A Report of the Proceedings

Stakeholders Consultation on Regional Economic Cooperation in South Asia with a Focus on India- Bangladesh Trade Department of Economics, Jadavpur University, Kolkata, West Bengal September 19, 2008 Introduction A Report of the Proceedings CUTS Centre for International Trade, Economics & Environment (CUTS CITEE) and CUTS Calcutta Resource Centre (CUTS CRC) in association with the Department of Economics, Jadavpur University and in partnership with Friedrich Ebert Stiftung (FES India), organised a stakeholders consultation workshop titled Regional Economic Cooperation in South Asia with a Focus on India-Bangladesh Trade at the Dr. Triguna Sen Auditorium, Jadavpur University on September 19, 2008. The objectives were to: engage the participation of Indian stakeholders in regional trade initiatives in South Asia and promote policy responses that would be inclusive of stakeholder preferences; and involve business representatives, farmer organizations, civil society representatives, academics, and government for creating an awareness and momentum towards regional economic cooperation in South Asia in a way that is expected to influence future policy direction in trade and investment promotion within the country. CUTS CITEE is organising a series of such consultations in different parts of India to gather peoples opinions on how to enhance regional economic cooperation in South Asia. One such workshop has been organised at Kochi in collaboration with Cochin University of Science and Technology (CUST). After this workshop in Kolkata another workshop will be organised in Srinagar focusing on India-Pakistan Trade. Recommendations made by the participants in these consultations will be taken forward to stakeholders and decisions makers at various levels, including the Central Government and inter-governmental bodies. In all, 60 participants including representatives from business chambers and associations; civil society; exporters; government officials; academicians; researchers and students attended the consultation workshop. Some of the key resource persons of the workshop included Sanjeev Nandwani, Joint Director General, Directorate General of Foreign Trade, Ministry of Commerce & Industry, Government of India; Sushil Khanna, Professor of Economics & Strategic Management, IIM Calcutta; Anil Saraf, Director, Federation of Industries and Commerce of North East Region, Guwahati; Saikat Sinha Roy, Associate Professor, Department of Economics, Jadavpur University; Siddhartha Mitra, Director (Research), CUTS Jaipur; D. K. Sarma, Executive President, North East Chamber of Commerce and Industry, Guwahati and Dipanjol Deka, Secretary General, Tea Association of India (North East Region), Guwahati, Assam. 1

Opening Session Keya Ghosh of CUTS CRC inaugurated the workshop by giving a brief overview of the project objectives and activities of CUTS. Next, she introduced the key speakers and the topics they would cover to the participants. She pointed out that, at present there is hardly any country not opting for preferential trade arrangements with more than 300 preferential agreements in operation and 60-70 percent of global trade taking place through such agreements. For India such pacts are undoubtedly a step towards fostering better trade relations with neighboring countries like Bangladesh, SriLanka and Pakistan and to achieve long term developmental objectives. She further added that the primary objective of this workshop is to assess the benefits of regional economic cooperation that India is likely to get from these preferential trade agreements. With these few words she invited Gautam Gupta, Head of the Department of Economics, Jadavpur University, to deliver a welcome address on behalf of the University. Gautam Gupta welcomed all the resource persons and attendees on behalf of Jadavpur University. At the outset he gave a brief introduction of the University touching upon the road traversed by the University in the past, right from its inception. He pointed out that West Bengal and Bangladesh share a common history and a common language. These nations are currently dealing with problems of migration, illegal border trade etc. To mitigate these problems and to ensure better cross border relations CUTS can play a key role by carrying out policy advocacy and bridging the communication gap between policy makers and all other relevant stakeholders. With these words he invited Sanjeev Nandwani to take the stage. Sanjeev Nandwani thanked Jadavpur University and CUTS for inviting him to deliver the opening address at the workshop. Referring to some of the recent observations of the Commerce Ministry he said that RTAs are building blocks towards the overall multilateral process of trade liberalisation. It is not a substitute for globalisation but rather its supplement. He further added that RTAs provide good opportunities for domestic industries in foreign lands. RTAs have acted as healthy precursors to free trade He said that India is still an emerging superpower and it is in this context that the government had adopted the look-east policy. He added that in relation to the look-east policy, North-East India is very important, given that it has immense potential for trade with China, Bangladesh and Myanmar. In this context he emphasised the role of the government as well as private entrepreneurs to facilitate infrastructural development in the area. With beautiful tourism spots in the North East, the government can encourage the tourism industry and even have a Disney World in that part of the country. Before he ended his address he elaborated on how tax relief to Uttarakhand and Himachal Pradesh, which had subsequently seen rapid industrialisation, had neutralised the impact of similar tax relief for the North East. He stressed that proper decentralised planning for the North East is needed to promote India s economic cooperation and trade relation with its eastern neighbours. In his opening remarks Sushil Khanna, Professor of Economics & Strategic Management, Indian Institute of Management Calcutta, emphasised the role of cross-border trade in building an integrated South Asia. He also said that RTAs are only bilateral trade agreements, which are not very successful because these imply arm-twisting of the weaker countries by stronger ones. He pointed to the fact that that there have been only two successful RTAs till now. One is the NAFTA and the other is the European Union. Increased international trade, according to him is possible only through lowering of tariffs, duties and simplified work procedures. As an example he cited the case of Indo-Nepal and Indo-Bhutan trade where both the countries gained from duty free access to Indian markets. He further added that the official trade data between India and its neighbouring countries is often misleading as a lot of informal trade takes place among them which is not recorded. 2

