Making Safta work

Perhaps the most telling indicator of the success of the proposed South Asian Free Trade Area (Safta) is the fact that, soon after the plan to have a free trade zone by 2006 was made public (a formal announcement will be made during the Saarc summit in Islamabad), the focus of the country's media moved back to whether there would be a Vajpayee-Musharraf meeting, whether Pakistan would continue to view Kashmir as a "core" issue, whether there would be any consensus on tackling cross-border terrorism, and so on.

All this points to the underlying problem, because if there's one reason why Saarc hasn't got very far, and which could trip up the proposed Saarc as well, it's the level of suspicion between India and Pakistan.

Today, the two countries have just one rail link, and that too is irregular "" FICCI secretary general, Amit Mitra cites the example of how, since it took three months to send a consignment of cement by rail from India, it became concrete by the time it reached Pakistan! The other rail link, from Rajasthan, is permanently closed.

Lorry transport, though more efficient in several cases, is not feasible since goods have to be unloaded first, inspected, and then re-loaded if moved from either side of the border.

Similarly, letters of credit between exporters and importers are negotiated through third-country banks. Paperwork at customs is perhaps the lengthiest between India and Pakistan, as compared to anywhere else in the world.

So, addressing deep-seated mutual suspicion will have to be a precursor to Safta's success. Of course, the advantage of a regional initiative as opposed to a bilateral one, is that such issues stand a better chance of resolution.

If they do, trade is certain to grow rapidly. The signing of a free trade agreement with Sri Lanka saw Indo-Sri Lankan trade jump 1.6 times in just a year, and Indo-Chinese trade jumped seven-fold in three years once there was a certain degree of political comfort between the two countries.

By way of comparison, Indo-Pak trade is officially a mere $250 million, while informal trade is over six times this figure.

As compared to Europe, where intra-regional trade is 65 per cent of all European trade with the world, intra-Saarc trade is a mere 5 per cent.

And while it is true that the economies of Saarc members are remarkably similar, the fact is that trade does take place between similar nations "" the bulk of US and EU trade is with each other despite their economies being so similar.

While there are certain to be fears that goods from one country will swamp the other "" cheaper cotton textiles from Pakistan and garments from Bangladesh are an Indian fear "" Saarc leaders would do well to look at the Indo-Sri Lankan FTA.

While there was vociferous protest against allowing Sri Lankan tea and textile imports into India, this problem was gotten around by fixing an import quota, which gave producers in both countries time to adjust to the eventuality of free imports.

Similarly, quotas on Indian exports of yarn and textiles to Bangladesh, or on Bangladeshi garments to India, will help curtail local protests, while industries from both sides of the border figure out the benefits of working together, of sourcing yarn/fabric from India and converting it into garments from the more efficient Bangladeshi export zones.

While the Indian establishment will instinctively oppose this, Safta has a chance only if India makes some big gestures.

Countries like Bangladesh, for instance, have huge trade deficits with India and would be suspicious of any arrangement that could increase the imbalance.

So, if India has to open up her markets first, with some adjustment-lag for its neighbours, this should be considered.

Allowing firms from Saarc countries to list, and then raise money on Indian markets, would be another such step. Big brother needs to act big, not small.