South Asian Association for Regional Co-operation (SAARC), was established in 1985. The SAARC's member countries are India, Pakistan, Sri Lanka, Nepal, Bhutan, and the Maldives.
The South Asian Preferential Trade Agreement (SAPTA) was drawn up in 1993, providing for bilateral reductions in tariff and non-tariff barriers on specified commodities on a reciprocal basis, but with special treatment given to the least developed states.
The eventual objective is for SAPTA to become a South Asian Free Trade Area (SAFTA), based on multilateral tariff reductions. On the whole, the achievements of SAARC and SAPTA have been limited. Although tariff concessions have not been negligible, they have been introduced on items that represent no more than 1 percent of the total trade of the seven-country grouping.
BRIEF OVERVIEW OF TRADE IN SAARC REGION: According to trade statistics for the region, it is an established fact that India has benefited from trade in the region more than any other country. India's share of exports in intra-SAARC trade has shown strong growth during the post-SAARC period, despite low levels of overall regional trade and weak regional integration.
During the pre-SAARC period of 1975-85, India's exports increased from $160 million in 1975 to $315 million in 1984, a compound growth rate of 7.8 percent.
However, during the post-SAARC period, India's exports increased from $277 million in 1986 to $1.5 billion in 1995, showing an additional growth of 22 percent. For more recent data, India's exports increased from $622 million in 1991 to $2 billion in the year 2000, indicating 9 percent growth during this period. However, at the same time, India's imports from SAARC countries were quite low.
It was just $56 million in 1975 and rose to only $105 million during 1984, and was only $182 million in 1995.
This created a situation where it was obvious that India was not a good importer in intra-SAARC trade. India benefited in the regional grouping far more than its global trade trends.
In 1985, the total turnover of India's trade with SAARC was $382 million, a figure that increased to $1.7 billion in 1995 and to $2.36 billion in 2000. India's global trade increased from $24.6 billion in 1985 to $94 billion in 2000.
India's balance of trade with almost all favourable, with a surplus of well over $2.2 billion, over other SAARC members. Above all, there were huge subsidies for the Indian industry in the shape of subsidised energy rates. This might create problems for Pakistan, which has one of the highest electricity prices in the region.
India is the major exporter and minor importer in intra-SAARC trade, and this issue needs to be addressed before a real free trade regime can take place. Many LDCs, like Nepal, have suffered a lot in recent years.
Nepal's share of exports to India has declined rapidly in the post-SAARC period. For Bangladesh, India's exports rose from $180 million, in 1991, to $1 billion in 2002, while India's imports from Bangladesh increased from $31 million, in 1991, to a mere $50 million in 2001-2002.
Another problem that has afflicted the region is inconsistent trade patterns during the 1980s and 1990s.
The trade-GDP ratios in India (from 12 percent to 21 percent) and Bangladesh (from 16 percent to 28 percent) have improved in the period under review. However, in Pakistan, the trade-to-GDP ratio declined from 38.5 percent in the early 1990s to 33.7 percent in the late 1990s.
Small countries like, Nepal, Bhutan, the Maldives and Bangladesh fear being swamped by Indian products due to low duties. Under the preferential regime, low tariff lines on some 5,500 products have been agreed to so far.
Signing of SAFTA
SAFTA, which was agreed during the recent South Asian Association of Regional Co-operation (SAARC) conference in Pakistan, promises to be a major milestone in South Asian trade relations.
Under the terms of the agreement, Pakistan and India will reduce their tariffs to 0-5 percent within seven years beginning in 2006, and the least developed countries (LDCs) are to reduce their tariffs to 0-5 percent in a period of 10 years in the same period.
Each member state will maintain a sensitive list of products in which tariffs will not be reduced.
Under the agreement, three developing countries - Pakistan, India and Sri Lanka - will reduce their maximum tariffs to 20 percent, and the LDCs, including Bangladesh, Nepal, Bhutan and the Maldives, will reduce their maximum tariffs to 30 percent before January 1, 2008. At the conclusion of the first phase, all developing states of SAARC will reduce their maximum tariffs to the 0-5 percent range for LDCs from January 1, 2009.
In the second phase, the developing countries - Pakistan and India - will reduce tariffs to the 0-5 percent range before January 1, 2013, Sri Lanka will do the same before January 1, 2014 and LDCs will follow suit before January 1, 2015.
At this stage, SAFTA will fully replace the existing South Asian Preferential Trade Agreement (SAPTA) and trade will move from a list of positive items to free trade, barring a few sensitive items.
All member states will establish their own Committee of Experts (COEs) to identify the list of sensitive items, as well as para-tariffs, non-tariff barriers and other restrictive measures within three months from the signing of the SAFTA treaty.
IMPACT OF SAFTA: Great expectations have overrun pessimism and caution expressed by diehard antagonists and moderates of Indo-Pak détente that seems to be in the making after signing SAFTA on 6 January 2004 in Islamabad.
It has been aired and declared to be an economic imperative to turnaround the regional economies, which support nearly one-fourth-world population and where fifty percent of world's poor people live below poverty line. How will this come about? SAFTA agreement has still two years to go before it comes into force and that too if it would be ratified by all the seven member states.
