India-South Asia Connectivity: An argument on fostering common benefits

India-South Asia Connectivity: An argument on fostering common benefits

Convening the first Asian Relations Conference in March 1947, Pandit Jawaharlal Nehru declared: “It is fitting that India should play her part in this new phase of Asian development…geographically she is so situated as to be the meeting point…”

 

Introduction

The geographically contiguous regions of South Asia and Central Asia comprise a number of landlocked and least developed countries, natural resource rich countries and some of the fastest growing economies with highly complementary economic structures. Yet intraregional trade within and between these regions is impeded by higher costs than those applicable to their trade with the European Union, largely due to poorly developed transport links not allowing them to benefit from geographical proximity.

India’s geographical location at the crossroads of Asia has defined its external interactions through the ages. Both the continental and the maritime realms of Asia have been conduits for these civilization connections for over 2000 years. As Asia surges economically, the importance of the maritime domain and related security challenges will grow. India is adjusting to this changed scenario by repositioning itself from a continental power, which it will remain, to a growing maritime power. Already, one-third of India’s trade is with East Asia. In 2012 alone, India-ASEAN trade grew by 41 per cent to reach $79.4 billion.

Cross-border trade is especially important for smaller countries and for landlocked provinces/countries, including Afghanistan, Bangladesh, Bhutan, Nepal, Northeast India   and Northwest Pakistan. Expanded intra-regional trade, increased investment and supply chain integration, will need policy reforms, and improvements in regulations, border management, and infrastructure. Measures will need to pay due regard to the security concerns which dominate each country’s view of borders. Small and medium enterprises are likely to play a large role in expanded commerce (relative to power sector cooperation), creating a wider canvas of opportunities for cooperation, reduced mistrust and poverty reduction.

Highlights

  • South Asia’s intra-regional trade accounts for just 5% of total trade, compared to 25% in ASEAN.
  • The South Asia Regional Integration program manages a portfolio of $280 million in energy, trade and transport, and wildlife conservation.
  • Greater regional integration will enhance prospects for growth and shared prosperity in South Asia, home to 44 percent of the world’s poor.

Present situation

Transport is the backbone of economic activity and social development. Large-scale increases in production and trade have been made possible with advances in transport, such as the diffusion of containerization. When it comes to improving connectivity, each mode of transport – roads, railways, maritime shipping and aviation – has its own physical and operational characteristics which require different considerations.

In the South Asia, the maritime and aviation sectors are relatively well connected to their respective global networks. There is also a higher degree of private sector involvement in developing and managing infrastructures in these sectors. From a regional perspective, therefore, the priority should be given to the development and upgrading of land-based transport infrastructure. Tremendous efficiency gains could also be realized by removing non-physical barriers to transport and improving intermodal connectivity. Both of these steps would improve the efficiency of transport services and raise the utilization rates of existing infrastructure.

Much discussion in recent time has focused on improving connectivity between India and SA. This includes connectivity by both land and sea. Greater land links with these countries of the SA region would significantly augment movement of goods and people. But there has hardly been substantive progress on connectivity.

Improved connectivity in the South Asian region, both through road links and waterways, is being leveraged by the India as a means to enhance regional co-operation and foster intra-regional trade. The latest among these measures is the standard operating procedure (SOP) India and Bangladesh signed to operationalize an agreement on coastal shipping. Apart from this, India has also signed a proposal to facilitate free vehicular movement with Bhutan, Bangladesh and Nepal (BBIN).

Nevertheless, there is significant inter-country variation; shipping connectivity is still poor between South Asian countries. On top, there are three landlocked countries and one island country in South Asia, which depend on transshipment ports in neighboring countries for their trade.

Considering that trade-reducing effects of high transport costs are the strongest for transport-intensive activities (De 2009b; De 2009c), in which most South Asian LLDCs are engaged in, they have smaller export baskets and limited access to markets since the burden of high transportation costs limits the range of potential exports and markets in which the goods can be competitively and profitably traded. Moreover, the price of imports also tends to increase because of high transit transportation costs, which in turn contributes to higher prices of export products (De 2009b). Lacks of territorial access to seaports, remoteness and isolation from world markets have substantially inflated transportation costs in LLDCs.

