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Elusive SAFTA

Central Chronicle, India

Elusive SAFTA

By Dr Vinod Mehta,-INFA

10 May 2008

Fourteen SAARC Summits have been held till date, but the South Asia Free Trade Area (SAFTA) is yet to take off! While ASEAN and EU are reaping the benefits of a common market, South Asian countries continue to lag behind. Since the start of our liberal economic policies we have been opening up our market to foreign goods and investments, such as China and South East Asia . While we have signed FTA with Thailand , SAFTA is still elusive.

This raises the question: what should India do? With Pakistan unwilling to extend the MFN (Most Favoured Nation) status, should we keep waiting for it to act, or considering that India is a large country, should it unilaterally become more liberal towards imports and investments from small neighboring countries?

The relatively strained relations with Pakistan , which are showing signs of thawing, should not come in the way of trade and economic relations between India and other SAARC countries. Note that there is a huge potential for trade and economic links with Nepal , Bhutan , Bangladesh , Sri Lanka and Maldives . With its elections over, Nepal is likely to concentrate a lot more on its economy to fight the widespread poverty and unemployment. As for Pakistan , with the new civilian coalition government in saddle, its attitude towards India may too change.

What about us? Well, at this stage we can afford to be a bit more generous with our smaller neighbours. We need not become hyper-sensitive to being labeled as ’big brother’ by some quarters in these countries. Both territory and population-wise, India is relatively much bigger than all SAARC countries put together. In economic terms too, India is large — one huge market perhaps the size of EEC.

Besides, its GDP is much higher than its neighbours and at the moment India is enjoying a large and comfortable volume of foreign exchange reserves that it hadn’t seen in the past five decades. The Indian economy is growing at an average rate of 9 to 10 per cent per annum, which is a reasonable rate of growth. Reasons enough for us to be more liberal than what we had been in the past.

Apart from economic gains, India should also aim to earn the goodwill of the people of these countries by being more accommodative towards them. At the moment, Bangladesh is having adverse trade balance with India . There should be no problem for India to allow duty free import of certain Bangladeshi products like jamdani sarees and hilsa fish. Already some retail outlets in Delhi are selling biscuits from Bangladesh which are as good as any Indian manufactured ones and have not posed any threat to our producers.

In fact, India could make similar gestures to other neighbouring countries especially Nepal , Bhutan , Sri Lanka and Maldives and allow their products to have an access to the Indian market in a big way. We have no reason to get paranoid that the neighbours’ goods would flood our markets. 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, following liberalization many Indian companies have shifted their production base to some of these countries.

India ’s external trade is today mainly oriented towards the US . The EEC and a few West Asian countries, and ASEAN would come second. As for SAARC, the trade turnover between India and its member countries is so small that it does not even attract attention in our annual Economic Surveys.

A few years ago when we opened up our economy, it was feared that cheap Chinese goods would flood the Indian market. While this did happen in a big way, the Chinese had to beat a hasty retreat as their quality was sub-standard. The Indian consumer refused to accept these 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 this region has been neglected for long. While tourism has a low capital investment, it is relatively a high-earning potential. At one point of time, daily air services to link the capitals of all the SAARC countries was under consideration. This idea could be revived. We should learn from the ASEAN experience, wherein its capitals are linked by air and they have special low airfares for travel within the countries.

This apart, 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 both 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 could be admitted as dialogue partners. It is India , which can take the initiative by lobbying with SAARC nations. And, if it calls for amending the original SAARC charter, India should be able to carry other members along with it.

Let’s take the example of Afghanistan . It is engaged in reconstructing its economy and not only needs humanitarian aid but also trade. If Afghanistan is admitted as a member of SAARC it would be easier for countries like Nepal , Bhutan , Bangladesh and India to send goods by road through Pakistan as the latter would find it difficult to block transit facilities to Kabul .

Yet again, land-locked Central Asian nations like Uzbekistan , Tajikististan, Kyrghistan and Kazakhstan , too are looking for trade opportunities through land routes with India . If they become dialogue partners or associate members of the SAARC, 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 time India becomes active in SAARC by winning over its small neighbours. Allow them some duty free goods to India which are of importance to them. Let these nations also share India ’s higher growth rate. For, India will benefit by large trade turnover within the region in the long run.