Gross domesticsavings

36.126.351.447.421.311.6Gross capitalformation

78.880.137.236.335.319.8Services6.88.07.38.316.117.2Manufacturing

16.715.035.934.325.323.2Industry

8.48.822.427.739.557.0Agriculture

200620002006200020062000

MaldivesBhutanAfghanistan

Source: ADB, UNCTAD


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Growth Momentum in the Region

Source: ADB,2007* Data for 2005.

8.37.09.64.82.45.711.05.76.15.1Services

7.27.55.01.33.58.710.96.49.66.2Industry

4.71.81.66.11.74.92.7-0.24.57.4Agriculture

0.9-1.529.86.5-22.5—31.73.627.420.1Export (Services)*

19.731.439.414.617.124.029.87.322.59.5Imports

12.329.215.413.54.239.723.227.632.819.5Exports

5.24.54.71.60.15.06.32.55.34.6GDP per capita

7.46.06.94.32.86.19.75.46.45.6GDP

2006200020062000200620002006200020062000

Sri LankaPakistanNepalIndiaBangladesh

Indicator

Contd.


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Growth Momentum (Contd.)

23.86.013.218.710.4*4.0**Services

10.61.23.05.219.3*-2.8**Industry

-0.7-0.20.44.62.8*7.1**Agriculture

-37.51.748.3-0.630.3—Export (Services)*

24.4-3.411.67.413.5*16.2Imports

39.418.864.9-7.525.9*-17.4Exports

15.92.73.8*2.47.8—GDP per capita

23.54.411.07.67.5n/aGDP

200620002006200020062000

MaldivesBhutanAfghanistan

Indicator

** Data for 2003*Data for 2005Source:ADB, 2007


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Business Environment in SAARC Countries

1148391605931Maldives 53

15116515217374-17Afghanistan 162

1331731393311215588India 134

951051366015012749Nepal 100

59909960987144Sri Lanka89

9317413415756768Bangladesh 88

4616398191268954Pakistan 74

Closinga

business

Enforcingcontracts

TradingAcrossborders

Protectinginvestors

Employingworkers

Dealingwith

licenses

Starting abusiness Country

CountryRanking(1– 175)

Source: World Bank, 2007


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Competitiveness Indicators

72266748India

94517370Sri Lanka

162102120107Bangladesh

138797292Pakistan

(Country Ranking (1-179)Country ranking (1– 131)

Corruption Perception Index

Business Sophistication

Infrastructure Quality

Global Competitiveness

Country

Source: World Economic Forum and Transparency International


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South Asia: Status of Regional Cooperation


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SAFTASAFTA came into force in January 2006.Aims “to strengthen intra-SAARC economic cooperation to maximisethe realization of the region's potential for trade and development for the benefit of their people, in a spirit of mutual accommodation, with full respect for the principles of sovereign equality, independence and territorial integrity of all States”Focuses on reduction of tariffs for intra-regional trade among the SAARC members in a time bound manner.No tariff reduction on sensitive items of the members if they sodesire.All quantitative restrictions, if not permitted under GATT 1994 to be eliminated.

Contd.


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SAFTA (contd.)

SAFTA Ministerial Council and Committee of Experts to monitor the implementation of SAFTA Agreement.

Mechanism for Compensation of Revenue loss incurred by the LDCs due to reduction of tariffs.

To protect domestic industry from possible injury due to increased preferential import, scope for partial or full withdrawal of preference granted under SAFTA for a period of maximum 3 years.

Safeguard measures not to be applied against the product of LDCsif share of import from an LDC of the product concerned in totalimport of importing country is less than 5%.

Consultations and Dispute Settlement Procedures put in place.


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Intra Regional Trade – A Comparison

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Intra Regional Trade Among SAARC Countries-A Profile

(Average Over 2002-06)

4.4100.067766.2100.06754SAARC Region

19.423.615988.77.5508Sri Lanka

2.88.55738.917.91209Pakistan

45.911.276251.94.7319Nepal

20.01.912713.90.217Maldives

0.914.59845.566.24474India

15.227.118361.82.1145Bangladesh

39.813.289641.91.283Afghanistan

Own Total ImportsRegion

Own Total ExportsRegion

Share inValue(US $ mill)

Share inValue(US $ mill)

Intra Regional ImportsIntra Regional Exports

Estimated from data from DoTS


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Composition of Intra SAARC Trade- Exports(percent)

100100100100SAARC Region0.31.91.00.6Commodities n.e.s9

4.85.01.71.7Misc. manufactured goods8

10.514.314.813.2Machinery/Transport equipment7

26.830.034.837.3Manufactured goods6

11.511.510.09.4Chemical/products n.e.s5

4.50.60.20.1Animal/ veg oil/fat/wax4

19.12.81.73.1Mineral fuel/lubricants3

4.74.75.513.1Crude Materials ex. food/fuel2

0.50.60.90.8Beverages & Tobacco1

17.428.629.320.8Food & Live Animals0

2005200119951991DescriptionSITC

Calculated on the basis of data from WITSCountries considered: India, Pakistan, Sri Lanka and Bangladesh.