There are several reasons given for the slow progress in strengthening intra-regional economic integration in South Asia, including inadequate intra-regional connectivity, lack of political commitment to liberalization, and weak national and regional institutions (Bhattacharyya 2012).

Opportunities

Governments in South Asia can attract more ships, and a wider range of ships, by investing and maintaining their maritime ports. They may also improve competitiveness by improving the efficiency of land transport, particularly through road and railways. More ambitious programs of upgrading and modernization could be accelerated, however, through the greater participation of the private sector in the development of ports and provision of port services.

Maritime shipping has historically been the main mode of transportation in international trade due to its ability to transport large volumes at low cost per unit of freight. As a result, land transport development patterns have tended to lead to major urban or trading centers in coastal areas.

South Asian leaders gathered in Kathmandu for the 18th Summit of the South Asian Association for Regional Cooperation (SAARC) and there was growing expectation for the discussions to result in stronger economic and energy connectivity in the region and opportunity for enhanced regional collaboration on a host of other areas, such a focus is long overdue in a region that continues to be one of the least connected in terms of inter-regional trade. The United States firmly believes that increased regional economic connectivity within South Asia, as well as with other parts of Asia, can bolster economic growth, reduce poverty and enhance regional stability and security, which is why we continue to encourage governments, civil society and businesses in South Asia to strengthen regional cooperation.

This is not to say that progress has not been achieved. It has. Over the past 20 years, South Asia has averaged six percent economic growth per year, lifting millions out of poverty and improving the quality of life for hundreds of millions more. It is the second fastest growing region in the world and has the human capital, industry, and technology to catapult its citizens forward in the 21st century. Still, in terms of economic linkages, the countries of South Asia remain oceans apart, especially in stark contrast to other regions of the world. For South Asia, intraregional trade is anchored at around 5 percent, the lowest in the world. But the good news is we are seeing real leadership from governments of the region to change that dismal statistic.

India’s Prime Minister Modi has made growing trade and investment among SAARC countries one of his government’s top priorities, and these early efforts are having positive ripple effects throughout the neighborhood. This is especially true in areas like energy connectivity, where increased flows of electricity can fill supply gaps, provide factories with the power they need to engage in regional trade and showcase to potential investors the region as a platform for business and market access. Following Modi’s trip to Nepal earlier this year, the two countries have advanced power trade and power development cooperation, which could enable greater private sector investment to develop hydropower capacity. India and Bhutan recently signed agreements to strengthen their ties and deepen regional energy, trade, and educational connectivity. And India and Bangladesh are working closely to expand their cross-border 500 MW electricity transmission line, which came online last year. In Afghanistan, the newly elected Government of National Unity has prioritized regional economic engagement, already signing a pricing agreement for transiting electricity from Central Asia through Afghanistan to Pakistan as one of its first policy acts.

SAARC members have the chance to further deepen regional ties by moving on three agreements that have the potential to revolutionize trade and regional economic growth: a South Asia power trade agreement, a motor vehicle agreement and a railway agreement which collectively will provide the basic framework for regional integration. It is also welcome to have continued pursuit of a South Asian Free Trade Area (SAFTA) by all the countries of SAARC, which would provide a strong, stable and transparent framework for investment while fostering greater trade and spreading opportunity. Such steps are necessary to create a single regional market that will spur market efficiencies, generate comparative advantages and shift to more productive, innovative and balanced economies.

As SAARC members work together towards a more connected and more prosperous future, they will have the support of international partners like the United States. They are already taking several steps to support greater South Asia cooperation. On the energy side, they have been working with South Asian countries on steps needed to create a regional energy market through greater electricity trade. On transit trade, the United States supports a strong regulatory environment for private investment and greater harmonization of trade standards across borders. On border crossings, SAARC is implementing a single-window customs system to reduce border wait times at key points such as the Benapole-Petrapole crossing across India and Bangladesh. They have also offered technical assistance to organizations that facilitate greater regional linkages to the global marketplace like the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) secretariat.

