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Saarc Saarc Document Transcript

  • EXPORT-IMPORT BANK OF INDIA OCCASIONAL PAPER NO. 123 SAARC: AN EMERGING TRADE BLOC EXIM Bank’s Occasional Paper Series is an attempt to disseminate the findings of research studies carried out in the Bank. The results of research studies can interest exporters, policy makers, industrialists, export promotion agencies as well as researchers. However, views expressed do not necessarily reflect those of the Bank. While reasonable care has been taken to ensure authenticity of information and data, EXIM Bank accepts no responsibility for authenticity, accuracy or completeness of such items. © Export-Import Bank of India Published by Quest Publications June 2008
  • CONTENTS Page No. List of Tables 5 List of Figures 7 Executive Summary 9 1. Introduction 18 2. South Asian Association for Regional Cooperation (SAARC): 23 Evolution, Objectives and Economic Agenda 3. Economic Profile of SAARC Member Countries 27 4. Trend in Foreign Trade and Trade Policies in the 37 SAARC Region 5. Foreign Direct Investment and Investment Policies in 51 the SAARC Region 6. India’s Trade and Investment Relations with SAARC 61 7. An Empirical Examination of Trade Flows in the 74 SAARC Region 8. Summary and Recommendations 80 References 85 Annexures 1. List of Indian Joint Ventures and Wholly Owned Subsidiaries 87 Approved in SAARC Member Countries 2. India’s Bilateral Trade Agreements in the SAARC Region 93 3. Exim Bank Supported Project Export Contracts in 95 the SAARC Region 3 Project Team: Mr. David L. Sinate, General Manager Dr. P. R. Madhusoodanan, Manager
  • List of Tables Table Title Pg. No. No. 3.1 Select Economic Indicators of SAARC Countries 35 4.1 SAARC’s Global Exports during 2000-2006 37 4.2 SAARC’s Global Imports during 2000-2006 38 4.3 Intra-SAARC Exports during 2000-2006 39 4.4 Intra-SAARC Imports during 2000-2006 39 4.5 Average Tariff in the SAARC Countries, 2006 45 4.6 Planned Phased Tariff Cuts on Intra-SAFTA Trade 50 5.1 Trend in FDI Inflows into SAARC Countries, 2000-2006 52 5.2 Trend in FDI Outflows from SAARC Countries, 2000-2006 53 5.3 Sectors Attracting Highest FDI Equity Inflows into India, 54 April 2000-February 2008 5.4 Foreign Investment Inflows into Pakistan (1997-98 to 2004-05) 55 5.5 Foreign Investment Inflows into Bangladesh (1991-96 to 2004-05) 55 5.6 FDI as a Percentage of GDP in Sri Lanka, 1990-2005 56 5.7 FDI Inflows into Nepal, 1989-94 to 2002 56 5.8 Foreign Investment Policies of South Asia 57 6.1 Trend in India’s exports to SAARC Countries, 2002-03 to 2007-08 61 6.2 Trend in India’s Imports from SAARC Countries, 2002-03 to 2007-08 62 6.3 India’s Exports to Afghanistan – Principal Commodities, 2006-07 63 6.4 India’s Imports from Afghanistan – Principal Commodities, 2006-07 64 6.5 India’s Exports to Bangladesh – Principal Commodities, 2006-07 64 6.6 India’s Imports from Bangladesh – Principal Commodities, 2006-07 65 6.7 India’s Exports to Bhutan – Principal Commodities, 2006-07 65 6.8 India’s Imports from Bhutan – Principal Commodities, 2006-07 66 6.9 India’s Exports to Maldives – Principal Commodities, 2006-07 66 6.10 India’s Imports from Maldives – Principal Commodities, 2006-07 66 6.11 India’s Exports to Nepal – Principal Commodities, 2006-07 67 6.12 India’s Imports from Nepal – Principal Commodities, 2006-07 67 6.13 India’s Exports to Pakistan – Principal Commodities, 2006-07 68 6.14 India’s Imports from Pakistan – Principal Commodities, 2006-07 68 6.15 India’s Exports to Sri Lanka – Principal Commodities, 2006-07 69 6.16 India’s Imports from Sri Lanka – Principal Commodities, 2006-07 69 6.17 Approvals of Indian Direct Investments in Joint Ventures (JVs) 70 and Wholly Owned Subsidiaries (WOSs) in SAARC Countries, April 1996 to December 2007 6.18 Foreign Direct Investments from SAARC Countries, 72 April 2000 to February 2008 7.1 Multicollinearity Test 77 7.2 Results of Gravity Model Regression Estimation 78 5
  • List of Figures No. Title Pg. No. 3.1 Trend in GDP Growth – Afghanistan 27 3.2 Trend in GDP Growth – Bangladesh 28 3.3 Trend in GDP Growth – Bhutan 29 3.4 Trend in GDP Growth – India 30 3.5 Trend in GDP Growth – Maldives 31 3.6 Trend in GDP Growth – Nepal 32 3.7 Trend in GDP Growth – Pakistan 33 3.8 Trend in GDP Growth – Sri Lanka 34 4.1 Trends in Intra-SAARC Trade and SAARC’s Global Trade 40 7
  • 9 Regional Integration Agree- ments (RIAs) have been around for hundreds of years. Most of the countries of the world are members of a bloc, and many belong to more than one. In South Asia, South Asian Association for Regional Cooperation (SAARC) is an emerging trading bloc. The total trade of the bloc has improved after the creation of the agreement. Quite apart from the general opening up, the countries in the region also began to see increased cooperation and trade among themselves as a key objective. This was reflected partially in the founding of the SAARC in 1985 by a group of seven South Asian countries, namely, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Later on, Afghanistan also joined as a full member of SAARC on April 3, 2007. The worldwide proliferation of preferential trade arrangements in the last decade has now led to a change in thinking in the region, especially in India, which has begun to negotiate a series of preferential trade agreements of its own. Within the region, this has led to the signing of the South Asian Free Trade Area (SAFTA)Agreement with the ultimate objective of turning South Asia into a full-fledged free trade area (FTA) with the internal liberalisation beginning in 2006. Against the background, the aim of the present study is to examine the trade opportunities and challenges of the SAARC trading bloc. Thus, the objectives of the study are: (a) To examine the emergence of SAARC as a trade bloc (b) To present the brief profile of SAARC countries (c) To analyse trade, investment, and recent developments in the SAARC region (d) To examine briefly India’s trade and Investment relation with SAARC region with special reference to Exim Bank (e) To empirically examine the trade potential in SAARC region, and (f) To recommend relevant policy suggestions. EXECUTIVE SUMMARY
  • 10 SAARC: EVOLUTION, OBJECTIVES AND ECONOMIC AGENDA Evolution The idea of regional cooperation in SouthAsia was first mooted in May 1980. The foreign secretaries of the seven countries met for the first time in Colombo in April 1981. This was followed by a meeting in Colombo in August – September 1981, which identified five broad areas for regional cooperation. At their first meeting in New Delhi inAugust 1983, the Foreign Ministers of South Asia adopted the Declaration on SouthAsian Regional Cooperation (SARC) formally launching the Integrated Programme of Action (IPA) in five areas of cooperation, namely, Agriculture, Rural Development, Telecommu- nications, Meteorology, Health and Public Activities. At the first SAARC Summit in Dhaka in December 1985, the heads of State or Government adopted the Charter formally establishing the South Asian Association for Regional Cooperation (SAARC). 8th December every year is observed as the SAARC Charter Day in member states. Objectives The objectives of the SAARC are: (a) To promote the welfare of the peoples of South Asia and to improve their quality of life; (b) To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realise their full potential; (c) To promote and strengthen collective self- reliance among the countries of South Asia; (d) To contribute to mutual trust, understanding and appreciation of one another’s problems; (e) To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; (f) To strengthen cooperation with other developing countries; (g) To strengthen cooperation among themselves in international fora on matters of common interests; and (h) To cooperate with international and regional organisations with similar aims and purposes. Economic Agenda The main economic agenda of SAARC include: a) SAARC Preferential Trading Agreement (SAPTA) The Agreement on SAPTA was signed on 11 April 1993 and entered into force on 7 December 1995. The Agreement reflected the desire of the Member States to promote and sustain mutual trade and economic
  • 11 cooperation within the SAARC region through the exchange of concessions. b) South Asian Free Trade Area (SAFTA) The Agreement on South Asian Free Trade Area (SAFTA) was signed on 6 January 2004 during the Twelfth SAARC Summit in Islamabad. The Agreement came into force on 1 January 2006. c) South Asian Economic Union The Eleventh Summit (Kathmandu, 4-6 January 2002) provided further impetus to the regional economic cooperation to give effect to the shared aspirations for a more prosperous South Asia. At the Summit, the Leaders agreed to accelerate cooperation in the core areas of trade, finance and investment to realise the goal of an integrated South Asian economy in a step-by-step manner. They also agreed to the vision of a phased and planned process eventually leading to a South Asian Economic Union. Economic Profile of the SAARC Member Countries In Afghanistan, GDP growth is estimated to have reached 13.9% in 2007, owing to a strong rebound in agricultural production (from the prior-year’s drought). Industry and services remained dynamic, with estimated growth of 13.3% and 12.4%, respectively. Construction, up by 20.0%, was industry’s main driver. GDP growth in FY2007 (ended June 2007) decelerated to 6.5% in Bangladesh, largely reflecting agriculture’s moderation from the postflood outturn of the previous year. It was underpinned by steady expansion in manufacturing and continued buoyancy in services, on the base of rising domestic and external demand. Rapid growth in manufacturing and foreign trade aided services. Bhutan’s GDP growth in FY2007 (ended June 2007) is estimated to have doubled to 17.0%. This was driven by the power sector (with a GDP share of 11.3% in FY2006) due to the commissioning of the 1,020 megawatt (MW) Tala hydropower station, which has been phased in since July 2006. In India, the impressive economic performance of the past few years continued, with a real GDP growth of 9.0% in 2007- 08, as compared to 9.6% in the previous period. Economy of Maldives grew by 6.6% in 2007, reverting to its historical growth path after the post- tsunami contraction in 2005 and the rebound in 2006. Tourism, the leading sector with a near one-third share of GDP, grew by 10.0% as a result of growing tourist arrivals that, in 2007, finally exceeded the pre-tsunami peak level of 2004. Overall GDP growth of Nepal stood at to 2.3% in FY2007 (ended mid-
  • 12 July 2007) from 3.1% in FY2006, due primarily to poor weather conditions which impacted agriculture and industry. At 7.0%, GDP growth of Pakistan was strong in FY2007 (ended June 2007) for the fourth consecutive year. Services remained strong (especially telecommuni- cations, finance, international port services, and logistics), contributing 64% of GDP growth in 2007 despite slowdown in tourism. TREND IN FOREIGN TRADE AND TRADE POLICIES SAARC’s Global Trade During the year 2000 to 2006, the total exports of SAARC countries increased more than two and half fold from US$ 63.5 billion to US$ 161.4 billion. Among all the member countries, India is the largest exporter followed by Pakistan and Bangladesh. The total imports of SAARC countries also increased from US$ 79.5 billion in 2000 to US$ 255.3 billion in 2006, depicting more than a three-fold rise during the period. India is the largest importer in the SAARC region followed by Pakistan and Bangladesh. Intra-SAARC Trade As regards intra-SAARC trade, total intra-SAARC exports increased from US$ 2.8 billion in 2000 to US$ 10.8 billion in 2006, registering almost four-fold rise during the period. Exports among the SAARC countries are dominated by India, followed by Pakistan and Sri Lanka. The total intra-SAARC imports increased from US$ 3.0 billion in 2000 to US$ 9.6 billion in 2006. The intra-SAARC imports are dominated by Sri Lanka, followed by India. Trade Policies Trade liberalisation in SouthAsia started with a series of sweeping reforms in Sri Lanka in 1977/78. For the rest of SouthAsia, the 1980s and 1990s saw substantial reductions of tariffs and phasing out of quantitative restrictions (QRs), along with liberali- sation of the exchange regimes. With respect to SAARC, in the first phase, the Least Developed Countries (LDCs) in SAFTA will reduce their maximum tariff rates to 30% within two years from the date of coming into force of the Agreement. The non-LDC members will reduce their maximum rates to 20% within the same time frame. In the second phase, from January 1, 2008, the non-LDC members will reduce their import tariffs to the 0- 5% range in 5 years, while the LDCs will do the same in 8 years. With a view to further enhance regional trade and co-operation in the SAARC region, on January 01, 2008, India has reduced import duty on all items other than those in the negative list to zero. During the third SAFTA Ministerial Council meeting in New Delhi, on March 03, 2008, India also announced the pruning of
  • 13 negative list from 744 items to around 500 items for the least developed country members of the SAARC. Further, the third SAFTA Ministerial Council Meeting also directed the drafting of SAARC Framework Agreement on Trade in Services (SAFAS) under SAFTA Agreement. DEVELOPMENTS IN SAARC TRADE INTEGRATION SAARC Preferential Trade Agreement (SAPTA) was signed at the seventh SAARC summit in 1993, in Dhaka. The agreement provides a framework and institutional base for trade liberalisation and economic cooperation between the seven SAARC member countries. The agreement also provides for the exchange of concessions between SAPTA members on tariffs, para- tariff and non-tariff barriers. It envisages four basic approaches to the exchange of trade preferences: (1) product-by-product; (2) across- the-board; (3) sectoral ; and (4) “direct trade” measures. South Asian Free Trade Agreement (SAFTA) has been ratified and entered into force on January 1, 2006. SAFTA builds on the provisions of SAPTA, and extends the scope of SAPTA to include trade facilitation elements and switches the tariff liberalisation process from a positive to a negative list approach. FOREIGN DIRECT INVESTMENT IN THE SAARC REGION The total FDI inflows into the SAARC region increased from US$ 5.6 billion in 2000 to US$ 22.3 billion in 2006. Growth in private capital flows to South Asia was largely driven by India, which received the majority of capital flows to the region. FDI flows into Pakistan, Bangladesh and Sri Lanka has also increased faster during the period. FDI outflows from the SAARC region increased from US$ 351.0 mn in 2000 to US$ 9.8 billion in 2006. Out of all eight-member countries, FDI outflow from India is the highest with US$ 9.7 billion in 2006, followed by Pakistan US$ 107 mn and Sri Lanka US$ 29 mn. INDIA’S TRADE AND INVESTMENT RELATIONS WITH SAARC Trade Relations India’s exports to the SAARC region increased from US$ 2.8 billion in 2002-03 to US$ 6.5 billion in 2006- 07. Amongst the SAARC members, Sri Lanka has the largest market, accounting for 35% of India’s total exports in the SAARC region during 2006-07, followed by Bangladesh (25%), Pakistan (21%) and Nepal (14%). An analysis of the trend in India’s exports to the SAARC region during the period 2002-03 to 2006- 07 reveals that, while exports to all
  • 14 the SAARC members have registered a rise, India’s imports to Pakistan, Afghanistan and Nepal have exhibited distinct buoyancy. While India’s exports to Pakistan registered a six-fold rise during the five-year period, exports to Afghanistan and to Nepal also rose three-fold and two and half-fold, respectively, during the period. India’s imports from the SAARC region have also risen from US$ 531.5 mn in 2002-03 to US$ 1.5 billion in 2006-07, depicting almost a three-fold rise during the period. Sri Lanka is again the leading partner, accounting for 31% of India’s total imports from the region during 2006-07, followed by Pakistan (21%), Nepal (20%), Bangladesh (15%) and Bhutan (9%). The robust rise in India’s total imports from the SAARC during the period 2002-03 to 2006-07 has been underpinned by the sharp increase in imports from Pakistan, Sri Lanka, Bhutan and Bangladesh. India generally maintains a positive trade balance with the other SAARC member countries with the surplus having risen from US$2.3 billion in 2002-03 to US$ 5.0 billion in 2006-07. Investment Relations The total foreign direct investments from India to other SAARC countries amounted to US$ 312.4 mn during April 1996 to December 2007.Among the SAARC countries, Sri Lanka (US$ 153.1 mn) is the major destination of Indian investment followed by Nepal (US$ 87.2 mn). During January 2005 to December 2007, 33 JVs and 42 WOSs have been approved in the SAARC countries. Most of these approvals were in engineering goods, electrical equipments, pesticides, readymade garments, cables and wires, plastic products, rubber products, automobile components, financial services, and tourism & travels. As regards investments flows from other SAARC members into India, total investment into India amounted to US$ 11.7 mn during April 2000 to February 2008. Among the SAARC countries, Sri Lanka is the largest source of FDI with US$ 8.5 mn during the period, followed by Maldives (US$ 3.1 mn). The investment flows between India and Sri Lanka have increased mainly after the implementation of India Sri Lanka Free Trade Agreement (ISLFTA). EXIM BANK IN THE SAARC REGION Export-Import Bank of India (Exim Bank) operates a comprehensive range of financing, advisory and support programmes to promote and facilitate India’s trade and investment relations with the SAARC region.
