Report on SAARC Countries Economic Integration

Executive Summary

Integration between the SAARC countries makes both economic and logistical sense. In this report we have looked at some areas of cooperation that could strengthen the economic integration between these countries and the benefits of such integration.

The SAFTA agreement is the first step towards such union. However, if South Asia’s trade is to be integrated then this will require the integration of the infrastructure of the region. This would point to cooperation in the areas of energy as well as the strengthening of transportation, transit and communication links across the region. This would further require harmonization of standards and simplification of customs procedures. Trade cooperation would point to monetary cooperation, thereby suggesting the need for greater coordination among Central Banks. To sustain trading links would require investment cooperation involving public and private sector cooperation through joint ventures.

In each of the above areas, as interaction develops, there would be scope for deepening cooperation. Energy cooperation could eventually lead to a common energy grid with an integrated electricity and gas system which should lead to the benefit of all members. Transport cooperation could lead to an integrated transport infrastructure which permits for uninterrupted travel from Peshawar to Chittagong and from Kathmandu to Colombo. Investment cooperation could culminate in regional corporations with production facilities located across the region within vertically and horizontally integrated production systems.

There are however constraints to achieving the level of cooperation that is required. To realize transformations in the investment climate, preconditions have to be created where perceptions of political hostility and attendant security threats to investors, particularly from India will have to be put to rest. The real apprehensions remain invisible and in the mindset of the policy makers in the respective countries. The barriers to communication are also politically motivated and prevent the region from reaping many benefits. A shipment of cotton from Pakistan now takes 40 days to get to Bangladesh whereas it could have reached here within 4 days. Had there been no barriers, Nepal ,Bhutan and North East India could have ended their landlocked status with the use of Bangladeshi ports. In the energy sector, the idea that the supply and demand must be balanced within a country does not make much sense in a region where countries such as Nepal and Bhutan see energy as their major export and some other countries are major importers of energy. It would make sense for South Asia to move towards considering energy security in regional terms. Although there are other complications involved in achieving these ends the main barrier remains the politicization of what in most other regions would have been economic and commercial decisions. These barriers make neither commercial nor logistical sense and originate in the pathologies of inter-state and domestic politics.

It is the responsibility of the Governments, the political parties, the business community and the media to create preconditions where regional economic cooperation can take place for the greater good of all countries involved.

Introduction

1.1   Origin

As a requirement of the BBA program, the students of the 11th batch are required to undertake the “International Business” course in the sixth semester. This report has been prepared as a partial requirement of the course and it will demonstrate how well the students have grasped elements of the regional economic cooperation in the context of the SAARC nations and its implications on Bangladesh.

1.2   Objective

The main goal of this report is to give an overview of the importance of regional economic integration as well as take a look into the South Asian economic cooperation and reasons for its failure till date. The potential attainment of the SAARC has also been discussed in the light of a few specific sectors where progress can be made. However, the report has following objectives

 

n  To give an overview about regional economic cooperation

n  To identify benefits of cooperation and take a look at the status of  the South Asian nations

n  To analyze the inefficiency and slow growth of SAARC and its underlying reasons

n  To investigate some ways to enhance the efficiency of SAARC and the SAFTA

n  To explore some areas where cooperation can be enhanced and positive results can be gained

1.3   Scope

The report provides an insight into what level of cooperation exists between the SAARC member states and some of the limitations of progress of SAARC. It also discusses how such problems can be overcome and the advancement that can be attained if it is possible.

1.4   Methodology

While preparing this report the information was gathered from the following sources:

Primary data were collected through interviews with personnel from the Centre for Policy Dialogue.

Also, the sources of secondary data are Internet resources, library research and reports created for research into the topic.

1.5   Limitations

The information and data provided in this report are factual and represent the actual scenario relating to the economic cooperation among SAARC member states. Although it has data ranging from annual figures to data of a few decades, the report cannot, in any event be taken as a thorough research paper since it provides a cursory glance at the whole scenario. There are also a lot of other factors that influence regional integration and factors also hinder the progress of such free trade areas. Hence the scenario discussed is only a cursory image of the real situation. Also, since it was not feasible to gather information regarding all sectors of cooperation among the nations, it is does not provide a whole picture.

Regional Economic Cooperation

Regional economic cooperation is a concept that has come up in the last few decades and has proved fruitful for many nations. This trend in the global economy has been accelerated in recent years. Regional economic cooperation refers to agreements among countries in a geographic region to reduce, and ultimately remove tariff and non tariff barriers to the free flow of goods, services and factors of production between each other.  The last few years have seen an unprecedented proliferation of regional trade agreements. The global economy witnessed an explosion of Regional Trade Agreements from the latter half of the 1980s to the early 1990s. Many countries have formed trading blocks and have made cooperation between nations in different forms and sectors and have enjoyed positive results. Not all regional agreements notifies in the past 50 years are still in force. Most of the discontinued agreements have been superseded by redesigned agreements among same signatories. Among the most common regional economic cooperation are the WTO (World Trade Organization), NAFTA (North America Free Trade Area), EU (European Union), ASEAN (Association of South East Asian Nations), SAARC (South Asian Association for Regional Cooperation), APEC (Asia Pacific Economic Cooperation) and so on. Inline with predictions of international trade theory, particularly the theory of comparative advantage, the belief has been that agreements designed to promote freer trade within regions produce gains from trade for all member countries. By entering into regional agreements, groups of countries aim to reduce trade barriers more rapidly. Europe has been the most successful in such economic integration.

A move toward greater regional economic integration can potentially deliver important benefits to consumers and firms with new challenges. Such regional cooperation is generally seen as a good thing, however, some observes worry that it will lead to a world in which regional trade blocks compete against each other.

2.1 Levels of economic integration

Several levels of integration are possible in theory. From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union and finally a full political union.

In a free trade area all barriers to the trade of goods and services among member countries are removed. Theoretically in an ideal free trade area no discriminatory tariffs, quotas, subsidies or administrative impediments are allowed. However, each country is allowed to determine its own trade policies with regard to non members. A custom union eliminates trade barrier between member countries and adopts a common external trade policy. The EU began as a customs union and has moved beyond that stage.  A common market has no barriers to trade between members, includes a common external trade policy and allows factors of production to move freely between members.  An economic union entails even closer integration. Like the common market it involves the free flow of factors of production and common external trade policy, but it also requires a common currency, harmonization of members’ tax rates and a common monetary and fiscal policy. In order to ensure proper coordination within the economic union and make it accountable to the citizens of the member countries a political union is necessary. A central political apparatus coordinates the economic, social and foreign policy of the member states.

Although South Asia was fairly late in embracing the concept of regional cooperation in trade, it was quick to set itself an ambitious agenda. SAARC falls under the first level of integration of a free trade area. However, since its inception SAARC has succeeded in few things and it has not been able to develop the nations as a free trade area. Compared to 4% of intra SAARC trade the intra block trade figures of other regions are as follows NAFTA 37%, EU 63%, ASEAN 38%. The SAARC established an inter government group (IGG) on intra-regional trade liberalization in December 1991. The South Asian Preferential Trade agreement (SAPTA) drafted by IGG was signed in April 1993 and it became operational in December 1995.

South Asian Economic Cooperation

3.1 SAARC

The South Asian Association for Regional Cooperation (SAARC) Forum was established in1985, although it had been proposed five years earlier in 1980. The First SAARC Summit was held in Dhaka on December 7-8, 1985. Its members are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The main objectives laid down in the SAARC Charter adopted at the Summit are to promote the welfare of the peoples of South Asia; accelerate economic growth and social progress; promote active collaboration in the economic growth and social progress; promote active collaboration in the economic, social, cultural, technical and scientific fields; strengthen cooperation in international forums on matters of common interest; and cooperate with international and regional organizations with similar aims and purposes. Decisions at all levels in SAARC are taken on the basis of unanimity.

With a lot of expectations and anticipations from the people of the region, SAARC began its journey. Bangladesh was the main initiator in forming this regional association since Ziaur Rahman was the first to propose such regional cooperation.

SAARC Region (7 Countries)
 199619992000
Population1.3 bn1.3bn1.4bn
Population Growth Annual %1.90%1.90% 
Life Expectancy 62.6 
GNI Per Capita ($)410440460
GDP (Current $)513.7 bn581 bn620.3 bn
GDP Growth6.45.8 
Export of Goods and Services12.413.413.1
% of GDP
Import of Goods and Services17.216.917

Table 1: Overview of the SAARC Region

Source: World Development Indicators, July 2001

3.2 An Overview of South Asian Economies

The population of the SAARC nations is about 1.38 billion. The GDP per capita in the region is a little over $400. The common factor in each of the nations is that they inhabit a significant proportion of poor people. The region is characterized by large income disparities, with 43 percent of its population living below the poverty line. South Asia’s economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of support services. Among the SAARC nations India is the largest in size with a population of 1,080 million people. Bangladesh with a population of about 140 million and Pakistan with a population of about 163 million are medium sized. Sri Lanka population is 19 million, Nepal’s population stands at about 25 million, Maldives has about 0.2 million and Bhutan with a population of about 2 million have a much smaller population with respect to the total population of the region.

REGION/COUNTRY

AGRICULTURE

INDUSTRY

SERVICES

 

1980

1997

1980

1997

1980

1997

SAARC

37.8

24.8

25

30.2

37.2

45

Bangladesh

49.4

32.4

14.8

19.2

35.8

48.4

India

38.1

24.3

25.9

31.9

36

43.8

Nepal

61.8

41

11.9

19.1

26.3

39.8

Pakistan

30.6

24.2

25.6

26.4

43.8

49.4

Sri Lanka

26.6

18.3

27.2

32.3

46.2

49.4

Table 2: Sectoral Composition of National Income (as % of GDP)

Source: RIS SAARC Survey of Development and Cooperation 1998/99.

3.2.1  BANGLADESH                                                                                                                                

Bangladesh emerged as an independent country on 16 December 1971. Its official name is the ‘People’s Republic of Bangladesh’. Dhaka is the capital of the Republic and Bangla is the state language. The Independence and National Day of Bangladesh is 26 March.

The population of the country currently stands at around 126 million. About 80 percent of the people live in rural areas. Sixty percent of the people depend on agriculture for their livelihood.

The four major religions in the country are Islam, Hinduism, Buddhism and Christianity. The Muslims constitute about 88% of the population and Hindus about 10%. The constitution guarantees religious and cultural freedom to all citizens of Bangladesh.

Bangladesh is a unitary, independent and sovereign republic comprising three basic organs: the Executive, the Legislature, and the Judiciary. The President is the Head of State and is elected by the members of Parliament. The President acts in accordance with the advice of the Prime Minister.

Bangladesh has primarily an agrarian economy. Agriculture is the single largest sector in the economy producing about 30% of the country’s GDP and employing around 60% of the total labour force. The country has a considerable number of large, medium and small-sized industries in both the public and private sectors based on both indigenous and imported raw materials. Among them are jute, cotton, textiles, fertilizer, engineering, shipbuilding, steel, oil-refinery, paper, newsprint, sugar, chemicals, cement and leather.

3.2.2  BHUTAN                                                                              

The Bhutanese call their country Druk-yul, the land of the Drukpas (the people) and of the Druk (Thunder Dragon as in the national flag of Bhutan). The ancient history of the kingdom remains shrouded in mystery. Since the 8th century A.D., however, it is clear that Buddhism has played a large part in shaping the course of Bhutan’s history. Although Bhutan was unified under a central authority in the 17th century, evidence strongly suggests that it had existed as an independent entity from very early times.

Bhutan’s population currently stands at 638,000 people. The people of Bhutan may be divided into two main groups – the Drukpas, who are of Mongoloid origin and are Buddhists, and the Lhotsampas, or the southerners, of Nepali origin, mainly Hindus.

Bhutan is a monarchy, ruled by the Wangchuck dynasty, which was founded in 1907 by King Ugyen Wangchuck. Over the years, the monarchs of Bhutan have been the fountainhead of far-reaching and often dramatic changes in the legislative, judicial and administrative systems in the country.

With over 80% of the people dependent on subsistence farming, the Bhutanese economy is predominantly rural. The share of the agriculture sector in the gross domestic product has dropped to less than 50% with the increase in the contribution of hydroelectric power generation and sale which now accounts for over 30 percent. The country has the potential to generate 30,000 MW of power from its rivers. Besides electricity, Bhutan exports calcium carbide, wood products and cement.

3.2.3  INDIA                                                                                                                                                                                                        

The roots of Indian civilization stretch back in time to pre-recorded history. The earliest human activity in the Indian subcontinent can be traced back to the Early, Middle and Late Stone Ages. India gained independence from the British on 15 August 1947. The freedom struggle was led by Mohandas Karamchand Gandhi, also known as The Mahatma, who is revered as the Father of the Nation.

India has one of the world’s most diverse populations, with most of the major races represented. Today, India has over one billion people. There are fifteen languages recognized by the Indian Constitution and these are spoken in 1600 dialects. Hindi, the fourth most widely spoken language in the world, is the language of 30% of the population and the official language of India.