In this context he said that the immense potential for trade between India and Bangladesh has not been realised due to certain structural constraints like high tariff walls, insufficient number of check points and transit rights, Bangladesh s internal problems etc. He added that market imperfections caused due to barriers to trade often manifest themselves in high prices for cheap imports. He added further that another impediment to Indo-Bangladesh trade is the lack of acceptance of each other s documents and certificates. There were also other factors viz. lack of staff at the check posts, nonusage of computers at check posts resulting in low quality of trade documentation, and strict rules for verification that often delay movement of consignments across borders. Before concluding his session he said that Bangladesh is a more open economy than India from the outset which allows for greater imports from various countries. Thus it is India, which has to play a proactive role in correcting the imperfections and opting for greater regional cooperation with its neighbouring countries. Anil Saraf, Director, Federation of Industries and Commerce of North East Region (FINER) Guwahati, started out by pointing to the fact that a successful bilateral and multilateral agreement requires facilitation of hassle free movement of resources and people across borders. In this context he referred to some of the major problems faced by India in recent years while trading with different countries viz. rules of origin, high tariff barriers and various other non tariff ones. With respect to Indo-Bangla trade the major roadblocks as viewed by him were problems of transit, lack of sufficient rail and road connectivity, poor quality of air connectivity etc. Easy access to information about each other s business environment is also lacking between the two regions. In view of the problems, the suggestions put forward by him included lowering of tariff and non-tariff barriers (NTBs), legal and institutional arrangements to improve investment climate in the two countries to protect interests of foreign investors and formation of an exporter s consortium to facilitate exports from one country to the other. He concluded by giving a brief overview of FINER and its various activities. Thematic Presentation and Discussion The first presentation of the session was made by Saikat Sinha Roy, Associate Professor, Jadavpur University. He started by saying that, historically, a regional trading group is formed among a few countries on the basis of external sector policies among themselves and vis-à-vis the rest-of-theworld. This regional process targets free trade within a particular region through PTAs amongst the member countries. Till December 2006, out of 367 PTAs notified to the World Trade Organisation, about 214 of them were in operation. He said that RTAs tend to emerge among traditional trading partners. There have been different kinds of RTAs and FTAs taking place throughout the world viz. inter-regional RTAs which are mostly bilateral (e.g. US-FTAs); block-to-block RTAs (EU-Mercosur, EPAs); those involving non-traditional regional traders - India, Japan, Korea, China, Singapore, Aus, NZ; North- North RTAs (US-AUS, EU enlargement); North-South and South-South RTAs etc. With proliferation of RTAs, share of world trade covered by RTAs has increased between 2000 (43%) and 2005 (51%). He further added that apart from forming an FTA, the South Asian countries have unilaterally liberalised their trade regimes and committed themselves to the multilateral order, thus resulting in deeper global economic integration. With regards to merchandise trade as well, all South Asian economies have registered higher growth rates after 2002. The growth rates in some cases have more than doubled. The South Asian countries have increasingly exported to other Asian countries. These emerging patterns do indicate that preferential trading arrangements in the region has played a role in promoting trade, along with the gains that have accrued due to unilateral trade liberalisation and multilateral commitments. He pointed to the fact that after a robust performance since 2002, the world economy has shown signs of slowdown in 2008. This is largely on account of the slowdown in the US economy. The world economy is expected to grow at above 3.5 % in 2008, with downside risks including US-recession, high oil prices, rising cereal prices and metal prices. 3