  • 15 In the SAARC region, the Bank has supported several Indian project exporters to execute contracts in countries such as: Hydroelectric project, tunnel house and dam construction in Bhutan; Road improvement projects, railway construction and maintenance, gas turbine power plant project, electrical substations, cement plant project, transmission line project, conveyor belt project in Bangladesh; Steel, local telephone network, transmission lines, sub-stations, out door LED video system for cricket matches and diesel fired power project in Sri Lanka; Transmission lines and substations, optic fibre cable project, hydro electric projects and irrigation projects in Nepal, and Airconditioning & electro mechanical work at Male Airport in Maldives. The Bank, in order to help Indian companies in their internationa- lisation efforts, provides term loans to them, both for equity investment in their ventures overseas. Besides, Exim Bank also undertakes direct equity stake in Indian ventures abroad, to enable Indian companies to supplement their equity with Exim Bank’s contribution. To facilitate Indian presence in the SAARC region, the Bank has supported joint ventures by Indian companies in several sectors including: Textiles, pharmaceuticals, steel, glass sectors in Sri Lanka; Electrical sector in Bangladesh, and Engineering goods and textile sector in Nepal. Exim Bank extends Lines of Credit (LOCs) to overseas financial institutions, foreign governments and their agencies, enabling them to import eligible goods from India. Bank’s LOCs in the region include LOCs extended to Government of Sri Lanka, Ceylon Petroleum Corporation, Hatton National Bank, Sri Lanka, and Government of Nepal. Bank has also sought to develop useful relationships, both structured and informal, with multilateral agencies, other export credit agencies, trade and investment promotion bodies, Indian Missions abroad, commercial banks and financial institutions to help create an enabling environment to support two- way transfer of technology, trade and investment. The Bank has linkages with institutions in SAARC countries, which include: Afghanistan Investment Support Agency (AISA), Afghanistan;
  • 16 Industrial Promotion and Development Co. of Bangladesh Ltd., Bangladesh, and Board of Investment of Sri Lanka, Hatton Bank Ltd., and Ceylon Chamber of Commerce, Sri Lanka. EMPIRICAL EXAMINATION OF TRADE FLOWS IN THE SAARC REGION The analysis has been carried out within the gravity model framework. The test for multicollinearity reveals the presence of no multicollinearity among the variables. The coefficients of GDP of both exporters and importers are positive and significant at 1% and 5% respectively. For 1% increase in GDP of exporting (importing) country, bilateral export flow would increase by 0.88% (0.79%). This approximate proportional relationship between bilateral export flows and size of the economy (either exporter or importer) indicates that intra-SAARC trade could rise if the SAARC counties could maintain strong economic growth. GDP per capita of country i and country j are also statistically significant and have positive signs. GDP per capita of both exporting and importing countries are significant at 1% level. This implies that countries with high per capita income are likely to trade more. The coefficient of Import-GDP ratio of importing country is positive and statistically significant. For 1% increase in openness, bilateral export flow increases by 1.16%. This indicates that it is possible that increased openness of the SAARC member countries could boost intra-regional trade in the region. Further, in extra-SAARC trade context, it reveals the absence of trade diversion in the SAARC region. Exchange rate parameter has a positive effect on export flows since the bilateral exchange rate is defined as units of domestic currency per one unit of foreign currency. If exchange rate increases (domestic currency depreciation) by 1%, export increases by 0.67%. The Rijt coefficient is positive and significant. This shows the importance of specialization in the region based on the principle of comparative advantage. The presence of bilateral trade agreements in the SAARC countries increases trade by 152.2%. The common border demonstrates positive and statistically significant effect. If two countries share a common border, export flow between them increases by 32.4% than the otherwise. POLICY IMPLICATIONS OF THE STUDY a) More emphasis could be given to boost exports in order to reduce the global trade deficit experienced by the SAARC region.
  • 17 b) SAARC countries are mainly exporting agricultural commodities and agro-based products. Further, among the SAARC countries trade is highly competitive and which are mostly in identical commodities. Therefore, more diversification is essential based on the comparative advantage. c) The tariff level in SAARC countries is still high. Therefore, to reap the fullest benefit of the trade bloc tariff could be reduced further. d) Though foreign direct investment inflow is increasing in the SAARC region, it is still low in volumes. Therefore, adequate steps could be taken to attract more FDI into the region. e) The direct relationship between bilateral exports and GDP in the SAARC region reveals the potential for export-led growth in the region. f) When the openness of an economy increases, bilateral exports within the SAARC region also show a corresponding increase. Since, this reveals absence of trade diversion in the region, SAARC countries could adopt more open trade policies. g) There is a significant and positive relation between the bilateral trade agreement and bilateral export flows in the SAARC region. Therefore, study supports the creation of bilateral agreements in the region. h) SAARC countries could adopt cautious exchange rate policies as this may have adverse impact on the terms of trade. This is because, since SAARC countries are mainly exporting agro based commodities, a devaluation of currency may exert adverse terms of trade. i) Since there is a positive and significant relation between the difference in relative factor endowments and bilateral export growth, specialisation could be promoted based on the principle of comparative advantage. Factor endowment shows whether the country is labour using or capital using. Given the factor endowments and available resources countries can specialise in various commodities. j) Stronger economic relations can serve to improved political relations in the region, especially the key relationship between India and Pakistan. k) An effective and vibrant South Asian trade bloc could also serve to enhance the South Asian regions’ bargaining position in multilateral negotiations on trade with other regions and regional groupings.
  • 18 The growth of regional trade blocs has been one of the major developments in international relations in recent years. Virtually all countries are members of a bloc, and many belong to more than one. Regional agreements vary widely, but all have the objective of reducing barriers to trade between member countries. At their simplest, these agreements merely remove tariffs on intra-bloc trade in goods, but many go beyond that to cover non-tariff barriers and to extend liberalisation to investment and other policies. At their deepest, they have the goal of economic union and involve the construction of shared executive, judicial, and legislative institutions. The past decade also witnessed qualitative changes in Regional IntegrationAgreements (RIA). There have been three major developments: 1. The move from “closed regionalism” to a more open model, in line with prevailing views about national economic policy. Many of the trade blocs that were formed between developing countries in the 1960s and 1970s were based on a model of import- substituting development, and regional agreements with high external trade barriers were used as a way of implementing this model. New-wave RIAs (some of which are old agreements resurrected) are generally more outward looking and more committed to boosting rather than controlling international commerce. 2. The recognition that effective integration requires more than simply reducing tariffs and quotas. Many other types of barriers have the effect of segmenting markets and impeding the free flow of goods, services, investments, and ideas, and wideranging policy measures—going well beyond traditional trade policies—are needed to remove them. Such “deep integration” was first actively pursued in the Single Market Programme of the European Union (EU), but its elements are now finding their way into the debate on other regional agreements. 1. INTRODUCTION
  • 19 3. The advent of “North-South” trade blocs in which high- income countries and developing countries are equal partners. Perhaps the most important example is the North American Free Trade Agreement (NAFTA), formed in 1994 when the Canada–United States Free Trade Agreement (CUSFTA) was extended to Mexico. The EU also has North-South arrangements, including the Europe Agreements that link the EU with the transition economies of Eastern Europe, a customs union with Turkey, and agreements with many Mediterranean countries. In addition, the EU is committed to negotiating reciprocal trade agreements (economic partnership agreements, or EPAs) with the African, Caribbean, and Pacific (ACP) countries. NEED FOR REGIONAL INTEGRATION Many factors lay behind the recent spurt in regionalism. The important among them are as follows. Governments’ wish to bind themselves to better policies— including democracy—and to signal such bindings to domestic and foreign investors. A desire to obtain more secure access to major markets The pressures of globalisation, forcing firms and countries to seek efficiency through larger markets, increased competition, and access to foreign technologies and investment Governments’ desire to maintain sovereignty by pooling it with others in areas of economic management where most nationstates are too small to act alone RTAs convey advantages as well as limitations. By reducing the number of participants in the negotiation they can help expand the discussion to include more dimensions of economic integration. Compared with unilateral liberalisation, political support for RTAs also seems to be greater given the perception of reciprocity from other member countries. Although RTAs have varied components, these agreements include some or all of the following eight elements (Bhagwati and Panagariya, 1996 provide an overview): (i) a tariff liberalisation program—TLP (transformation of nontariff barriers, e.g. quotas, to their tariff equivalent and the sequential reduction of tariffs; special considerations to least developed countries are not uncommon); (ii) sensitive lists (goods or services
  • 20 to be exempt from the tariff reduction program);1 (iii) rules of origin—ROO (prevention of the application of the preferential tariffs to non regional goods or services as defined by the agreement);2 (iv) institutional arrangements (establishment of a council or administrative committee responsible for the administration and implementation of the agreement); (v) trade facilitation policies (collection of instruments to reduce transaction costs of importing and exporting, including homogenization of customs practices and technical assistance especially to the least-developed members); (vi) dispute settlement mechanism (procedures to report and deal with violations to the agreement); (vii) safeguards measures (suspension of preferential treatment on grounds that imports are causing or threatening to cause serious injury to the domestic industrial base); and (viii) parallel reduction in foreign investment barriers and/or trade in services. THE CONTEXT Apart from the general opening up, the countries in the SAARC region also since the 1970s, began to see increased cooperation and trade among themselves as a key objective. This was reflected partially in the founding of the South Asian Association for Regional Cooperation (SAARC) in 1985 to promote dialogue and cooperation. Though the actual exchange of preferences remained extremely limited, the process of negotiation kept the dialogue among the member countries alive. But the worldwide proliferation of preferential trade arrangements in the last decade has led to a change in thinking in the region, with more focus on enhanced regional trade. Within the region, this has led to the signing of the South Asian Free TradeArea (SAFTA)Agreement with the ultimate objective of turning South Asia into a full-fledged FTA with the internal liberalisation beginning in 2006. This agreement has come in the wake of a bilateral FTA agreement between India and Sri Lanka in 1998 that became operational on March 1, 2000. Further, South Asia has experienced unprecedented growth, averaging close to 6% per annum since the 1990s. This growth is impressive because many developing countries grew more slowly during this period. As India accounts for more than three 1 They take the form of positive (inclusions) or negative (exclusions) lists. 2 Examples include percentage of value added in member country(ies) and specific content requirements.
  • 21 quarters of the region’s gross domestic product (GDP), its growth has had a decisive impact on the overall regional growth. India grew at 3.2% during 1965-81, accelerated to 5.1% during 1981-87, then to 6% during 1987-2004, and during 2005- 2007 registered an average growth rate of 9.2%. While India has led the way, the other South Asian countries including Bangladesh and Pakistan have also shown remarkable improvements in economic growth (Ahmed, 2006). It is this steady rise in growth that has attracted the world’s attention to the South Asia region. In light of the above, the study attempts to examine various opportunities and challenges facing the SAARC countries. Thus, the objectives of the study are: a) To examine the emergence of SAARC as a trade bloc b) To present the brief profile of SAARC countries c) To analyse trade, investment and recent developments in the SAARC region d) To examine briefly India’s trade and Investment relation with SAARC region, with special reference to Exim Bank e) To empirically examine the trade nexus in the SAARC region, and f) To recommend suggestions and policy implications of the study METHODOLOGY AND DATA Augmented Gravity Model has been adopted to examine the causing factors for trade and the degree of trade in the SAARC region. The use of models is expected to help improve policy-making. Economic models provide a theoretically consistent, rigorous and quantitative way of evaluating different trade policies. Data on different variables incorporated in the model have been retrieved from various reliable sources.3 SCHEME OF THE STUDY The study consists of eight chapters. The first chapter introduces the historical background, context, objectives, methodology and data, and scheme of the study. The evolution, objectives and economic agenda of the SAARC are presented in chapter two. The economic profile of SAARC member countries are presented in chapter three. The fourth chapter presents trends in foreign trade of the region 3 Details of model and data are explained in the analytical chapter (Chapter VII).
  • 22 (intra and extra), trade policies and recent developments. The flow of foreign investment and investment policies are underlined in chapter five. A brief examination of India’s trade and investment relation with SAARC countries with special reference to Exim Bank is presented in chapter six. An empirical examination of trade nexus in the SAARC region is presented in chapter seven. Summary, conclusions and policy recommendations are delineated in chapter eight.
  • 23 The present chapter provides profile of the SAARC region in general, as also the objectives and principles, and economic agenda of SAARC. South Asian Association for Regional Cooperation (SAARC) comprises eight countries of South Asia, viz. Afghanistan4, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. It is an association based on the premise that in an increasingly interdependent world, the objectives of peace, freedom, social justice and economic prosperity in South Asia are best achieved by fostering mutual understanding, good neighbourly relations and meaningful cooperation amongst the countries in the region. The idea of regional cooperation in SouthAsia was first mooted in May 1980 and the foreign secretaries of the seven countries met for the first time in Colombo in April 1981. This was followed by a meeting in Colombo in August – September 1981, which identified five broad areas for regional cooperation. At their first meeting in New Delhi inAugust 1983, the Foreign Ministers of South Asia adopted the Declaration on SouthAsian Regional Cooperation (SARC) formally launching the Integrated Programme of Action (IPA) in five areas of cooperation, namely, Agriculture, Rural Development, Telecommu- nications, Meteorology, Health and Public Activities. At their first SAARC Summit in Dhaka in December 1985, the heads of State or Government adopted the Charter formally establishing the SouthAsianAssociation for Regional Cooperation (SAARC). 8th December every year is observed as the SAARC Charter Day in member states. The objectives, principles and general provisions contained in the SAARC Charter are as follows: OBJECTIVES (a) To promote the welfare of the peoples of South Asia and to improve their quality of life; (b) To accelerate economic growth, social progress and cultural 2. SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION (SAARC): EVOLUTION, OBJECTIVES AND ECONOMIC AGENDA 4 Afghanistan joined as a full member of SAARC on April 3, 2007.
  • 24 development in the region and to provide all individuals the opportunity to live in dignity and to realise their full potential; (c) To promote and strengthen collective self- reliance among the countries of South Asia; (d) To contribute to mutual trust, understanding and appreciation of one another’s problems; (e) To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; (f) To strengthen cooperation with other developing countries; (g) To strengthen cooperation among themselves in international forums on matters of common interests; and (h) To cooperate with international and regional organisations with similar aims and purposes. PRINCIPLES (a) Cooperation within the framework of the Association is based on respect for the principles of sovereign equality, territorial integrity, political independence, non-interference in the internal affairs of other states and mutual benefit; (b) Such cooperation is to complement and not to substitute bilateral or multilateral cooperation; and (c) Such cooperation should be consistent with bilateral and multilateral obligations of member states GENERAL PROVISIONS (a) Decisions at all levels in SAARC are to be taken on the basis of unanimity; and (b) Bilateral and contentious issues are to be excluded from the deliberations of the association THE SUMMIT The highest authority of the Association rests with the Heads of States or Government, who meet annually at the Summit level. To date fourteen Summits have been held: Dhaka (1985), Bangalore (1986), Kathmandu (1987), Islamabad (1988), Male (1990), Colombo (1991), Dhaka (1993), New Delhi (1995), Male (1997), Colombo (1998), Kathmandu (2002), Islamabad (2004), Dhaka (2005) and New Delhi (2007). The fifteenth summit is scheduled to be held in August 2008 at Colombo. ECONOMIC AGENDA Cooperation in the core economic areas amongst Member Countries was initiated following the completion of the Study on Trade, Manufactures and Services (TMS) in June 1991. Among other things, the TMS Study recognised economic cooperation as an imperative for promoting all-round development of South Asia.
  • 25 Following are the main economic agenda of the SAARC. a) SAARC Preferential Trading Agreement (SAPTA) In December 1991, the Sixth Summit held in Colombo approved the establishment of an Inter- Governmental Group (IGG) to formulate an agreement to establish a SAARC Preferential Trading Arrangement (SAPTA) by 1997. Given the consensus within SAARC, the Agreement on SAPTA was signed on 11 April 1993 and entered into force on 7 December 1995 well in advance of the date stipulated by the Colombo Summit. The Agreement reflected the desire of the Member States to promote and sustain mutual trade and economic cooperation within the SAARC region through the exchange of concessions. The basic principles underlying SAPTA are: a. overall reciprocity and mutuality of advantages so as to benefit equitably all Contracting States, taking into account their respective level of economic and industrial development, the pattern of their external trade, and trade and tariff policies and systems; b. negotiation of tariff reform step by step, improved and extended in successive stages through periodic reviews; c. recognition of the special needs of the Least Developed Contracting States and agreement on concrete preferential measures in their favour; and d. inclusion of all products, manufactures and commodities in their raw, semi-processed and processed forms. So far, four rounds of trade negotiations have been concluded under SAPTA covering over 5000 commodities. Each Round contributed to an incremental trend in the product coverage and the deepening of tariff concessions over previous Rounds. The Member States are in the process of completing the necessary procedural formalities to give effect to the concessions extended in the Fourth Round. b) South Asian Free Trade Area (SAFTA) SAPTA was envisaged primarily as the first step towards the transition to a South Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union, Common Market and Economic Union. In 1995, the Sixteenth session of the Council of Ministers (New Delhi, 18- 19 December) agreed on the need to strive for the realisation of SAFTA and to this end an Inter- Governmental Expert Group (IGEG) was set up in 1996 to identify the necessary steps for progressing to
  • 26 a free trade area. The Tenth SAARC Summit (Colombo, 29-31 July 1998) decided to set up a Committee of Experts (COE) to draft a comprehensive treaty framework for creating a free trade area within the region, taking into consideration the asymmetries in development within the region and bearing in mind the need to fix realistic and achievable targets. The Agreement on South Asian Free TradeArea (SAFTA), drafted by the COE, was signed on 6 January 2004 during the Twelfth SAARC Summit in Islamabad. The Agreement entered into force on 1 January 2006. Under the Trade Liberalisation Programme scheduled for completion in ten years by 2016, the customs duties on products from the region will be progressively reduced. However, under an early harvest programme for the Least Developed Member States, India, Pakistan and Sri Lanka are to bring down their customs duties to 0-5 % by 1 January 2009 for the products from such Member States. The Least Developed Member States are expected to benefit from additional measures under the special and differential treatment accorded to them under the Agreement. c) South Asian Economic Union The Eleventh Summit (Kathmandu, 4-6 January 2002) provided further impetus to the regional economic cooperation to give effect to the shared aspirations for a more prosperous South Asia. At the Summit, the Leaders agreed to accelerate cooperation in the core areas of trade, finance and investment to realise the goal of an integrated South Asian economy in a step-by-step manner. They also agreed to the vision of a phased and planned process eventually leading to a South Asian Economic Union. At the Twelfth SAARC Summit (Islamabad, 4-6 January 2004) the SAARCFINANCE was given the responsibility to study and make recommendations on the early and eventual realisation of a South Asian Economic Union (SAEU). It was also tasked with examining the concept of a SouthAsian Development Bank.