The Constitution of India, which envisages a parliamentary form of government, is federal in structure with unitary features. The President of India is the Constitutional Head of the Executive of the Union. The Constitution provides that there shall be a Council of Ministers with the Prime Minister as head, to aid and advise the President, who shall in exercise of his functions, act in accordance with such advice. Real executive power, thus, vests in the Council of Ministers with the Prime Minister as head. The Legislature of the Union is called the Parliament, and consists of the President and two Houses, known as the Council of States (Rajya Sabha) and the House of the People (Lok Sabha).

India ranks among the top ten industrial nations of the world and has an increasingly powerful middle class. The Indian economy is potentially very strong with its large industrial output, technological knowledge and extensive reservoir of skilled manpower. Major exports include cotton goods, iron, raw jute and jute products, coffee, electrical goods, leather, handicrafts, diamonds, chemicals and software. The major imports are machinery, petroleum, chemicals, cereals, copper, and zinc.

The majority of Indians (64%) earn their livelihood from the land with agriculture accounting for about 35 % of national income.

3.2.4  MALDIVES                                                                             

The civilization of Maldives as far as can be estimated, dates back more than 2000 years. Archeological findings from many ancient sites in Maldives show ruins of old Buddhist structures, some dating back to 3rd and 4th centuries. The evidence shows that at the time of conversion to Islam in 1153 A.D. the population of Maldives was mainly Buddhist.

 

Throughout its history, Maldives has remained independent, although the Portuguese occupied the country for 15 years in the 16th century. From 1887, Maldives was a British protectorate until it became fully independent on 26 July 1965.

 

The archipelago of the Maldives is made up of a chain of 1190 small, low-lying islands stretching over 800 kms. Out of them only 198 islands are inhabited. The population of Maldives is 270,101. Maldivians comprise a mixed race, unified through sharing a common history, language and religion. Dhivehi is the official language. Islam is the strength and backbone of the country, permeating the entire fabric of the Maldivian culture, polity and civil society.

The Maldives political system is a unique blend of its history, traditions, Islamic faith and modern democratic principles. It has evolved over a period of many years, the first written constitution having been proclaimed in 1932, though unwritten constitutional principles had been in existence long before then. A republican form of government in 1968 replaced the constitutional monarchy, with an Executive President as the Head of State. A new Constitution, that is more comprehensive and in tune with the country’s democratic principles was adopted by the country on 1 January 1998.

The mainstay of the Maldives economy today comprises fisheries and tourism. Nearly 19% of the labour force is engaged in the fisheries sector, which account for over 6% of the GDP. Tourism, which became a major industry since the mid-eighties, accounts for 33% of the GDP. Industrial activity consists of a traditional and a modern sector. The traditional sector consists of boat building, mat-weaving, rope making, black-smithing, handicrafts and other cottage industries. The activities in the modern sector include fish canning, manufacture of garments construction of fiberglass boats, production of cleaning fluids, and bottling of aerated water.

3.2.5  NEPAL                                                                                                              

The documented history of Nepal begins with the Changu Narayan temple inscription of King Manadeva I (464 AD) followed by Malla rulers among other important ones. Before Nepal’s emergence as a unified nation in the later half of the 18th century, Nepal meant KathmanduValley only. The present Nepal consisted of more than 52 small principalities. Prithvi Narayan Shah, the Great King of Gorkha was the founder of modern Nepal who united the country by 1769 by conquering KathmanduValley and making it the Capital.

Nepal has a population of about 23.9 million made up of over 61 ethnic groups living in different regions speaking 70 languages and dialects. Nepali is the national language. Hinduism is the official religion of Nepal and Hindus constitute over 85% of the population. Buddha, the founder of Buddhism, was born in Nepal about 563 B.C. and Buddhists account for 7.8% of the population. A small minority of Nepalese adheres to Islam and Christianity.

After 1951, Nepal has exercised multi-party democracy except during the period of about three decades from 1961 to 1990 when a party-less panchayat system existed. But again, following the democratic movement of 1990, Nepal restored a multiparty system with a constitutional monarchy. The King is the Head of State and the Prime Minister. Constitutionally, there are two houses of parliament namely Pratinidhi Sabha (House of Representatives) and Rastriya Sabha (National Assembly). The House of Representatives consists of 205 members elected by the people for a five year term. The National Assembly comprises 60 members, 10 of whom are nominated by the King, remaining 50 are elected, 35 by members of the Pratinidhi Sabha and 15 by members of local bodies.

The mainstay of the Nepalese economy is agriculture, which accounts for 41% of the GDP with more than 80% of the people dependent on it. The main crops grown are paddy, maize and wheat. Manufacturing, trade and tourism follow farming as the main economic activities of the country. Hand knitted woolen carpets and readymade garments are flourishing industries in the country whose total share in the exports figures is almost 32 %. Petroleum products, chemicals and drugs, food and live animals, vehicles, machinery and equipment are the major imports of Nepal.

3.2.6  PAKISTAN                                                                                                                              

The Islamic Republic of Pakistan appeared on the world map on 14 August 1947 under the leadership of Muhammad Ali Jinnah, Quaid-e-Azam (the Great Leader), who is revered as the Father of the Nation. Pakistan is divided into four provinces: Sindh, Baluchistan, Punjab and the North-West Frontier Province. Islamabad is the capital of the country.

The population of Pakistan (1998 estimate) is 130.58 million. The national language is Urdu, while the official language is English. The leading religion of Pakistan is Islam, which is the faith of about 95 percent of the people. Hinduism and Christianity form the leading minority religions. Other religious groups include the Sikhs, the Parsis and a small number of Buddhists.

Pakistan has a federal structure. The Parliament consists of the Lower House (National Assembly) and the Upper House (Senate). The new administration consists of the President, who continues in office, the National Security Council headed by the Chief Executive, and the Cabinet. Governors have been appointed in all the four Provinces.

Agriculture and related activities engage 46.1 percent of the workforce and provide 25 percent of GDP. The main exports include cotton textiles, cotton yarn and thread, clothing, raw cotton, rice, carpets and rugs, leather, fish and petroleum products. The main imports include machinery, electrical equipment, petroleum products, transportation equipment, metal and metal products, fertilizer and foodstuffs.

3.2.7  SRILANKA                                                                                                                             

Lanka means “resplendent” (from the Pali “alankara”). Stone-age implements found on the island date back at least ten millennia, while evidence is available that the domestication of plants may have taken place around 15,000 B.C. Given Sri Lanka’s central location on the trade routes of the ancient world and the attraction then of her “products”, pearls, timber, gems and ivory and later spices, the island had become a center of East-West commerce well before the Christian era. The direct influence of European maritime powers was felt beginning from the 16th century with the arrival of the Portugues, Dutch and later British. Sri Lanka gained independence from the British on 4 February 1948.

The population of Sri Lanka (1998 estimate) is 18.77 million. The country is a multi-ethnic nation. The Sinhalese, of Indo-Aryan origin, comprise 74 percent of the population; the Sri Lankan Tamils, of Dravidian origin, who migrated to the island thereafter: 12.6 percent; the Indian Tamils, descendants of migrant workers from South India recruited in the last century by the British: 5.5 percent; the Moors, descendants from Arab traders who arrived in the island from about the 12th century AD: 7.1 percent; and others, who include Burghers, descendants of the Dutch and Portuguese: 0.8 percent. Sinhalese and Tamil are official languages while English is the national language. Four major religions are freely practiced in Sri Lanka. Buddhists account for 69.3 percent of the population, Hindus for 15.5 percent, Christians for 7.6 percent and Muslims for 7.5 percent.

At the time of independence, Sri Lanka adopted a Westminster system of Parliamentary government with a House of Representatives, a Senate and a Cabinet headed by a Prime Minister. The British monarch was retained as constitutional head of state, and was represented in the Island by a Governor-General. In 1972, a Republican Constitution was adopted with a single legislature (the National State Assembly) and a constitutional President thus formally severing links with the British Crown. Following the amendment of Constitution in 1978, an Executive Presidential system of government prevails.

The President of Sri Lanka is both the Head of State and Head of Government. The President is directly elected by the people for a term of six years. The supreme legislative body is a unicameral parliament consisting of 225 members elected by a system of proportional representation. A multi-party system prevails and many smaller parties are allied to either the government or the opposition group. The leader of the majority party in the parliament is elected as the Prime Minister.

Ninety percent of the economy of the country at independence depended on the export of the three plantation crops of tea, rubber and coconut. Since the late 1970s, the economy has been progressively liberalized. Industrial policy has shifted from import substitution to export-oriented production. The service center now accounts for 52% in the sectoral composition of the GDP; the manufacturing sector for 16.5%; agriculture for 21.1%; construction for 7.6%; and mining for 1.9%.

Colombo is the largest Tea Auction Centre in the world since London auctions ceased to function in June 1998. Other exports include textiles and garments, coconut products, spices, cocoa, coffee, essential oils, gems, fishery products, rubber, machinery, footwear and leather products and petroleum by-products. Major imports include rice, wheat and sugar, fertilizer, crude oil and investment goods such as raw materials, building materials, transport equipment and machinery.

Benefits of Regional Economic Cooperation & the South Asia Scenario

4.1 Benefits of cooperation

Trade liberalization and regional economic cooperation not only helps reap economic benefits quickly but also benefits the people of the member states and brings welfare to the life in all respects. In international trade regional blocks have been created and positive results have been seen. Regional integration enhances trade opportunities in the light of international trade theory. In international business transportation and geographical factors play a vital role. Regional integration and sharing of resources can lead to very negligible transport cost and may even push it to zero. Due to increased cooperation between neighbouring countries the regional block becomes more competitive and gains from both absolute and comparative advantages. Customer and individual benefit in economic growth is correlated to regional integration. A cluster economic power helps use everyone’s resources efficiently and makes the economies stronger and attracts investment from outside the region. The SAARC was formed with a similar vision. The South Asian region could benefit from free trade of goods and services within the region, very negligible transport cost, use of port facilities of Bangladesh by the other land locked countries, exploit the huge unutilized natural and mineral resources of the region and so on.

4.2 Trade liberalization in South Asia

Around the 1970s the tariff and non-tariff barriers were extremely high, state intervention in economic activities had become pervasive in the South Asian nations. However, this gradually started to change in the 1980s, but it was often a rather hesitant liberalization process and was very uneven between countries.  By 1990s enormous progress had been made but the South Asian region still remained a highly protective region. Historically, the SAARC members have not been trading among themselves to any significant extent. For much of the 1980s intra- SAARC trade has accounted for less than 4% of trade in South Asia. However, this figure has been increasing gradually throughout 1990s. Bilateral trade imbalances in the region are a contentious issue. With the exception of Pakistan all other South Asian economies have a trade deficit with India. The low volume of intra-SAARC trade shows that reflects the fact that most of the regional economies trade with the developed world. The low level of trade among the South Asian countries is a cause for concern in the attempt to successfully move ahead an agenda for regional economic integration.

Country

1970

1975

1980

1985

1990

1995

Exports      
Bangladeshn.a.

2.4

9.1

7.7

3.6

2.7

India

3.9

3.7

3.5

2.9

2.7

5

Nepal

61.9

81.1

38.1

38.5

6.9

7.6

Pakistan

1.5

6.8

6.3

5.3

4

3.1

Sri Lanka

3.2

9

6.8

3.7

3.1

2.4

Intra-South Asia

3.7

5.1

4.8

4

3.1

3.9

Extra-South Asia

96.3

94.9

95.2

96

96.9

96.1

Imports      
Bangladeshn.a.

7.9

3.7

1.3

7

17.7

India

1.4

0.9

1

0.7

0.4

0.5

Nepal

73.6

62

48

32.5

11.5

17.5

Pakistan

0.5

2.8

2.1

1.7

1.6

1.5

Sri Lanka

12.4

6.9

6.3

6.3

6.6

8.4

Intra-South Asia

3.3

3.2

2.3

1.7

1.8

3.6

Extra-South Asia

96.7

96.8

97.7

98.3

98.3

96.4

Trade      
Bangladeshn.a.

6.9

4.9

3

5.9

12.8

India

2.7

2

1.9

1.5

1.4

2.6

Nepal

70.3

67

45.7

34.4

10

14.9

Pakistan

0.9

4.1

3.5

2.9

2.6

2.2

Sri Lanka

8.1

7.8

6.5

5.2

5.1

6.1

Intra-South Asia

3.5

3.9

3.2

2.6

2.4

3.7

Extra-South Asia

96.5

96.1

96.8

87.4

97.6

96.3

Table 3: Intra-regional Trade of South Asia by Country (percentage of each country’s intra-regional trade)

Source: Samaratunga (1999)

The SAPTA and SAFTA

The proposal to set up a SAARC Preferential Trading Agreement (SAPTA) was accepted by all seven member nations of SAARC, in 1993. The process of economic integration in South Asia gathered momentum with the implementation of the SAPTA in 1995 with ratification of the first round of tariff concessions. SAPTA has, however, come to be viewed as an interim platform in the move towards economic integration in South Asia. In 1996, the South Asian governments committed themselves to the creation of a South Asian Free Trade Area (SAFTA). It should be noted here that regional cooperation initiatives providing preferential treatment to members has been largely confined to trade, and have not extended to the investment. Although it was decided at the ninth SAARC Summit to establish SAFTA by 2001, this has proved too ambitious a target. The Eminent Persons Group appointed to examine the implications of the transition to SAFTA recommended that the timeframe be revised, for the non-Least Developed Country (LDC) states of SAARC to have free trade with members by 2008 and for LDC member states to follow by 2010. In the meantime South Asia has forged ahead in expanding concessions under the SAPTA. The first round of concessions came into effect in 1995 where tariff concessions were exchanged on a total of 226 products on a product-by-product basis. The second round of concessions was completed in 1996 with the exchange of concessions on 1,900 additional products. The third round of negotiations was completed in 1998 to include further concessions on 2,500 tariff lines. With the inclusion of the third round over 4,600 tariff lines out of 6,000 have been covered by preferential access.  India offered the largest number of concessions followed by Bangladesh, Pakistan and Nepal. However, the total concessions offered to all member nations still remained very limited at only 1,900 tariff lines.

