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Getting SAARCastic

Hard News, December 2005

Getting SAARCastic

India has to defend its exclusive sphere of influence in South Asia at all costs

N Chandra Mohan Delhi

In line with a fast expanding global trend for regional free trade arrangements (FTAs), the seven members constituting the South Asian Association for Regional Cooperation (SAARC), notably, India, Pakistan, Nepal, Bhutan, Bangladesh, Sri Lanka and Maldives intend to operationalise a South Asian Free Trade Agreement (Safta) by January 1, 2006. As this region has half the number of the world’s poor, the case for greater regional cooperation, if not integration, is compelling. But two decades after SAARC came into existence, the reality is that politics casts a long and troubled shadow over this process.

This regional formation hasn’t quite taken off like other regional FTAs such as Asean, Apec, Mercosur, Nafta for a simple reason. India is the dominant economic power in the entire South Asian region but most of its neighbours like Bangladesh, Nepal and Pakistan - who are rapidly becoming failed states - resent its dominance. At the recently concluded 13th SAARC summit in Dhaka, these countries, in fact, strongly pitched for China’s entry as a dialogue partner - which all of a sudden threatens India’s claim of an exclusive sphere of influence in South Asia.

India earlier sought to participate in other regional groupings like Bimstec or the Bay of Bengal rim of countries due to the frustratingly slow progress at SAARC. As is well known, tensions between India and Pakistan have virtually put paid to cooperation, if not integration, in South Asia. What sort of trade ties is possible when Pakistan doesn’t even extend most favoured nation status to India? So, Bimstec equals SAARC minus Pakistan with Myanmar and Thailand thrown in for good measure! But with the shadow of China over SAARC, India now has no choice but to defend its turf and make Safta a reality.

Towards this end, India can contribute to greater flows of trade within the region through unilateral trade liberalisation. This implies ensuring greater market access for goods of failing states in SAARC so that they acquire a greater stake in India’s rise as a global economic power and benefit from it. Unfortunately, for various reasons, this has not been happening, which has only deepened their resentment over India’s dominance. This is why even after two decades of SAARC, intra-SAARC exports work out to only 5 per cent of total exports as against the share of intra-Asean exports of 20.4 per cent.

As if all of this weren’t bad enough, every one of India’s SAARC neighbours has registered massive trade deficits with India. The loudest clamour for a unilateral opening up of India’s market has come from Bangladesh, which registered a deficit of US $1.1 billion in 2002-03, which further widened to $1.5 billion in 2004-05. Nepal’s deficit with India too has ballooned from US $68.6 million to $388 million over this period. Pakistan’s deficit also grew from US $161 million to $410 million. The combined deficit of SAARC members with India thus rose from $2.2 billion in 2002-03 to $3.4 billion in 2004-05.

If it desires to fend off China from South Asia, India must, therefore, import more from its neighbours so that they acquire a greater stake in its rise as an economic power. To be sure, measures like importing jute bags from Bangladesh or allowing the import of molasses from Pakistan by wagons instead of barrels and textiles at ad valorem rather than specific duty rates from both these countries can make a difference. But the need is for bolder liberalisation where India must take whatever they have to offer. This is indeed affordable as India has foreign exchange reserves and its balance of payments is healthy.

The moves to usher in Safta would, however, be more meaningful if there is also greater connectivity within the region. At the recent 13th SAARC summit in Dhaka, Indian Prime Minister Manmohan Singh indicated a willingness to adopt a liberal open skies policy within the region. But physical connectivity remains a major problem, thanks largely to politics rather than economics. For instance, Afghanistan is now being admitted as the eighth member of this regional grouping but Pakistan steadfastly refuses to allow India transit facilities to this country and Central Asia -due to its tensions with India.

The long shadow of politics also may be seen in the lack of any momentum whatsoever on the export of natural gas from Bangladesh to India. The South Asian region’s diverse topography lends itself to greater cross border power trade, but political inhibitions again have ensured that actual progress is less than the potential. To be sure, some amount of power trading is already taking place, with the action observed in regions bordering Nepal, Bhutan and India. The exportable power generated by hydel power stations in Nepal and Bhutan coincides with the seasonal peak demand in the supply-short Indian economy.

But the only silver lining in this regard is Bhutan which sells its power to the highly power-deficit regions of West Bengal, Orissa and Northeast India. Its Chukha hydel project could well serve as a model for power trading in SAARC as a whole as Bhutan exports as much as 76 per cent of its generation to India, revenues from which constitute a significant fraction of its GDP. Projected revenues from ongoing projects and those in the pipeline bid fair to transform it into a middle income country over the next 15 years - exactly the sort of stake that Nepal needs to develop in India’s rise.

However, Bhutan is keen to diversify its power supplies as India is the only monopsonistic buyer at present. If economic efficiency rather than politics were the sole yardstick, Bangladesh should also be trading in power with India. The least cost short-term option is for it to import power from West Bengal at present and from Meghalaya and Arunachal Pradesh in the future to avoid the high domestic costs of electricity generation, according to a report Economic Reforms and Power Sector in South Asia: Scope and Challenges for Cross Border Trade by Mahendra P Lama et al.

But politics is spoiling the party for South Asian power trade. While the economic imperatives include the need for placing the matter on sounder commercial principles and adopting suitable power trading models, such forces are not in command. "The hydel power of Nepal and gas from Bangladesh have faced several such blocks sometimes driven by sheer irrationality and myopic thought processes," adds the report cited earlier. Clearly, the challenge ahead is to address these political inhibitions head on if India is to successfully defend its turf and keep China out of SAARC.

Towards this end, India must also highlight the successful example of its FTA with Sri Lanka to impress upon Bangladesh, Nepal and Pakistan that freer trade with the dominant partner is not inimical to their interests. The Indo-Sri Lankan FTA agreement is a win-win situation for both as the island country’s exports to India have grown by 100 per cent as have India’s exports to Sri Lanka. True, India ran up a trade surplus of US $989 million in 2004-05 but Sri Lanka is confident enough to demand a comprehensive economic cooperation agreement with India - of the sort that the latter has with Singapore, for instance.

Unless other SAARC members similarly benefit from integrating with India, the roadblocks to Safta will persist and they will turn to China for deliverance. In the past, India threw up its hands in despair and looked elsewhere to forge regional FTAs beginning with Asean and stretching all the way to the Gulf. There is talk of concluding similar agreements with Mercosur and the EU. No doubt, this pitch for regional FTAs also reflects India’s growing sense of frustration over the contentious nature of the Doha round of WTO talks.

Currently, there are 300 RTAs in operation - more than the number of countries in the world. Half the world’s trade now takes place within the umbrella of some RTA or the other. Safta, if it comes into being as scheduled, will only add to this "spaghetti bowl" of FTAs - to borrow an expression of Professor Jagdish Bhagwati. While the temptation exists to conclude as many FTAs as possible - in line with the global trend - India’s aspirations to become a global power will not amount to much unless it defends its exclusive zone of influence in South Asia against China.

 source: Hard News