  • 15.1 9.4 16.4 6.1 13.9 0 5 10 15 20 Percent 2003 2004 2005 2006 2007
  • 6.3 6.0 6.6 6.5 5.3 0 1 2 3 4 5 6 7 Percent 2003 2004 2005 2006 2007
  • 9.0 7.0 6.9 7.8 17.0 0 5 10 15 20 Percent 2003 2004 2005 2006 2007
  • 8.5 7.5 9.4 9.6 9.0 0 2 4 6 8 10 Percent 2003 2004 2005 2006 2007
  • 3.8 4.4 2.9 3.1 2.3 0 1 2 3 4 5 Percent 2003 2004 2005 2006 2007
  • 4.7 7.5 9.0 6.6 7.0 0 2 4 6 8 10 Percent 2003 2004 2005 2006 2007
  • 5.9 5.4 6.2 7.7 6.7 0 1 2 3 4 5 6 7 8 Percent 2003 2004 2005 2006 2007
  • 35 Table3.1: SELECTECONOMICINDICATORSOFSAARCCOUNTRIES IndicatorsYearAfghanistanBangladeshBhutanIndiaMaldivesNepalPakistanSriLanka GDPGrowth(%)20066.16.67.89.619.13.16.67.7 200713.96.517.09.06.62.37.06.7 2008*9.06.014.48.08.03.86.36.0 2009*9.06.57.28.57.04.36.56.0 Inflation(%)20065.17.24.95.43.58.07.99.6 20079.87.25.24.47.46.47.820.2 2008*10.29.04.54.56.07.08.016.2 2009*7.28.04.54.56.06.56.514.0 ExportsGrowthrate(%)20060.421.547.221.839.42.614.98.5 20073.315.864.518.12.84.34.412.5 2008*8.012.033.916.0–6.18.08.0 2009*8.715.09.018.0–4.310.09.0 ImportsGrowthrate(%)200610.012.1-5.621.824.417.833.315.7 200715.016.615.128.514.811.38.010.2 2008*13.220.019.522.0–14.013.09.5 2009*-1.416.023.424.0–14.510.09.0 contd...
  • 36 Contd... IndicatorsYearAfghanistanBangladeshBhutanIndiaMaldivesNepalPakistanSriLanka TradeBalance(US$mn)2006-4,942-2,889-123-63,171-590-1,531-8,441-3,370 2007-5,893-3,45813-94,510-704-1,765-9,711-3,555 2008*-6,765-5,11488-124,377–-2,08311,837-4,009 2009*-6,465-6,06711-164,753–-2,482-13,021-4,370 CurrentA/CBal.(US$mn)2006-444824-38-9,766-369198-4,990-1,497 2007-119952114-22,072-472506,878-1,373 2008*-50543141-29,483-541––-1,546 2009*-15086338-40,443-544––-1,631 Externaldebt(US$mn)200612,08318,603677169,6295743,24935,65512,235 20071,88319,703756190,516–3,21838,69916,130 Exchangerate(:US$1)200649.967.144.745.312.871.959.9104.0 200750.169.044.240.212.870.660.6110.6 Foreignex.reserves20062,0643,484479199,1792321,83410,7602,515 (US$mn)20072,3355,077599306,4883092,40113,3453,100 Fiscalbal.ofCentralGovt.2006-3.1-3.2-0.8-6.4-6.7-1.6-4.3-8.1 (%ofGDP)2007-2.9-3.2-3.4-5.5-7.9-2.0-5.8-7.7 *-forecasts SOURCE:AsianDevelopmentOutlook2008,AsianDevelopmentBank.
  • 37 Trend in SAARC’s global trade as also intra-SAARC trade in recent years are presented in this chapter. Further, trade developments in each SAARC member countries as also developments in SAARC trade integration are also presented in the chapter. SAARC’s GLOBAL TRADE During the period 2000 to 2006, the total exports of SAARC countries increased from US$ 63.5 billion to US$ 161.4 billion. The growth rate of exports also increased from 3.9% in 2001 to 23.9% in 2006. Among all the member countries, India is the largest exporter followed by Pakistan and Bangladesh. Table 4.1 presents the trend in SAARC’s global exports. The total global imports of SAARC countries also increased from US$ 79.5 billion in 2000 to US$ 255.3 billion in 2006, registering more than a three-fold rise during the 4. TREND IN FOREIGN TRADE AND TRADE POLICIES IN THE SAARC REGION Table 4.1: SAARC’S GLOBAL EXPORTS DURING 2000-2006 (US$ billion) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan 0.1 0.1 0.1 0.2 0.2 0.2 0.3 Bangladesh 5.6 5.7 5.4 6.2 7.6 8.5 12.7 Bhutan 0.10 0.1 0.1 0.1 0.2 0.3 – India 42.6 45.2 50.5 61.1 75.4 97.9 122.7 Maldives 0.1 0.1 0.1 0.1 0.1 0.1 0.2 Nepal 0.7 0.8 0.6 0.6 0.7 0.8 0.8 Pakistan 8.9 9.2 9.9 11.9 13.3 16.0 17.2 Sri Lanka 5.5 4.7 4.7 5.1 5.8 6.4 7.5 Total 63.5 66.0 71.4 85.4 103.2 130.3 161.4 – (3.9) (8.2) (19.6) (20.8) (26.3) (23.9) SOURCE: Direction of Trade Statistics Year Book 2007, IMF. NOTE: Values in parentheses show percentage growth.
  • 38 period. India is the largest importer in the SAARC region followed by Pakistan and Bangladesh. Thus, data on exports and imports reveal that SAARC as a trade bloc experienced trade deficit of US$ 93.9 billion with the world in 2006. Table 4.2 presents the trend in SAARC’s global imports. INTRA-SAARC TRADE Table 4.3 presents the trend in intra-SAARC exports during 2000- 2006. The total intra SAARC exports increased from US$ 2.8 billion in 2000 to US$ 10.8 billion in 2006, registering nearly a four-fold rise during the period. Exports among the SAARC countries are dominated by India, followed by Pakistan and Sri Lanka. The trend in intra-SAARC imports is presented in Table 4.4. The table shows that total imports increased from US$ 3.0 billion in 2000 to US$ 9.6 billion in 2006, depicting a three-fold rise. The intra- SAARC imports are dominated by Sri Lanka, followed by India. The growth rate of intra-SAARC imports increased from 13.0% in 2001 to US$ 11.6% in 2006. Figure 4.1 depicts the trend in intra-SAARC trade (exports plus imports), vis-a-vis trend in SAARC’s global trade. A comparison of the trends would help to highlight the buoyancy in intra-SAARC trade especially after 2003, as compared to SAARC’s global trade. Table 4.2: SAARC’S GLOBAL IMPORTS DURING 2000-2006 (US$ billion) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan 0.6 0.6 1.0 1.6 2.0 3.0 3.8 Bangladesh 9.0 9.0 7.8 9.8 11.6 13.9 17.8 Bhutan 0.2 0.2 0.2 0.2 0.4 0.4 – India 50.3 59.0 58.9 74.0 99.8 134.7 185.0 Maldives 0.4 0.4 0.4 0.5 0.6 0.7 0.9 Nepal 1.6 1.6 1.4 1.6 1.8 2.0 2.4 Pakistan 10.7 10.2 11.2 13.0 17.8 25.4 33.8 Sri Lanka 6.7 5.7 6.0 6.7 8.0 8.9 11.6 Total 79.5 86.7 87.1 107.4 142.0 189.90 255.3 – (9.1) (0.46) (23.3) (32.2) (33.01) (35.2) SOURCE: Direction of Trade Statistics Year Book 2007, IMF. NOTE: Values in parentheses show percentage growth.
  • 39 Table 4.3: INTRA-SAARC EXPORTS DURING 2000-2006 (US$ mn) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan 60.3 49 44.4 64.1 87.4 102.1 125.3 Bangladesh 93.6 97.7 78.4 112.5 126.5 187.3 228.5 Bhutan 24.5 27.1 33.3 50.8 57.1 95.4 117.0 India 1822 2082 2601 3918 4416 5273 6789.0 Maldives 13.8 17 14.1 15.7 15.6 17.2 21.2 Nepal 222.9 243.8 279.0 265.3 302.2 343.7 568.8 Pakistan 404 407 452 751 959 1797 2191.0 Sri Lanka 189.9 157.8 256.8 350.6 507.9 655.5 808.6 Total 2831.0 3081.3 3759.0 5527.9 6471.7 8471.1 10849.5 – (8.8) (22.0) (47.1) (17.1) (30.9) (27.1) SOURCE: Direction of Trade Statistics Year Book 2007, IMF. NOTE: Values in parentheses show percentage growth. Table 4.4: INTRA-SAARC IMPORTS DURING 2000-2006 (US$ mn) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan 169.5 196.9 307.9 590.2 684.8 1333.0 1648.6 Bangladesh 1058.9 1299.1 1221.1 1612.2 1887.4 2121.9 1036.5 Bhutan 3.9 4.5 32.4 79.4 88.6 99.3 122.1 India 473.0 533.0 544.0 664.0 891.0 1297.0 1763.0 Maldives 89.6 93.2 103.0 114.2 136.5 129.3 159.9 Nepal 163.1 179.2 355.8 659.0 793.8 921.6 1486.3 Pakistan 291.0 321.0 259.0 345.0 599.0 765.0 945.0 Sri Lanka 707.3 712.5 933.1 1175.7 1574.8 1981.3 2448.7 Total 2956.2 3339.3 3756.2 5239.6 6655.9 8648.4 9610.1 – (13.0) (12.5) (39.5) (27.0) (29.9) (11.6) SOURCE: Direction of Trade Statistics Year Book 2007, IMF. NOTE: Values in parentheses show percentage growth.
  • 5.8 20.5 143.0 416.7 0.0 5.0 10.0 15.0 20.0 25.0 2000 2001 2002 2003 2004 2005 2006 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 450.0 500.0 SAARC's Global Trade Intra-SAARC Trade
  • 41 previous year. The imports of the country also increased by 28.1% to US$ 17.8 billion in 2006 from US$ 13.9 billion due to growing import bill for oil. Thus, Bangladesh experienced a trade deficit of US$ 5.1 billion in 2006. Imports are expected to continue to grow in both volume and value terms as demand for capital goods and some industrial raw materials remains strong. The main export items of Bangladesh in 2006 were garments (63.9% of total exports), fish & prawns (4.9% of total exports), jute goods (3.2% of total exports), and leather & hides (3.1% of total exports). The important imports in 2006 were capital goods (24.7% of total imports), textiles (20.5% of total imports), petroleum & petroleum products (11.6% of total imports), and cereal and dairy products (3.7% of total imports). The major export destinations of Bangladesh in 2006 were the US (24.2% of total exports), Germany (13.2% of total exports), and the UK (10.6% of total exports). The major import sources were India (14.7% of total imports), China (14.6% of total imports), and Kuwait (8.0% of total imports). India India’s exports increased by 25.3% to US$ 122.7 billion in 2006 from US$ 97.9 billion in 2005 due mainly to sharp increase in the export of manufactured goods. The imports have also increased by 37.3% to US$ 185.0 billion in 2006 from US$ 134.7 billion in 2005. Hence, India experienced a trade deficit of US$ 62.3 billion in 2006. The major items of India’s exports in 2006 were engineering goods (22.0% of total exports), textiles and textile products (16.4% of total exports), gems and jewellery (15.9% of total exports), and chemicals and chemical products (14.8% of total exports). The important import items of India in 2006 were petroleum products (32.6% of total imports) and capital goods (23.5% of total imports). The major destinations of India’s exports in 2006 were the USA (17.6% of total exports), the UAE (8.8% total exports), China (6.9% of total exports), Singapore (5.7% of total exports), and Hong Kong (4.6% of total exports). The main sources of imports in 2006 were China (8.0% of total imports), the USA (5.8% of total imports), Switzerland (4.9% of total imports), Germany (4.3% of total imports),Australia (3.6% of total imports), Belgium (3.5% of total imports), South Korea (3.2% of total imports) and the UAE (3.2% of total imports). Maldives The exports of Maldives have increased to US$ 0.2 billion in 2006 from US$ 0.1 billion in 2005. The Maldives is an import-dependent country, bringing in everything from staple foods to resort supplies, construction materials and petroleum
  • 42 products. The average ratio of imports to GDP in 2000–2005 was about 60%, while that for merchandise exports was about 20%. The imports have increased by 28.6% in 2006 to US$ 0.9 billion from US$ 0.7 billion in 2005 as both private sector and public sector imports grew. Marine products constitute the lion share of Maldives’ exports. The major import items of Maldives in 2006 were mineral fuels, mineral oils & products (16.0% of total imports), electrical machinery & equipments (15.0% of total imports), machinery & mechanical appliances (11.0% of total imports), and base metal & articles of base metal (8% of total imports). The major destinations of Maldives exports in 2006 were Thailand (21.8% of total exports), Japan (21.6% of total exports), Sri Lanka (15.5% of total exports), the UK (13.8% total exports). The important sources of country’s imports in 2006 were Singapore (25.1% of total imports), Sri Lanka (10.7% of total imports), the UAE (10.4% total imports) and India (10.3% of total imports). Nepal The total exports of Nepal was US$ 0.8 billion in 2006, same as in 2005, as a result of sharp growth in exports to India. Exports to other countries improved by 1.8%. Performance in export sector underlined the facts that the country’s export base is not well diversified and that traditionally large earners such as garments, as well as carpets and pashmina shawls, face stiffer competition, which has eroded sales both to India and to the rest of the world. The imports of Nepal increased by 20.0% to US$ 2.4 billion in 2006 from US$ 1.9 billion in 2005. Oil-product imports accounted for about one quarter of the increase and remittance- financed consumption expenditure most of the rest. The major export items of Nepal in 2006 were garments (13.3% of total exports), woolen carpets (12.5% of total exports), vegetable ghee (8.3% of total exports), polyester yarn (7.5% of total exports) and jute goods (5.7% of total exports). The main imports of the country in 2006 were petroleum products (24.0% of total imports), vehicles & spares (3.7% of total imports), medicine (3.1% of toal imports), crude palm oil (2.8% of total imports) and mild steel billets (2.7% of total imports). The major destinations of Nepal’s exports in 2006 were India (66.9% of total exports), the USA (12.8% of total exports) and Germany (5.3% of total exports). The main sources of Nepal’s imports in 2006 were India (59.0% of total imports), China (5.7% of total imports), Singapore (5.3% of total imports) and Indonesia (3.6% of total imports).