Despite the apparent progress made in pushing forward the SAPTA, the actual trade impact on the region’s economies has been nebulous. SAPTA to date has had no significant impact in changing the existing trade patterns in the South Asia. Under SAPTA, most of the tariff preferences extended has not been relevant to the trade interest of the member countries. The trade coverage of SAPTA concessions has been limited while other non-tariff barriers and bureaucratic hindrances have constrained countries from benefiting from the agreements. Political tension in the region has served to undermine the agenda in the economic cooperation. In South Asia, political divisions, lack of confidence, and conflicts have hampered the process of regional cooperation. One of the impediments to the progress of regional cooperation may also be the economic predominance of India in the region.  Even then most South Asian economies were engaged in accelerating the liberalization of their economies unilaterally.

The SAARC leaders decided to set up a Committee of Experts to draft a treaty on the SAFTA. The treaty is expected to lay down binding time frames for freeing trade, rules of origin, measures to facilitate trade in the area of customs, provisions to ensure an equitable distribution of benefits of trade to all the states. In order to conform to the GATT, SAFTA should endeavor to cover “substantially all trade” and as such all products should be subjected to tariff negotiations, except for items on the negative list. Given the limited progress made towards trade liberalization in the context of SAPTA, it might be more acceptable to most South Asian economies to initiate the movement towards SAFTA using a negative list like that under ILFTA. However, it should be limited to a very few items unlike the ILFTA. A realistic timeframe should be should be discussed and set out in order to retain credibility o the SAFTA. It would mean that the SAARC countries have to show greater commitment to open their markets to other member countries.

Presently the SAPTA is confined to only trade in goods and does not cover trade in services. Given that trade in services is inseparable parts of trade in goods; free trade in goods will be ineffective and incomprehensive without free trade in services. The inclusion of free trade in service would be a major step and would bring in further integration among the SAARC nations. The Eleventh SAARC Summit moved a step forward in regional cooperation as it agreed to finalize the SAFTA treaty by the end of 2002. The treaty would have to extend special provisions in favour of the smaller and least developed member states to meet the objectives of SAFTA. The finalization of the draft treaty of SAFTA and subsequently its implementation will be in itself an important step forward not only for the SAARC, but also for economic cooperation in the region.

Criteria

Bangladesh

India

Nepal

Pakistan

Sri Lanka

Exchange Rate

Unitary

Unitary

Unitary

Unitary

Unitary

 

Exchange Rate Determination

Managed Float

Managed Float

Pegged1

Managed Float

Managed Float

Payment Restrictions Current Account

No

No

No

No

No

Capital Account

Yes

Yes

Yes

Yes

Yes

State Monopolies in External Trade

Yes

Yes

Yes

Yes

Yes

Import Licenses

Yes

Yes

Yes2

Yes

Yes2

Simplification of Tariffs

Yes

Yes

Yes

Yes

Yes

Average tariff –1995 (unweighted) %

42

48

17

51

24

Maximum tariff rate –

45

40

1103

45

35

1997

Existence of High Level of NTBs

No

Yes

No

No

No

Table 4: Status of Trade Liberalisation Measures in South Asia

Source: Samaratunga (1999); Weerakoon (1998)

5.1 How to advance the SAFTA

The South Asian Free Trade Agreement (SAFTA) which was first debated in 1995 came into a treaty form in early 2004 at the 12th SAARC Summit in Islamabad. The treaty is viewed as a good starting point for progressing towards a free trade area. However a few guidelines have been suggested to advance the SAFTA. There are many lessons that SAFTA could draw up from SAPTA. Although the SAPTA completed four rounds it was not very effective in stimulating intra-regional trade. The main reasons for this were: (1) commodity by commodity approach or the positive list approach, (2) inadequate tariff cuts, (3) leaving out actively traded goods, (4) inadequate trade coverage, (5) non-removal of Non-Tariff Barriers (NTBs). The SAFTA had addressed the positive list approach and had adopted a negative list approach instead. Under this a list of items termed as “Sensitive List” was made and the treaty states that products on this list we be subjected to maximum ceiling that is mutually agreed upon by member nations. However, the other items have remained under discussion. Thus SAFTA has to progress with deeper tariff cuts, reduction of the sensitive list, removal pf NTBs and has to subject actively traded goods to tariff preferences. In order for SAFTA to have regional significance it will have to supersede or integrate the existing bilateral free trade agreements (BFTAs) in South Asia. For superseding the BSTAs the SAFTA time frame should be revised. While reconsidering the time frame, the rules and regulations governing SAFTA has to be designed to minimize trade diversion and maximize trade creation. Economists suggest that it is high time that SAFTA move forward to the liberalization of services to support trade integration. The SAARC Investment Area should come into operation to exploit the trade investment nexus and thereby stimulate intra-regional trade. Thus, investment liberalization in the region should also begin in the immediate future. Non-trade integration in SAARC should start soon and in this context energy and transport cooperation should receive priority. The SAARC Development Fund should come into operation to support the LDCs and develop their supply side. SAFTA should be seen as a building block for a future South Asian Economic Union.

Reasons for slow progress and the future potentials

6.1 Reasons for slow progress

The problem between the nations in the South Asian region dates back to the late 1940s. The problem initiated with the separation of India and Pakistan in 1947. From that tie onwards a very sensitive political difference existed between India and Pakistan. Later with partition of the East and West Pakistan the political difference between Bangladesh and Pakistan also became significant. Political division also existed between India and Sri Lanka regarding the Tamil Nadu issue. Some political distance also exists between India and Bhutan and India and Nepal. The formation of SAARC could not overcome this problem and thus SAATC has become a platform with no action and slow positive results.

As already discussed India is the largest country among the SAARC nations with the highest population, GDP and most resources. Since most of the nations have a problem with India, India is considered the bottleneck for growth and further cooperation in the region. India is a vast country and it also has political problems within itself. The seven sister states of India is one of the most backward regions which receives very little attention. The border trade has special significance to these states due to their geographical location. With the exception of a narrow area the rest of the border of these states are shared with Bangladesh. These states however possesses significant amount of natural resources which can be utilized for the growth of the seven sister states, for India and for the region as a whole. The main reason for the backwardness and weak links of these states with mainland India is the high transport cost involved in moving goods from mainland India to these states and the poor infrastructure of the region. However, if a transport network is set out through Bangladesh the transport cost of transportation will come down significantly. Although the seven sister states possess natural resources investment in the area is low by the Indian government. The goods produced in mainland India also seldom reaches these places since the price becomes too high since transport cost is very high.

The political tension between Pakistan and India has also retarded the progress of SAARC. India often assumes that the smaller nations of SAARC will join hands with Pakistan and become stronger than India. On the other hand Pakistan seems to fear that the SAARC is an Indian strategy to organize the other South Asian nations against it.

6.2 Future Potentials that can be achieved

In order for the nations to come forward with more enthusiasm and enhance cooperation they must have something to offer which their other partners would be needing, be it a product or a service. Even transit facilities for products having export potentials, especially for landlocked countries could serve as a basis for further integration. This would provide economic complementarity. It would help countries to optimize the benefits which could be derived from the exploitation of latent regional potentials. Complementarity could also occur in the area of production, available resources, technology and skills in the areas of specialization of labour forces and even in geographical locations. Thus, complementarity arises mainly from the differentials in factor endowments and it is an important factor determining the pattern of trade between and among nations.

Geographical proximity or contiguity is an important factor for countries intending to cooperate with one another. Since cooperation means exchange or transaction of something, a cost effective transaction among countries is only possible if they are contiguous. The SAARC countries can establish a multi-modal system of transportation within the region to facilitate exchange of goods since they are geographically in close proximity to each other. The proximity factor and a better transport system within the region will lead to increased interaction among the people of the nations which would in turn lead to a more intense cooperation. The SAARC nations must integrate their road and rail networks for improved transportation within the zone. Smooth movement of different modes of transport including the waterways and airways will facilitate exchanges of all kinds. An improved transportation system will ensure lower transaction cost. The countries within the region should also have regional power and energy grids since the countries have natural supply of energy and mineral resources. Similar integration in other major infrastructure depending on the differences in factor endowments would also enhance the growth of the economies and ensure a harmonious relation between the nations.

The potential of growth also exists in exploiting the huge untapped resources of the region including energy and mineral resources. Establishment of common power and energy grids are possible which would ensure the optimal use of the huge natural and mineral resources of the region. Another important potential of the region is the huge reserve of natural gas and coal in the West Bengal, Bangladesh region. The free movement of labour and integration of infrastructure would facilitate external trade and investment into the zone. Technologies could be exploitable economically since cooperation would bring in opportunities for economies of scale.

Lack of political will was a major hindrance to the success of the planned free trade area. A major change in the mindset of the political leadership of the countries is required in order to ensure successful economic integration. An important pre-requisite for establishing close cooperation is to have a shared perception of common benefits. There has to be a feeling amongst the governments as well as the people of the participating countries that they are benefiting equitably, if not equally, from cooperation. The distribution of the benefits has to be fair among the member states. Lack of political will mainly generated from lack of mutual trust at both government and non-government levels. The strained relationship that exists between some of the SAARC nations needs to be overcome in order for the SAARC to exist and provide positive result for the region. Many view the normalization of the bilateral relation between India and Pakistan as an important prerequisite for successful regional integration among the SAARC nations. Strong political will and commitment on the part of the governments of constituent countries is a vital factor for the success of a regional economic cooperation. All this can only be done if the political tension between the SAARC nations can be overcome with the vision of better life for the people of the region and acceleration in the regions economies.

At the present time it is a challenge for the economic and business people to bring in integration into the region. India has to realize that if the SAARC platform cannot be strengthened they will lose out. Excluding India, the countries within the SAARC region have about 50% of the population of the region. This huge population could prove to be a potentially profitable market for India. If India wishes to tap this market they have to share in the light of trade theory and economic integration.  The Seven Sister States is an expensive area for India, since transport to that region is expensive. In order to bring forward this region India needs to integrate with Bangladesh in terms of transportation through Bangladesh and this would improve relation with India. Seven Sisters have a lot of untapped resource. Improvement of relations between India and Bangladesh will help accelerate the efficient use of these resources. Bangladesh can bring energy from Nepal and Bhutan, price of energy would fall and it would benefit Bangladesh. Nepal and Bhutan would also benefit since their resources would be used more efficiently. Such integration and cooperation has to be set out between all countries so that the benefit is reaped by each nation.

In recent years China has entered into the South Asian market with its export of cheap goods especially electronic. China has become competent in the production of all types of goods at a very cheap rate and an acceptable quality. India on the other hand is a vast country with a varied supply of natural resources. India can easily produce products similar to China at almost equivalent prices and good quality. However, in order to do that it may need to integrate with some of its neighbouring countries. If India does not do this they will lose out the market in the SAARC regions who are currently importing a lot of products from China. However, if India moves ahead and integrates to produce the Chinese products and sets up a free trade area with its partners China will lose the market and India can tap a huge market in the region. The SAARC nations would also be more eager to trade and cooperate with India rather than with China. The nations are all developing economies and they can only receive from China but have little to offer. For most nations it is a one way track with China which is leading to widening of the trade gap. But if similar products can be obtained from neighboring countries and resources can be shared the nations can give and take and be more competitive. This can lead to the formation of and development of an economic hub in the region. The region can grow to be a strong economic power which can compete with other regional blocs. Sharing and exchange will be done and political issues can be resolved. However, the above are proposed and potential achievement that can be made. The edge line and risk is whether SAARC will survive or not.