However, with the acceleration and the development of a greater sense on transport connectivity for domestic, intraregional, and interregional cooperation; common belonging could be achieved by concentrating first on the realization of a few highly visible and symbolic transport projects. These projects are not new but they have not so far received legitimate priority. They are expensive dream projects and are sometimes contentious, but all of them are key pivot realizations that could boost regional integration and bring long-term economic and strategic benefits.

The first one consists in establishing a land connection (bridge or tunnel) between India and Sri Lanka through the Palk Strait. Until 1964 there was a railway roll-on/roll-off service between Talaimannar and Dhanushkodi in Tamil Nadu. The second project is in Nepal along the major trade corridor to India between Kathmandu and Birgunj. The Kathmandu–Mungling–Narayanghat–Hetauda–Birgunj Corridor is the most important route for Nepal, serving the Kathmandu Valley and accounting for 60% of the country’s industrial and trading activities. The third project is also a dream project as it consists of re-establishing a through rail connection between West Bengal in India to the northeastern states through Bangladesh with a saving of 1,000 km. The fourth project concerns building rail connections from India to the landlocked countries of Nepal and Bhutan. The last project concerns South Asia–Southeast Asia integration. A few road projects are being planned and implemented in stages to link states in northeast India with Southeast Asia through Myanmar, but, there is a project with more symbolic attraction—the reconnection of Bangladesh with Myanmar by road. The reconstruction of an old existing road from Chittagong to the Myanmar border through Gundum would create a new trade corridor between South Asia and Southeast Asia, and in particular would link Bangladesh with the People’s Republic of China through Myanmar, opening vast possibilities for trade.

De, Raihan and Kathuria show that improved trade facilitation and regional transit would help increase trade between India and Bangladesh. There is strong evidence to show that improving the efficiency of customs and administrative procedures, and simplifying trade-related documentation can facilitate trade between the two countries. The augmented gravity model shows that a 10% reduction in trader elated documentation could result in a 7.31% increase in bilateral trade, and a 10% reduction in the inefficiency of border control agencies, including customs, might lead to a 3.91% increase in trade. The strongest impact on bilateral trade would come from regional transit. In all, a 1% improvement in trade facilitation would increase Bangladesh’s exports by 4%.

The United States sees a South Asia with unlimited potential, not only to dramatically increase trade within the region but to also reach out to regional neighbors in Central and Southeast Asia. And this is the reason on why SAARC is supporting initiatives like the Indo-Pacific Economic Corridor — connecting South to Southeast Asia — and the New Silk Road — connecting South to Central Asia — with greater energy, trade, transit and people-to-people links.

In short, the United States sees the potential of a much more unified Asia — with South Asia at the heart of dynamic regional connections. SAARC members can lead the way and unleash the region’s true potential and create a more prosperous and secure future for their people.

Challenges

Goods produced by South Asian countries, particularly the least developed countries (LDCs), do not find adequate market access in the region and abroad due to high transportation time and costs. There is lack of a regional transit arrangement, and trade procedures—mainly at borders—are not simplified and harmonized. There is also absence of modern corridor management techniques in selected corridors in South Asia. Moreover, there is no fast track lane and priority for goods in transit to cross borders. In some border posts, there is lack of Standard Operating Procedures resulting in excessive time and costs in handing goods and vehicles.

In general, as illustrated in Figure, transit leads to a decrease in transportation costs, which subsequently increases transport volume. The net regional effects of this are difficult to predict in a more-than-one-sector model as intermediate deliveries between the countries in a particular region or between the regions within a country play a complicating role. When both import and export become cheaper as an effect of lower transportation cost, net effect would be difficult to assess if we do not know the internal trade of intermediate products between the export and import sectors within a country. In addition, there may be compensating forces in the regions in which employment is negatively affected by increased competition, particularly when there is a rise in imports.

