Editorial Notes

[Editorial Notes] Why building economic bridges in the neighbourhood matters?

With concerns over Chinese strategic relations in South Asia, India should reach out to its neighbours, have better terms of trade with them.
By IASToppers
July 14, 2020

Contents

  • Introduction
  • South Asian Region
  • Present Scenario
  • Way Forward
  • Conclusion

Why building economic bridges in the neighbourhood matters?

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Introduction:

Amid the growing Chinese economic and strategic relationships in the South Asian region, India is missing economic bridges. The larger and more sophisticated economies usually open up their markets before their smaller and less industrialised trading partners do. India needs to reach out to its neighbours, have better terms of trade with them.

South Asian Region:

  • The South Asia includes Afghanistan, India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives as the constituent countries.
  • India is the largest and fastest-growing economy in the region (US$2.957 trillion) and makes up almost 80% of the South Asian economy; the world’s 5th largest in nominal terms.

Present scenario:

  • India’s imports from the seven other South Asian countries are $4.6 billion, whereas its exports are $24.6 billion.
  • The region has an intra-regional goods trade potential (exports and imports) estimated at $67 billion versus actual trade of $23 billion in 2015.
  • As pointed out in a World Bank report, India’s trade regime, like that of many other countries in South Asia, discriminates against fellow South Asian countries.
  • An index of overall trade restrictiveness developed in the report is two to nine times higher for Indian, Nepalese, Sri Lankan and Pakistani imports from South Asia than for imports from the rest of the world.
  • Can India take any measure to follow up on such liberalisation, and try to increase its imports from South Asia?
  • India has accepted such asymmetric liberalisation in 2012, provided unilateral duty-free access to its market for the least developed countries from South Asia (Afghanistan, Bangladesh, Bhutan, Maldives and Nepal).

Way Forward:

India can focus on three broad sets of measures to encourage imports from South Asia.

1. Investment:

  • Encourage the Indian private sector to invest more in the neighbourhood.
  • This is perhaps the measure with the highest long-run payoffs for both India and its neighbours.
  • Trade and investment are intimately linked, especially in the form of cross-border value chains.
  • By investing in neighbouring countries, Indian firms can help accelerate regional value chains, which will increase regional trade in parts and components.
  • Such opportunities can arise in sectors like IT services, tourism, spices, garments, leather products, agriculture products, to name just a few.
  • Likewise, firms from neighbouring countries can invest in India, to create the same positive impact on regional trade and value chains.

2. Infrastructure:

  • Trade costs between countries in South Asia are disproportionately high.
  • The average trading cost between country pairs in South Asia is 20 % higher than among country pairs in ASEAN, and it is cheaper for India to trade with Brazil than with Pakistan.
  • To address this, India could accelerate its border post upgrading programme, but the soft measures are as important.
  • These include introducing electronic data interchange, risk management systems and single windows at more locations along India’s borders.
  • The goal should be to have a seamless clearance of imports at the borders, with only random (say 2-3 per cent) checking of consignments.
  • This system will work best if both exporting and importing county authorities are on the same page, sharing data electronically, and setting up agreed and preferably harmonised systems for cargo clearances.

3. Non-tariff measures:

  • Take pro-active steps to help neighbours address India’s non-tariff measures (NTMs).
  • NTMs are policy measures other than tariffs that affect trade and include quotas, sanitary regulations, and licensing.
  • Even though NTMs are legitimate and are imposed by all trading nations, border authorities can create burdens for traders in their implementation.
  • Even if implemented efficiently, NTMs can be more difficult to tackle in poor capacity environments.
  • India could undertake campaigns and workshops in exporting countries to disseminate information about its NTMs and also listen to concerns about its NTMs from exporters.
  • While such sessions have been done on a somewhat ad-hoc basis ( as in Sri Lanka), they could be made more systematic and regular.

4. Fixing Standards:

  • Another positive is to help with capacity building for standards and testing so that exporters from neighbouring countries can more easily certify their products as conforming to Indian standards.
  • For instance, the Bureau of Indian Standards (BIS) has been providing technical support to the Bangladesh Standards and Testing Institution to help in standardisation and conformity assessment.
  • The BIS has similarly worked with its counterparts in Nepal and Afghanistan.
  • Such capacity-building support could be made more systematic and intensive.

Conclusion:

Size and capacity asymmetry make its neighbours view India with suspicion and mistrust. A more pro-active India, seeking to encourage imports and build economic bridges in its neighbourhood will generate much goodwill in the region. So far, India imports more from the seven other South Asian countries than China ($4.6 billion vs $3.6 billion), but it could be only a matter of time before it is overtaken, even in this regard.

A stated intention to increase imports from South Asia will go down well with India’s neighbours. As trade and cross-border investment are interlinked and mutually beneficial, it will be a win-win situation for the region.

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