 

Analysis on the basis of Trade Theories

7.1 Absolute Advantage

A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. Each of the SAARC countries has absolute advantage in the production on certain goods. Some nations even have natural resources which gives them absolute advantage in those goods. Some countries also have acquired advantages on mainly industrial products. The ability to produce the goods and services at the cheapest possible price in comparison to the other nations has given the nations absolute advantage. India has natural advantage in iron ore deposit of coal, manganese, chromite, bauxite, mica, nickel ore, copper ore and gold mines. On the other hand it has acquired advantages in automobile, basic food items, textile, computer software and some heavy industries like arms, ship manufacturing etc

Bangladesh has natural advantage in shrimp, coal, natural gas, limestone, kaolin and alluvial clay, glass sand, construction stones and mineral sand. It has acquired advantage in textile goods, leather goods, jute products, cement, pharmaceuticals and manpower. Pakistan has natural advantage in antimony, bauxite, chromite, copper, gypsum, iron ore, limestone, magnesite, marble, molybdenum, rock salt and sulphur. The country has acquired advantage in clothing, cotton and cotton products, rice, carpets and leather goods. Sri Lanka has natural advantage in limestone, graphite, mineral sands, gems, phosphates, clay, pearls and hydro power. They have acquired advantage in aqua fish, aqua culture and sea food, coconut and coconut products, handicrafts, gems and jewelries, rubber and rubber products, tea, toys etc. Nepal has natural advantage and acquired advantage in tourism and hydroelectric power. Bhutan on the other hand has natural and acquired advantages in coal, dolomite, ferrosilicon, gypsum and limestone. Maldives, being a very small country has natural and acquired advantage in fisheries, tourism and cottage industries.

 

The traditional theory of absolute advantage explains:

A. India has a good market in the SAARC countries for:

  • Automobile industry
  • § Computer software
  • § Some heavy industries like arms, ship manufacturing

India can penetrate the SAARC markets by:

  • § Materializing the objectives of SAARC and SAPTA
    • Solving border issues with Pakistan will help India to capture the markets of Pakistan
    • § Moving from basic industries and concentrating on heavy industries.

B. Bangladesh has a good market in the SAARC countries for:

Natural gas

  • § Leather goods
  • § Jute products
  • § Cement
  • § Pharmaceuticals

India and Bangladesh can come to an agreement so that Bangladesh can enter the market of seven sisters with the products like:

  • § Natural Gas
  • § Cement
  • § Pharmaceuticals

C. Pakistan has a good market in the SAARC countries for:

  • § Marble
  • § Sulfur
  • § Carpets
  • § Leather goods.

India can give Pakistan advantage in the product like carpets and leather goods. On the contrary Pakistan can open up for Indian heavy industries.

D. Sri Lanka has a good market in the SAARC countries for:

  • § Gems, pearls

Aqua fish, aqua culture and sea food

  • § Coconut and coconut products
  • § Jewelries
  • § Rubber and rubber products
  • § Tea

Sri Lanka has potential in the SAARC region is for:

  • § Jewelries in the market of other SAARC countries
    • Rubber and TEA extensively to Indian market by allowing India to utilize its automobile and heavy industries in the Sri Lankan market

 

E. Nepal has a good market in the SAARC countries for:

  • § Tourism
  • § Hydroelectricity

Among the SAARC countries Nepal has the unique advantage for hydroelectric project because of its geography. Nepal can allow India:

  • Establishing Hydroelectric project in a joint venture

India needs to help Nepal by giving free transit of its product using Indian land. Also, Nepal can sell its energy to Bangladesh and hence the cost of production of industrial goods will fall significantly in Bangladesh, which in turn will be a contributing factor in supplying the neighboring countries with good quality products at a more competitive price. But before that, India must be economically motivated to let Nepal establish the supply pass through it to Bangladesh.

F. Maldives has a good market in the SAARC countries for:

  • § Fisheries
  • § India can establish joint venture in Maldives to capitalize the natural opportunity.

7.2 Comparative Advantage/Factor Proportion Theory

According to the factor proportion theory a country should concentrate on the product where a relatively cheap input is required. The following table shows recent export import patterns of the SAARC countries and major partners.

 

BANGLADESH

BHUTAN

INDIA

MALDIVES

NEPAL

PAKISTAN

SRI LANKA

BANGLADESH

1981

na

2.5

0

0

5.3

0.3

1987

na

1.0

0

0.5

2.6

0

1991

na

1.4

0

0.7

2.3

0.4

1995

na

1.2

na

0.3

0.8

0.4

1999

0.02

1.1

na

0.1

0.6

0.2

BHUTAN

1981

na

na

na

na

na

na

na

1987

na

na

na

na

na

na

na

1991

na

na

na

na

na

na

na

1995

na

na

na

na

na

na

na

1999

na

na

na

na

na

na

na

INDIA

1981

0.7

na

na

1.2

0

1.0

1987

1.3

na

0

0.6

0.1

0.6

1991

0.9

na

3.3

0.3

0.2

0.7

1995

3.1

0.04

0.04

0.4

0.2

1.3

1999

2.4

0.05

0.02

0.9

0.3

1.4

MALDIVES

1981

na

na

na

na

na

na

1987

0

na

0

na

0.1

16.4

1991

0

na

0

na

0

19.2

1995

na

na

na

na

na

na

1999

na

na

na

na

na

na

NEPAL

1981

11

na

43

na

2

0

1987

0

na

24.7

na

0.6

1.3

1991

0

na

6.1

na

1.5

0

1995

1.2

na

7.7

na

na

0.3

1999

1.4

na

27.7

na

0.2

7.2

PAKISTAN

1981

2.0

na

2.3

na

0

1.0

1987

2.2

na

0.5

0

0

1.2

1991

1.5

na

0.7

0

0

1.0

1995

1.9

0.01

0.5

0.01

0.04

0.7

1999

1.3

na

1.0

0.01

0.02

1.2

SRI LANKA

1981

0.2

na

2.8

na

0

5.1

1987

0.7

na

0.5

0.5

0

2.3

1991

0.2

na

1.0

0.4

0

1.5

1995

0.3

na

0.8

0.4

na

1.1

1999

0.2

na

1.1

0.7

0.05

0.8

Table 5: Intra-Country Exports in the SAARC Region (As a percentage of total exports)

Source: IMF, Direction of Trade Statistics Yearbooks, IMF, 1988, 1992, 2002.

 

BANGLADESH

BHUTAN

INDIA

MALDIVES

NEPAL

PAKISTAN

SRI LANKA

BANGLADESH

1981

na

2.4

na

0

5.3

0.3

1987

na

2.8

0

0

1.4

0.2

1991

na

5.6

0

0

1.7

0.1

1995

0.06

15.3

na

0.06

2.1

0.2

1999

0.05

12.3

0.01

0.11

1.0

0.1

BHUTAN

1981

na

na

na

na

na

na

na

1987

na

na

na

na

na

na

na

1991

na

na

na

na

na

na

na

1995

na

na

na

na

na

na

na

1999

na

na

na

na

na

na

na

INDIA

1981

0.1

na

na

0.3

0.5

0.4

1987

0

na

0

0.2

0.1

0

1991

0.1

na

0

0.1

0.2

0.1

1995

0.2

na

na

0.08

0.1

0.1

1999

0.1

na

na

0.35

0.2

0.1

MALDIVES

1981

na

na

na

na

na

na

1987

0

na

3.1

na

0.4

8.7

1991

0

na

7.4

na

0.4

7.3

1995

na

na

na

na

na

na

1999

na

na

na

na

na

na

NEPAL

1981

0.1

na

41

na

0

0

1987

1.0

na

14.1

na

0.3

0

1991

1.7

na

6.5

na

0

0

1995

1.5

na

15.7

na

0.4

na

1999

0.4

na

31.0

na

0.1

0.1

PAKISTAN

1981

1.0

na

0.1

na

0.1

2.2

1987

0.9

na

0.2

0

0

0.9

1991

0.4

na

0.5

0

0

0.8

1995

0.3

na

0.7

na

0.01

0.4

1999

0.3

na

1.3

na

0.01

0.4

SRI LANKA

1981

.1

na

4.1

na

0

0.1

1987

0

na

4.1

0.3

0.1

2.3

1991

0.2

na

4.5

0.4

0

2.4

1995

0.02

na

9.8

0.02

0.02

1.1

1999

0.4

na

10.1

0.1

0.1

1.7

Table 6: Intra-Country Imports in the SAARC Region (As a percentage of total imports)

Source: IMF, Direction of Trade Statistics Yearbooks, IMF, 1988, 1992, 2002.

7.3 Product Life Cycle Theory of International Trade

According to this theory, the innovator country of a technology is initially an exporter then it loses its competitive advantage. Its trading partner may eventually become an importer of the commodity.

 

This theory has a good implication in the South Asian Economy. The new booming sectors with high growth potential for the Indian economy are:

  • § Software Business
  • § Indian Automobile sector
  • § Heavy machine equipment

 

This business was once in the hands of the USA, EU and Japan. The SAARC countries having a large demand for these products can be good market for India. Already India has entered the Bangladesh market with this business.

Promoting and Facilitating Investment in South Asia

The seven member states of SAARC (South Asian Association for Regional Cooperation), Bangladesh, India, Pakistan, Nepal, Bhutan, Sri Lanka and Maldives, collectively have a population of 1.5 billion, approximately 22 per cent of the world’s population. It is also the region in which a large majority (around 43 per cent) of the world’s poor live. South Asia’s gross domestic product (GDP) is only 2 per cent of the world’s GDP, indicating the low level of per capita income in the region.

Lack of investment capital accumulation and regional cooperation are considered important reasons for the low level of economic dynamism in South Asia. Unlike East and Southeast Asia where regional cooperation initiatives have contributed significantly to the economic growth of the countries in these regions through an increase in inter-regional trade and investment, regional cooperation in South Asia remains weak. An opportunity for accelerated growth and further energizing the economies of South Asia does exist by increasing investment through regional cooperation. Therefore, enhancing investment cooperation and facilitating investment among the countries in the region will be crucial for the development of the economies in the region.

A recent study shows that there is considerable convergence between South Asian economies. Both theory and evidence suggest that regional integration arrangements may provide an important stimulus to foreign investment. Besides attracting more foreign investment, there are many areas, particularly the energy and transportation sectors, in which South Asia can benefit through increased regional investment cooperation given the existing complementarities. Regional investment cooperation can also help lower transport costs, generate more complementarities by expanding and diversifying the production base and trade structure, diversify comparative advantage, introduce appropriate technologies and encourage competition.

 

1980-85

1990

1995

1998

Bangladesh

-0.1

0.1

0.1

9.2

Bhutan

Na

na

na

na

India

34.7

35.4

71.3

65.8

Maldives

-0.2

na

0.2

0.2

Nepal

0.1

1.3

0.2

0.3

Pakistan

42.0

53.3

26.2

14.5

Sri Lanka

23.5

9.4

1.9

10.0

Table 7: Country shares of FDI as a Percentage of Total Inflows to SAARC Countries

8.1 The Investment Scenario in South Asia

Most of the South Asian countries have undertaken far-reaching economic reforms; they have adopted industrial policies that encourage foreign direct investment (FDI) resulting in an increase in FDI flows. However, the amount of inflows attracted by the region remains relative to East Asia and South East Asia quite insignificant. In 1998, it was only US$ 3.43 billion, a mere 0.5 per cent of global flows. In contrast, China received more than 10 per cent of all global inflows. By 2002 although total FDI flows to South Asia had increased to US$4.58 billion, this was still well below 1 per cent of global FDI flows.

 

Country Gross Private Capital Flows (% of GDP) 1990 2000

Gross Foreign Direct Investment (% of GDP) 1990 2000

Bangladesh0.9

3.6

0.0

0.6

India0.8

3.0

0.0

0.6

Nepal3.5

4.8

0.0

0.0

Pakistan4.2

2.5

0.6

0.5

Sri Lanka13.1

7.6

0.5

1.1

Table 8: Private Capital Flow and Foreign Direct Investment in South Asia

Source: World Bank (2002) World Development Indicators Table 6.1

FDI to the region is predominantly from outside the region. The sectors that have attracted most foreign investment vary between countries. In the case of Bangladesh and Sri Lanka, the textile and garment sectors account for 28 per cent and 16 per cent respectively of FDI, whereas 56 per cent of FDI has gone into infrastructure projects in India. In the case of Pakistan, 40 per cent of all FDI has gone into the power sector. While FDI from outside the region has been far greater than intra-regional investments, there are signs that intra-regional investments are increasing. The major outward FDI flows are from Indian firms, which have started to expand FDI both within South Asia and beyond. Firms from other South Asian countries are also increasingly undertaking FDI within the region and investing in a wide range of sectors and activities.

There are two SAARC countries, Nepal and Bhutan, where FDI from India is the predominant source of FDI. On the other hand, none of the SAARC countries are significant investors in Pakistan though there is a very limited FDI flow from the other countries in the region. India is the largest investor among the SAARC countries in Sri Lanka, while Pakistan and Maldives are respectively second and third to India as investors. In the case of Bangladesh, firms from India, Pakistan and Sri Lanka have in recent years invested US$418 million in 133 ventures covering a wide range of sectors. Inspite of India’s huge internal market, investments from other SAARC countries have been quite insignificant, both in relative and absolute terms, accounting for less than one per cent of total foreign investment in India. Bangladesh is the largest investor in India from the region, followed by Sri Lanka, Nepal and Maldives.