  • 43 Pakistan The total exports of Pakistan increased in 2006 to US$ 30.1 billion from US$ 17.2 billion in 2005 as a result of export in cotton textiles. Over the past 5 years, merchandise exports have benefited from an enabling policy environment, low inflation, the low cost of credit, and general upturn in economic activity. The main issue is exports’ heavy reliance on textiles as well as limited geographic diversification. Between them, textiles and clothing, cotton, leather, rice, and sports goods account for over three quarters of total exports—textiles and clothing alone for three fifths. Thus a downturn in these segments has a significant overall impact. Further, textile exports have come under competitive pressure from Bangladesh, People’s Republic of China, and India, specifically in the higher value-added categories that have traditionally not been a strength of the Pakistani textile sector. The imports of Pakistan also increased by 33.1% in 2006 to US$ 33.8 billion from US$ 25.4 billion in 2005 due to high oil prices and rising imports. Thus, the trade deficit of Pakistan has increased from US$ 9.4 billion in 2005 to US$ 16.6 billion in 2006. The major export items of Pakistan in 2006 were cotton fabrics (11.6% of total exports), knitwear (10.2% of total exports), bedwear (9.0% of total exports), cottonyarn & thread (6.6% of total exports) and rice (5.8% of total exports). The important imports of Pakistan in 2006 were machinery & transport equipments (23.4% of total imports), mineral fuels (16.9% of total imports), chemicals (14.2% of total imports), manufactures (8.9% of total imports) and food & live animals (4.3% of total imports). The major destinations of Pakistan’s exports in 2006 were the USA (24.0 % of total exports), the UAE (7.6% of total exports), the UK (6.2% of total exports), Afghanistan (5.2% of total exports) and Germany (4.8% of total exports). The main sources of imports of the country in 2006 were Saudi Arabia (12.3% of total imports), China (8.9% of total imports), the UAE (8.3% of total imports), the USA (7.6% of total imports) and Japan (7.0% of total imports). Sri Lanka The total exports of Sri Lanka increased by 17.2% in 2006 to US$ 7.5 billion from US$ 6.4 billion in 2005 due to increase in the export of garments. Exports of garments are expected to grow, but strong domestic demand, particularly for infrastructure investment goods and military hardware, will also suck in imports. The imports also increased by 30.3% in 2006 to US$ 11.6 billion from US$ 8.9 billion in 2005. As a result, the trade deficit of Sri Lanka has increased from US$ 2.5 billion in 2005 to US$ 4.1 billion in 2005. The cost of oil imports is expected
  • 44 to remain relatively high, although Sri Lanka’s oil import bill will be eased by falling global petroleum prices. The volume of oil imports could also be driven up if power shortages, caused by poor rains affecting hydropower generation, lead to increased use of generators. The major items of Sri Lanka’s exports in 2006 were textiles & garments (48.4% of total exports), tea (13.8% of total exports), diamond & jewellery (4.9% of total exports), and petroleum (2.9% of total exports). The main imports in 2006 were machinery & transport equipment (24.5% of total imports), mineral products (23.4% of total imports), textiles (17.5% of total imports) and base metals (9.2% of total imports). The major destinations of Sri Lanka’s exports in 2006 were the USA (28.2% of total exports), the UK (11.5 of total exports), India (9.0% of total exports) and Germany (4.1% of total exports). The important sources of the country’s imports in 2006 were India (18.5% of total imports), China (10.5% of total imports), Singapore (8.7% of total imports) and Hong Kong (4.2% of total imports). POTENTIAL COMMODITIES FOR TRADE Export Potential SAARC has potential for exports and imports in a number of commodities. The region has potential for exports in commodities namely; textiles, gems & jewellery, jute goods, handicrafts, fish & fish products, and engineering goods. Textile is the major commodity with export potential in the SAARC region. This constitutes around 40.0% of the total exports of the region. The main textile items with export potential are articles of apparel and clothing accessories and cotton yarn fabric madeups. Gems & jewellery is another major commodity with export potential in the SAARC region. India and Sri Lanka are the major exporters. Jute goods, handicrafts, fish & fish products are the other important commodities with potential for export. Fish products include mainly commodities such as fish and crustaceans, molluscs and other aquatic invertebrates. India is a major exporter of engineering goods. Import Potential Petroleum & petroleum products and capital goods are the main items having import potential. Petroleum & petroleum products constitute more than 20% of the total imports of SAARC. Among the capital goods, machinery & mechanical appliances and electrical machinery and appliances are the commodities with highest import potential. The other important import commodities with potential are
  • 45 organic chemicals, iron & steel, cotton and edible vegetables. The import of these commodities increased sizably during the recent years. Region’s import of drugs & pharmaceuticals also increased faster during the recent years showing more potential for imports. TRADE POLICIES IN SAARC COUNTRIES Trade liberalisation in SouthAsia started with a series of sweeping reforms in Sri Lanka in 1977/78, followed by a new second phase of trade liberalisation during the 1990s. For the rest of South Asia, the 1980s and 1990s saw substantial reductions of tariffs and phasing out of QRs, along with liberalisation of the exchange regimes. The average tariff in the SAARC region is presented in Table 4.5. SAFTA-RECENT POLICY INITIATIVES As regards SAARC, India is in the process of identifying the barriers and removing them as far as possible. Recently the government of India has taken a decision to waive the stipulation for testing and certification of products by Indian laboratories as a precondition for imports. Instead of testing and certification by the Indian entities, it would now be enough if the job was done by laboratories in the SAARC countries accredited by the Bureau of Indian Standards. With a view to further enhance regional trade and co-operation in the SAARC region, a number of measures has been effected in recent period which would include: (a) With effect from January 01, 2008, the import duty on all Table 4.5: AVERAGE TARIFF IN THE SAARC COUNTRIES, 2006 (Per cent) Countries Tariff Level Afghanistan 5.7 Bangladesh 15.2 Bhutan 22.1 India 15.8* Maldives 20.2 Nepal 13.9 Pakistan 14.3 Sri Lanka 11.2 SAARC 15.5 SOURCE: World Tariff Profiles 2006, WTO; * Trade Policy Review 2007, WTO.
  • 46 items other than those in the negative list has been reduced to zero; (b) During the 3rd SAFTA Ministerial Council meeting in New Delhi, on March 03, 2008, India announced the pruning of negative list from 744 items to around 500 items for the least developed country members of the South Asian Association for Regional cooperation (SAARC) such as Bangladesh, Bhutan, Nepal and Maldives, thereby enlarging the scope of duty- free entry to the export items from these countries. (c) The 3rd Ministerial Council also supported the creation of SAARC Development Fund, the South Asian University and the SAARC Food Bank. (d) Moreover, the meeting set an intra-trade target of US$ 40 billion in the next 3-5 years, from the present US$ 20 billion; (e) Further, recognising the importance of Trade in Services in the region, the third SAFTA Ministerial Council Meeting also directed the drafting of SAARC Framework Agreement on Trade in Services (SAFAS) under SAFTA Agreement. DEVELOPMENTS IN SAARC TRADE INTEGRATION SAARC Preferential Trade Agreement (SAPTA) A notion that deeper trade interaction can create functional spillovers that would help build stronger general ties has long been in the minds of South Asian policy makers.Although the acceleration of economic growth through regional cooperation was incorporated as an objective in the SAARC Charter in 1985, it was not until 1987 that an explicit commitment to cooperation in the area of economic development was adopted. This eventually led to the signing of SAPTA at the seventh SAARC summit in 1993, in Dhaka. The agreement provides a framework and institutional base for trade liberalisation and economic cooperation between the seven SAARC member countries. The agreement provides for the exchange of concessions between SAPTA members on tariffs, para- tariff5 and non-tariff barriers. It envisages four basic approaches to the exchange of trade preferences: (1) product-by-product; (2) across- the-board; (3) sectoral ; and 5 Border and other taxes having the equivalent or similar protective effects as Customs duties.
  • 47 (4) “direct trade” measures.6 Key aspects of the agreement are the following: “Special and Favourable Treatment”. As done by the UN agencies and the WTO, SAPTA distinguishes between its members according to their level of economic development. Bangladesh, Nepal, Bhutan and the Maldives are defined as “Least Developed Countries” (LDCs) and are treated differently from the three “non-LDC” members, India, Pakistan and Sri Lanka. The agreement provides for “Special and Favourable Treatment” for the LDCs by the non-LDCs, including deeper and wider tariff preferences; favorable terms for technical assistance; the provision of special facilities with regard to shipping; assistance with the preparation and establishment of industrial and agriculture projects; training facilities; and support in marketing. Regional MFN principle. A unique feature of SAPTA is the application of a regional MFN principle with regard to its members. Under this principle, tariff or other concessions accorded by a non-LDC to another non-LDC are extended unconditionally to all member countries. However, concessions extended by a non-LDC to an LDC are automatically applied only to other LDC members. Rules of Origin. The SAPTA rules of origin (ROOs) distinguish between goods that are “wholly produced or obtained” and goods that are not “wholly produced or obtained” in an exporting SAPTA country. The former includes domestic raw materials, agricultural products, fish, waste and scrap, and products wholly obtained from these inputs. As regards the latter, the agreement initially provided that the total value of the materials, parts or produce originating from non- contracting states or of undetermined origin and used in the production of the exported product, should not exceed 50% of the f.o.b. value, and that the final process of manufacture was performed within the territory of the exporting member state. The non-local inputs are valued at their cif prices where obtainable, or otherwise at “the earliest ascertainable price” paid for them in the exporting country. In 6 “Product-by-product” means negotiating at HS 6-digit tariff line level. “Across the Board” means a uniform reduction applying to all products under negotiations. “Sectoral basis” means agreements on groups of products which are closely related in end use or in production. “Direct trade measures” means such things as long and medium term contracts containing import and supply commitments in respect of specific products, buyback arrangements, state trading operations, and government and public sector procurement.
  • 48 order to encourage regional value addition, the agreement also includes a “cumulative” rule of origin which initially laid that goods processed in more than one member country can be eligible for concessions provided that the value added in SAPTA countries was at least 60% of the fob value. At the SAARC Council of Ministers meeting held in March 1999, the local content requirement was reduced to 40% for non-LDCs and to 30% for the four LDCs, and the “cumulative” origin requirement was reduced to 50%.7 South Asian Free Trade Agreement (SAFTA) South Asian Free Trade Agreement (SAFTA) has been ratified and entered into force in mid- 2006. SAFTA builds on the provisions of SAPTA. SAFTA extends the scope of SAPTA to include trade facilitation elements and switches the tariff liberalisation process from a positive to a negative list approach.Aspecial consideration in SAFTA is the compensation for revenue losses for small countries in the event of tariff reductions. For these countries SAFTA proposes that “until alternative domestic arrangements are formulated to address this situation, the Contracting States agree to establish an appropriate mechanism to compensate the Least Developed Contracting States…” (SAARC Secretariat, 2006). With the coming into force of the Agreement, the SAFTA Ministerial Council (SMC) and the SAFTA Committee of Experts (COE) have also been established under Article 10 of theAgreement. The SMC is the highest decision-making body and is responsible for implementation of the Agreement. It consists of Commerce/Trade Ministers of the Member States and is required to meet at least once annually or more often as and when considered necessary. The COE, consisting of one nominee from each Member State at the level of senior economic official, is to support the SMC and monitor, review and facilitate implementation of the Agreement. The COE is to meet once every six months or more often as necessary. The Twelfth Meeting of the Committee of Experts (COE) on SAFTA held at the SAARC Secretariat, Kathmandu on 29 November – 1 December 2005 successfully concluded the negotiations on the following issues which now form an integral part of the Agreement: i. Sensitive Lists - of products that would be temporarily exempt from reduction in 7 This issue was discussed during the third negotiating round.
  • 49 customs tariffs to be applied across the board for all other products. ii. Rules of Origin - specifying the conditions that would have to be met by products to qualify for application of reduced customs tariffs on export to another SAARC Member State; iii. Mechanism for Compensation of Revenue Loss for least developed country (LDC) Member States in the event of revenue loss resulting from lowering of customs tariffs in terms of the Agreement; and iv. Technical Assistance to the LDC Member States. In the first phase, the LDCs in SAFTA will reduce their maximum tariff rates to 30% within two years from the date of coming into force of the Agreement. The non-LDC members will reduce their maximum rates to 20% within the same time frame. In the second phase, which will resume on January 1, 2008, the non-LDC members will reduce their import tariffs to the 0-5% range in 5 years, while the LDCs will do the same in 8 years (Table 4.6). The described tariff reduction schedule may not apply to items on the ‘Sensitive Lists’, which are to be negotiated among the contracting members.
  • 50 Table 4.6: PLANNED PHASED TARIFF CUTS ON INTRA-SAFTA TRADE SAARC Countries: First Phase Second Phase/a (two years)/a January 1, 2006- January 1, 2008- January 1, 2008- January 1, 2008 January 1, 2013 January 1, 2016 For LDCs: Reduce maximum Reduce tariffs (Bangladesh, Nepal, tariff to 30% to the 0-5% Bhutan, Maldives) range in 8 years. (Equal annual reductions recommended, but not less than 10%) For non-LDCs: Reduce maximum Reduce tariffs to the (India, Pakistan, tariff rate to 20% 0-5 % range in Sri Lanka) 5 years; (Sri Lanka: in 6 years) (It is recommended that reductions be done in equal installments-at least 15% reduction each year) Reduce tariffs to 0-5 % for products of the LDCs within a timeframe of 3 years) /a: These phased tariff cuts for intra-SAFTA trade may not apply to items on each country’s ‘Sensitive Lists’. SOURCE: World Bank8 8 Trade Policies in South Asia: An Overview, Vol II, September 7, 2004.
  • 51 The chapter examines the trend in foreign direct investment (FDI) in the SAARC region. In addition to examining the trend in inflows and outflows of FDI, sources and sectors attracting FDI are also presented. Further, the chapter discusses the FDI policies followed in the member countries also. One of the remarkable features of globalisation in the 1990s was the flow of private capital in the form of foreign direct investment. FDI is an important source of development financing, and contributes to productivity gains by providing new investment, better technology, management expertise and export markets. Given resource constraints and lack of investment in developing countries, there has been increasing reliance on the market forces and private sector as the engine of economic growth (Sahoo, 2006). Net private capital flows to developing countries reached a record high of US$ 491 billion in 2005, driven by privatisations, mergers and acquisitions, external debt refinancing, and strong investor interest in local-currency bond markets in Asia and Latin America (Global Development Finance Report, 2006). The surging flows, including record bank lending and bond issuance, among others, coincided with 6.4% economic growth in the developing world last year, more than double the 2.8% growth in developed countries. TREND IN FDI INFLOWS FDI inflows to South Asia have continuously increased over the years and particularly since 2000. An improving economic situation and a more open FDI climate encouraged inflows to India, at record levels. The total FDI inflows to India amounted to US$ 58.1 billion during April 2000 to February 2008. Cross-border M&As in India rose in this period, as the telecommunications, business process outsourcing and pharmaceutical industries saw an increase in large deals. The improved investment environment and the privatisation of assets in Pakistan and Bangladesh contributed to increased FDI inflows to those countries. Table 5.1 reveals that apart from India, FDI flows into Pakistan, 5. FOREIGN DIRECT INVESTMENT AND INVESTMENT POLICIES IN THE SAARC REGION
  • 52 Bangladesh and Sri Lanka also has increased faster during the period. The total FDI inflow into the SAARC region increased from US$ 5.6 billion in 2000 to US$ 22.3 billion in 2006. TREND IN FDI OUTFLOWS The recent trend in FDI outflows from SAARC region is presented in Table 5.2. FDI outflows from the SAARC region increased from US$ 350.0 mn in 2000 to US$ 9.8 billion in 2006. Out of all eight-member countries, FDI outflow from India is the highest with US$ 9.7 billion in 2006, followed by Pakistan (US$ 107 mn) and Sri Lanka (US$ 29 mn). Sources of FDI and Sectors Attracting FDI in Select SAARC Countries Though the South Asian countries have lagged behind in attracting FDI compared to their counterparts in East and Southeast Asia, in recent years they have managed to consistently step up their FDI inflows mostly from the developed countries. The sources of FDI to SAARC countries are discussed below. India – Sector-wise Inflows: The sectors that received the highest cumulative inflows of FDI over the period April 2000 to February 2008 (see Table 5.3) are services sector (22.4%), computer software & hardware (14.0%), telecommuni- cations (7.2%), and construction activities (5.5). Similarly, in 2006-07 the sectors that received the most FDI were services (US$ 4.7 billion), electrical equipment (US$ 2.7 billion), construction activities (US$ 1 billion) and telecommunications (US$ 0.5 billion). Investment rose in industries such as cement, sugar, plastics and rubber, and hotels. Table 5.1: TREND IN FDI INFLOWS INTO SAARC COUNTRIES, 2000-2006 (US$ billion) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan – – – 0.002 0.001 0.004 0.002 Bangladesh 2.800 0.700 0.520 0.350 0.460 0.690 0.620 Bhutan – – – 0.001 0.003 0.009 0.006 India 2.300 3.400 3.400 4.600 5.770 6.670 16.880 Maldives – – – 0.014 0.015 0.009 0.014 Nepal – 0.019 0.006 0.015 0.010 0.002 – Pakistan 0.300 0.380 .820 0.530 1.120 2.200 4.270 Sri Lanka 0.170 0.170 0.190 0.230 0.230 0.270 0.480 Total 5.570 4.669 4.936 5.740 7.608 9.850 22.270 SOURCE: Various issues of World Investment Reports, UNCTAD.
  • 53 Table 5.2: TREND IN FDI OUTFLOWS FROM SAARC REGION, 2000-2006 (US$ billion) Countries Year 2000 2001 2002 2003 2004 2005 2006 Afghanistan – – – – – – – Bangladesh 0.002 0.021 0.004 0.006 0.006 0.020 0.008 Bhutan – – – – – – – India 0.336 0.757 0.431 1.300 2.180 2.490 9.670 Maldives – – – – – – – Nepal – – – – – – – Pakistan 0.011 0.031 0.017 0.019 0.056 0.044 0.107 Sri Lanka 0.002 – 0.011 0.027 0.006 0.038 0.029 Total 0.351 0.809 0.463 1.352 2.248 2.592 9.814 SOURCE: Various issues of World Investment Report, UNCTAD. The major sources of FDI inflows into India are Mauritius, USA, UK, the Netherlands, Japan, Germany, Singapore and France. Pakistan — Sources of FDI and sectors: In Pakistan, privatisation and resource-related FDI led to a doubling of foreign investment from US$ 1.1 billion in 2004 to US$ 2.2 billion in 2005, and further to US$ 4.3 billion in 2006. The US, UAE, UK, Saudi Arabia, Switzerland and the Netherlands are among the major investors in Pakistan. Among the sectors attracting foreign investment, power, chemicals and pharmaceuticals, telecommunications and mining and quarrying are the leading sectors. This can be attributed to the increasing needs and demand for energy in Pakistan and natural resource advantages in the case of pharmaceuticals and mining. (See Table 5.4) Bangladesh — Sources of FDI and sectors: In Bangladesh, the Board of Investment (BoI) plays a key role in facilitating investment into the country. The services sector has attracted the greatest investment, followed by IT and engineering and manufactured goods. Agro-based industries have also attracted investment, as Bangladesh is a predominantly agrarian economy, and the second most important industry in the country is textiles. The U.K. is the leading investor in Bangladesh, followed by Canada, Malaysia, the U.S., Singapore, India, Thailand, Hong Kong, China, PRC, Germany, and Republic of Korea. (See Table 5.5)
  • 54 Table 5.3: SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS INTO INDIA, APRIL 2000-FEBRUARY 2008, AMOUNT RUPEES IN CRORE Ranks Sector Cumulative Inflows % with total (from April 2000 to Inflows February 2008) (In terms of rupees) 1 Services Sector 51162 (financial & non-financial) (11934) 22.4 2 Computer software & Hardware 32020 (7241) 14.0 3 Telecommunications 16491 (radio paging, cellular mobile, (3778) 7.2 basic telephone services) 4 Construction activities 12515 (including roads & highways) (2947) 5.5 5 Housing & Real estate 9598 (2324) 4.2 6 Automobile industry 9363 (2115) 4.1 7 Power 7755 (1741) 3.4 8 Metallurgical industries 6519 (1557) 2.9 9 Chemicals (other than fertilizers) 6091 (1373) 2.7 10 Drugs & Pharmaceuticals 5607 (1276) 2.5 NOTE: Values in brackets show amount in US dollar million. SOURCE: Department of Industrial Policy and Promotion, Government of India. manufacturing, followed by services and agriculture. Nepal — Sources of FDI and sectors : Tertiary sectors, hotels and restaurants and transport, etc., have attracted the maximum investment. It is basically the U.S., PRC, Japan and India that are the major investors in Nepal. Table 5.79 Sri Lanka — Sources of FDI and sectors : Developed countries such as Singapore, UK and Japan are among the leading investors in Sri Lanka. Table 5.6 shows FDI as a percentage of GDP in Sri Lanka (1990-2005). The maximum number of FDI projects has been in the area of 9 There are slight differences between investment data provided by World Investment Report and the Investment Policy Review of Nepal.
