For too long, members of the South Asian Association for Regional Cooperation (Saarc) have deprived themselves of the benefits of regional economic integration.
With one-fifth of the world’s population, the Saarc region is home to two-fifths of the world’s poor. However, it accounts for only 3 per cent of global output and 2 per cent of world exports. Intra-regional trade has stagnated at around 5 per cent of its total trade, compared to over 50 per cent in East Asia and around 20 per cent in Latin America. Even Sub-Saharan Africa, with poor transport and telecommunication infrastructure, scores over South Asia, with over 10 per cent of its trade being intra-regional.
Regional economic cooperation is an acknowledged tool for regional prosperity. This was recognised by Saarc as early as 1993, when the South Asian Preferential Trading Agreement was signed. Since then, it has evolved into the South Asian Free Trade Area (Safta) in 2004, coming into effect in 2006. Bilateral and sub-regional trading agreements also exist between various members. At the previous Summit in Thimpu, the commitment to implement Safta was reiterated and a Saarc Agreement on Trade in Services was signed.
Despite these initiatives, members have retained a plethora of tariff and non-tariff barriers, which greatly inhibits trade and investments in the region. With a large list of negative items, the trade basket remains very narrow, with little value addition.
According to a CII paper, the major cross-border structural rigidities include ‘behind-the-border’ barriers in customs procedures, poor transport links, weak networking of private sectors, and administrative issues such as visas. Foreign direct investment (FDI) too is minimal, due to regulatory issues and a non-facilitative business environment.
India, a connecting land mass and the largest economy of the region, has a special responsibility in increasing intra-regional economic integration and must facilitate access to its large markets for Saarc members. Its above-average growth, expanding middle-class population, and demand for global goods can prove to be an engine of growth for the region. India's trade with South Asian countries has increased encouragingly, from $7 billion in 2005-06 to $15 billion in 2010-11, but much trade is below the official radar.
Further, India’s trade with countries such as Nepal, Bangladesh, Sri Lanka and Afghanistan remains heavily skewed in its own favour. The services trade further adds to the trade imbalance, leading to concerns among other South Asian countries about trade sustainability. India must make every effort to minimise tariff and non-tariff barriers and source goods from its neighbours.
Three areas offer large potential for economic cooperation — the services trade, energy cooperation, and logistical connectivity.
Many South Asian economies source services from India directly by obtaining those services in India — primarily healthcare and education. However, consumption abroad is expensive. An improved FDI regime and business environment would help regional firms to provide such services directly to other South Asian countries, through direct investments or joint ventures in hospitals, schools and transport services.
Tourism, a major growth opportunity for countries like Afghanistan and Nepal, remains constrained by security problems. Allowing intra-regional trade in services would enable South-Asian economies to become more globally competitive. The services component of Safta should be made a priority and many more services should be brought under its ambit.
Energy and electricity cooperation are non-traditional areas of trade relationship development. Bhutan has managed to balance its trade with India with large exports of hydro-electric power, and similar potential exists for Bangladesh and Nepal.
An integration of electricity grids across South Asia will reduce power costs and enhance manufacturing competitiveness for all members, and should be high priority. Huge hydro-electric potential exists in Nepal, Bhutan, Afghanistan and India, which could be tapped for intra-regional power trade.
Further, major finds of natural gas are arising across South Asia. Countries bordering South Asia — i.e., Myanmar, Iran and Turkmenistan — also have excess capacity of natural gas. A pan-South Asian pipeline infrastructure would enable South Asia to transit to natural gas as the fuel of choice, with pipelines connecting parts of South Asia to neighbouring resources. Transit fees earned could be substantial and would help rectify the trade balance with power-deficient India to a certain extent.
The development of logistical hubs that facilitate the flow of trade across the region would greatly reduce the costs of doing business. Such hubs should be multi-modal, incorporating containerised and non-containerised cargo and moving via rail, road, air and shipping links. These logistical hubs would connect critical regional corridors, especially with countries having no common borders.
Finally, private sector connectivity must be systematically encouraged. The Saarc Summit process should include a parallel business conference for linking business communities.
We look forward to the regional leadership for realising this potential. Intra-regional economic cooperation can serve well as a credible instrument for poverty alleviation, prosperity, and, ultimately, peace.
The author is Director General of the Confederation of Indian Industry