 

The Lafarge Surma Cement plant in Bangladesh is the single largest cross-border investment in the region involving a major multinational firm. Lafarge, a French multinational, is one of the largest cement manufacturers in the world. The plant is expected to go into production very shortly. The raw materials, mainly limestone and shale, for this 2 10 million dollar joint venture cement plant in the district of Sylhet, located in North-eastern Bangladesh close to the Indian border will be supplied from a quarry in the bordering state of Meghalaya. The plant, one of the largest in the region, and the quarry are connected by a 17 kilometer (11 mile) cross-border conveyor belt to transport the limestone. The plant will have an initial capacity of 1.2 million tons of cement per annum although this capacity is expected to be doubled in due course.

Another example of a successful joint venture is in the rubber sector in Sri Lanka. The vertical joint venture was initially between an Indian motor vehicle company, Associated Motorways Private Ltd and the Sri Lankan subsidiary of CEAT for the manufacture of tyres. Sri Lanka, which did not have a developed rubber-based industry, gained greater access to the protected and growing Indian market, while India obtained easy access to the supply of good quality natural rubber. At the end of the day both countries benefited through this joint venture.

8.2 Constraints to Investment in South Asia

The enormous difference in size between the economies in the region, above all, the overwhelming size of the Indian economy in comparison to the other countries in the region has proved to be a psychological barrier which needs to be overcome. The situation is further complicated as a result of the varying pace of economic reforms, as well as important policy differences. The many outstanding political problems have without question proved to be a major obstacle to regional cooperation and coordination on economic policies. The safeguard measures designed and adopted by some of these countries particularly to protect their respective domestic industries can largely be diluted by the strong presence of foreign direct investors who have literally a free command over regional natural resources in the same areas across the borders. There is no super regulatory framework and common competition law to safeguard against anti-competitive practices of multinational companies and cross-border mergers and acquisition (M & A). Trade barriers including tariff and non-tariff barriers, such as different standardization and certification processes, subsidies on agricultural products and different customs rules and regulations, impede investment flows across the region. The differences in tax laws and regulations, exchange rates, interest rates, duty structures as well as macroeconomic policies in general have proved to be a major factor in inhibiting intra-regional investment flows.

The investment climate in the ASEAN region and in China is far more attractive than that of South Asia. A study conducted by the Bangladesh Enterprise Institute in 2002, which was supported by the World Bank, found that poor infrastructure, electricity problems, corruption, excessive regulations and poor access to finance for Small and Medium Enterprises (SMEs) were important factors that impede economic growth and development in Bangladesh; that the investment climate was also a major factor in influencing FDI flows into the country. The very same problems, in varying degrees, were adversely impacting on the investment climate of all the other countries in South Asia.

Apart from the poor infrastructure in the countries in the region, the even poorer state of the cross-border facilities was another major problem. During the Tripartite Business Summit held in Dhaka in January 1998, the Prime Ministers of India, Pakistan and Bangladesh emphasized the need to develop the transport and communications sector, as well as the energy sector on a regional basis. They recognized that without doing this, investment both from abroad and within the region would remain insignificant. They recognized that South Asia was potentially one of the richest regions in the world in energy but at present had one of the most poorly developed energy sectors; that the region ought to integrate the supply and distribution of energy. The infrastructure sector until recently has been highly regulated in most South Asian countries; this has restricted private sector investment in the development of a common infrastructure; there were also some serious reservations on the part of India in respect of the role of the World Bank (WB) and other multilateral agencies in promoting and funding regional and cross-border infrastructure projects, particularly in the energy sector. It is important that as SAARC moves towards implementing SAFTA that equal importance is given to the need for the member states to cooperate in promoting and facilitating investment. This will require studies to be carried out on how best to facilitate and fund some of the mega infrastructure projects.

Political factors, acute mistrust and lack of confidence, governance issues, lack of knowledge about each other’s financial systems and capital markets and the reluctance to share information are also important factors retarding the progress and pace of regional cooperation in South Asia. The banking network in the region is poorly developed; the level of cooperation between the central banks is all but absent. The relatively poor regulatory, fiscal, and legal systems have held back investment in South Asia by raising direct costs and by corruption; bureaucratic delays; property disputes also create a sense of uncertainty.

Other constraints to investment in South Asia include:

  1. Low growth rates
  2. Shallow credit markets
  3. Financial market imperfections and weak creditor’s rights that weaken efficiency of the credit market and restrict financing for investment
  4. Low levels of private savings and financial development and high levels of public expenditure
  5. Identical comparative advantages
  6. Low levels of FDI that reduce investment by limiting access to an important source of finance and by forgoing the complementarity between foreign and domestic investment.

8.3 Investment Opportunities in South Asia: Examples

Given the existing complementarities, there are many areas, particularly energy and transportation sectors, in which South Asian economies can all benefit through increased regional investment cooperation. Establishment of joint ventures is crucial in this regard for the economies of this region. Besides generating more complementarities, these ventures help to expand and diversify the production base and trade structure of the South Asian countries and in the introduction of appropriate technologies. Some investment opportunities in South Asia, in particular for infrastructure and energy projects are discussed below.

8.3.1    The Energy Sector

Bangladesh, Bhutan, India and Nepal can develop and utilize a combination of thermal and hydropower more efficiently through a regional agreement. Such an approach would enable India and Bangladesh to use their coal and gas reserves more efficiently while allowing Nepal and Bhutan to develop their large untapped hydro-power potential. All four countries could benefit in the long term by optimally developing and scheduling their generation capacities on an integrated basis through regional cooperation. This will help the countries to avoid building transmission grids across high mountains or major rivers. Trading of electricity would widen the market for electricity in the region and the resource base thereby leading to the least cost development of larger hydro projects.

A study conducted by the Asian Development Bank (ADB) showed that sub-regional cooperation among the countries of the Ganges-Brahmaputra-Meghna (GBM) basins could generate 25000 MW of power. A sub-regional growth quadrangle (since it would cover four countries Bangladesh, Bhutan, India and Nepal) could be established in the GBM area. The objective of the GBM quadrangle would be (1) joint development and management of water and energy resources (2) development of physical infrastructure mainly roads, railways, ports, inland waterways and the GBM rivers and tributaries and telecom (3) promotion of intra and inter-regional trade and (4) promotion of cooperation in other areas such as environment protection, tourism, and establishment of export processing zones.

Cooperation between India and Bangladesh can commence with small-scale transfer of electricity (150-200 MW) from East Zone of India to West Zone of Bangladesh, at the same time Bangladesh may consider exporting 50 MW to Tripura from the eastern grid of Bangladesh. A pre-feasibility study in September 2000 for Bangladesh with USAID support established the viability of a 750 MW power project in the western region of Bangladesh. It was envisaged that 50 per cent of the power generated could be exported to India.

At sub-regional level, there are efforts to tap hydropower potential. At a meeting sponsored by the ADB held in New Delhi in March 2002, an Inter Governmental Task Force of Energy and Water Resources Secretaries of Nepal, India, Bhutan and Bangladesh agreed to develop the hydropower resources of ArunValley in Nepal.

A number of gas pipeline projects have also been recommended ranging from the Iranian and Turkmanistan pipelines to pipelines from Myanmar, Tripura and Bangladesh. Each of these proposals has their advocates and also critics. The politics of energy cooperation cannot be divorced from the other considerations. The key to moving forward is to devise a win-win approach which will be acceptable to all the countries in the region. As in the case of a seamless electricity grid covering the entire region, consideration can also be given to a similar gas grid. However, implementing such a complex project will require time, money and expertise. The World Bank and the multilateral agencies as well as the private sector can play a key role in making such an ambitious project possible.

Non-Commercial energy sources like solar, wind, small hydro, biogas and biomass technologies could play an important role in increasing access to electricity in rural areas. Regional cooperation can provide the framework for such exchanges.

More recently, there is a proposal from the Tata group to invest two billion dollars in Bangladesh in three projects: a steel mill, a fertilizer plant and a power plant. A substantial part of the production from all the three projects will be exported back to India. Both the governments of India and Bangladesh have welcomed this investment at the highest level. However, much will depend on an agreement being reached between the Tata’s and the government of Bangladesh regarding the terms and conditions for the supply of gas for the three projects. Should these projects be implemented they will provide an enormous impetus to both bilateral and regional cooperation.

8.3.2     Transport and Communication

For enhanced regional investment cooperation an integrated transport network is essential (Discussed in detail in the next section). Some of the recommendations for improved logistics are as follows:

  1. Opening up borders and improved border management
  2. Open sky policy for South Asian countries
  3. Opening up ports (For example, Chittagong port of Bangladesh can be used as a regional hub port to serve Eastern South Asia as well as land-locked South West China which is keen to have access facilities to a port in the Bay of Bengal, while Mongla Port can be developed and modernized to take care of Nepal’s exports and imports as well as those of Bangladesh
  4. Constructing a Trans South Asian railway
  5. Building integrated roads and high ways
  6. Integrating South Asia’s road and railway network with that of the ASEAN countries and China
  7. Developing coastal shipping and feeder networks in the region
  8. Improving infrastructure for telecommunication
  9. Developing a cross-country transport system linking Nepal, Bhutan, West Bengal, Bangladesh and the NorthEasternStates of India together.

8.3.3     Information Technology

Considering the enormous potential in the field of information technology (IT), particularly e-commerce, promoting regional cooperation for the development of IT infrastructure through sharing knowledge, experiences and expertise needs to be emphasized. Information technology (IT) plays an important role by increasing connectivity, communication and transparency in the business process. It is also instrumental in attracting FDI. Creating a South Asia wide information network will buttress cooperation among member countries. For example, the lead taken by India in attracting US outsourcing in the IT sector may spill over to other SAARC countries through a common IT infrastructure, technology transfer and knowledge sharing.

8.4 Steps to facilitate Investment Cooperation

The South Asian region is facing formidable challenges today posed by the rising cost of non-cooperation among member countries and the adverse impact of globalization. A SAARC Investment Area, similar to the ASEAN Investment Area, can help in generating intra-regional investment flows as well as attracting foreign direct investment from outside the region. A draft SAARC Regional Investment Agreement is under consideration. It is hoped that this agreement will be signed at the forthcoming SAARC summit to be held in January 2005 in Dhaka.

In order to create conditions favorable for promoting and protecting investments in South Asian countries both by regional investors and outside investors, a common investment platform should be formed based on a common investment framework and common approaches. The approach should include:

  1. Harmonizing investment policies, taking a common stand towards FDI and simplifying rules and regulations for FDI in the region
  2. Harmonizing and coordinating macroeconomic policies
  3. Ensuring that financial institutions (central banks, other related agencies) are properly integrated and banks are interconnected
  4. Harmonizing exchange rates
  5. Harmonizing tax laws
  6. Harmonizing customs laws and procedures between member countries
  7. Developing a legal framework through revision of the existing laws with current market realities and by setting up a SAARC Arbitration Council
  8. Developing a regulatory framework geared towards proper competition policy and anti-trust laws
  9. Harmonizing national standards and certification processes to ensure quality.

A common investment strategy can help in building a common investment framework and in harmonizing and coordinating policies. The main focus of the common investment strategy within South Asia should be: (1) growth enhancement by increasing investment and capital accumulation; (2) fiscal, regulatory, banking, and judicial reforms; (3) FDI policies; and (4) improving infrastructure.

It is particularly important to have inter-SAARC bodies that will facilitate investments, improve banking links, and intensify the cooperation between the stock exchanges in the region with a view to sharing information, data, undertaking joint training program and eventually facilitating cross listings and joint issues. Some thought may be given to the establishment of a SAARC Investment Authority to oversee all matters relating to the promotion and facilitation of investment in the region.

Regional cooperation for the development of SMEs through investment and sharing of knowledge, experiences and expertise needs to be taken under consideration. Specifically, FDI policies for SMEs need to be revised and harmonized.

A key factor in encouraging investment cooperation will be the speeding up of the South Asian Free Trade Area (SAFTA). At this stage bilateral free trade and investment agreements can be concluded, which will not only stimulate trade but also investment. This has been the experience of the Sri Lanka-India FTA. For example if India can be persuaded to give immediate duty-free access to a wide range of exports from Bangladesh, under an early harvest arrangement, this will almost certainly stimulate and encourage Indian investments in Bangladesh. Bangladesh would then become an excellent location for Indian manufacturers not only to access the Indian North East, but also the rest of India. Indian manufacturers could also take advantage of Bangladesh’s duty-free access to the European Union, Japan, Canada and Australia.

With the ultimate objective of enhancing regional cooperation, opportunities for sub-regional cooperation based on geographic proximity and common economic interests (such as cooperation between Northeast India and Bangladesh) can be explored. Promoting vertical integration of production and joint venture for intraregional investment and technology transfer needs to be highlighted.

Finally, it is important that the governments in the region become more proactive on a whole range of issues relating to regional cooperation in general and SAARC in particular. It is extremely important to have strong institutional support in the way of close interaction and cooperation between governments, central banks, finance ministries, related government agencies and business people. Interaction, specifically between the private and public sectors, needs to be intensified in order to facilitate and encourage investment cooperation.

An Annual Business Summit with the SAARC heads of government, which would also be attended by the finance and trade ministers, Governors of the central banks, the heads of the Boards of Investment, business leaders, editors, heads of think-tanks, may be organized along the lines of the Davos World Economic Forum. The Business summit could rotate between the Maldives and Bhutan. At the time of the annual SAARC Summit or just preceding it, the SAARC Chamber of Commerce and Industries (SCCI) and the South Asia Centre for Policy Studies (SACEPS) can hold a joint meeting to provide some inputs to the summit.