From the day of its coming into effect, it would need another seven years to reduce intra-regional trade tariff between 0-5 percent by the developed countries which are India and Pakistan and 10 years for other five SAARC member states which are considered LDCs according to-un-laid down policy and have been accepted as such. There have to be certain cogent reasons to ride on the waves of 'Great Expectations'.
We can have a look at the expectations particularly with reference to ground, political and economic realities that prevail at present and are likely to prevail in near future.
REGION'S BACKLOG: SAARC region in general and Indo-Pak in particular have suffered because of political miscalculations and misadventures of their leaders.
India under the Congress rule remained addicted to state-controlled economy that could give it at best 4 percent growth rate till it opted to liberalise its economy in early 90s.
Pakistan underwent traumatic political experiences but despite them made enviable economic progress in 60s. It could not maintain the same momentum during 70s and 80s. The decade of 90s proved to be a 'decade lost'.
Bangladesh showed signs of improvement but the task of uplifting the country economically, within three decades, was hard dedicated efforts. The regional economic stagnation towards economic integration persisted at least for no less than 10 years after coming into being of SAARC in 1985.
Specific reasons for it were that none of the SAARC member states then opted for bold economic reforms, India held onto the policy of protecting her market and Indo-Pak political conflict made the region, a 'dead region' as far as economic co-operation and integration was concerned.
The consequences of living with political conflicts, adopting protectionist and non-integrative economic policies holding against the wind of globalisation, and remaining indifferent towards growing regional economic models severally limited the prospects of making economic gains for SAARC countries.
The benefits would have, otherwise, accrued because of enhancement of regional trade, increased foreign investment, human resource development and innovation to improve industrial and agricultural sectors.
Some of the economic indicators give credence to this stark reality. SAARC region's share in global trade is around one percent, intra-regional trade is 4-5 percent of member states' exports and SAARC's total GDP is 1.5 percent of global GDP.
Intra-region per capita income varies steeply between US $600 (for Sri Lanka, the highest) and US $180 (for Bhutan, the lowest). In direct contrast to low SAARC intra-regional trade, world's leading integrated regions, the EU and ASEAN have 60 percent and 25 percent intra-regional trade respectively.
The most important question is: will SAFTA provide an opportunity to enhance intra-regional trade to any reasonable percentage? The answer to this question should be positive. But, it is difficult to quantify at this stage.
In addition to poor economic indicators of SAARC region, the region suffers because of illiteracy, gender biases, high maternal and infant mortality, poverty, poor governance, religious extremism and other socio-economic ills, which indirectly affect economic growth and regional co-operation.
INDIA-PAK TRADE RELATIONS -- A HISTORICAL PERSPECTIVE: India and Pakistan have a long and chequered history of bilateral trade relations. Soon after independence, India was Pakistan's biggest and most important trading partner. In 1948-49, Pakistan's exports to India were 56 percent of her total exports (mostly from former East Pakistan) and her imports were 32 percent of total imports. But, Pakistan's quest for industrialisation and non-resolution of political conflicts, made trading between the two countries gradually prohibitive.
The second important factor was the sheer large size of the Indian market and its central location. 80 percent of SAARC's intra-regional trade is to and from India.
India has a stronger, finer and broad-based industrial base. Some of its products like steel, autos, electronic goods, garments and medicines, and software are comparatively of better quality and cost-effective. Pakistan's industrialists have been entertaining fears in the past that an open trade with a reduced tariff rate would give India a big advantage to overwhelm the Pakistani market and thus put them in the corner.
India remained interested in boosting trade relations with Pakistan and gave trading preference over conflict resolution. That is why India in principle granted 'most favoured nation' (MFN) status to Pakistan in 1995. But she made trading less attractive by imposing high tariffs. Pakistan did not reciprocate but maintains a positive list of 600 trading items that can be imported from India.
Despite official barriers to boost trade between the two countries that have kept trading volume low to around US $237 million annually; illegal trade along the contiguous Indo-Pak border has remained a well-known secret. Its volume is estimated to be around US $1.5 billion annually.
Informal trade through "third" countries Dubai and UAE involving items like pharmaceuticals, cosmetics, chemicals and viscose has been taking place since past many years.
The volume of the trade is to the tune of US $1 billion to 1.5 billion annually. There is a widespread belief among the trading communities of the two countries that with the introduction of SAFTA rules, trading between India and Pakistan would get boost and may touch around US $4.0 billion mark within a few years.
ECONOMIC REALITIES AND SCOPE: In the context of boosting of Indo-Pak economic relations, knowing a few economic realities of the two countries, will give a better picture of the scope of trading between them. India is an emerging giant with a huge market, high economic growth rate of more than 6 percent for the past few years; exports of around US $40 billion and forex reserve of around US $100 billion.
She is producing world-class products of steel, software, medicine, autos, textile and many other items. There is a profound realisation among the Indian political and business leaders that their policy of remaining somewhat indifferent towards ever the changing winds of globalisation and regional co-operation has put India in a visible economic disadvantage. During the past 5-6 years she has tried hard to leap forward to make up for the deficiency of the past by increasing bilateral trade with China.
