3. 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
4.
5. 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
6.
7. 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
8.
9. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.
37. 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. 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. 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.
41. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
58. 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. 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. 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. 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. 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. 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. 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. 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. 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.
