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Prosper-thy-neighbour in South Asia

Financial Express, India

15 February 2005

Prosper-thy-neighbour in South Asia

Unilateral initiatives by India could help build supply capacities in Bangladesh


The postponement of the Dhaka Summit of Saarc, twice over the past two months, is a setback for the fledgling process of economic integration in South Asia. Hopefully, the process is revived soon, and the summit considers options to make Safta more effective, as proposed in this column on February 1, 2005. But that should not prevent India from taking unilateral initiatives for promoting industry and supply capacities in its neighbours, especially Bangladesh. India can play an important role in expediting development in neighbouring countries.

A case in point is Bhutan, where India has played a critical role by investing in hydro electrical projects and buying back the output. This resulted in Bhutan growing richer in terms of per capita income, even compared to India. ‘Prosper-thy-neighbour’ policies bring rich rewards in the form of expanded markets for Indian exports and may also solve the problems of refugee migration, border insurgencies and terrorism.

Over the past five decades, India has contributed to the development of its neighbours with grants, technical assistance and trade preferences under different programmes of assistance, besides the ITEC programme. Since 1995, India has exchanged trade preferences with South Asian countries under Sapta negotiations and with Bangladesh and Sri Lanka under the Bangkok Agreement. Trade with Bhutan, Nepal and Sri Lanka is conducted on free trade basis. However, the balance of trade has been perpetually in India’s favour (except for Bhutan).

With a consistent trade surplus, India is perceived in the region as a big brother, not concerned with the development of her lesser-developed neighbours. Trade surplus with Bangladesh has become a sensitive issue and a limiting barrier to expansion of bilateral trade. The widening trade surplus arises mainly because of growing imports of intermediate goods by Bangla-desh for its expanding garment export industry. So, imports from India are enabling Bangladesh to earn trade surplus in other markets. Other reasons include limited supply capabilities and political constraints to export natural gas to India. This perception can be changed by gradually removing obstacles to exports of neighbouring countries, and facilitating supply capabilities (a la Bhutan) for exporting back to India.

Due to limited coverage and narrow margins of preferences, arrangements such as Sapta/Bangkok Agreement are hardly able to exploit the potential for industrial restructuring and building supply capacities with investment flows. A free trade arrangement (FTA) is an important prerequisite for facilitating investment as seen in the India-Sri Lanka FTA. The proposed Safta and Bimstec FTA will evolve a framework for Bangladesh and India in due course. In view of the emerging regime, the Tata group has already announced an investment of $2 billion in Bangladesh in gas-based fertiliser, steel and power plants. Given the long schedule of implementation proposed under Safta/Bimstec, however, the two countries may consider bilateral FTAs, which could be implemented faster.

The Indian government may also consider duty free entry to goods produced in Bangladesh with Indian and local inputs, subject to cumulative rules of origin, without waiting for a duty free access by Bangladeshi products under the proposed agreements. This may stimulate Indian investments in Bangla-desh, specifically producing for India besides the domestic market.

• India’s trade surplus with Bangladesh has become a sensitive issue
• The proposed Safta and Bimstec FTA will evolve a framework in due course
• Given their slow progress, other options can boost investment for now]

Another proposal worth considering, is the creation of an Indo-Bangla Revolving Fund for joint projects. The proposed fund may recycle a part of India’s trade surplus for investments in Bangladesh that would, in time, contribute to more balanced trade. India may consider putting 20% of its trade surplus (i.e. about $200 million) in India-Bangladesh trade for the next five years into the fund. A corpus of about a billion dollars will thus be created, given the current patterns of bilateral trade. The fund could be managed by the Exim Bank in India, in collaboration with a Bangladesh agency. It could lend on an exclusive basis, on concessional terms, to Indian companies that want to invest in Bangladesh. This may prompt Indian companies to exploit the investment opportunities in Bangladesh to mutual advantage. The fund could give preference to proposals seeking to locate production in Bangladesh that would lead to exports to India (such as gas based industries) or would boost infrastructure, especially the transport and transit facilities that may facilitate bilateral trade.

Another window of the fund may support preparation of project reports/feasibility studies of joint infrastructure or industrial projects. Given the fact that the fund will be built up by recycling the trade surplus of India, it may help create a perception that a part of the surplus is being retained in Bangladesh for facilitating her development. By lending exclusively for investment projects set up in Bangladesh, the fund could be instrumental in pulling FDI from India into Bangladesh and help grow its industry and supply capabilities. It would also help Indian companies to establish a lasting foothold in the Bangladesh market and lead to growing interdependence between their economies.

By stimulating investments in building supply capacities to take care of the trade imbalances and promoting industrial development of an important neighbour, these proposals may contribute to peace and prosperity in South Asia!

* The writer is director general, Research and Information System for the Non-aligned and Other Developing Countries. These are his personal views