  • 55 shows trend in FDI inflows into Nepal. POTENTIAL FOR INVESTMENT SAARC countries have investment potential in various sectors. The investment potential varies from countries to countries. Manufacturing sector is the largest sector attracting FDI to the region. In the manufacturing sector, electrical equipment, chemicals and pharmaceuticals, and engineering goods are the fields attracting the major share of investment. Services sector is the next sector having potential and receiving large direct Table 5.4: FOREIGN INVESTMENT INFLOWS INTO PAKISTAN (1997–98 TO 2004–05), (US$ mn) 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Total Foreign Investment 822.6 403.3 543.4 182 474.6 820.1 921.7 1676.6 Portfolio 221.3 27.3 73.5 -140.4 -10.1 22.1 -27.7 152.6 Investment Foreign 601.3 376 469.9 322.4 484.7 798 949.4 1524 Direct Investment SOURCE: Board of Investment, Pakistan Table 5.5: FOREIGN INVESTMENT INFLOWS INTO BANGLADESH (1991–96 TO 2004–05) (US$ mn) Year Inflows 1991-96 961 1996-97 1516 1997-98 1054 1998-99 3440 1999-00 1926 2000-01 2119 2001-02 1271 2002-03 302 2003-04 359 2004-05 509 SOURCE: Board of Investment (BOI), Bangladesh.
  • 56 Table 5.7: FDI INFLOWS INTO NEPAL, 1989-94 TO 2002 (US$ mn) Year FDI Inflow 1989-94 4 1995 8 1996 19 1997 23 1998 12 1999 4 2000 0 2001 21 2002 10 SOURCE: Investment Policy Review of Nepal. Table 5.6: FDI AS A PERCENTAGE OF GDP IN SRI LANKA, 1990-2005 Year % of GDP 1990 22.2 2001 22.0 2002 21.3 2003 22.1 2004 25.0 2005 26.5 SOURCE: Board of Investment, Sri Lanka. investment from outside. In addition to the above, power sector, mining and quarrying, IT & telecommu- nication are the other major sectors having investment potential in the SAARC region. FOREIGN DIRECT INVESTMENT POLICY IN SELECT SAARC COUNTRIES A summary of FDI policy frameworks in South Asia is presented in Table 5.8. With a view to attracting investments, the countries in the SAARC region have effected measures initiatives also. India Most of the sectors/activities are under theAutomaticApproval Route, except for a few sectors where there are additional restrictions on FDI such as equity caps, divestment conditions, lockin periods on
  • 57 Table5.8: FOREIGNINVESTMENTPOLICIESOFSOUTHASIA INDIAPAKISTANNEPALSRILANKABANGLADESH RestrictedSectorsi.Arms&ammunitionsi.Arms&ammunitionsi.Cottageindustriesi.Nonbankmoneyi.Arms&ammunitions ii.Defenceaircrafts&ii.Highexplosivesii.Personalbusinessserviceslendingii.Productionof warshipsiii.Radioactivesubstancesiii.Arms&ammunitionsii.Pawnbrokingnuclearenergy iii.Atomicenergyiv.Securityprinting,iv.Consultativeservicesiii.Retailtradewithaiii.Securityprinting& iv.Railwayscurrency&mintcapitalinvestmentofminting v.Newunitsofalcohollessthan$1mniv.Forestryinreserved manufacturingexceptforestareas industrialalcoholisv.Railways banned 100%equityForcertainsectors,sectoralYes,forallsectorsYes,exceptrestrictedsectorsYes,exceptafewsectorsYes capsexistsuchastelecom,education, masstransportation,mining etc. IncentivesYes,centralgovtgivesforIncentivesareindustryYes,withexportrequirementYes,withexportYes.Itvaries R&Dmeasures.Stategovtsspecificbuthaslocalcontent&localcontentrequirementrequirementandminimumdependinguponthe giveawidevarietyofrequirementinvestmentlocationofindustries incentives RestrictionsinNo,butcertainminimumNoNoNoNo.Theconditionis royaltyorconditionstobemetsuchthatitshouldnot technologyaslumpsumpaymentsnotexceed6%of transferpaymentsexceedingUS$2billionetc.previousyear’ssales PerformanceYes,specificrulesforNo.(OnlyforeligibilityNo.(OnlyforeligibilityNo.(OnlyforeligibilityNo requirementsautomobilesectorsofincentives)ofincentives)ofincentives) EPZincentivesYesYes,completeexemptionofNoNo.IndustrialProcessingYes taxationfromfederal,Zonesforbetterland provincial&municipalbodiesallocation AutomaticYes,byRBIYesNo.ApprovalisgivenbyYes,byBoardofYes,byBOI&BEPZ approvalIndustrialPromotionBoardInvestment (IPB)authority NationaltreatmentYesYesContracttermsaregivenYesYes precedenceoverNepalilaw ininvestmentsvaluedatmore thanNepalirupees500mn MIGAsignatoryYesYesYesYesYes TaxholidaysYesNo,onlycustomsduty&IncomeearnedfromexportsYesYes salestaxexemptionisfreefromIncometax SOURCE:AdoptedfromPravakarSahoo,ForeignDirectInvestmentinSouthAsia:Policy,Trends,ImpactsandDeterminants,ADBInstituteDiscussionPaperNo.56.
  • 58 investment, etc. These restrictions have been imposed in view of sectoral requirements, security and strategic concerns and in the interest of the domestic investments. There are only a few sectors where FDI is not permitted. Industrial Licensing: Industrial licensing policies and procedures have also been liberalised from time to time. All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for: (i) industries retained under compulsory licensing,10 (ii) items of manufacture reserved for the small-scale sector; and (iii) when the proposed location attracts locational restriction.11 Pakistan In November 1997, the government of Pakistan announced the New Investment Policy that included major policy initiatives to attract FDI, which had earlier been restricted to the manufacturing sector. Sectors like services and agriculture, which constitute three fourths of GNP have been opened to FDI. The main objective of the new policy is to enhance the level of foreign investment in the fields of industrial base expansion, infrastructure and software development, electronics, engineering, agri-food, value-added textile items, tourism and construction industries. Foreign investment on a repatriable basis is also allowed in agriculture, services, infrastructure and social sectors, subject to the following conditions: (a) the basis for joint venture is (60:40), (b) foreign equity will be at least US$ 1 mn, (c) foreign companies registered in Pakistan will be allowed to invest; and (iv) for social sector and infrastructure projects, the joint venture requirement is waived (100% foreign equity may be allowed). Investment in the manufacturing sector and non-manufacturing sector : Foreign investors are allowed to hold up to 100% equity of industrial projects without any permission from the government except in certain fields of activity such as: (a) arms and ammunition (b) high explosives (c) radioactive substances (d) security printing, currency and mint; and (e) alcoholic beverages and liquors. Foreign investment at 100% equity on a repatriable basis is allowed in the service, infrastructure and social and agricultural sectors 10 These industries are liquor, tobacco, defense equipment, industrial explosives and hazardous chemicals. Statutory environmental clearances are required. 11 Restricted related to setting up business in urban area and designated “industrial areas.”
  • 59 subject to certain conditions including registration of company with the Security and Exchange Commission of Pakistan (SECP) and also intimation to the State Bank of Pakistan. Foreign equity of 100% is allowed in the service sector, infrastructure projects and social sector projects on a repatriable basis. FDI is also actively encouraged in tourism, housing and construction, information technology, etc. Sri Lanka The most important feature of FDI policy measure in Sri Lanka was the establishment in 1992 of the Board of Investment (BOI), with wide powers of tax relief and administrative discretion in all matters related to FDI. FDI is permitted in most sectors, subject to a negative list where FDI is barred completely or where foreign investors may only take a minority stake in an enterprise. However, there are a few areas reserved for Sri Lankans, such as money lending, pawn broking, retail trade investment, providing personal services other than for the export of tourism sectors, coastal fishing, education of students and award of local educational degrees. However, there are regulated areas such as the growing and processing of primary commodities, mining, timber-based industries, education, etc., where foreign investment is restricted to 40% and approval by the BOI is required. In a few cases, FDI entry and incentives are subject to performance requirements.12 Bangladesh Foreign direct investment is encouraged in all industrial activities in Bangladesh excluding those on the list of reserved industries such as production of arms and ammunitions; forest plantation and mechanised extraction within the bounds of a reserved forest, production of nuclear energy and printing and minting fresh currency notes. Such investments may be undertaken either independently or through joint ventures, either with the local, private or public sector. The capital market also remains open for portfolio investment. The policy framework for foreign investment in Bangladesh is based on the Foreign Private Investment (Promotion and Protection)Act, 1980, which provides measures for the non-discriminatory treatment and protection of foreign investment. Incentives to foreign investment: The government has liberalised its industrial and investment policies in recent years by reducing controls 12 The general condition is that the manufacturing enterprises have to export 80% of output while the service sector has to export 70% of its output.
  • 60 over private investment and opening up many areas. Some of the major incentives are tax exemptions for power generation, import duty exemptions for export processing, an exemption of import duties for export oriented industries, and tax holidays for different industries. Facilities for the full repatriation of invested capital, profit and dividend exist. Concessionary duty on imported capital machinery: An import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares imported for initial installation. For 100% export oriented industries, no import duty is charged in the case of capital machinery and spares. Duties and taxes on the import of goods that are produced locally are higher than those applicable to imports of raw materials for the production of such goods. Nepal Most sectors have been opened up to foreign investors, allowing 100% equity or joint ventures with Nepalese investors. The sectors that have been opened up to foreign investment are manufacturing, energy based industries, tourism, mineral resource based industries, and agro based industries and services. However, there are a few industries where investment is prohibited, including national security; cottage (i.e. craft) industries; personal services of a kind that would normally be performed by self-employed people; and real estate. FDI is also not permitted in the retail business; travel agencies; cigarette, tobacco and alcohol production other than for export; a range of small tourist related activities, including tourist lodging, etc. Investment incentives: The government of Nepal provides several incentives to industries that are set up for export purposes. They include an income tax exemption on export income, exemption on foreign investor’s interest income earned abroad, and a relaxation of taxes on specific industries.
  • 61 This chapter presents recent trends in India’s trade and investment relations with the SAARC countries. TRADE RELATIONS WITH SAARC COUNTRIES India’s Exports to SAARC Countries Table 6.1 presents recent trends in India’s exports to SAARC countries. India’s total exports to the region increased from US$ 2.8 billion in 2002-03 to US$ 6.5 billion in 2006- 07. Amongst the SAARC members, Sri Lanka has the largest market, accounting for 35% of India’s total exports in the SAARC region during 2006-07, followed by Bangladesh (25%), Pakistan (21%) and Nepal (14%). An analysis of the trend in India’s exports to the SAARC region during the period 2002-03 to 2006-07 would 6. INDIA’S TRADE AND INVESTMENT RELATIONS WITH SAARC Table 6.1: TREND IN INDIA’S EXPORTS TO SAARC COUNTRIES, 2002-03 TO 2007-08* (US$ mn) Countries Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08* Afghanistan 60.89 145.57 165.37 142.65 181.57 175.70 Bangladesh 1178.32 1741.94 1630.45 1664.12 1627.48 1600.20 Bhutan 39.12 89.55 84.55 99.15 58.64 62.70 Maldives 31.65 42.37 47.59 67.57 68.56 61.40 Nepal 351.05 669.81 742.83 859.84 930.82 914.10 Pakistan 206.57 287.13 520.84 689.13 1347.41 1320.90 Sri Lanka 922.80 1320.10 1412.60 2024.37 2252.59 1917.00 Total 2790.40 4296.47 4604.23 5546.83 6467.07 6052.10 – (53.97) (7.16) (20.47) (16.6) (12.2) SOURCE: Ministry of Commerce & Industry (MOCI), Government of India. NOTE: Values in parentheses show growth in percentage, * – April-Dec. 2007.
  • 62 reveal that, while exports to all the SAARC members have registered a rise, India’s imports to Pakistan, Afghanistan and Nepal have exhibited distinct buoyancy. While India’s exports to Pakistan registered a six-fold rise during the five-year period, exports to Afghanistan and to Nepal also rose three-fold and two and half-fold, respectively, during the period. India’s Imports from SAARC Countries India’s imports from the SAARC region have also risen from US$ 531.5 mn in 2002-03 to US$ 1.5 billion in 2006-07, depicting almost a three-fold rise during the period. Sri Lanka is again the leading partner, accounting for 31% of India’s total imports from the region during 2006-07, followed by Pakistan (21%), Nepal (20%), Bangladesh (15%) and Bhutan (9%) (Table 6.2). The robust rise in India’s total imports from the SAARC during the period 2002-03 to 2006-07 has been underpinned by the sharp increase in imports from Pakistan, Sri Lanka, Bhutan and Bangladesh. In the case of Pakistan, India’s imports from the country increased seven-fold during the period, followed by Sri Lanka (five-fold rise), Bhutan (four and half - fold rise) and Bangladesh (three and half - fold rise). India generally maintains a positive trade balance with the other SAARC member countries with the surplus having risen from US$2.3 billion in 2002-03 to US$ 5.0 billion in 2006-07. In the case of Bhutan, Table 6.2: TREND IN INDIA’S IMPORTS FROM SAARC COUNTRIES, 2002-03 TO 2007-08* (US$ mn) Countries Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08* Afghanistan 18.49 40.54 46.99 58.41 34.48 74.10 Bangladesh 62.17 77.68 59.35 127.01 228.15 193.10 Bhutan 32.22 52.41 70.97 88.76 141.34 154.10 Maldives 0.33 0.37 0.61 1.98 3.05 2.80 Nepal 282.32 286.24 345.69 379.79 305.81 312.10 Pakistan 44.94 57.69 94.94 179.53 322.97 212.00 Sri Lanka 91.00 194.87 378.24 577.62 470.20 330.70 Total 531.47 709.80 996.79 1413.10 1506.00 1278.90 – (33.55) (40.43) (41.76) (6.60) (28.7) SOURCE: Ministry of Commerce & Industry (MOCI), Government of India. NOTE: Values in parentheses show growth in percentage, * – April-Dec. 2007.
  • 63 however, the trade balance have moved in favour of the country, with India’s trade surplus with Bhutan turning into deficit in 2006-07, reflecting the sharp rise in imports from Bhutan during the year. COMMODITY WISE TRADE WITH SAARC COUNTRIES Afghanistan The commodity wise exports and imports of India with respect to Afghanistan are presented in Table 6.3 and Table 6.4, respectively. In 2006-07, pharmaceutical products (US$ 40.93 mn) are the major export item of India toAfghanistan, followed by manmade yarn fabrics madeups (US$ 29.45 mn), and manufactures of metals (US$ 19.23 mn). As regards imports, spices (US$ 18.27 mn) are the main import items from Afghanistan, followed by fruits & nuts (US$ 15.44 mn), and non- electrical machinery (US$ 0.12 mn). Bangladesh Important export items of India to Bangladesh are presented in Table 6.5. Cotton yarn fabrics madeups etc. (US$ 226.25 mn) are the major export items to Bangladesh, followed by non- basmati rice (US$ 108.97), and sugar (US$ 92.81 mn) Inorganic chemicals (US$ 41.43 mn) are the major import item of India from Bangladesh (see Table 6.6). Fertiliser manufactured (US$ 29.90 mn), and juite (US$ 24.93 mn) are the other two major import items. Bhutan Machinery & Instruments (US$ 8.85 mn) are the major export item of India to Bhutan in 2006-07. The other two important export items are Table 6.3: INDIA’S EXPORTS TO AFGHANISTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Pharmaceutical products 40.93 2 Manmade yarn fabrics madeups 29.45 3 Manufactures of metals 19.23 4 Tobacco manufactured 8.94 5 Readymade garments of other textile materials 8.68 6 Machinery & instruments 7.48 7 Readymade garments cotton incl. accessories 7.43 8 Plastic & linoleum products 5.63 SOURCE: Ministry of Commerce & Industry, Government of India.
  • 64 transport equipment (US$ 7.28 mn), and articles of manufactures of metals (US$ 7.1) (see Table 6.7). The major import items of India to Bhutan are presented in Table 6.8. Table reveals non-ferrous metals (US$ 57.95 mn) as the major item of imports, followed by vegetable oils (US$ 26.90 mn), and primary steel pig iron based items (US$ 14.28 mn). Maldives Ores & minerals (US$ 9.15 mn) are the main export item of India to Bhutan in 2006-07. Plastic & linoleum products (US$ 4.99 mn), Table 6.5: INDIA’S EXPORTS TO BANGLADESH – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Cotton yarn fabrics madeups etc. 226.25 2 Non-basmati rice 108.97 3 Sugar 92.81 4 Transport equipment 88.21 5 Oil meals 81.62 6 Primary & semi-finished iron & steel 71.92 7 Fresh vegetables 70.78 8 Drugs, pharmaceuticals & fine chemicals 67.52 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.4: INDIA’S IMPORTS FROM AFGHANISTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Spices 18.27 2 Fruits & nuts 15.44 3 Non-electrical machinery 0.12 4 Electronic goods 0.11 5 Pulp & waste paper 0.07 6 Non-ferrous metals 0.04 7 Cotton yarn & fabrics 0.03 8 Other textile yarn, fabrics, madeups articles 0.02 SOURCE: Ministry of Commerce & Industry, Government of India.