There is a need for more interaction and cooperation at the non-governmental level through networking arrangements, information exchange, visits and conferences. The SAARC Chamber and SACEPS should be encouraged and supported to complement the work of SAARC and the intergovernmental process. A joint Business Council bringing together the public and private sector on investment and trade issues needs to be established to explore possibilities of investment and trade through joint ventures. SACEPS should be encouraged to carry out research work on trade and investment issues and feed this research both to the SAARC intergovernmental process and to the SAARC Chamber. At the political level, it is necessary to undertake confidence-building measures, which would help to create a more congenial climate for investment cooperation.

Integrating Transport System of South Asia

Surface transport networks in South Asia still continue to remain fragmented for various historical, political and economic reasons. As a result their potential as engines of economic growth at the regional/sub-regional level remains largely unrealized. This is despite the fact that basic infrastructures and facilities already exist in many countries to establish mutually beneficial intra and inter-regional transport linkages.

In the highly competitive world economy of today, transport cost is a significant determinant of competitiveness, which makes an integrated and efficient surface transport network an essential element for enabling economic integration at any level.  Some of the consequences of non-cooperation in South Asia are highlighted and an attempt is made to indicate how the member countries of SAARC can mutually benefit from closer cooperation.

Considering the present unsatisfactory state of transport integration and the political constraints which are standing in the way of transport cooperation in South Asia, it is time now for concerted efforts to be made by all stakeholders and the civil society at large to bring about a change in the political mind-sets of the leaders.

9.1 CurrentState of Transport Integration in SAARC

        Railways

Before the partition of India in 1947, the intra-sub-continental movements were mainly carried out by railway with inland water transport carrying part of the traffic, particularly between the states of Uttar Pradesh, Bihar, Bengal and Assam. Until the 1965 war between India and Pakistan, Indian rail wagons used to come well inside the then East Pakistan using rail lines which crossed national boundaries (See Map 1). Although these physical links are still there, very little cross-border movement by rail is taking place today between India and Bangladesh. In this connection, lack of coordination between gauge conversion in Indian Railway (IR) and dualization in Bangladesh Railways (BR) could kill prospects of uninterrupted flow in the future. Indian and Bangladesh wagons have different coupling and breaking systems. BR wagons do not cross the border because these cannot be connected to Indian rolling stock without reducing the efficiency of Indian trains. Possibilities of having unit trains of BR wagons could be looked into as a solution. Currently, Indian rail wagons are pulled by Bangladesh locomotives only over short distances inside Bangladesh. Similarly, movement of Pakistani passenger train across the Indo-Pakistan land frontier can move only up to in India.

        Inland Water Transport

Today, inland water transport (IWT) movements between West Bengal, Bangladesh and Assam still continue though with periodic interruptions, The class-I routes operate throughout the year with a minimum draft of 12 feet (See Map 2), However, shifting rivers and the increasing rate of siltation (which requires continuous dredging) make it difficult to maintain stable depths on the secondary routes within Bangladesh. The IWT protocol which was signed between Bangladesh and India in 1972 is being renewed every two years with improved provisions to stimulate use of IWT routes. Inspite of this protocol, India apparently, is not making full use of these river routes transiting through Bangladesh. Some of the problems which might be contributing to low levels of IWT use may include: difficulties of round the year navigation along certain major routes due to the draft limitation; lack of sufficient ports of call; and absence of facilities for night navigation.

        Road Transport

Road transport development in the SAARC countries has been very fast. Even in India, railways are facing the tough competition from road transport (See Map 3). In Bangladesh around 65 to 70 per cent of all goods and passenger traffic are moved by road transport. Due to differences in the axle load limit which is 10.2 tons in India vis-à-vis 8.2 tons in Bangladesh and Pakistan, Bangladesh has not been allowing trucks from other countries to travel on its roads. (Bangladesh has, however, revised its axle load limit to 10 tons recently). India has imposed similar restriction, but does allow trucks from Nepal and Bhutan to operate on designated transit routes within India. Indian trucks are allowed into Nepal but are given only 72 hours to return to India.

Considerable inefficiencies exist at the land border crossings between SAARC countries. The basic constraints are the lack of efficient customs operations, including lack of transparency of procedures for inspection, informal payments, and inadequate preparation of customs documents by the shipper, etc. An unusually long time is taken for scrutiny, checking and completion of documents and for completion of formalities with the banks. Banking facilities are inadequate; medical, communication, warehousing, security and fire fighting facilities are deficient; wayside amenities are absent. For want of truck terminals, vehicles are parked on the road creating acute congestion. In most of the border points there is only one exit both for passengers and goods creating considerable inconvenience for users. A World Bank publication prepared in 2001 by Uma Subramanian, and her team identified key transport and logistics impediments that have left the South Asian sub-region, comprising Bangladesh, Bhutan, eastern India and Nepal, lagging behind in economic growth, by obstructing the seamless flow of their goods and services to regional and global markets. Detailed information on physical gaps and constraints, policies, procedures, commodity type, and market conditions helped to determine where improvements in the short term can bring about significant returns in terms of efficiency improvements.

9.2 Constraints to Crossing National Borders

Summarized below are some of the constraints to crossing borders among the SAARC countries which remain as major problems.

        India- Bangladesh

  • Road, Rail, Water routes available but no through movement except by waterways.
  • Goods by road need trans-shipment at border.
  • Dhaka-Kolkata bus operation since 1999 doing well but Dhaka-Agartala bus operation since 2002, with one bus on alternate days, a losing concern.
  • Indian wagons pulled by BR Locomotives within Bangladesh. No Inter-country trains as yet. Shahbajpur/Mohishasan rail link with North East India not in use for years,
  • From Petrapole, only taxis and no bus available for Kolkata. Facilities and roads on Indian side from Petrapole to Kolkata not adequate.

        India-Bhutan

  • Unhindered transit facilities provided for goods.
  • Bhutanese buses allowed up to certain towns in West Bengal and Assam.
  • Private goods vehicles allowed up to rail head.
  • Bhutanese third country cargo faces problems at Kolkata port.
  • Movement of goods in containers can help, for which dry port at Phuentsholing essential, where new truck parking also required.
  • Road up to Thimpu needs improvement.

9.2.3   India-Nepal

  • Indian vehicles allowed free anywhere in Nepal and given a limit of 72 hours to return to India.
  • Nepalese trucks need permit for every trip to India, validity 3 months.
  • Multi-entry permit essential. A draft under consideration.
  • Nepalese trucks allowed freely up to rail head at Rauxal. Calcutta port congested, Mumbai port as an alternative not attractive.
  • Only third country traffic allowed through Rauxal, but Nepal also wants to explore options for bilateral trade through this point.

        India-Pakistan

  • No goods movement by Road, one passenger bus moves per week in either direction since 1999.
  • Goods movement by rail not in use. Pakistani passenger trains move only up to Attari inside India (opposite Wagah in Pakistan), where transfer takes place.
  • Visa restriction city wise; Police reporting needed; single port of entry/exit. Direct shipping between Karachi-Mumbai not allowed, unless it touches a third country.
  • Toilet, water, banking facilities lacking at border crossings.

In conclusion, it may be said that considerable inefficiencies prevail at the land border crossing between the member countries of SAARC which remain a serious impediment to trade and social intercourse in the region.

9.3 Consequences of Non-cooperation

Some of the consequences of non-cooperation in South Asia are indicated below:

  9.3.1 Movement between North East India, Bhutan, Nepal and Bangladesh

During British India, the transport networks were all radiating outwards from the international sea ports of Karachi, Bombay, Madras, Kolkata and Chittagong. Subsequently, several new ports have been developed in the sub-region which includes sea ports near Karachi and Bombay, Haldia near Kolkata, and Mongla in the south-west of Bangladesh. In the context of North-East India, Bhutan and Nepal due to congestion at Kolkata port, Bangladesh ports (Chittagong and Mongla) could have provided a very easy access to the sea. The shipment of Assam tea to Europe on its traditional route through Chittagong is not possible since it is not covered by the current bilateral agreement. As a result, the transportation cost includes a trucking route of more than 1400 kilometers to KolkataPort through the land corridor termed the “chicken neck” between Bangladesh and Nepal (See Map 4). The traditional route for Assamese tea via Chittagong port would have cut the journey for export shipments by almost 60 per cent. Third-country trade for both Nepal and Bhutan is also routed through Kolkata port, with associated delays and cost. But their export/import cargo could have moved more cost effectively through Bangladesh ports.

Agartala, the capital of Tripura state, is also constrained by its weak transport links with the outside world as well as with the mainland India. The southern border of Tripura state is only 75 km from Chittagong port. But since access to Chittagong port is not allowed under any agreement between Bangladesh and India, goods from Agartala are required to travel a distance of 1645 km to reach Kolkata, against a direct distance of 350 km across Bangladesh.

If Bangladesh would have allowed Indian cargo access to the sea through ChittagongPort, it could have earned considerable foreign exchange for the services it would render in terms of say railway charges, the port charge and transit fee.

9.3.2     Movement between Nepal and Bangladesh

Due to lack of political understanding with India, Bangladesh is not only losing the chance to earn foreign exchange, but also paying a price. Although India has allowed a route between Bangladesh and Nepal across the “Chicken Neck” for bilateral trade, yet goods are required to be trans-shipped at the Banglabandh land port. Since this route cannot be used for third country trade of Nepal, its export and import traffic cannot use Bangladesh seaports of Mongla, although it has a direct broad gauge link with Rauxal, the Indian Rail head at the India/Nepal border. Due to congestion at Kolkata port, Nepal expressed an interest in using Bangladesh ports for its third country trade, but India did not agree to this.

9.3.3     Movement between India and Bangladesh

In the absence of a clear political understanding among the countries of SAARC, overland movement of goods and passengers among the member countries has been very limited except between India, Nepal and Bhutan. As a result, it takes 45 days to transport a container from Delhi to Dhaka, because the container first moves to Tughlakabad ICD, then to Mumbai (India) and Singapore (See Map 4). From Singapore, the container is shipped to Chittagong port, and then to Dhaka. According to a reliable estimate, the distance of around 2,000 kilometers between Dhaka and Delhi could have been covered in two to three days by rail, Similarly, the distance between Dhaka and Lahore has also increased from 2300 km to 7162 km after 1947, because overland movement across India is not allowed.

9.3.4     Movement between India and Pakistan

The movement of goods and people between India and Pakistan by road and rail remains severely restricted. Goods movement by road is not allowed. One passenger bus a week has been traveling across the border in either direction since 1999, with occasional interruptions. Goods movement by rail is not allowed. Pakistani passenger trains are allowed only up to Attari in India opposite to Wagah in Pakistan. Passengers going to Pakistan change their trains at that station. Direct shipping between say Karachi and Mumbai port is also not allowed, unless the ship touches a third country. All these restrictions apply due to lack of any political understanding and expose both countries to high transaction costs. The matter does not end there. New Delhi and Teheran are cooperating in the development of a transport corridor from India to Afghanistan and Central Asia through Iranian territory (See Map 3). Since Pakistan has been denying facilities for overland trade between India and Afghanistan, this corridor has become the key to rapid expansion of economic cooperation between New Delhi, Kabul, and Central Asia.

Iran is developing a new port at Chabahar (See Map 3) from where a road will skirt the Pakistan border into Afghanistan where it will link up with the garland road system that connects all the major cities in that nation. India will help Afghanistan build the road link from the border with Iran to its internal road system.

The Chabahar corridor will give India the much needed access to Afghanistan and Central Asia, although through a much longer and more expensive route. Had there been a more positive understanding between India and Pakistan, it could have opened up much wider avenues for economic cooperation involving other countries of South Asia as well.

9.3.5     Visa Requirements

With regard to visa requirements for passenger movement between SAARC countries, there has been very little improvement over the years. Citizens of SAARC countries still need visas to visit each other except for travel between India and Nepal, and India and Bhutan. Maldives is the only country in the region which permits SAARC countries to enter without a visa and it extends this facility to all countries. Recently, Sri Lanka has permitted visa free entry to all SAARC countries, a move which has not been reciprocated by its neighbors. However, visa less travel has given a big boost to Indian tourists visiting Sri Lanka. With regard to visa issuance between Pakistan and India, the situation is more complicated. Visas are issued city wise, and visitors are required to report to the police on arrival. Visas are again restricted to a single port of entry and exit.

9.4 What Needs to be Done

Considering the present unsatisfactory state of transport integration and the political constraints which are standing in the way of transport cooperation in South Asia, a number of actions are required to address the situation. Indicated below are some of the major actions which could be taken.

9.4.1     Strong Political Commitment

Virtually all the constraints to improved transport connectivity in South Asia indicated above remain political. Thus, the key to transport integration lies in a change in political mind-sets. The declaration at the Islamabad summit in January 2004 seeking to strengthen transportation, transit and communication links across the region as well as harmonization of standards and simplification of custom procedures indicates a renewed political commitment to improve connectivity across the SAARC countries. The challenge to the SAARC governments will be to operationalize these commitments by dismantling the political as much as the infrastructural barriers to improved communications.

