South Asia is one of the emerging economies and most dynamic regions of the world. It is home to almost 20 percent of the world’s population, including 40 percent of the world’s poor; yet it accounts for only three percent of the global Gross Domestic Product (GDP) and less than two percent of world trade. Despite the geographical proximity shared by South Asian countries, intra-regional trade (two percent approx.) is abysmally low. As these countries shares a common history, culture and preferences, the region has huge potential for economic cooperation, but because of political tensions and mistrust, efforts at regional inclusiveness and integration have been in the lurch. Rise in internal conflicts, political mistrust between neighboring countries, low connectivity, and substantial trade barriers will continue to weaken South Asia’s regional integration efforts as well as its identity as a region. Removal and harmonization of all such problems is of high importance for a remarkable South Asia.
Over the last 50 years, South Asian countries have undergone substantial transformations and successfully integrated into the world economy. Regional dynamics have also changed to some extent, over time, with the presence of various institutional mechanisms. A number of institutions are working exclusively to make changes in the region, but their speed is appallingly slow. Regional cooperation initiatives began with the formation of SAARC in 1985, which led to the establishment of SAARC Preferential Trading Arrangement (SAPTA) in 1995 for enhancing regional cooperation through trade. In order to deepen regional integration through increased trade flows, the South Asian Free Trade Agreement (SAFTA) came into force in 2006. SAFTA is confined only to trade in goods and has constricting conditions, such as lack of substantive tariff reduction offers, exclusion of many items through negative lists, and long time frames for tariff liberalization. Thus, in order to have regional inclusiveness to a greater extent, developed economies of South Asia will have to extend their support to push the pace of efforts towards making South Asia one unit and conceptualizing “unionism”. Cooperative endeavors are required from all SAARC members, with an objective of making South Asia an ideal region with a motive to benefitting all.
India is a major emerging economy with substantial economic and political clout, not only in South Asia but also in the world. Pakistan, Sri Lanka and Maldives are developing nations, while Afghanistan, Bhutan, Bangladesh and Nepal are least developed member states. Additionally while Sri Lanka and the Maldives are small island states, Afghanistan, Bhutan, and Nepal are landlocked nations. Given that the members are on different stairs of the development ladder, their structural composition and trade baskets do not completely overlap. Exploiting this diversity and seeking complementarities in trading structures would be the key to increase intra-regional trade. Above all, addressing political challenges and non-tariff barriers are crucial for increasing regional integration through trade.
India, being the major power among SAARC countries, must take necessary action to speed-up reforms and enhance regional harmony. Ever since the new NDA Government has been formed in India, some meaningful efforts can be seen towards improving relations with its South Asian neighbors. Escalation in efforts and sticking to the agenda of reforms is much required; the current emphasis on economic development and regional cooperation is likely to ameliorate trade relations and other associations within the region.
South Asian Trade Potential
In 2012, the total trade of South Asian countries amounted to USD 940.2 billion, with only USD 16.58 billion exchanging hands through regional trade. This indicates that only 1.8 percent of South Asian trade is intra-regional, making it one of the least integrated regional blocs in the world.
As South Asian countries enjoy geographical proximity, they show great potential for larger engagement in trade. The table below shows trade potential that South Asian countries possess with each other. Total trade potential for all eight countries accounts for USD 438.24 billion in 2012 and USD 488.7 billion in 2013.
NOTE: Trade Potential is calculated using the data from International Trade Centre, Trade Map (data taken on July 2014). Calculations are based on Country’s total imports from rest of the world and SAARC’s exports to rest of the world. From both these figures, exports from SAARC to the member country are deducted. Then the two results are compared and the minimum of the two is been taken as Trade Potential.
In the year 2012, intra-regional trade was just USD 16.58 billion, although eight countries possessed the capability of trading up to USD 438.24 billion. This makes evident that currently, resources, closeness and other benefits enjoyed as a region are being underutilized, realizing only 3.7 percent of its potential. India has maximum trade potential with its neighboring countries, which it should support and utilize by harmonizing non-tariff barriers and through mutual cooperation.
Challenges and the Way Forward
It has often been pointed out that South Asian countries may not be natural trading partners due to their limited trade complementarities leading to a pessimistic outlook towards formal trade. However, there are high volumes of informal trade. Most estimates suggest that the volume of informal trade in South Asia is much higher than formal trade. Presence of numerous tariff and non-tariff barriers, trade restricting regulations and significantly high border trade costs have resulted in cross-border informal trade. Bilateral mistrust, conflict and lack of political will for cooperation at the regional level have also been some other major obstacles to regional integration.
The power dynamics among countries in South Asia have been complex due to longstanding political tensions among neighboring countries, and these political problems have made regional inclusiveness very difficult. Thus, in order to strengthen South Asia’s regional identity and growth as a region, it is necessary for all countries in the region to have political stability, a decent economic growth rate and a feeling of mutual benefit.
One of the key measures to facilitate trade is the call for substantial development of inland transport infrastructure. Transport infrastructure is important because intra-regional trade (because of geographical closeness) takes place through the land route via land corridors. Along with infrastructure, the transit policy for cross border movement of goods and vehicles and mutual harmonization is important.
The fast growing Indian economy could play an important role in driving South Asia forward. The smaller South Asian members can benefit from India’s dynamic scale of growth, however, it is essential for them to first strengthen their own supply capacities, improve infrastructure and remove border impediments to take advantage of the growing markets in the region.