  • 65 Table 6.7: INDIA’S EXPORTS TO BHUTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Machinery & instruments 8.85 2 Transport equipment 7.28 3 Manufactures of metals 7.10 4 Petroleum products 4.85 5 Primary & semi-finished iron & steel 4.21 6 Electronic goods 2.94 7 Non-basmati rice 2.76 8 Other ores & minerals 2.76 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.6: INDIA’S IMPORTS FROM BANGLADESH – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Inorganic chemicals 41.43 2 Fertiliser manufactured 29.90 3 Jute raw 24.93 4 Madeup textile articles 19.32 5 Other textile yarn, fabrics, madeups articles 17.32 6 Electrical machinery 12.51 7 Petroleum crude 12.09 8 Metaliferrous ores & metal scrap 7.59 SOURCE: Ministry of Commerce & Industry, Government of India. and manufactures of metals (US$ 4.49 mn)aretheothertwomajorexport item. Table 6.9 provides the list of principal export commodities of India to Maldives. As regards imports, metaliferous ores and metal scrap are the major item from Maldives (US$ 2.96 mn), followed by electronic goods (US$ 0.05 mn) (see Table 6.10). Nepal Table 6.11 provides the list of principal export commodities of India to Nepal in 2006-07. Petroleum products (US$ 369.53 mn) are the
  • 66 Table 6.9: INDIA’S EXPORTS TO MALDIVES – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Ores & minerals 9.15 2 Plastic & linoleum products 4.99 3 Manufactures of metals 4.49 4 Machinery & instruments 4.48 5 Non-basmati rice 4.39 6 Pharmaceutical products 4.19 7 Paper/wood products 4.10 8 Primary & semi-finished iron & steel 4.08 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.10: INDIA’S IMPORTS FROM MALDIVES – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Metaliferrous ores & metal scrap 2.96 2 Electronic goods 0.05 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.8: INDIA’S IMPORTS FROM BHUTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Non-ferrous metals 57.95 2 Vegetable oils (edible) 26.90 3 Primary steel pig iron based items 14.28 4 Iron & steel 12.65 5 Inorganic chemicals 11.87 6 Wood & wood products 5.17 7 Manmade filament/spun yarn (incl.waste) 5.02 8 Professional inst, optical goods etc. 1.30 SOURCE: Ministry of Commerce & Industry, Government of India.
  • 67 major export item followed by transport equipment (US$ 56.52 mn), and pharmaceutical products (US$ 54.89 mn). Iron & Steel (US$ 29.39 mn) are the important import item of India from Nepal. Table 6.12 reveals manmade filament / spun yarn (US$ 27.48 mn), and chemical material & products (US$ 18.97 mn) as the other two major import items from Nepal. Pakistan The commodity wise exports of India to Pakistan are presented in Table 6.13. The table reveals sugar (US$ 354.04 mn) as the major export Table 6.11: INDIA’S EXPORTS TO NEPAL – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Petroleum products 369.53 2 Transport equipment 56.52 3 Pharmaceuticals products 54.89 4 Glass/glassware/ceramics/refractories/cement 51.72 5 Machinery & instruments 43.81 6 Non-basmati rice 33.69 7 Primary & semi-finished iron & steel 27.94 8 Plastic & linoleum products 23.16 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.12: INDIA’S IMPORTS FROM NEPAL – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Iron & steel 29.39 2 Manmade filament/spun yarn (incl.waste) 27.48 3 Chemical material & products 18.97 4 Essential oil & cosmetic preparations 18.25 5 Other textile yarn, fabrics, madeups articles 18.19 6 Organic chemicals 11.18 7 Non-ferrous metals 11.13 8 Artificial resins, plastic materials etc. 10.36 SOURCE: Ministry of Commerce & Industry, Government of India.
  • 68 item of India to Pakistan in 2006-07, followed by dyes intermediates & coal tar chemicals (US$ 210.58 mn), and cotton raw including waste (US$ 198.76 mn). Petroleum crude (US$ 114.78 mn) is the major import item of India from Pakistan. The other two major import items are fruits & nuts (US$ 88.44 mn) and cotton yarn & fabrics (US$ 48.86 mn) (see Table 6.14). Sri Lanka Table 6.15 presents petroleum products (US$ 699.46 mn) as the important export item of India to Sri Lanka in 2006-07. Transport Table 6.13: INDIA’S EXPORTS TO PAKISTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Sugar 354.04 2 Dyes intermediates & coal tar chemicals 210.58 3 Cotton raw including waste 198.76 4 Plastic & linoleum products 107.96 5 Oil meals 66.06 6 Pharmaceutical products 53.24 7 Rubber manufactured products 37.41 8 Meat & preparations 29.88 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.14: INDIA’S IMPORTS FROM PAKISTAN – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Petroleum crude 114.78 2 Fruits & nuts 88.44 3 Cotton yarn & fabrics 48.86 4 Organic chemicals 26.48 5 Metaliferrous ores & metal scrap 7.62 6 Non-ferrous metals 6.47 7 Manmade filament/spun yarn (incl.waste) 4.90 8 Wool raw 3.74 SOURCE: Ministry of Commerce & Industry, Government of India.
  • 69 Table 6.15: INDIA’S EXPORTS TO SRI LANKA – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Petroleum products 699.46 2 Transport equipment 351.18 3 Cotton yarn fabrics madeups etc. 125.9 4 Primary & semi-finished iron & steel 107.12 5 Machinery & instruments 88.31 6 Pharmaceutical products 87.48 7 Sugar 70.93 8 Paper/wood products 63.22 SOURCE: Ministry of Commerce & Industry, Government of India. Table 6.16: INDIA’S IMPORTS FROM SRI LANKA – PRINCIPAL COMMODITIES, 2006-07 (US$ mn) Sl. No. Commodities Value 1 Non-ferrous metals 73.91 2 Electrical machinery 41.84 3 Manufactures of metals 39.44 4 Spices 28.45 5 Non metalic mineral manufactures excluding pearls 24.87 6 Natural rubber 15.59 7 Paper board & manufactures 14.98 8 Pulp & waste paper 11.60 SOURCE: Ministry of Commerce & Industry, Government of India. equipment (US$ 351.18 mn), and cotton yarn fabrics madeups etc. (US$ 125.9 mn) are the other two major export items. As regards imports, non-ferrous metals (US$ 73.91 mn) are the major item from Sri Lanka to India. Other two major import items are electrical machinery (US$ 41.84 mn), and manufactures of metals (US$ 39.44 mn) (see Table 6.16). The above discussion shows the nature of trade relation of India with other SAARC member countries. Discussion reveals the recent trend in India’s trade with SAARC countries. The discussion also reveals the trade in principal commodities with the region.
  • 70 India’s export and import commodities with the SAARC region are highly competitive in nature and they constitute primarily agriculture products and agro-based commodities. INVESTMENT RELATION WITH SAARC COUNTRIES India’s Investment in SAARC Countries The approved investment of Indian companies in Joint Ventures (JVs) and Wholly Owned Subsidiaries (WOSs) has been increasing in SAARC countries. The total approvals of foreign direct investment (FDI) in joint ventures and wholly owned subsidiaries in SAARC countries during April 1996 to December 2007 are presented in Table 6.17. The table reveals that total foreign direct investments from India to other SAARC countries amounted to US$ 312.4 mn during April 1996 to December 2007. Among the SAARC countries, Sri Lanka (US$ 153.1 mn) is the major destination of Indian investment followed by Nepal (US$ 87.2 mn). During January 2005 to December 2007, 33 JVs and 42 WOSs have been approved in the SAARC countries. Out of this, 1 JV was approved in Afghanistan, 7 JVs and 8 WOSs were approved in Bangladesh, 2 JVs in Maldives, 2 JV and 6 WOSs in Nepal, 1 JV in Bhutan and 20 JVs and 28 WOSs in Sri Lanka. Most of these approvals were in engineering goods, electrical equipments, pesticides, readymade garments, cables and wires, other professional services, plastic & Table 6.17: APPROVALS OF INDIAN DIRECT INVESTMENTS IN JOINT VENTURES (JVS) AND WHOLLY OWNED SUBSIDIARIES (WOSs) IN SAARC COUNTRIES, APRIL 1996 TO DECEMBER 2007 (US$ mn) Countries Investments Afghanistan 1.8 Bangladesh 43.5 Bhutan 2.1 Maldives 22.2 Nepal 87.2 Pakistan 2.5 Sri Lanka 153.1 Total 312.4 SOURCE: Department of Economic Affairs, Ministry of Finance, Government of India
  • 71 plastic products, rubber & rubber products, manufacturing and export of textiles, hydrogenated oil, ghee etc., processed and semi-processed food, automobile components, financial services, and tourism & travels. The details of approvals are presented in Annexure I. The only JV approval in Afghanistan is in electrical equipments. There is no WOS approval in this country. In Bangladesh, the JV approvals are mainly in the areas such as construction work, animal feeds and poultry feed, vehicles and readymade garments. The WOS approvals are in areas like engineering goods, electrical equipments, readymade garments and pesticides. The JV approvals in Maldives are in areas namely; telecommunications and civil construction projects. In Nepal, JV approval is in diamond trading, while WOS approvals are in areas such as electrical equipments, plastic and plastic products, rubber and rubber products, cables and wires, and containers. Among the SAARC countries, Sri Lanka accounts for the maximum number of approvals both in terms of JVs and WOSs. Most of the JV approvals are in areas such as engineering services, consultancy, food manufacturing, hydrogenated oils, ghee, and house keeping and hygiene services, while WOS are mainly in the areas such as manufacturing and export of textiles, processed and semi-processed food, automobile components, plastic and plastic products, rubber and rubber products, electrical motors and electrical equipments. SAARC INVESTMENTS IN INDIA As regards SAARC investments into India, Table 6.18 shows that total investments of SAARC countries to India have amounted to US$ 11.7 mn during April 2000 to February 2008. Among all the SAARC countries, Sri Lanka is the largest source of FDI with US$ 8.5 billion during the period, followed by Maldives (US$ 3.1 mn). The investment flows between India and Sri Lanka have increased mainly after the implementation of India Sri Lanka Free Trade Agreement (ISLFTA). Even though Sri Lankan FDI in India is miniscule, some Sri Lankan investors have been making forays into India. Recently, Ceylon Biscuits Ltd (manufacturers of the famous ‘Munchee’ brand) took over Bakemans. Other Sri Lankan investors include Bodyline Pvt Ltd (Apparel), Damro Exports Ltd (Pre- fabricated furniture) and Indo Lanka Stainless Steel Ltd. EXIM BANK IN THE SAARC REGION Export-Import Bank of India (Exim Bank) operates a
  • 72 comprehensive range of financing, advisory and support programmes to promote and facilitate India’s trade and investment relations with the SAARC region. Project Exports In the SAARC region, the Bank has supported a number of project exports in various sectors. They include: Hydroelectric project, tunnel house and dam construction in Bhutan: Exim Bank has supported the Indian companies associated with the Tala hydro-electric power project, which is the main driver of Bhutan’s economic growth and exports in recent years. Road improvement projects, railway construction and maintenance, gas turbine power plant project, electrical substations, cement plant project, transmission line project, conveyor belt project in Bangladesh; Steel, local telephone network, transmission lines, sub-stations, out door Light Emitting Diode (LED) video system for cricket matches and diesel fired power project in Sri Lanka; Transmission lines and substations, optic fibre cable project, Trisuli Devighat & Kali Gandaki hydro electric projects and irrigation projects in Nepal, and Airconditioning & electro mechanical work at Male Airport in Maldives. Table 6.18: FOREIGN DIRECT INVESTMENTS FROM SAARC COUNTRIES, APRIL 2000 TO FEBRUARY 2008 (US$ mn) Countries Value Afghanistan – Bangladesh – Bhutan – Maldives 3.1 Nepal 0.1 Pakistan – Sri Lanka 8.5 Total 11.7 SOURCE: Department of Industrial Policy and Promotion, MOCI, Government of India
  • 73 Exim Finance for Indian Ventures Overseas The Bank, in order to help Indian companies in their internationalisation efforts, provides term loans to them for equity investment in their ventures overseas. Besides, Exim Bank also undertakes direct equity stake in Indian ventures abroad, to enable Indian companies to supplement their equity with Exim Bank’s contribution. To facilitate Indian presence in the SAARC region, the Bank has supported a number of joint ventures by Indian companies in various sectors including: Textiles, pharmaceuticals, steel, glass sectors in Sri Lanka; Electrical sector in Bangladesh, and Engineering Goods and textile sectors in Nepal. Lines of Credit Exim Bank extends Lines of Credit (LOCs) to overseas financial institutions, foreign governments and their agencies, enabling them to on- lend term loans to finance imports of eligible goods from India. Bank’s LOCs in the SAARC region are: Operative LOCs Ceylon Petroleum Corporation for the export of petroleum products by MRPL in Sri Lanka; Hatton National Bank, Sri Lanka for general purpose; Government of Nepal for road projects, rural electrification projects, power transmission projects and hydro power projects; and Government of Sri Lanka for the Upgradation of Southern railway line for Sri-Lanka (Negombo-Colombo-Galle- Matara) Institutional Linkages Exim Bank has consciously sought to develop useful relationships, both structured and informal, with multilateral agencies, other export credit agencies, trade and investment promotion bodies, Indian Missions abroad, commercial banks and financial institutions to help create an enabling environment to support two-way transfer of technology, trade and investment. The Bank has linkages with following institutions in SAARC countries: Afghanistan Investment Support Agency (AISA), Afghanistan; Industrial Promotion and Development Co. of Bangladesh Ltd., Bangladesh, and Board of Investment of Sri Lanka, Hatton Bank Ltd., and Ceylon Chamber of Commerce, Sri Lanka.