A major bottleneck in the existing structure is the absence of active participation from the India’s Northeastern region. The sub-region in the eastern fringe of South Asia includes the Northeastern part of India along with Bangladesh, Bhutan, Nepal and Myanmar and also the South Western China. The Northeastern region is an essential factor in extending linkages with the Southeast Asian countries, it is important this region jointly participates in the development process of the region. Similar to the GMS structure where the Yunnan Province and Guangxi Zhuang Autonomous Region are at the front line of China’s participation in the regional structure, the Northeastern states too needs to be integrated into the sub-regional grouping in the eastern periphery of South Asia.

With shared history and culture, the South Asia region has a huge potential for economic integration but issues on national identity and internal consolidation have caused political tensions and mistrust between countries, and as a result, intra-regional integration is limited. By building common interests across borders, regional integration could enhance stability in this volatile region — which is home to 570 million or 44% of the world’s poor — and pave the way for countries to cooperate on urgent and shared climate change-related challenges which aggravate the risks to sustainable growth.

However, nothing concrete has come out of these initiatives and the GMS model has cast a shadow over these regional grouping. A major question that arises is, on one hand where a sub-regional grouping has contributed to improve the connectivity in the region, on the other cooperation such as the BIMSTEC and MGC have failed to achieve such success. Whether it is named BIMSTEC, BCIM or MGC, India and its neighbors Bangladesh, Myanmar, Nepal, Bhutan and Sri Lanka needs to embrace into a similar working model as the GMS.

In order to facilitate harmonized transport facilitation measures at national and international levels are a pre-requisite for enhancing international trade through major road and rail routes of international importance, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), at its 48th session, adopted Resolution 48/11 on road and rail transport modes in relation to facilitation measures. Most South Asian countries are yet to accede to most of the international Conventions related to transport facilitation as illustrated in the Table below. Also some of the South

Asian countries, which have signed some of the international Conventions on transport facilitation, have failed to adopt updated versions of the Conventions.

A number of bilateral trade and transit agreements exist between South Asian countries. Although the need for harmonization of standards and mutual recognition in the transport sector for enhanced trade are widely recognized, South Asia is yet to conclude a regional transport and transit agreement. The Table below states clearly that transit routes with India is presently not working effectively with land locked countries.

Improving transport connectivity for domestic, intraregional, and interregional cooperation and integration remains a long-term challenge. Sri Lanka’s imports from India are now $4 billion with 40% coming from Tamil Nadu with exports to India being $735 million. The economics of the project might be questioned by some but would be successfully rebutted, and the realization of this dream project would become a landmark of South Asia integration.

Bangladesh and India do not allow trucks from either side to cross border checkpoints. This allows the more inefficient partner to carry on with inefficiency. Bangladeshi importers are mandated to have LCs from only Bangladeshi banks, which take a relatively longer time than international banks. This is part of the trade costs affecting international trade between the two countries.

On average, three days each was spent on either side of the border since the goods had to be unloaded and reloaded at the checkpoint, with customs checking on both sides. In addition, road conditions in Bangladesh preclude the use of container trucks there.

Unfortunately, though India has the technological capability, the machines are bought from PRC, Taipei, China and Italy because RMG producers in Bangladesh find they are better priced when weighted by quality.

High tariff rates among the South Asian countries have long been pointed out as one of the major reasons for low intraregional trade. South Asia, as a region, has higher average tariff rates than in any other in the world. An important aspect of South Asian intraregional trade is that there is a huge volume of informal border trade. Some studies have pointed out that the informal and illegal trade between India and Bangladesh, India and Nepal, and India and Sri Lanka could equal a significant proportion of the recorded trade between them.

