A Way Forward


Written by M. R. Sivaraman • Cover Stories • December 2011

India is a booming global economy but inter-SAARC trade is at a dismal level. What are the dynamics of SAARC trade with India and how can it be improved? There is a hope that the granting of the MFN status by Pakistan to India after 16 years will open a new chapter in trade relations amongst the SAARC countries, which represent close to one-fifth of the world population.

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

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

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

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

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

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

As far as transportation is concerned, except for Maldives all other members could easily connect by road and rail networks including Sri Lanka. When the EU can have a similar structure connecting all its member states then there is little reason why it would be unachievable in the SAARC region. The 1970s saw numerous European tourist buses make their way to India. However, it is only a pipe dream that this will be restored so long as the Taliban presence is not addressed.

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

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

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

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