  • 74 The study so far presents the trends regarding trade and investment flows in the SAARC region, and highlighted that there is an increasing trend in trade and investment flows both within the region and with the rest of the world. An empirical examination of the impact of different variables on the trade flows in the region would help us to identify the fundamentals of trade flows, which would be useful to frame the future trade policies. Thus, the present chapter examines empirically the trade flows in the SAARC region within a gravity model framework. At present, SouthAsia combines a low level of regional integration— especially among its largest members—and the presence of relatively high trade barriers. The proportion of trade originating in the region has increased in the last decade but still lags behind ASEAN levels. While Bangladesh, India and Pakistan sustain 5% of their exports and 2½% of their imports with regional partners, the smallest members (Bhutan, Nepal, Maldives, and Sri Lanka) exhibit a higher reliance on intra-SAARC trade relations averaging 20% and 9% for imports and exports, respectively. In terms of trade barriers, the region has undertaken an overall liberali- sation program with the member countries having reduced tariff level. The debate as regards impact of RTAs has given rise to a renewed interest in estimation of their effects. Computable General Equilibrium (CGE) models and gravity models are the two major classes of quantitative tools that are popularly used by trade researchers to analyse the impact of policies on economic outcomes. The focus of the present study is to apply the gravity model to examine the impact of SAARC on its member countries. METHODOLOGY AND DATA Gravity Model in the Study Gravity model is a powerful econometric tool to assess the trade flows, and to test the impact of different variables on trade flows. Trade creation and trade diversion effects of RTAs, possible impact of a set of natural factors and policy factors, etc. can be examined through 7. AN EMPIRICAL EXAMINATION OF TRADE FLOWS IN THE SAARC REGION
  • 75 the application of an extended gravity model. Majority of the empirical literature on gravity model use total bilateral trade flows as dependent variable. However, Cernat (2001) suggested the use of bilateral export flows arguing that for a given pair of countries, with total bilateral trade one cannot distinguish between the impact of RTA formation on exports from non-member to RTA members from that on exports from the RTA member to the non-member. In line with Rahman et al, (2006), bilateral export flow is used as dependent variable for the present study. Variables that traditionally appear in the gravity model are GDP, Population, Distance, Common Border and Common Language. The coefficients of exporter and importer GDP are expected to have positive signs implying that an economy with larger size trades more. According to Martinez-Zarzoso and Nowak- Lehmann (2003) the coefficient of population of the exporters may have negative or positive sign depending on whether the country exports less when it is big (absorption capacity) or whether a big country exports more compared to a small country (economies of scale). For similar reasons, the coefficient of importer population may have negative or positive sign. Distance appears in the model as a proxy of remoteness or transportation costs implying that the coefficient of this variable is expected to have negative sign. It is also expected that coefficients of common language and common border would be positive. To capture the impact of depreciation (or appreciation) of domestic currency, the gravity model in the study was augmented by including real exchange rate of dollar in terms of domestic currency, both for exporting as well as importing countries following Soloaga and Winters (2001). The coefficient of exporter exchange rate is expected to be positive while that of importer exchange rate is expected to be negative.Avariable import-GDP ratio (as a proxy indicator of openness) is included in the model. Theoretically, this variable should have positive impact on bilateral export flows. Since, bilateral trade agreement plays important role in determining trade among partner countries, a dummy variable for bilateral agreements has been incorporated in the model. This variable takes one if two partner countries have bilateral trade agreement at time period t, and zero if they don’t. The model specification for the present study is as follows. log Xijt = β0 + β1 log (GDPit) + β2 log (GDPjt) + β3 log(PGDPit) + β4 log (PGDPjt) + β5 log(IM/GDP)j + β6 log(Exijt) + β1 (BILATERALij) + β8 (BORij) +β0 log(Rijt) + Vt +εijt)
  • 76 Xijt: bilateral export flows between Country i and j in time t GDPit: Gross Domestic Product of Country i in time t GDPjt: Gross Domestic Product of Country j in time t PGDPit: income per capita of Country i in time t PGDPjt: income per capita of Country j in time t (IM/GDP)j: import-GDP ratio of Country j Exijt: bilateral real exchange rate in time t Rijt: difference in relative factor endowments which are calculated from the difference between the log of GDP per capita of country i and the log of GDP per capita of country j in the absolute value. This variable bases on the idea that the volume of trade increases as the difference in the relative factor e n d o w m e n t s increases. BILATERALij: bilateral trade a g r e e m e n t s between Country i and Country j. BORij: common border Vt: full set of time dummy to identify the effect of time on the export flows. εijt: normally distributed error term DATA DESCRIPTION The sample consists of 7 SAARC member countries viz; Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Afghanistan is excluded from the analysis because it has joined the SAARC only in April 2007. The time period under study is 2000-2005. Since data on all countries are not available, our data consists of 18 country pairs with 108 observations. Bilateral export flows measured at current US billion dollar are calculated from IMF Direction of Trade Statistics (DOTS) database. Data on GDP at current prices and income per capita have been taken from the World Economic Outlook, IMF. Data on exchange rate has been taken from OANDA database. EMPIRICAL RESULTS The results of the augmented gravity model are discussed here. The econometric analysis begins with the test for multicollinearity among the variables. Table 7.1 reports R2 obtained from full model
  • 77 and Rj2 obtained from individual regression. As is revealed from the table, R2 obtained from OLS estimation of the full model is greater than each individual Rj2 indicating there is no multicollinearity problem in the model. In general, the model has high explanatory power with R2 of 0.79. In other words, 79 % of the variation in the exports is explained by the regression model (by independent variables). The result shows that most of the coefficients of the basic gravity variables are statistically significant and have signs as expected except for the coefficient of the V which is not statistically significant, but have a positive sign. The coefficients of GDP of both exporters and importers are positive and significant at 1% and 5% respectively (Table 7.2). For 1% increase in GDP of exporting (importing) country, bilateral export flow would increase by 0.88% (0.79%). This approximate proportional relationship between bilateral export flows and size of the economy (either exporter or importer) indicates that intra-SAARC trade could rise if the SAARC counties could maintain strong economic growth. GDP per capita of country i and country j are also statistically significant and have positive signs. GDP per capita of both exporting and importing countries are found to be statistically significant at 1% level. This implies that countries with high per capita income are likely to trade more. The coefficient of Import-GDP ratio of importing country is positive and statistically significant. For 1% Table 7.1: MULTICOLLINEARITY TEST R-squared from overall model (OLS)= 0.79 Regression R-squared When log (GDPEX) is dependent variable 0.66 When log (GDPIM) is dependent variable 0.68 When log (PGDPEX) is dependent variable 0.48 When log (PGDPIM) is dependent variable 0.26 When log (IM/GDP) is dependent variable 0.42 When log (EX) is dependent variable 0.65 When log (R) is dependent variable 0.61 NOTES: GDPEX is the GDP of exporting country, GDPIM is the GDP of importing country, PGDPEX is the per capita GDP of exporting country, PGDPIM is the per capita GDP of importing country, (IM/GDP) is the import GDP ratio of importing country, EX is the bilateral exchange rate and R is the difference in relative factor endowments.
  • 78 Table 7.2: RESULTS OF GRAVITY MODEL REGRESSION ESTIMATION Independent Variable Estimated Coefficient GDPi 0.88*** (5.96) GDPj 0.79** (2.47) PGDPi 1.76*** (2.73) PGDPj 1.85*** (3.30) MGDPj 1.16** (1.98) Exij 0.673*** (5.39) Rij 5.68*** (4.27) V 0.037 (0.43) Dummy Variables BILATERALij 152.2*** (3.61) BOR 32.4*** (4.27) No. of observations 108 R2 0.80 NOTES: Values in parentheses show ‘t’ statistic *** and ** denote significant at 1% and 5% respectively. increase in openness, bilateral export flow increases by 1.16%. This indicates that it is possible that increased openness of the SAARC member countries could boost intra- regional trade in the region. Further, in extra-SAARC trade context, it reveals the absence of trade diversion in the SAARC region. Exchange rate parameter has a positive effect on export flows since the bilateral exchange rate is defined as units of domestic currency per one unit of foreign currency. If exchange rate increases (domestic currency depreciation) by 1%, export increases by 0.67%. Thus, exchange rate variation is having little impact on the trade flows in the region. The Rijt coefficient is significant and has an expected sign. This means that more the difference in relative factor
  • 79 endowments, the larger the volume of exports. If there is 1% change in the difference in relative factor endowments, the exports increase by 5.68%. The interesting finding is that export between two countries would increase by as much as 152.2% if there exists a bilateral trade agreement between countries compared to country-pairs without having bilateral trade ties. The common border demonstrates positive and statistically significant effect. If two countries share a common border, export flow between them may increase by 32.4% more than two otherwise similar countries. CONCLUSION The chapter examined the nature of trade flows in the SAARC region within a gravity model framework. The theoretical background of gravity model is also discussed in brief. The analysis shows that most of the variables are significant as expected. SAFTA’s formation is estimated to have a positive impact on enhancing intra- regional trade in the SAARC region. Reduction in tariff and bilateral trade agreements are found to be a better measure to improve trade in the region. Study also supports specialisation based on the principle of comparative advantage.
  • 80 SUMMARY The first chapter outlines historical background of the RTAs and present context of the study. The evolution of Regional Integration Agreements (RIAs) and the arguments for and against RIAs by different authors are discussed. The chapter also examined evolution of SAARC as a trade bloc. Further, objectives of the study, methodology and data, and scheme of the study are presented subsequently. Chapter two examines the evolution, objectives and economic agenda of the SAARC. Apart from discussing principles and general provisions of SAARC, the chapter discusses the introduction of SAPTA and SAFTA to foster trade and investment relations in the South Asian region. SAPTA was envisaged primarily as the first step towards the transition to a South Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union, Common Market and Economic Union. At the Eleventh Summit in Kathmandu in 2002, it was agreed to accelerate cooperation in the core areas of trade, finance and investment to realise the goal of an integrated South Asian economy in a step-by- step manner. Further, the vision of a phased and planned process eventually leading to a South Asian Economic Union, was agreed upon. Chapter three presents trend in macroeconomic indicators of the SAARC member countries including the latest member, Afghanistan. The fourth chapter examines the trend in intra-regional trade and extra-regional trade, and highlights an increasing trend in intra-SAARC and extra-SAARC exports and imports. Chapter five examines the trend in foreign direct investment inflows and outflows in the SAARC region, along with major sectors and sources of FDI in region’s member countries. Chapter six presents the trend in India’s trade and investment relations with the SAARC region, as also presents the trend in India’s investment in SAARC region and other SAARC member’s investment in India. Empirical examination of trade flows in the SAARC region is undertaken in chapter seven. The 8. SUMMARY AND RECOMMENDATIONS
  • 81 analysis is done within a gravity model framework. Data on various factors viz; GDP, per capita GDP, import-GDP ratio, exchange rate and factor endowments have been collected and calculated from reliable sources. As the first step, a multicollinearity test has been employed. The results of the analysis show that except for Vij all other coefficients are as expected and significant. The details of the findings are presented in the next section. FINDINGS OF THE STUDY Following are the important findings of the study. 1. During the year 2000 to 2006, the total exports of SAARC countries have increased from US$ 63.5 billion to US$ 161.4 billion, depicting a 2½ fold rise during the period. Among the member countries, India is the largest exporter followed by Pakistan and Bangladesh. 2. The total imports of SAARC countries have also increased from US$ 79.5 billion in 2000 to US$ 255.3 billion in 2006, registering a higher 3-fold rise during the period. The growth rate of import has also increased from 9.1% in 2001 to 35.2% in 2006. India is the largest importer in the SAARC region followed by Pakistan and Bangladesh. 3. SAARC as a trade bloc experiences trade deficit of US$ 93.9 billion with rest of the world in 2006. 4. The total intra-SAARC exports have increased from US$ 2.8 billion in 2000 to US$ 10.8 billion in 2006, showing almost a 4-fold rise. Exports among the SAARC countries are dominated by India, followed by Pakistan and Sri Lanka. 5. The total intra-SAARC imports have also increased from US$ 3.0 billion in 2000 to US$ 9.6 billion in 2006. The intra-SAARC imports are dominated by Sri Lanka, followed by India. 6. The total FDI inflows into the SAARC region has increased from US$ 5.6 billion in 2000 to US$ 22.3 billion in 2006. Apart from India, FDI flows into Pakistan, Bangladesh and Sri Lanka also has increased during the period. 7. FDI outflows from the SAARC region have also increased from US$ 0.35 billion in 2000 to US$ 9.8 billion in 2006. Out of all eight-member countries, FDI outflows from India is the highest with US$ 9.7 billion in 2005, followed by Pakistan (US$ 107 mn) and Sri Lanka (US$ 29 mn). 8. In India, the sectors that received the highest cumulative inflows of FDI over the period April 2000 to February 2008
  • 82 are services sector, computer software & hardware, telecommunications and construction activities. 9. In Pakistan, privatisation and resource-related FDI led to a doubling of foreign investment from US$ 1.1 billion in 2004 to US$ 2.2 billion in 2005, and further to US$ 4.3 billion in 2006. Communications, power and financial business, are more FDI recipient sectors. 10. In Bangladesh, services sector has attracted the greatest investment, followed by IT and, engineering and manufactured goods. 11. In Sri Lanka, FDI as a percentage of GDP at 26.5% in 2005 is high compared to most of the South Asian countries. The maximum number of FDI projects has been in the area of manufacturing, followed by services and lastly agriculture. 12. The major chunk of FDI in Nepal is from India. Hotels and restaurants, and transport have attracted the maximum investment. 13. India’s total exports to the region increased from US$ 2.8 billion in 2002-03 to US$ 6.5 billion in 2006-07. Among the SAARC countries, Sri Lanka is the major export destination for India with total exports of US$ 2.3 billion in 2006-07, followed by Bangladesh with US$ 1.6 billion in the same year. 14. The total imports of India from SAARC have increased from US$ 531.5 mn in 2002-03 to US$ 1.5 billion in 2006-07. Sri Lanka is the major import source from the region with US$ 470.2 mn in 2006-07, followed by Pakistan (US$ 323 mn) and Nepal (US$ 305.8 mn). 15. India’s export and import of commodities with the SAARC region are highly competitive in nature, primarily constituting agriculture products and agro- based commodities. 16. Total foreign direct investments from India to other SAARC countries amounted to US$ 312.4 billion during April 1996 to December 2007. Among the SAARC countries, Sri Lanka (US$ 153.1 mn) is the major destination of Indian investment followed by Nepal (US$ 87.2 mn). 17. During January 2005 to December 2007, 33 JVs and 42 WOSs have been approved in the SAARC countries. Out of this, 1 JV was approved in Afghanistan, 7 JVs and 8 WOSs in Bangladesh, 2 JVs in Maldives, 2 JV and 6 WOSs in Nepal, 1 JV in Bhutan and 20 JVs and 28 WOSs in Sri Lanka.
  • 83 18. Most of these approvals were in engineering goods, electrical equipments, pesticides, readymade garments, cables and wires, other professional services, plastic & plastic products, rubber & rubber products, manufacturing and export of textiles, processed and semi-processed food, automobile components, financial services, and tourism and travels. 19. Total investments of SAARC countries to India have amounted to US$ 11.7 mn during April 2000 to February 2008. Among the SAARC countries, Sri Lanka is the largest source of FDI with US$ 8.5 mn during the period, followed by Maldives (US$ 3.1 mn). 20. Empirical result shows significant positive relationship between export flows and the size of the economy (of either the exporter or importer) indicating that strong economic growth of the SAARC countries could result in a little less than proportionate rise in intra- SAARC trade flows. 21. A percentage increase in per capita GDP results in more than proportionate increase in bilateral export implying that countries with high per capita income are likely to trade more. 22. The coefficient of Import-GDP ratio of importing country is positive and statistically significant. For 1% increase in openness, bilateral export flow increases by 1.16%, showing the absence of trade diversion in the SAARC region. 23. Exchange rate parameter has a positive effect on export flows. If exchange rate increases (domestic currency depreciation) by 1%, export increases by 0.67%. 24. Difference in relative factor endowments helps in increasing the volume of exports. 25. Export between two countries would increase by as much as 152.2% if there exists a bilateral trade agreement between countries compared to country-pairs without having bilateral trade ties. 26. Sharing common border also helps in increasing export flows between countries by 32.4% than otherwise. Policy Implications of the Study a) More emphasis could be given to boost exports in order to reduce the trade deficit experienced by the SAARC region with rest of the world. b) SAARC countries are mainly exporting agricultural commodities and agro-based products. Further, with trade being competitive and identical in many cases, more
  • 84 diversification is essential based on the comparative advantage. c) While SAARC members have effected reduction in tariff level to reap the fullest benefit of the trade bloc, tariff could be reduced further. In this direction India has reduced import duty on all items other than those in the negative list to zero, under SAFTA initiatives. Further, during the 3rd SAFTA Ministerial Council meeting in New Delhi, on March 03, 2008, India announced the pruning of negative list from 744 items to around 500 items for the least developed country members of the SAARC. d) Though foreign direct investment inflow is increasing in the SAARC region, it is still low in volumes. Therefore, adequate steps could be taken to attract more FDI into the region. e) The direct relationship between bilateral exports and GDP in the SAARC region reveals the potential for export-led growth in the region. f) Since the empirical analysis points to the absence of trade diversion in the region, SAARC countries could adopt more open trade policies in the region. g) There is a significant and positive relation between the bilateral trade agreement and bilateral export flows in the SAARC region. Therefore, study supports the creation of bilateral agreements in the region. h) Though there is a direct relationship between the exchange rate depreciation and exports, SAARC countries could adopt cautious exchange rate policies as this may have adverse impact on the terms of trade. i) Since there is a positive and significant relation between the difference in relative factor endowments and bilateral export growth, specialisation could be promoted based on the principle of comparative advantage of each member. j) Stronger economic relations could be used to enhance political relations in the region. k) An effective South Asian trade bloc could also be able to improve the South Asian regions’ bargaining position in multilateral negotiations with other regions and regional groupings.
  • 85 Ahmed, Sadiq. 2006, Explaining South Asia’s Development Success: The Role of Good Policies. Washington, DC: World Bank. Bhagwati, J., and A. Panagariya, 1996, “The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends,” American Economic Review, Vol. 86, No. 2, pp. 82–87. Cernat, L. 2001, “Assessing Regional Trade Arrangments: Are South-South RTAs More Trade Diverting?”, Global Economy Quarterly, Vol. 2, No. 3, pp. 235-59. Coulibaly, S. 2004, “On the Assessment of Trade Creation and Trade Diversion Effects of Developing RTAs,” Paper Presented at the Annual Meeting 2005 of the Swiss Society of Economics and Statistics on Resource IMF, 2007, Direction of Trade Statistics, Year Book, Washington DC. Martinez-Zarzoso, I. and Nowak-Lehmann, F. 2003, “Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows”, Journal of Applied Economics, Vol. 6, No. 2, pp. 291-316. Piermartini, R. and Teh, R. 2005, “Demystifying Modelling Methods for Trade Policy “, WTO Discussion Paper, No 10. Rahman et al., 2006, Trade Potential in SAFTA: An Application of Augmented Gravity Model, Centre for Policy Dialog, Dhaka. Rahman, M. M. 2003, “A Panel Data of Bangladesh’s Trade: The Gravity Model Approach”, Paper presented at the European Trade Study Group (ETSG) 2003 Programme. September. Madrid. SAARC Secretariat, 2006, “Agreement on South Asian Free Trade Area (SAFTA).” Available via the Internet: http://www.saarc-sec.org. Sahoo, P. 2006, Foreign Direct Investment in South Asia: Policy, Trends, Impact and Determinants, ADB Institute Discussion Paper. REFERENCES
  • 86 Soloaga, I and Winters, L.A. 2001, “Regionalism in the Nineties: What Effect on Trade?” The North American Journal of Economics and Finance, Vol. 12, pp.1-29. UNCTAD, 2007, World Investment Report, Geneva. United Nations, 2006, “LDCs List.” Available via the Internet: http:// www.un.org. Viner, J., 1950, The Customs Union Issue (New York: Carnegie Endowment for International Peace). World Bank, 2004, Trade Policies in South Asia: An Overview, Report 29949, Vol II, World Bank, Washington, DC. World Bank, 2004. “Trade Policies in SouthAsia:An Overview.” Report 19939, vol. II, World Bank, Washington, DC. World Bank, 2006, Global Development Finance Report, World Bank, Washington, DC. World Bank, 2007, Global Development Finance Report, World Bank, Washington, DC.