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Factors Inhibiting Regional Cooperation in South Asia


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Empirical LiteratureEmpirical literature suggests no consensus on gains from an RTA in the region.

M. Kabir Hassan (2001) with the help of gravity model tries to make an analysis of the unexplored trade opportunities in the region. His results suggest that SAARC member countries are yet to harness the fruits of regional integration in totality.

Jayatilleke S. Bandara and Wusheng Yu (2003). Using trade data and a global Computable General Equilibrium (CGE) model, show that unilateral liberalisationrather than preferential liberalisation (SAFTA) would benefit South Asian countries much more. The small countries in the region would gain little and may even lose under preferential liberalisation.

Batra (2004). Using Augmented Gravity Model finds positive trade potential for SAARC region as a whole. India’s trade potential is revealed to be highest with Pakistan.

Arvind Panagariya(2007). argues that SAFTA is not a persuasive idea on both economic and political grounds . Economically, the region is small in relations to the outside world and remains heavily protected. The probability of trade diversion rather than trade creation is higher. Politically, border dispute between the two largest nations are ongoing and unresolved. Therefore aim should be to promote project-by-project cooperation in areas of mutual interest.


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Factors Inhibiting Intra-Regional TradeLow trade complementarities.

Export basket not diversified (exception, India).

Restrictive Rules of Origin and destination.

Services not included in the regional trade agreement.

High trade barriers (large negative list, non tariff and para-tariff barriers ).

Lack of communication links (Poor transport infrastructure).

High transaction costs ( Corruption, custom delays etc.)

Inability to build a relationship of mutual trust and confidence .

Politics and lack of commitment.


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Sri Lanka Trade with India

•Indo-Sri Lanka Bilateral Trade Agreement came into existence in March 2000.

•Since 1999 , Sri Lanka’s exports to India have increased by 10.5 times and Imports from India by 4.5 times. Consequently Import/Export ratio has fallen.

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Exports Imports Import/Export Ratio


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India’s Imports from Sri Lanka

470.26Total44.23Total

11.6Pulp Of Wood or other Fibrous Cellulosic Material; Waste And Scrap Of Paper

0.7Products of Animal Origin, nes. 10

11.6Wood / Articles of Wood etc 0.85Paper /Articles of Paper Pulp, etc9

13.24Machinery /Mechanical Appliances like Dish WashngMach./Machnry for Filng,, Sealng,, Labelng Boxs, Bags/ Containrs

1.4Rubber/articles thereof.

8

20.62Articles Of Stone, Plaster, Cement, Asbestos, Mica etc2.11Edible Fruit /Nuts; Peel /Citrus Fruit /Melons. 7

24.31Aluminium /Articles thereof. 2.13Lac; Gums, Resins/ Other Vegetable Saps/ Extracts. 6

26.55Rubber/ Articles thereof. 2.34Plastic/ Articles thereof. 5

28.7Coffee, Tea, Mate / Spices. 2.74Animal or Vegetable Fats and Oils etc4

44.13Electrical Machinery / Equipment /Parts thereof; 3.34Pulp of Wood or of other Fibrous CellulosicMaterial; etc3

87.63Copper /Articles thereof. 8.1Iron and Steel 2

99.93Animal /Vegetable Fats And Etc13.9Coffee, Tea, Mate and Spices. 1

ValueValue

2006-07 Commodity1999-2000CommodityS.N

Value in US $ millionSource: DGFT

Structure of trade has changed. Sri Lanka is exporting more intermediate goods to India.


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India’s Investments in Sri LankaThe India-Sri Lanka FTA has stimulated new FDI into Sri Lanka for rubber-based products, ceramics, electrical and electronic items, wood-based products, agri-commodities and consumer durables

India is the 4th largest investor in Sri Lanka with FDI approvals of US$ 450 million.

Indian Oil Corporation, Taj Hotels, L&T, Ambuja, Tata and Ashok Leyland are among the prominent Indian companies operating in Sri Lanka.

With close to 120 flights per week including by Indian private airlines tourist arrivals from India in Sri Lanka are the largest.

Some of the important projects in the pipeline include a 500MW coal-based thermal power plant at Trincomalee by NTPC, oil & gas exploration in Mannar blocks of Sri Lankan waters by ONGC and up-gradation of the Colombo-Matara railway by RITESIRCON.