The volume of trade between them stands at US $10 billion, which is to grow rapidly. India-ASEAN trade accounts for around US $12.5 billion at present. India is targeting to increase its volume by 250 percent during next five years.
India maintains 1 to 4 ratios in her imports-exports to SAARC countries. She has overall US $2 billion trade surplus with them at present.
Her trade surplus with Pakistan is around US $175 million. Will execution of SAFTA help increasing trade among the member states, particularly between India and Pakistan? The answer is positive as stated earlier. Keeping in view the illegal and informal trade via third country, and across the border between the two countries; achieving US $4 billion target within a few years should not be difficult. It could be more as well.
There is a long list of items that show commonality of economies and trading pattern of two countries. Agriculture is pivotal for both countries for achieving a higher economic growth rate. Its contribution towards GDP of both the economies is around 25 percent.
This sector is the largest employers in both the countries and contributes substantially towards the textile sector. Pakistan's textile is the main source of foreign exchange, ie around 66 percent.
Pakistan's low value textile sector such as grey cloth, yarn, thread and spinning is more developed than value-added textile sector (garments, knitwear, hosiery, apparel) of India. The variation in the products of textile sector would be mutually beneficial.
Pakistan has been trying, during the past one year, to modernise her value-added textile sector.
With the implementation of the WTO regime from January 2005 and SAFTA from January 2006, Pakistan has nothing to fear but to compete. Pakistan can import iron ore, medicine, tea, coffee, tyres and export fertilisers. It should benefit the consumer.
Pakistan can also benefit from India's world-class quality IT software, and autos. Our automobile products have been made quite expensive because of protection provided by the government to the automobile industry. SAFTA and WTO will dilute the effects of protectionism.
Pakistan's economy is in the phase of recovery. Her debt burden, though reduced to 90 percent of GDP from 102 percent of GDP around four years earlier, is still a big burden on the national economy.
Forex reserves position is comfortable, (US $12.02 billion), growth rate is expected to be 5.4 percent of GDP this year, and exports are likely to overshoot the target of US $12.2 billion. But, despite these positive macro economic indicators Pakistan like India attracts less investment. India on the average attracted around US $4 billion FDI compared to US $45 billion, the average, FDI attracted by China during the past few years. Pakistan, on the average, has attracted US $500-600 million during the past few years.
Making SAFTA workable would create an environment which would attract foreign investment. A large number of multinational houses are already stepping into the Indian market and with the opening of intra-regional trade, more are likely to step in Pakistan and Bangladesh will also benefit from the positive investment environment.
SAFTA is likely to brighten the chances of laying a gas pipeline between CAS (Central Asian States) or Iran and India via Pakistan. It will benefit all. The project is presently shelved because of political uncertainty that has existed between India and Pakistan.
POLITICAL CONFLICT RESOLUTION -- A MUST: SAARC region, during the past 18 years, has remained a hostage to Indo-Pak political antagonism. Changes that have taken place in the world after the end of Cold War; the impetus given to the free market regime and global trade; conflict resolution through dialogue; visible benefits of integrating regions economically and Washington's assertive role playing in South Asian conflict resolution, have gone a long way to bringing a strategic shift in New Delhi and Islamabad's hard positions for not developing a 'composite' dialogue, till now.
The groundwork done thus far, the Islamabad declaration and the desire of the Indian and Pakistani leaders and the people to improve relations should help in resolving political conflicts not only between India and Pakistan but set the momentum to resolving conflicts between India-Sri Lanka and India-Bangladesh. Economic integration will get going if political conflicts are in sight for resolution.
South Asian region has remained hostage to self-created vulnerabilities, at least for one and a half-decade. People have suffered. The Islamabad declaration along-with SAFTA, is on the scene belatedly and a lot of mileage is still to be traversed to reap the benefits of economic integration.
It would be possible to do so only if the fruits of economic integration and political conflict resolution are shared equitably and according to the wishes of the people.
Though the signing of SAFTA will increase the intra-regional trade by manifold, Pakistan with its present industrial infrastructure may be at the losing end as compared with India.
India as a big economic manager of the region, is already in a position to capture the entire market of SAARC by flooding goods and products at highly competitive prices.
Pakistan can compete with India in textiles, leather, sports and surgical equipment's whereas automobiles (vendor's industry) and SMEs will have to face a serious threat.
The other option for Pakistan to exploit SAFTA is in the establishment of joint ventures with India, Sri Lanka and Bangladesh, in those sectors which may be mutually beneficial for every country.
Negative list of imports from India to Pakistan mainly consists of those items, which are also being manufactured in Pakistan. The objective of including such items in the negative list was to provide a safeguard to the local industry. However, there are still many items, which are being imported by Pakistan from other countries at higher rates.
If at present, Pakistan imports paint/dryer from various countries, this product and such other items are available in the Indian markets at competitive prices but the government has included this item in the negative list of products in bilateral trade with India. Such items should be included in the positive list so that foreign exchange is saved.
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