  • 87 WHOLLY OWNED SUBSIDIARIES APPROVED IN THE SAARC REGION Bangladesh US$ mn Indian Party Field of Operations Investment Goderaj Sara Lee Ltd., Phirojshanagar, Mumbai. Pesticides 0.5757 Cavin Kare P Ltd, Chennai. Make-ups 0.4925 Ate Marketing P Ltd, Mumbai Engineering goods 0.0003 Thyssen Krupp Elevator Pvt. Ltd., New Delhi. Electrical Equipments etc. 0.0016 KLF Agro Extracts P. Ltd, Kerala. Coconut Oil 0.0014 Promising Exports Ltd, Calcutta. Readymade Garments 0.0100 Poineer E Bizz Pvt .ltd, Hyderabad Electrical Equipment 0.0039 Flexituff International Ltd. Manufacturing — Nepal US$ mn Indian Party Field of Operations Investment Manaksia Ltd., Calcutta. Cables and wires 0.0697 Crompton Greaves Ltd., Mumbai. Electrial Equipments 0.0977 Manaksia Ltd, Calcutta. Containers 0.0829 Exterior- Interior Pvt. Ltd, Calcutta. Other Professional Services 0.0028 KLJ Plasticizers, KLJ House, New Delhi. Plastic and plastic products 0.3549 Jesson Industries Ltd, Mumbai. Rubber & Rubber Products 0.0014 ANNEXURE I: LIST OF INDIAN JOINT VENTURES AND WHOLLY OWNED SUBSIDIARIES APPROVED IN SAARC MEMBER COUNTRIES, JANUARY 2005 TO DECEMBER 2007
  • 88 Sri Lanka US$ mn Indian Party Field of Operations Investment Bhaskar Exxoils Ltd, Manufacturing & export of Dwarka Sadan, Bhopal Textiles Home Furn 7.0100 Deepak Vegpro P.Ltd., Alwar (Raj) Hydrogenated oils, ghee etc 0.2000 Saguna Poultry Farm Ltd., Coimbatore. Processed food 0.1560 MRF Ltd. Chennai. Automobile components 0.2513 Exterior- Interior Pvt. Ltd, Calcutta. Consultants 0.0005 Deepak Vegpro Pvt. Ltd, Alwar (Raj) Semi- Processed Food 0.1250 Visen Industries Ltd., Mumbai, Other Chemical Products 0.0100 Cosco India Ltd., Delhi. Rubber and Rubber Products 0.2000 K.L.J. Polymers & Chemicals Ltd., New Delhi. Plastic and plastic products 0.1000 Midwest Granites P. Ltd, Hyderabad. Marble & Granite Slabs 0.1343 Bhaskar Exxoils Ltd., Bhopal. Cotton Textiles 0.4800 Foods, Fertilizers Fats Ltd., Chennai. Hydrogenated Oils, Ghee etc. 0.1290 Visen Industries Ltd., Mumbai. Indigo, Ink and Adhesives 0.1000 Deepak Vegpro Pvt. Ltd., Alwar (Raj) Non edible oils 0.2000 Subray Catal Chem Pvt. Ltd., Plastic Products for 0.0224 Thane. Industrial Use Deepak Vegpro Pvt. Ltd., Alwar (Raj). Non edible oils 0.0900 Subray Catal Chem Pvt. Ltd, Thane. Plastic & Plastic Products 0.0270 Trimurti Polymers, Mumbai. Plastic & Plastic Products 0.1139 Deepak Vegpro Pvt. Ltd, Rajsthan. Hydrogenetaed Oils 0.2000 Engee Overseas Pvt. Ltd., New Delhi. Electrical Motors 0.0250 Subray Catal Chem Pvt. Ltd., Thane. Electrical Equipments 0.0630 Eagle Press Ltd., Chennai. Printing and Allied Activities 0.0250 (Contd...)
  • 89 (Contd...) Indian Party Field of Operations Investment Schensder Electric India Ltd. Heavy Engineering goods — Mafoi Management Professional Services — Consultants Ltd. Icomm Tele Ltd. Educational Equipments — I-source Infosystems Pvt. Ltd. IT enabled — Ismt Ltd. IT enabled — Modi Revlon P. Ltd. Manufacturing —
  • 90 JOINT VENTURES APPROVED IN THE SAARC REGION Afghanistan US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Aster Teleservices Pvt. Ltd, SPCL GBBL joint Electronic Equipment 0.0500 Secunderabad. Venture Construction Co. Ltd. Dhaka, Bangladesh Bangladesh US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Shapoorji Pallonji. Co. Ltd Nandan Park Ltd., Construction Work 0.0150 Mumbai. Dhaka. Kasila Farms, Hyderabad. Max Automobiles Animal feed, 0.0346 Products Ltd, poultry feed, etc Dhaka. Nicco Parks and Advanced Chemical Others 0.0192 Resorts Ltd., kolkata. Ind. Ltd., Dhaka. Rahee Industries Ltd., SPCL GBBL Vehicles 0.0500 Kolkata. Joint Venture Construction Co. Ltd., Dhaka. Godrej Agrovet Ltd., Pallas Holdings Ltd., Animal feed, 0.0680 Mumbai. Mauritius. poultry feed etc. Shapoorji Pallonji — Civil Construction 0.1678 & Co. Ltd., Mumbai. Projects Mina Estates P. Ltd., Warf Telecom Readymade Garments 0.1400 Goregaon. International Pvt. Ltd., Maldives. Maldives US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Reliance Infocomm Ltd Warf Telecom Telecommunication 1.1000 International Pvt. Ltd., 2nd Floor, HDFC Bldg, Arun Excello, Chennai Hulhumale Male, Civil Construction 0.0432 Maldives Projects
  • 91 Nepal US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Nupur International Pvt. Napo Pharmaceuticals Inc, Diamonds 0.0137 Ltd, Mumbai. South San Fra USA GMR Energy Ltd. — Engineering — goods Sri Lanka US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Metropolis Health Industrial Chemicals House keeping, 0.0500 Services (I) P Ltd, P Ltd. Pitakotte, Hygiene Services Mumbai. Sri Lanka Saturn Ship Agencies Favorite Investmentss Others 0.0040 P Ltd., Chennai. Ltd NO 385 Galle Road Colombo 03 Sri Lanka Gujarat Dyestuff MR Gary Eonald Other chemical 0.5200 Industries, Nandesari, Seaton, Sri Lanka products Gujarat. Deccan Aviation Private Logistics Plus Lanka Others 0.0251 Limited, Banglore. Pvt. Ltd, Colombo. Foods, Fertilizers, — Hydrogenated Oil, 0.3000 Fats Ltd, Chennai. Ghee etc. Logistics Plus India Mr Gary Eonald Others 0.0200 Pvt. Ltd, New Delhi. Seaton, Sri Lanka Midwest Granties P Ltd., — Bricks and tiles 0.2930 Hyderabad. Foods Fertilizers Fats Ltd Mulchand Kundanma, Coconut Oil 0.4727 Chennai. Colombo. Indo Fab Ltd., Trichi. International Finance Engineering services 0.0500 Washington, D.C. Indo Fab Ltd., Trichi. Mr Gary Eonald Engineering services 0.0980 Seaton, Sri Lanka Apollo Hospitals Ace Global Consultancy 0.2443 Enterprises Ltd., Chennai. Aviation Services Ltd, Colombo. Contd...
  • 92 (Contd...) Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Foods, Fertilizers Fats Ltd, MR Gary Eonald Food Manufactured 0.0600 Chennai. Seaton, Sri Lanka Items Global Aviation Services, . Messrs Hirdavmani Other Finacial 0.0100 Mumbai Ltd, Colombo. Services Foods, Fertilizers Fats Adamjee Extractions Hydrogenated Oils 0.0750 Ltd, Chennai. Pvt. Ltd., Colombo. Banayan Tours and Mulchand Kundanma, Tourism and Travel 0.0250 Travels P. Ltd., Giliram Jiwatram 207, Konarkshram, 114 Mai Street, Mumbai. Colombo. Jhunjhunwala Adamjee Extractions Hydrogenated oils, 0.1000 Vanaspati Ltd., Varanasi. P. Ltd., Colombo. Ghee etc. Indo Fab Ltd., Trichi. — Manufacturing & 0.1250 export of Textiles Home Furn Jhunjhunwala Vanaspati — Hydrogenated Oils, 0.1221 Ltd., Varanasi. Ghee etc. Plant Overseas Pvt. LTd. — Education — United Telecom Ltd. — Telecom Products — Bhutan US$ mn Name of Name of Field of Indian Indian Party Foreign Party Operations Investment Chiragsala Sales Pvt. Ltd. — Manufacturing — —: Not available SOURCE: India Investment Centre (IIC).
  • 93 ANNEXURE II: INDIA’S BILATERAL TRADE AGREEMENTS IN THE SAARC REGION Contd... Countries Status Details India-Pakistan MFN India has granted Most Favoured Nation (MFN) Status to Pakistan since 1996. The current Positive List of Pakistan, as per Trade Policy (2005- 2006) of Government of Pakistan, has 773 items. India-Bhutan Trade Agreement Agreement shall come into force with effect from the 29th July 2006 and shall remain in force for a period of ten years. India-Bangladesh Trade Agreement Amended Agreement shall come into force on the 1st April, 2006. It shall remain in force for a period of three years. It may be extended by a further period of three years by mutual consent subject to such modifications as may be agreed upon. India-Afghanistan PTA Agreement was signed on 6th March 2003. The Contracting Parties hereby agree to establish a Preferential Trading Arrangement for the purpose of free movement of goods between their countries through reduction of tariffs on the movement of goods. India-Sri Lanka FTA Agreement signed on 28th December 1999. The main objective is to promote through the expansion of trade the harmonious development of the economic relations between India and Sri Lanka. India-Nepal Treaty of Trade The treaty shall remain in force for a period of five years from 6th March, 2002 to 5th March, 2007 and shall be automatically extended for further periods of five (5) years at a time, unless either of the parties gives to the other a written notice, three months in advance, of its intention to terminate the Treaty. The
  • 94 Countries Status Details Contd... Contracting Parties shall explore and undertake all measures, including technical cooperation, to promote, facilitate, expand and diversify trade between their two countries. India-Maldives Trade Agreement This Agreement shall come into force on 31st March, 1981. It shall remain in force for a period of one year. The Agreement shall thereafter continue to remain in force until it is modified or terminated by either Contracting Party on giving three months notice to the other Party. SOURCE: Ministry of Commerce & Industry, Government of India.
  • 95 ANNEXURE III: EXIM BANK SUPPORTED PROJECT EXPORT CONTRACTS IN THE SAARC REGION Afghanistan Sl. No. Name of Company Project Sector 1 C&C Constructions P. Ltd. Construction of Kandahar Engineering & to Heart Highway Road Project for Construction Louis Berger Group Inc. 2 C&C Constructions P. Ltd. Reconstruction of Lashkar Gah to Infrastructure Ring Highway Road for United Nations Office for Project Services (UNOPS) in consortium with B. Seenaiah & Co. (Projects) Ltd. 3 KEC International Limited Supply and erection of 220 kV power Power transmission line Lot I for Ministry of (Generation & Energy and Water Transmission) 4 KEC International Limited Supply and erection of 220 kV power Power transmission line Lot II for Ministry (Generation & Energy and Water of Transmission) 5 KEC International Limited 220 kV D/C transmission line from Power Salang Tunnel to Phul-e-Khumri for (Generation & Power Grid Corpn. Of India Ltd. Transmission) 6 KEC International Limited 220 kV D/C transmission line from Power Kabul to Salang Tunnel for Power (Generation & Grid Corpn. Of India Ltd. Transmission) 7 Shapoorji Pallonji & Co. Ltd. Reconstruction of Kabul Infrastructure Serena Hotel 8 Shapoorji Pallonji & Co. Ltd. Alteration and refurbishment Engineering & of British Council Building Construction for British Council, Kabul
  • 96 Bangladesh Sl. No. Name of Company Project Sector 1 Bharat Heavy Electricals Contract for supply and installation Power Limited of 2X120 MW gas turbine power (Generation & plant project Transmission 2 Larsen & Toubro Limited Surma Cement Plant Project Others 3 Larsen & Toubro Limited Construction of Crushing Shop & Others Long Belt Conveyor Project 4 Shapoorji Pallonji & Co. Ltd. Construction of Canadian Chancery Engineering & in Dhaka for Government of Canada Construction 5 Power Power Power (Generation & Transmission) (Generation & Transmission) (Generation & Transmission) 6 TVS Interconnect Systems Ltd.Fibre Optic project from Rajbari to Others GP Coastal Barisal RBSC site in Bangladesh for Grameen Phone, Dhaka Bhutan Sl. No. Name of Company Project Sector 1 Bharat Heavy Electricals 6x170 MW Hydrogenerator project Power Limited (Generation & Transmission) 2 Hindustan Construction Construction of Tunnel for Power Company Limited Tala Hydro Electric Project (Generation & (Package C1) Transmission) 3 Hindustan Construction Construction of Tunnel for Power Company Limited Tala Hydro Electric Project (Generation & (Package C4) Transmission) 4 Jaiprakash Associates Limited Construction of Tunnel Package (C2) Power for Tala Hydro elect project (Generation & Transmission) 5 Jaiprakash Associates Limited Construction of surge shafts, Power power house and tunnel for (Generation & construction Package(C5) for Transmission) Tala Hydro elect project 6 Larsen & Toubro Limited Construction of Tunnel Power for Tala Hydroelectric (Generation & Project (Package C3) Transmission)
  • 97 Maldives Sl. No. Name of Company Project Sector 1 Voltas Limited Air-conditioning, Plumbing, Engineering & Firefighting and Electrical Construction Works for upgradation of Male Airport Sri Lanka Sl. No. Name of Company Project Sector 1 Larsen & Toubro Limited Diesel Fired Combined Power (Generation & Cycle Power project Transmission) 2 Technology Frontiers Installation and operation of outdoor Others (India) P. Ltd. led video system for all the matches including for the cricket matches
  • 98 RECENT OCCASIONAL PAPERS OP. No. Title 60. Engineering Consultancy Exports 61. Export of Financial Services 62. Theoretical Aspects of Liberal Trade Policies in Transition Economies: Exchange Rate, Competition and Exports 63. Indian Chemical Industry : A Sector Study 64. Transaction Costs of Indian Exports : An Analysis 65. SAARC Countries : A Study of India’s Trade and Investment Potential 66. Sports Goods : A Sector Study 67. International Joint Ventures and Technology Transfer in Developing Countries : Theoretical Analyses 68. Union of Myanmar : A Study of India’s Trade and Investment Potential 69. Foreign Direct Investment and Host Country Interaction : A Strategic Approach 70. Exports in India’s Growth Process. 71. Latin American Countries : A Study of India’s Trade and Investment Potential 72. People’s Republic of China: A Study of India’s Trade and Investment Potential 73. lnstitutional Support Systems for SMEs in India and International Experiences 74. Export Processing Zones in Select Countries : Critical Success Factors 75. Essays in International Economics 76. Institutional Support to SMEs : A Study of Select Sectors 77. Indian Handicrafts : A New Direction for Exports 78. Israel and India : A Study of Trade and Investment Potential 79. Indian Handloom : A Sector Study 80. Mumbai as an International Financial Centre - A Roadmap 81. Indian Export and Economic Growth Performance in Asian Perspective 82. The Architecture of the International Capital Markets : Theory and Evidence 83. International Technology Transfer and Stability of Joint Ventures in Developing Economies : A Critical Analysis 84. The People’s Republic of Bangladesh : A Study of India’s Trade and Investment Potential 85. Australia and New Zealand: A Study of India’s Trade and Investment Potential 86. Machine Tools: A Sector Study 87. Agro and Processed Foods: A Sector Study 88. Currency Risk Premia and Unhedged, Foreign-Currency Borrowing in Emerging Market
  • 99 89. Mercosur: A Gateway to Latin American Countries 90. Indian Silk Industry: A Sector Study 91. Select COMESA Countries: A Study of India’s Trade and Investment Potential 92. Sri Lanka: A Study of India’s Trade and Investment Potential 93. Potential for Export of IT Enabled Services from North Eastern Region of India 94. Potential for Export of Horticulture Products from Bihar and Jharkhand 95. Increasing Wage Inequality in Developed Countries: Role of Changing Trade, Technology and Factor Endowments 96. Essays on Trade in Goods and Factor Movements Under Increasing Returns to Scales 97. Export of Organic Products from India: Prospects and Challenges 98. Export Potential of Indian Medicinal Plants and Products 99. Select Southern African Countries: A Study of India’s Trade and Investment Potential 100. BIMST-EC Initiative: A Study of India's Trade and Investment Potential with Select Asian Countries 101. Some Aspects of Productivity Growth and Trade in Indian Industry 102. Intra-Industry Trade In India’s Manufacturing Sector 103. Export Potential of Indian Plantation Sector: Prospects and Challenges 104. Fresh Fruits, Vegetables and Dairy Products: India's Potential For Exports to Other Asian Countries 105. Biotechnology: Emerging Opportunities for India 106. ASEAN Countries: A Study of India's Trade and Investment Potentiala 107. Essays on Globalisation and Wages in Developing Countries 108. Select West African Countries: A Study of India's Trade and Investment Potential 109. Indian Leather Industry: Perspective and Export Potential 110. GCC Countries: A Study of India’s Trade and Export Potential 111. Indian Petroleum Products Industry : Opportunities and Challanges 112. Floriculture : A Sector Study 113. Japanese & U.S. Foreign Direct Investments in Indian Manufacturing : An Analysis 114. Maghreb Region: A Study of India’s Trade and Investment Potential 115. Strengthening R & D Capabilities in India 116. CIS Region: A Study of India’s Trade and Investment Potential 117. Indian Chemical Industry: A Sector Study 118. Trade and Environment: A Theoretical and Empirical Analysis 119. Indian Pharmaceutical Industry : Surging Globally 120. Regional Trade Agreements: Gateway to Global Trade 121. Knowledge Process Outsourcing: Emerging Opportunities for India 122. Indian Mineral Sector and its Export Potential
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