India requires “permitted risk analysis” of agricultural imports in biosecurity and sanitary and phytosanitary categories, and this has turned out to be a complex process lacking transparency. Nearly all livestock, agricultural, and food imports require sanitary or phytosanitary (SPS) certificates and import permits from India’s Ministry of Agriculture. Moreover, the Indian Food Adulteration (Prevention) Act 1954 requires the shelf-life of processed foods to be not less than 60% of the original shelf-life at the time of import. While this objective is fine, the process of determining shelf-life is often arbitrary and nontransparent. India’s Prevention of Food Adulteration Rules, 1955, are complicated. Just one rule, Number 32, has 30 provisions with further sub provisions.

It also cross-references other rules prescribing content, size and design of labels, display-panel specifications, details of colors and flavors, trade names, and so on. No certificate from the country of origin is accepted. The results of laboratory tests cannot be challenged. Separate regulations exist for various food types. Furthermore, to export textile and textile products to India, exporters must obtain a pre-shipment inspection certificate from a textile testing laboratory accredited to the national accreditation agency of the country of origin. No availability of the certificate requires testing from the notified agencies in India for each and every consignment. In some cases, even certificates issued by labs accredited by the European Union have been rejected by Indian customs authorities and such consignments subject to repeat tests in India.

In addition, it is prudent to mention the issue like domestic bureaucratic problems, inefficiency of the customs officers, shortage of efficient manpower, and poor infrastructure at different land and sea ports (such as Benapole land port, Chittagong sea port), and also under-utilization of many land ports such as Hili, Shonamasjid etc in Bangladesh.

Actions initiated

Momentum for economic cooperation has been building in recent years and months. India and Pakistan have revitalized ministerial-level negotiations on expanded trade including through granting Non-Discriminatory Access – a similar status to Most Favored Nation (MFN) – to India, reciprocating India’s granting of MFN status to Pakistan a decade ago. India has modernized its Attari border post with Pakistan and has offered to export 500 megawatts of power. India and Bangladesh have enhanced their bilateral ties, including in power trade, and India has extended tariff-free access to its market to all Least Developed Countries in the region. Afghanistan and Pakistan have started implementing a transit and trade treaty which they signed in 2011. Indian investment in Sri Lanka has risen significantly, as has cross-country trade, following a 2001 Free Trade Agreements.

There have been several initiatives in the last one decade to concretize a sub-regional cooperation such as the South Asia Growth Quadrangle initiative, Kunming initiative, the Bangladesh-China-India and Myanmar (BCIM) initiative, Mekong-Ganga Cooperation (MGC) and the Bay of Bengal Initiative for Multi-Sectoral Techno-Economic Cooperation (BIMST-EC).

Benefits

South Asia is one of the most dynamic regions in the world, but it is also one of the least economically integrated. Intra-regional trade accounts for just 5% of total trade, compared with 25% in the Association of Southeast Nations (ASEAN).

South Asian countries will benefit substantially from greater integration through energy trade, commerce and river basin management. The most obvious gains are in the power sector, with connectivity enhancing system reliability, lowering costs and carbon emissions, and relieving debilitating shortages in all countries by enabling the sustainable development of the enormous hydro and gas-based power generation potential of the Himalayas – the “water tower” of Asia – and of Central Asia. Afghanistan and Nepal have water resources that could potentially generate around 24,000 and 83,000 megawatts of electricity respectively. Transmission infrastructure, clean energy generation, and fair pricing agreements across borders hold the key to realizing this potential.

Thinking of South Asia as an economic gateway between East and Central Asia can bring large dividends. To do so, South Asia first has to connect within itself, and significantly reduce intra-regional trade costs which, on average, are 85% higher than those in East Asia. Improving internal connectivity means that trucks travel seamlessly between countries, using the most economical route between destinations with minimal waiting time for border clearance, among other things.

The dream project- The Kathmandu–Mungling–Narayanghat–Hetauda–Birgunj Corridor, when completed, will significantly reduce the transit time from Birgunj to Kathmandu by 4–5 hours and the distance by 155 km. The new highway will join the Mahendra Highway (East West corridor) at Nigadh, where a second international airport is planned to be built. This improved trade corridor between Nepal and India will also be used for Chinese goods originating from the Tibet Autonomous Region.

