South-Asian Trade: The Way Forward

India as an economy has been lagging behind China in terms of trade with the South Asian countries. This warrants a discussion on India’s role as a major force in the world’s fastest growing region and the benefits it can reap from the same. The importance of the South Asian region is evident from the fact that combined regional gross domestic product (GDP) of these economies is US$ 3.586 trillion. Further South Asian Association for Regional Cooperation (SAARC) accounted for 3.7% of the global GDP in 2018 and 24.81% of the global population (World Bank, 2019). 

India, in common parlance, can be considered as a major trading partner of its South Asian neighbours considering the fact that India has a positive trade balance with every country of SAARC and contributes roughly 75%-80% of SAARC region’s GDP. Despite the growing trade volume, India’s trade with its neighbourhood has remained roughly between 1.7% and 3.8% of its global trade. South Asian region is also one of the least integrated regions in the world in terms of trade, infrastructure, water, and energy cooperation. Despite various regional trade agreements such as South Asian Free Trade Area agreement, Indo-Sri Lanka Free Trade Agreement, Indo-Myanmar Border Trade Agreement, etc. trade connectivity is below what is necessary to unlock the region’s potential for prosperity. 

The sub-par trade connectivity is evident when we compare SAARC’s intra regional growth with that of other Asian tade blocs. For example ASEAN’s intra-regional trade share has grown from approximately 17 to 25 percent, and ASEAN +3 has grown from 38 to 45 percent. Regional trade in South Asia has been sluggish due to various factors including tariff, para-tariff (which have been kept out of SAFTA) and non-tariff barriers, weak infrastructure, high logistical cost, persistent informal trade, poor awareness among stakeholders, a lack of political will, and low levels of investment. These factors have also ultimately led to unusually high cost of trading. For example the average costs of trade within South Asia are 20 percent higher relative to country pairs in the Association of Southeast Asian Nations (ASEAN) and over three times higher than the corresponding costs among the countries of the North American Free Trade Agreement. 

Another factor that might be contributing to the low trade connectivity in the region is that India’s trade regime, like that of many other countries in South Asia, discriminates against fellow South Asian countries, as pointed out in the World Bank report — A Glass Half Full: The Promise of Regional Trade in South Asia. Another obvious reason for the sub-par intra regional growth can be attributed to the fact that many South Asian countries trade on better terms with distant economies than with their own neighbours. The World Bank report, aforementioned also lists out deficiency of trust in the region as a major contributor to lower trade connectivity. It states: 

“Trust promotes trade, and trade fosters trust, interdependency, and constituencies for peace. In South Asia, a complicated history and asymmetries in the size of economies, perpetuated by insufficient people-to-people interactions, have rendered trust a fragile commodity. An initiative by the governments of Bangladesh and India aimed at recapturing the once thriving economic and cultural relationships is now changing cross-border relations and reducing incentives for smuggling. This is occurring through haats, local border markets that enable small-volume trading among local communities on both sides of the border. The survey conducted for this report confirms significant increases in the income of vendors and in the creation of livelihood opportunities for women and marginalised workers, in India and Bangladesh. The haats have also led to a reduction in informal and illegal trading and generated a peace dividend. More than half the Indian respondents to the survey have a positive view of Bangladeshis, and an overwhelming proportion of Bangladeshi respondents have a positive view of Indians at the haats, views they attributed to their exposure to their Indian neighbours.” 

South Asia as a region needs to adopt an approach of open regionalism and view intraregional trade as complementary to and as a stepping stone for deeper global integration. South Asian countries may adopt the following recommendations to enhance intraregional trade in goods and services (recommendations have been picked up from here, here and here): 

One, countries must encourage private players to invest in neighbouring countries. This is perhaps the measure with the highest long-run payoffs for both India and its neighbours considering the fact that trade and investment are intimately linked, especially in the form of cross-border value chains. These opportunities can arise in various sectors including IT services, tourism, spices, garments, leather products and agriculture products. 

Second, countries can explore a non-tariff barrier resolution mechanism to enhance transparency and information flows and nudge the official system toward more rapid complaint settlement. They can do this by creating an institution that would provide traders with information to address problems, or direct their complaints to the relevant authorities while continuing to monitor progress until final resolution.

Third, improvement in cross border infrastructure can go a long way in facilitating trade in the region. Improved connectivity will enable greater connectivity and thereby strengthen the production network and value chains in the region. Measures in this regard may include introducing electronic data interchange, risk management systems and single windows at more locations along India’s borders.

Fourth, countries must also improve air services and thereby reduce the costs of connectivity between countries. Countries in the South Asian region can learn from the liberalisation of bilateral air services between India and Sri Lanka. It is also necessary that countries support reforms that can reinforce the gains from air services liberalisation. The Sri Lankan government’s authorisation of visa-on-arrival privileges for Indian tourists has complemented and may have even boosted the expansion in bilateral air services.

Lastly, relations built in the education sector enable countries to build long-lasting cultural associations, reap economic dividends and enable cross-cultural exchanges. India’s existing network of colleges and universities can be an attractive destination for students from SAARC nations.  These institutions need to encourage visits by academic professionals from other nations to exchange best teaching practices, training exercises and diversify dialogues within classrooms.

The growing dominance of China in the region coupled with reluctance on the part of South Asian countries to engage in a more robust manner has resulted in sub-par connectivity in the region. However it is very important for India and other countries in the region to understand that enhancing trade in the South Asian region is not only economically beneficial, it is also strategically important in order to integrate the region with the global economy. 

References/Further Readings: 

1. https://www.sadf.eu/working-paper-13-indias-growing-trade-relationship-within-south-asia-reflections-from-trends-of-the-recent-past/

2. https://www.brookings.edu/research/indias-limited-trade-connectivity-with-south-asia/

3. https://asiafoundation.org/resources/pdfs/IndiaRegionalTrade.pdf

4. https://indianexpress.com/article/opinion/columns/india-south-asia-trade-china-6499310/

5. https://openknowledge.worldbank.org/bitstream/handle/10986/30246/9781464812941.pdf?sequence=8&isAllowed=y

6. https://frontline.thehindu.com/incoming/article24208642.ece/BINARY/India%20South%20Asia%20trade%20ties

Know more:

This story is part of a four part series on the the Free Trade Agreements in place in Asia and how they factor into the India-China Trade Policy conundrum.

he other parts can be found here, here, and here.

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