ECONOMIC HIGHLIGHTS

New Delhi, 5 January 2006

India Ratifies SAFTA

TOWARDS SINGLE S-ASIAN MARKET

By Dr. Vinod Mehta

By ratifying the SAARC decision to launch South Asia Free Trade Area (SAFTA), India has taken a historic step, which will ultimately lead to a single South Asian Market in the next one and a half decade. This should have been done long ago. We have already opened up to China and have signed FTA with Thailand. There should not be any apprehension that goods from SAARC countries will swamp the Indian market.  The fact that India is a large country, it can always afford to be more liberal towards imports from neighbouring countries.

Pakistan has yet to ratify SAFTA. The relatively strained relations between India and Pakistan notwithstanding, the trade between the two countries is growing.  The potential of trade and economic links with Nepal, Bhutan, Bangladesh, Sri Lanka and Maldives are very high. The current political situation in Nepal is only a temporary phase and things are likely to improve in the near future. We only need to be a little bit more generous towards our neighbours.

Let us not become hyper-sensitive on being labeled as ‘big brother’ by some quarters in these countries. Both territory-wise as well as population-wise India is relatively much bigger than all the SAARC countries taken together. In economic terms also India is very large; it is one huge market perhaps of the size of EEC. Its GDP is much higher than those of its neighbours and at the moment India is enjoying a very large and comfortable volume of foreign exchange reserves that it had not seen in the last fifty years. The Indian economy is by and large growing at an average rate of 7% per annum which is a reasonable rate of growth (India would however, like it to be more than 8%). Therefore, at this stage India can afford to be more liberal towards its neighbors than what it had been in the past.

Apart from economic gains India is looking for, it should also aim at earning the goodwill of the people of these nations by being more accommodative to them. Under the SAFTA, Bangladesh and Maldives have been given some concessions. Last year the Indian Foreign Minister on his visit to Bangladesh announced that India will allow duty-free import of forty Bangladeshi products to India. This is a welcome measure. In fact I had argued on similar lines more than a decade ago in this column. At the moment Bangladesh is having adverse trade balance with India. Whether this measure will help reduce the adverse trade balance of Bangladesh vis-à-vis India has yet to be seen but it will have good impact on the relations between two countries.

One would like to say that India should show similar gesture to other neighbouring countries especially Nepal, Bhutan, Sri Lanka and Maldives and allow their products to have an access to Indian markets in a big way. Let us not get paranoid by the fact that the goods from these countries would flood the Indian market. Their production bases are so small that it will call for huge investment before they can produce goods on a scale which can flood the Indian market. In fact after the liberalization many of the Indian companies have shifted  their production bases to some of these countries.

At the moment, India’s external trade is mainly oriented towards OECD countries and some West Asian countries. ASEAN  countries would come second. The trade turnover between India and the individual SAARC countries is so small that it does not attract attention even in our annual Economic Surveys.

A few years ago it was being said that the cheap Chinese goods would swamp the Indian market when India would open up its economy. The Chinese goods entered the Indian market in a big way but had to beat a retreat as the quality of Chinese goods was low that the Indian consumer did not accept it even though they were relatively cheaper. Compared to China, our South Asian neighbours are small in every respect and unlike China would not be able to dump their goods on the Indian market.

There are also many additional opportunities to expand cooperation with the SAARC nations. For instance, the tourist sector within the SAARC region has been neglected for a very long time. Tourism sector has low capital investment but relatively high earning potential. At one point of time there was an idea to start daily air services to link the capitals of all the SAARC countries. This idea can be again revived. We can learn from the ASEAN experience. All the ASEAN capitals are linked by air and they have special low airfares for travel within ASEAN countries.

Apart from this wherever possible rail, road and sea links must be strengthened among the SAARC countries. With Pakistan, Nepal and Bangladesh we can develop world class road and rail links for speedy movement of goods and people. With Sri Lanka, Maldives and Bangladesh we can develop sea links

India must also take a lead in admitting more members.  It may be a good idea to allow other countries like Afghanistan and Burma to become full members while Central Asian countries should be admitted as dialogue partners. At the just-concluded SAARC meeting in Bangladesh, Afghanistan has been admitted as member of SAARC. It is India which can again take initiative in this direction by lobbying with SAARC countries for central Asia. Even if it calls for amending the original SAARC charter Indian should be able to carry the other members along with nit on this issue.

Afghanistan at the moment is engaged in reconstructing its economy. It not only needs humanitarian aid but also trade to put its economy on a strong footing in the long run. Now with its admission to SAARC countries like Nepal, Bhutan, Bangladesh and India would find it easier to send goods by road through Pakistan.  It would now be difficult for Pakistan to block transit facilities to Afghanistan.

As for the land locked Central Asian nations like Uzbekistan, Tajikististan, Kyrghistan and Kazakhstan, they are also looking for trade opportunities through land routes with India. If they become dialogue partners or associate members of the SAARC then it would again be difficult for Pakistan to stop the movement of Central Asian goods to India, Nepal and Bangladesh through its territory and vice-versa.

It is high time India maintains active role in the SAARC by winning over its small neighbouring countries and going a bit further away from SAFTA charter and allowing duty free to India some of their goods which they feel are important for them.  In the long run, Indian will benefit by large trade turnover within the region.

 (Copyright, India News and Feature Alliance)