Current rules require most trucks to transfer loads at the borders. There are no major transit agreements across the region and most border check-posts enforce tedious inspections on both sides of the border. The Motor Vehicles Agreement signed between Bangladesh, Bhutan, India and Nepal in June 2015, intended to pave the way for a seamless movement of road traffic, is a very good step in this regard.

On opening of transit leads to cargo movement between India’s NER and Bangladesh, benefits are stagnant in nature. Under the first scenario, Bangladesh earns transit revenues. India earns transit revenue, and Bangladesh earns freight and port revenues. India also earns freight revenue, and Bangladesh earns freight and port revenues.

Over the past few years, India has made significant efforts towards improving relations with its neighbors. Conveying India’s commitment to South Asian integration at the SAARC summit 2011 in Maldives, the Prime Minister announced reduction of items from SAFTA’s Sensitive List for least developed countries from 480 to 25. It has also reduced peak tariff rate to 8% for Non-Least Developed Countries under SAFTA.

Recommendations

An effective free-trade agreement can unleash the power of a market of 1.7 billion people. The South Asian Free Trade Agreement (SAFTA) contains too many ‘sensitive lists’ that allow countries to impose high import tariff restrictions on neighbors. A well-functioning SAFTA and reduced costs of trade can lead to a 250% increase in intra-regional trade (simulation estimates).

A unified market can unleash a powerful dynamic by attracting large and small investors, which would foster an even larger market and generate a more efficient and powerful distribution of production across the region, as countries and sub-regions begin to specialize.

Trade and investment go hand in hand. Foreign investment, in particular, can help improve technology and allow export diversification, and help create regional value chains. South Asian countries should improve their investment climate and pro-actively seek large anchor investors, including those from within the region.

There is a vast informal network of goods and people moving across borders. Tourism could be a low-hanging fruit. Promoting tourism for a range of needs including medical care and cultural tourism will expand people-to-people contact. Similarly, exchange programs and regional educational institutions will also help to engage the large youth cohort, representing 45% of the population. Education exchange is a particularly effective way to reduce misperceptions, and also produces eloquent ambassadors for the cause of South Asian regional integration. Corridors allowing cross border movement of cargo should be backed by transport regulations enabling trucks and other freight vehicles from both sides to enter and leave with ease. In the long run, however, efficient exploitation of a transit transport agreement is not possible without border trade agreements.

Organize a policy dialogue involving key stakeholders and multilateral and regional financial institutions such as the World Bank, the Asian Development Bank, as well as regional groupings, namely the South Asian Association for Regional Cooperation, the Economic Cooperation Organization, the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, and the Transport Corridor Europe-Caucasus-Asia, to enhance their awareness about the possible connectivity options and their economic and social benefits including existing interregional trade opportunities, for policy advocacy and build public opinion.

It can also be argued that NTBs in India and other South Asian countries hold back the export potential of Bangladesh to these countries. To do away with the trade impeding effects of these measures, there should be mutual recognition agreements among organizations in Bangladesh and their trading partners in South Asia, in particular India. There is also a need for harmonization of technical barriers to trade (TBT) and SPS measures. Further, Indian accreditation bodies or agencies could set up centers in Dhaka in collaboration with a designated national agency to facilitate cooperation and capacity building with technical and financial assistance. The non-acceptance of assessment certificates should be resolved through mutual cooperation. It is also important to note that NTBs and par tariff measures (PTMs) not notified by the World Trade Organization (WTO) should be prohibited. A code of good practice should be followed before the introduction of any new NTBs.

Examine the available legal instruments (multilateral, regional and bilateral agreements) and international arrangements for entry of vehicle, cargo and driver into a country’s territory for bilateral and/or for transit purposes; and business processes – existing and required –in countries of South Asia and Central Asia to operationalize the identified road and rail corridor(s).

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