Here civil society in South Asia and particularly the business community can play a proactive role in pressing governments to honor the commitments made at Islamabad. Serious professional work identifying measures to integrate the transport network of South Asia can be undertaken at the level of civil society to supplement intergovernmental initiatives and to accelerate official action in this area. Some ideas on the scope for coordination of transport development and facilitation of international traffic are presented below.

9.4.2     Coordination in Transport Development

 

Traditionally, development of transport system in the South Asian countries has been considered only as a national issue and did not seriously take into account the cross-border issues of compatibility, uniformity of standards, infrastructure and equipment design, which are vital to increasing movement of goods and people across national boundaries. In this context, the following areas need urgent attention.

9.4.2.1   Coordinated Development of Rail Network

The rail networks in South Asia are a mix of broad (1.68 meters) and meter (1.00) gauge. India is making a concerted effort to convert its network to broad gauge and Bangladesh is currently undertaking some conversions of meter gauge to dual gauge.

In order to ensure that traffic can move smoothly by railway between various countries of South Asia, there is a need to coordinate the conversion program of Indian Railways with the dualization program of Bangladesh Railways (See Map 6). The coupling and braking system will also need to be standardized. This would be essential for providing smooth rail corridors upto Chittagong and MonglaPort for traffic to and from Nepal, Bhutan and North-East India including Agartala, once the dualization of track is completed up to Chittagong. However, to be able to face the competition from road transport, it would be essential to achieve significant improvements in rail operation if this mode is to capture most of the inter-country traffic. To this end, use of compatible rolling stock would be essential. Since dualization has been completed up to Joydebpur near Dhaka, freight trains from India on BG track can now move almost up to Dhaka, if required. Once the dualization of the rail track is completed up to Dhaka a regular train service between Dhaka and Kolkata could be initiated.

9.4.2.2      Prospects of Road Transport

Most of the movements by road transport are taking place along the Highways, the majority of which in both Bangladesh and India consists of roads with 2 lanes (a width of 7.3 metre). To this end, India is yet to agree to a shorter Highway route between Bangladesh and Myanmar through Sutarkandi (Bangladesh), Karimganj and Silchar in India. The present route between Sylhet (Bangladesh) and Tamu (India/Myanmar Border) via Shillong, Dispur, Kotima and Imphal is 400 km longer than the route mentioned above.

Considering that road transport is already a dominant mode of transport compared to railway and water transport in most of the South Asian countries, it would be highly undesirable to overburden the road transport which is already contributing to growing environmental pollution. In addition, considering the physical condition of roads in Bangladesh, and the axle load limitation of Bangladesh and Pakistan, which is 8.2 tons per axle, compared to 10.2 tons in India, Nepal and Bhutan, it would be a bit premature to open Bangladesh and Pakistan roads to any substantial movement of international traffic without strengthening the road infrastructure. Although Bangladesh has recently raised the axle load limit to 10 tons, it will take quite sometime to upgrade the infrastructure to that standard. However, for movement of high value and perishable goods trucks will continue to play a dominant if not an exclusive role. Under those circumstances, it would be desirable to encourage use of more and more containers to be carried by “multi-axle vehicles.”

9.4.2.3      Using Full Potential of IWT

Inland Water Transport could play a very prominent role in transporting low value bulk cargoes that move between Kolkata and Northeast India, including TripuraState. It is a mode of transport where no trans-shipment at the border crossing is involved and its charges are the lowest per ton km of freight. Even then it is still at a disadvantage because of its low travel speed, in the range of 50 to 80 km per day due to limited night navigation and drafts on certain routes. Lack of sufficient ports of call may also be discouraging movement of inter-country trade by IWT. The above mentioned issues need to be jointly looked into by both the governments of Bangladesh and India with a view to make water transport really competitive for low value bulk cargo, with efficient logistics linkages to provide door to door services.

9.4.3          Facilitation of International Traffic

Facilitation of international traffic covers movement of both goods and passengers. As such these have been addressed separately:

9.4.3.1      Goods Movement

To facilitate movement of international traffic, there are international conventions. Taking lessons from European experience, UN-ESCAP resolution 48/11 of April 1992, urged member governments to accede to seven international land transport facilitation conventions mentioned in the resolution. Meanwhile, as an interim measure, a number of sub-regional groups have started adopting certain Transit Transport Framework Agreements (TTFAs). Important provisions from the international conventions are being included in the protocols of these TTFAs.

In addition, it would be essential to remove inefficiencies associated with documentation and procedures involved in border crossing such as customs inspection, excessive documentation and multiple signature requirements, lack of transparency, informal payments, etc. Emphasis also needs to be placed on human resources development to deal with trade and transport facilitation issues as well as customs management practices. Acquisition of such crucial competency in the work force will be a major challenge for SAARC member countries.

9.4.3.2      Movement of Passengers

In order to facilitate movement of passengers between SAARC countries, it is essential to simplify the visa requirements. Ideally, SAARC countries could approximate the arrangements between India and Nepal where visa requirements have been completely abolished. In case it is difficult for certain pairs of countries to achieve this arrangement immediately, in the interim period, visas may be issued free of charge on arrival, at the port of entry, leading finally to the abolition of visa requirements. In this context, it may be noted that in ASEAN countries, visa-free travel for all ASEAN citizen has been in operation for some years now. In BangkokInternationalAirport, separate immigration counter has also been set up for ASEAN passport holders. To facilitate visits to SAARC countries by outsiders, an arrangement similar to the Schengen Visa could be considered. With a Schengen visa, one may enter into one of the member countries and travel freely throughout the Schengen zone. Internal border controls have almost disappeared.

The present state of transport integration among SAARC countries is totally out of step with the global trend towards regionalization. The South Asian countries need to make a decisive departure from the present situation in order to be fully integrated into the ongoing globalization process. The economic pay off from such integration would be correspondingly high. As regards the political impediments to such integration, the SAARC countries should take some lessons from other sub-regions where mutually beneficial economic exchange are taking place in spite of political differences.

In this context a process of awareness creation about the mutual benefit of transport integration, or cost of non -cooperation, based on a comprehensive study referred to earlier, could go a long way in persuading the political leadership about the importance of transport integration. Unless rapid progress is make in this direction, the South Asian sub-region will become the missing link in an otherwise integrated regional and world transport network. National transport systems are within the exclusive jurisdiction of sovereign governments and their integration can be achieved only when the national governments show a strong political commitment to the goal of a more integrated South Asian community in general and an integrated South Asian transport system in particular.

Promoting Energy Cooperation

There are distinct advantages for South Asian countries to cooperate in the energy sector. These countries together possess vast stores of energy mostly in the form of water resources, oil, forest, coal and gas. However, these countries continue to be characterized by low per capita consumption of energy, poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy availability. These countries have remained largely energy importers and increasingly faced a serious energy shortfall. This is likely to deepen further both because of ongoing economic liberalization-led energy intensive activities and rise in income level-led steady switching over of the rural and urban families from traditional bio-fuels to more efficient and convenient modern fuels. The inability to cater to the increasing industrial and other commercial energy needs have adversely affected their productive activities, social development and investment climate. Power shortages, outages and low quality have imposed substantial costs on the economic growth. This is further exacerbated by structural, institutional and financial problems. Energy security is, therefore, emerging to be one of the most critical issues in South Asia region. The following table shows the commercial energy consumption of the region.

Country

Commercial Energy Consumption (1998)

Total Quadrillion (Btu)

Petroleum (%)

Natural Gas (%)

Coal (%)

Nuclear (%)

Hydro­electric (%)

Other

(%)2

Bangladesh

0.4

29

69

0

0

2

0

Bhutan

0.01

30

0

9

0

61

0

India

12.51

30

7

55

1

6

0.2

Maldives

0.004

100

0

0

0

0

0

Nepal

0.04

57

0

8

0

32

4

Pakistan

1.74

43

38

5

0.2

13

0

Sri Lanka

0.17

76

0

0

0

24

0

South Asia

14.87

33

12

47

1

7

0.2

Table 9: Commercial Energy consumption

Source: U.S. Energy Information Administration, International Energy Data base, December 1999.

10.1 Energy Sector Reforms

These countries have introduced massive reforms in the energy sector targeted at improving availability, accessibility and affordability and reducing import dependence. Most of the South Asian countries have focused on the following strategy in energy sector reforms:

  • Segregation of the regulatory functions from the government and vesting them in an independent regulatory commission
  • Unbundling the various activities from a vertically integrated unit to distinct and separate units based on functions
  • Corporatization of various units
  • Tariff and pricing reforms
  • Private sector participation
  • Cross-border trading options

This restructuring is aimed at making these utilities particularly power more efficient and financially viable. The private sector including the foreign investors can now set up thermal, hydroelectric and wind or solar and gas based energy projects. A large number of private sector investors have entered into the energy sector. At the same time there has been a realization that availability and accessibility to energy can transform the quality of life and work substantially, help raise health and educational standards and retard rural-urban and cross-border migration by enhancing the level and pace of income and employment generation

 

 

 

Per Capita Electric Power Consumption (KWH)

Transmission and Distribution Losses (% of output)

1990

1997

1990

1997

Bangladesh

43

76

34

15

Bhutan

-

-

-

-

India

254

363

18

18

Maldives

-

-

-

-

Nepal

28

39

39

28

Pakistan

267

333

21

24

Sri Lanka

153

227

17

17

South Asia

228

324

19

18

World

1928

2053

8

8

South Asia as % of World

11.8

15.8

137

125

Table 10: Electric Power Consumption and Losses

Source: World Development Report, 2000/2001, Attacking Poverty, World Bank 2000, p. 308, Table 18

10.2 Scope for Energy Cooperation

Regionalism, besides its strategic, geo-political and foreign policy dimensions, has been a major plank of development cooperation and integration in many parts of the world. There are ample examples of varieties of regional groupings that have transformed the conventional outlook and aspirations into more open, dynamic and wider systems and practices of peaceful coexistence, collective responsibility and regional development. There are instances where bilateral conflictual issues have been effectively dealt with by the larger concept of a win-win situation generated by regionalism and multilateralism. Regional cooperation has brought about significant transformations in some of the region’s strategic options, political actions, economic orientation and development gain.

Economic gain based on regional cooperation in the energy sector has become a firmly established practice across the regional groupings. Many developing countries, because of their low income and small market size, are unable to capture by themselves the inherent economies of scale of major infrastructure investments. Cross-border energy exchanges will bring the entire issues of regional cooperation and integration in this sector to the forefront

Given the historical context, topographic and demographic features, natural resource endowments and socio-cultural ethos, South Asia could be the most natural unit of cooperation and integration. Creation of a South Asian energy market and cooperative development of the available diverse energy sources in the region can help increase the level of energy security in the region and thus can subsequently contribute to achieving a sustained higher economic growth. This could lead to a South Asian regional power and gas market and competition among producers both public and private that would ensure economic and efficient delivery of services to the consumers in the region. At the same time, the power system networks of Bangladesh, Bhutan, India, Nepal, Pakistan and even Sri Lanka can be interconnected to achieve greater efficiency and economy in the overall system.

In South Asia there are clear options emerging in the arena of regional cooperation in the energy sector. The cross-border energy trading is one of them with the Bhutanese success story spreading to Nepal, Bangladesh and even Pakistan. This is further corroborated by a match between gas deposits in Bangladesh, hydro power potential of Bhutan, Nepal and North East India and the bourgeoning market in the South Asian countries. The strong seasonality factor in both generation and demand that is noticeable in the South Asian countries has in turn generated a lot of interest in cross-border power trading. In some cases, the imprudent use of power during a typical day and season has also led to major losses. For instance, in Bangladesh a sizable generation capacity to the tune of at least 1200 MW remains unutilized during the off-peak hours and in effect they remain shut for these hours. They produce power only when they are requisitioned to produce. This available capacity can be a ready source for regional cooperation for import-export of electricity from neighboring countries.

In India, clear seasonality exists in power generation. It particularly becomes clear in the hydroelectric power generation. The lean months for hydro power generation are from January to June whereas in Nepal the supply capacity is maximum during the wet months. It is during this period of hot summer months the Indian system is starved of energy and capacity. This is where the complementarity in cross-border power trade emerges.

10.3 Energy Cooperation: Regional Initiatives

A number of organizations in the region and outside have been consistently working towards fostering the cooperation in energy sector in South Asia. This includes the technical and professional public sector organizations such as Petrobangla, Power Grid and Power Trading Corporations of India, Electricity Authorities of Nepal, Sri Lanka and Pakistan. On the other hand, international agencies like the World Bank, ESCAP, Asian Development Bank, USAID (SARI-E initiatives) and UNDP have also been fairly active in the last few years. The SAARC has set up a Technical Committee exclusively on energy sector cooperation under its Integrated Program of Action and has recently appointed a Working Group on energy cooperation.