In order to provide safeguards from such global downturns, regional agreements have become important. South Asian countries have moved towards SAFTA in 2006, with an objective to progress towards SAEU. The RTA is likely to provide gains to member countries through trade creation and trade diversion. There can be industrial restructuring as well. There has been significant growth in intra-saarc trade since 2004, to the tune of an annual average of 25 per cent, indicating the benefits accruing from the regional integration process. With removal of trade barriers on account of SAFTA, there is immense potential for future growth. Gravity model estimates show high potential intraregional trade of the order of US $ 40 million. However, some experts are sceptical about these estimates. Moreover, there exists a large gap between the actual and the potentials estimated by these models. There can be certain explanations for these: Lack of complementarity in tradables across these countries persists; industrial restructuring in these countries is rather slow. Lack of supply capability Trade facilitation, transportation and transit facilties Lack of proper rules of origin The second presentation was given by Siddhartha Mitra, Director (Research), CUTS Jaipur. He defined Preferential Trade Agreement (PTA) as an arrangement by which a group of countries extend concessions in trade to each other that they do not extend to the rest of the world e.g. Free Trade Agreements, customs unions and common markets. Such preferential trade agreements result in both trade creation and trade diversion. He emphasised the positive contribution of PTAs in increasing a country s exports and imports by pointing to fact that during the period 1998-99 to 2005-06, characterised by India s engagement in PTAs and further tariff reductions, India s export-gdp ratio and import-gdp ratio increased more steeply than in the previous periods, 1980-97. He mentioned that the India-Sri Lanka FTA is a great success despite the fact that India had compensated for its large size through an asymmetric structure for the FTA. Because Sri Lanka has a liberal investment environment, some Indian entrepreneurs have gone to Sri Lanka, set up their vanaspati plants and exported these back to India thereby creating synergy for mutual trade in goods and services. These exports are also registered as a part of Sri Lankan exports. A contrasting feature is available from the Indo-Nepal Treaty of Trade where preferential trade arrangements had increased exports from India to Nepal only. With respect to Indo-Bangladesh trade he said that the two countries after signing of the SAPTA had entered into bilateral relationships with one another and extended tariff preferences e.g. Bangladesh was given concessions on textile and textile products like cotton, yarn etc. However Bangladesh could not take advantage of these arrangements and could manage to export only 48 items to India officially. This is because India structured its negative list strategically so as to shut out most imports from Bangladesh. Various other structural constraints adding to the cause included low savings leading to low investment, technological backwardness, persistent trade barriers and inadequate trade facilitation mechanisms and regulated investment regimes in both the countries. At the end he highlighted the fact that Bangladesh exports primary products with price and income inelastic demand and India exports mainly processed/manufactured goods with opposite characteristics. Thus, Indian exporters are likely to benefit more in the long run by creating better trade ties with Bangladesh than vice-versa. D. K. Sarma, Executive President, North East Chamber of Commerce and Industry started his presentation by emphasising the fact that most of the signatories to the SAFTA and other PTAs do not adhere to the spirit of regional cooperation. He said that the North East is backward compared to other states of India. 4

Though it has international borders yet it does not have any trade surplus or production surplus which can be exported to other countries We have potential and we can be a corridor to various other countries, he added. He pointed to the fact that though garments produced in Bangladesh are lot cheaper than those produced in India yet the consumers often cannot access those due to various tariff and non-tariff barriers. He also said that in order to tap the five hundred million customers in India s neighbouring countries, necessary arrangements should be made to facilitate border trade. This will help easy and hassle free movement of goods involving very low transaction costs. In this respect he emphasised that flights going to Bangladesh should stop at Guwahati. Major changes to facilitate a better trade relation between India and Bangladesh as prescribed by him are as follows: a) A common council should be formed to identify fields of regional economic cooperation playing a "value-added" role by: Mobilizing the necessary political will to foster concrete projects Contributing to a better utilisation of resources Assisting in the coordination of national and regional inputs Developing overall frameworks for trade and investment as well as for increasing crossborder business cooperation b) Establishment of a financial organisation for development of infrastructure and setting up of a common institute for bankers and financial institutions c) Establishment of a centre for agricultural research and extension centres in order to help smaller economies modernise their agricultural operations d) Establishment of a small scale industries forum whose main function will be to promote growth and development of SSIs and create marketing linkages. e) Establishment of Human Resource Development Centres with the objective of formulation of policies and promoting exchange programmes for entrepreneurs He concluded his session by saying that efforts should be made to create a win-win situation between the two countries through a two-way trade mission to identify opportunities of trade and investment. Dipanjol Deka, Secretary General, Tea Association of India (North East Region), Guwahati, said that though India and Bangladesh are signatories to the SAFTA, yet there is a severe lack of political will to facilitate their mutual trading relations. Gayatree Goswamee pointed out that academic courses should include separate topics on regional economic cooperation, especially in graduate and post graduate courses, handled by different parties to the agreement. Sushil Khanna emphasised that given the way China is opening up its markets to neighbours, India will lose out if it does not enter into preferential agreements with its neighbours. Keya Ghosh closed the workshop by thanking the participants and the resource persons for giving their valuable inputs and sharing their views in the workshop. She thanked Jadavpur University for its valuable contribution in making the workshop a great success. 5