Ceylon Biscuits and Damro are the most visible Sri Lankan investments in India


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India’s Trade (export+import) with Pakistan(and Sri Lanka)

OpportunitiesRecorded trade between India and Pakistan low however trade through third country like Afghanistan, Dubai, Gulf States, and illegal channels is quite significant.Potential for intra industry trade exists in engineering goods, transport equipment, agricultural goods, pharmaceuticals, chemicals and textiles.

ProblemsAbsence of MFN status to India.Restricted positive list of items of imports from India.Non tariff barriers in IndiaIndian trade regime considered to be more restrictive than Pakistan.Politics

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…with BangladeshOpportunities •Natural Gas Exploration and industries based on it like Electricity, Fertilizer and Petrochemicals.•Engineering consultancy in Infrastructure (power, telecommunications, ports, roads and railways)•Information Technology (Data Processing and Software Development)Problems•Poor infrastructure, corruption, uncertain law and order situation, inadequate commercial laws and courts, and policy instability (i.e., policies altered when a new government comes to power). •Investors in infrastructure and natural resource sectors, including power, mineral resources and telecommunications must seek approval from the corresponding government ministries. They have to face lengthy and corrupt bureaucratic procedures. On the Trade front :•In Bangladesh, slow pace of liberalization, tariff reduction andincrease in the scope and levels of para-tariffs to protect domestic consumer goods industry.•Non tariff barriers by India, protection to domestic textiles and apparel industry.•Constraints on imports by the land border by both countries.•Congestion, delays, bribes etc. at customs. Consequently Illegaltrade between the two countries amounts to 3/4 of regular trade.

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…With NepalOpportunities

Due to limited domestic production of manufactured products and increasing demand, India can export transport, vehicles and communication equipments; agricultural machinery, tools and fertilizer; medicine, medical equipment and tools etc.Joint venture opportunities in tourism industry, investment in hydroelectric power, telecommunication, civil aviation and infrastructure (road and airport) construction.Joint ventures potential for Indian manufacturing mainly for exporting exists in consumer durables ,non-durables ,garments and carpets, apparel etc.

ProblemsLimited natural resources, difficult topography, poor infrastructure, weak human capital base and labour union excesses supported by Maoist.Though Nepal open to foreign direct investment, implementation of policies often distorted by bureaucratic delays and inefficiency. Investors in Nepal face a non-transparent legal system.On the Indian side Nepal traders face non tariff barriers, corruption, politically motivated business and border closures, high transaction cost like submission of unnecessary documents, administrative hassles at customs office.

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Why should India support SAARCMake de facto the dejure

For greater inflow of FDI

Dynamic trade gains

Regional security

Promotion of development of least developed countries.

Returns to scale.

Increased efficiency in the provision of public goods and services.

Connectivity payoff with the rest of Asia

Achieving greater social cohesion within India.

Defining and defending our regional space.


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Some Recent Initiatives by IndiaIndia has unilaterally reduced negative list of trade items from 744 to 500 for least developed countries (LDCs) of SAARC.India has advanced the trade liberalisation programme in respect to LDCs by one year and with effect from 1st January 2008, the import duty on all items other than those in the negative list has been reduced to zero. A task force has been set up to address Non-Tariff Barriers faced by partner countries in India. To promote people to people contact, trade and commercial interaction within the regions India's initiatives include, opening up of road, rail and ferry links with Pakistan; the Open Skies arrangement with Sri Lanka; Integrated Check Posts along the borders; the optical fiber backbone across the Nepalese Terai as well as, the Rail Agreement with Nepal, hydro-electric projects in Bhutan and Nepal etc.Under the chairmanship of India an intergovernmental Agreement to establish the South Asian University was signed during the 14th SAARC Summit. The main campus of the University will be in India.To enhance cultural connectivity in the region, India hosted a SAARC Cultural Festival in November 2007.To focus on issues relating to women, India hosted meetings relating to Home-based Workers, Trafficking in Women and Children and, Micro Financing and Women Economic Empowerment.India will contribute $100 million of the $300 million initial corpus of SAARC Development Fund established to finance projects related to poverty alleviation, infrastructure development etc.India has offered SAARC nations access to free-of-cost remote sensing data collected by various satellites launched by the Indian Space Research Organisation (ISRO) during major disasters in the region.


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India’s Possible Role

Take a long term strategic view of South Asia and be seen to be doing

Committing greater resources by both Central and State Governments to regional cooperation.

Clarify that security is a concern but will not come in the way of promoting regional cooperation.


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India’s Possible Role

Further Encourage the private sector to take up cross border projects.

Invite multilateral and bilateral support in key sectors :Transport, Energy, Tourism, Environment, Irrigation.

Listen as an equal partner and report back on suggestions implemented.

Actively strengthen SAARC Secretariat.


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Promoting SAARC: India’s Roleicrier.org/pdf/10mar08/Rajiv Kumar.pdfLinking India to the World 15...

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