 

A number of studies have already been conducted on various aspects of energy cooperation in the region. These are conducted by research organizations such as South Asia Network of Economic Research Institutes (SANEI), Coalition for Action on South Asian Cooperation (CASAC), South Asia Centre for Policy Studies (SACEP), Bangladesh Unnayan Parishad (Dhaka), Centre for Policy Dialogue (Dhaka), Institute for Integrated Development Studies (Kathmandu), Centre for Policy Research (New Delhi) and Tata Energy Research Institute (New Delhi) and premier universities like Jawaharlal Nehru University (New Delhi), BUET (Dhaka), Quad-i-Azam University (Islamabad), Lahore University of Management Sciences, Tribhuvan University (Kathmandu) and Colombo University (Sri Lanka). Some of these institutes and universities have played a very active role in advocating the cooperation issues on both water and energy in the region.

 

The private sector role in energy cooperation issues in the region is emerging rather slowly. This is both because of their marginal role in the past in their respective national energy sector and overwhelming public sector domination in energy related activities. After the reforms initiated in the energy sector in the last decade or so, the private sector could now play an active role both at the national and regional levels. The SAARC Chambers of Commerce and Industries, a recognized apex body of the federations of chambers of commerce and industries in all the South Asian countries, is now emerging as a major agency for bringing the energy cooperation issues to the forefront.

10.4 Energy Cooperation: Options and Models

There are a range of options for any energy exchange project in South Asia region. The reality is that till 1947 an overwhelming part of the region had an integrated energy market and system. The choice of a model to trade or exchange electric power and other energy varieties among these countries is a crucial issue. There are successful instances of international gas and power trading mechanisms in some regions across the world. One notable enabling feature in the energy markets in these regions is the prevalence of competitive energy trade legislation.

 

The possibility of energy trading has opened new vistas of cooperation. Cross-border energy trade could lead to i) effective utilization of natural resources, ii) increase in reliability of power supply, iii) economy in operation and mutual support during contingencies, iv) bring about large scale transformation in the sectors contributing to economic growth, v) act as the single most effective confidence building measure (CBM) through the participation of multiple stakeholders and vi) substantially promote market integration in energy related goods and services. The changing nature of economic actors and institutions and their increasing support base in the civil society are likely to rather force policy designers in South Asia to procreate modalities for a substantive and lasting interaction.

 

Interconnection of power systems of contiguously located countries and their coordinated operation provides immense technical and economic benefits. All these interconnections allow each electrical utility to make savings on power plant investment and operating costs as a result of the improved use of the interconnected system. It also contributes to the quality of electricity supplied to customers as well as reduces environmental damage. Reducing losses in the power system is often more cost effective than constructing more generation capacity. Reduction of transmission and distribution losses (continues to remain very high in South Asia) by 90 MW due to the proposed interconnections would reduce the need for installing new capacity at an investment of Rs. 3606 million (US$79.12 million at the exchange rate of US$1 =Rs.45.50).

South African Power Pool (SAPP) created in 1995 encompassing, among others, South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe and Zambia under the regional cooperation organization Southern African Development Community (SADC) is one example which matches very well with the South Asian situation. They trade in power with a view to provide a reliable and economical power supply. SAPP countries have a diverse mix of hydro and thermal generation plants serving a population of over two hundred million people. It has a coordination center located in Harare which carries out a number of functions including monitoring the operations of SAPP, collecting data, undertaking planning studies and training activities, and disseminating information to members. The Pool is working satisfactorily with immense gain to all the participating countries. There are examples of such regional power pools successfully operating in several parts of the world.

There already exist considerable network of inter-connections among the South Asian countries. India’s Power Grid Corporation has worked out the interconnections required, their feasibility and the cost and benefits to the participating countries in the South Asia Growth Quadrangle (SAGQ) region consisting of Bangladesh, Bhutan, North East region of India and Nepal. All these interconnecting channels will bring about well match the Indian effort to integration of all regions to form a National Grid by the end of the Eleventh Five Year Plan in 2012.

As options for power trading in the broader ambit of regional cooperation in South Asia, the following three mechanisms can be cited:

i) Bilateral power trade;

ii) Pool based;

iii) Wheeling Facility.

i) Cross-border power trade on a bilateral basis already takes place widely between India and Bhutan and to a certain extent between India and Nepal.

10.4.1     India-Bhutan

In the case of 336 MW Chukha project, Bhutan earned as high as Nu 2367 million ($ 52 million) in 2002-2003 mainly from its power export to India (1472 GWh). This constituted almost 45 per cent of Bhutan’s exports to India and 11 per cent of the Kingdom’s GDP. This fully met Bhutan’s power sector objectives of increasing government revenues through the generation of power for sale to India and to industries within the country. The projected revenue generation from the ongoing capacity and the projects in the pipeline could transform Bhutan into a middle income country over the course of next 15 years. The sale of surplus power to highly power deficit areas of West Bengal, Orissa and the North East has been the hallmark of this project. The transmission link has also been a great success, which is likely to be upgraded to help evacuation of 4,500 MW from three large power projects which are being built in Bhutan.

10.4.2     India-Nepal

Power exchange between India and Nepal has been underway over the last three decades. There is an agreement between Governments of Nepal (HMG/N) and India (GO[) for exchanging power up to 50 MW as and when required by the border towns. Interconnection is between the Bihar State Electricity Board, Uttar Pradesh Power Corporation (formerly known as Uttar Pradesh State Electricity Board) and now with the newly created State of Uttaranchal. The power exchange at present is on a goodwill basis. This exchange has recently been increased to 150 MW. Despite the tariff being very nominal, the revenue generated by Nepal through sale of power to India has recorded an almost six-fold increase during the last eight years.

 

Another revealing example is that of the 750 MW West Seti power project in Western Nepal. This is a third type of bilateral power exchange, which is likely to take place in the region. A unique feature of this arrangement is the involvement of an Independent Power producer (IPP) to develop this power plant, the entire generation of which will be exported to India through the Power Trading Corporation of India. This indicates a changing paradigm of power exchange, a direct outcome of the new hydropower to development policy that opened power development to private producers.

It does not require grid synchronization, as the entire generation will be transmitted to the Indian grid without connection to the NEA system. As such, the project would work as an integral part of the Indian system. The power tariff deal is being negotiated for 25 years for which the levelized tariff would be computed at a rate not more than US$0.07. If this agreement, as designed, is implemented as per the schedules, Nepal is likely to realize a total payment of Rs 14030 million (US$308.35 million) by 2007 and Rs 56814 million (US$1248.57 million) by 2003.

10.4.3     India-Pakistan

Just a couple of years back Pakistan was producing surplus power mainly because of lower than expected economic growth and closure of over 3000 industrial units for various reasons. Pakistan’s informal offer to India in 1998 of selling surplus power very much matched the demand in the northern and the western regions of India. The northern region, one of the largest electricity consuming industrial areas, comprises the most populous states of Uttar Pradesh, Punjab, Haryana and Delhi. However, tariff came up as a major stumbling block in the entire negotiation process that was conducted during the second half of 1998 and first half of 1999. The WAPDA offered a price of US7.2 cents/KWH while the Indian side offered a price of 2.25 cents.7 It is mainly on this ground that the negotiations broke off.

Pakistan already has a 500 KV primary transmission system extending from Jornshoro in the south to Tarbela and Peshawar in the north. All these lines run very near to the adjoining borders of India and may not require complex transmission extensions to the Indian borders. “There is a complete network on our side and of course on theirs (India). What we need are the connections, which would take only a couple of weeks”

 

It is stated that each country will construct and maintain a double circuit twinbundled 220 KV transmission from the designated substations viz., Dinanath in Pakistan and Patti in India. National Power Grid Corporation of India may play an active role in concretizing the Indian side of the transmission of the power purchased from Pakistan. There is a proposal of laying a 50 km high voltage double circuit (HVDC) transmission line to evacuate power from the Dinanath sub-station near Lahore to the Patti sub-station in Indian Punjab. If this happens, it is likely to bring about a major transformation in the political economy of regional cooperation in South Asia.

However, the key issues to be settled before the cross-border flow is concretized are the cost of the transmission line and its sharing mechanism; the determination of the power tariff, the payment mechanism including the currency and the channel to be used like the Asian Clearing Union and most importantly the power supply sustainability and its geo-political immunization. It is very crucial to maintain a fair balance in the energy security equation in order to avert the risk of “trade and fade”.

10.4.4     India-Sri Lanka Projects

The Government of India (Gol) and the Government of Sri Lanka (GoSL) signed a Memorandum of Understanding to build a bridge across the Palk Strait in July 2002.10

An Indo-Lanka power interconnection through the land bridge is one important area where both countries can benefit. The joint Study Group appointed by the two Governments of Sri Lanka and India (2003) while noting the potential of regional power pool for Southern India and Sri Lanka, enabled by interconnecting the respective electricity grids, has recommended that “the interest of Indian companies to participate in future bids for coal-fired plants in Sri Lanka may be accentuated by the existence of a regional power pool. A regional power pool would also enable better management of peak-load demands on both sides, as well as enable faster recovery from disasters.”

There is a considerable degree of provincial disparity in terms of power distribution, as the Western province is in a privilege position and the North and East at an underprivileged position. Sri Lanka is likely to have a huge power deficit because of the newly initiated peace and development process.

 

In a study carried out by the Nexant (2002) the pre-feasibility of a 400kv transmission interconnection with 500 MW transfer capacity in phase I has been analyzed. Given the existing infrastructure conditions, this transmission line possibly connects to the Sri Lankan national grid at Anuradhapura. 12 The importance of the I-SL land bridge in the Indo-Lanka power interconnection lies in the fact that with reduced infrastructure costs, the transmission line can be laid on the bridge and not in the seabed as perceived earlier.

 

With the proposed transfer of 500MW power through the Indo-Lanka power interconnection-Phase 1, the total installed capacity in Sri Lanka would rise by 22 per cent from the current level of 223 1 MW to 273 1 MW. At the second phase of the project, it is estimated to double the transfer capacity by raising the installed capacity to 323 1 MW. Even if the current gross power generation per MW at 3.1 GWh is taken as the benchmark, with this additional capacity the gross annual power generation in Sri Lanka will increase by 1550 GWh in the first phase, and by 3 100 GWh in the second phase. By applying the different unit prices that are currently used by the Ceylon Electricity Board, it is possible to estimate the potential revenue from the transmitted power added to the national grid. The current average unit price of electricity in Sri Lanka is estimated to be SLRs.7.25 (US$0.0763) per KWh. At this rate, the additional power supply will annually generate US$118.3 million in the first phase and US$236.6 million in the second phase.

ii) The pool based approach also known as agent based integrated simulation can possibly provide support to develop competitive long run market equilibrium in regional power trade. This approach involves working together of a set of agents (manufactures), a monitoring, advisory and channelizing regional body in close harmony. These agents develop their own strategies to explore and exploit the capacity and other constraints of plant and market. They also evolve their own market clearing as well as settlement mechanisms. Each of the agents represents one of the generating firms. A key feature of this model is that it uses a micro level, bottom-up representation of the market with each generating firm (public and private) represented at the level of its individual plants.

In this context, establishing a Regional Power Trading Corporation (RPTC) would be highly beneficial for launching this type of market mechanism in the SAARC region. This could be called “SAARC-RPTC” which could provide market feed-back to individual power producers (agents) as well as the power consumers. The SAARC-RPTC can maintain and disseminate information on plant structures, avoidable cost of production, plant sales prices, sales volume, rate of utilization, profits generated, target utilization and market conditions, consumer behavior, and ongoing plant building and future investment in the sector.

This in essence would be pooling of surplus power generated by individual plants in the participating countries and transporting it to deficit ones by a coordinated exchange mechanism depending on demand and consumer categories (estimating consumer surplus). However, information asymmetry in this type of a model can create market havoc and thereby introduce serious aberrations. Therefore, a major task of the SAARC-RPTC is to gather and analyze information on generation, demand, transmission and payment modes well in advance and arrange for the smooth operation of markets. The idea should be to evolve an effective bidding system for individual plant generators depending on the plant capacity, fuel use, etc. across the entire spectrum of its activities.

To facilitate the process of setting up of SAARC-RPTC, it is essential to assess and understand the nature, direction and extent of intra-country power exchange of the South Asian countries. This gives a broad indication about the nature of power trading within a country and various regions of a country and also indicates geographical locations of load centers within a country.

iii) The physical boundaries in South Asia region are such that it is only India which shares common borders with almost all its neighbouring countries whereas no other two countries in the region have common borders. However, there are very distinct advantages for a country like Bangladesh, Pakistan or Sri Lanka to import power from Bhutan and Nepal because of the lower tariff and supply reliability. At the same time, the power generating countries would also like to diversify their markets. For instance, Bhutan is keen to expand the market for its power exports as at present, India is the only buyer for its power. This is more so as a number of hydro plants are under construction in the North East region of India, which may to a large extent lead to the diminution in the demand for Bhutanese power. Interestingly, these changing dimensions of power trading are widely matched by the expansive transmission lines that exist in all the bordering states of India including the North East, Tamil Nadu, Jammu and Kashmir, Punjab and Gujarat. Therefore, India as a transit corridor for power transfer could give a major boost to both the power trading activities and the process of regional cooperation and integration. India could also ensure full use of the transmission lines and generate substantial revenue as wheeling charges.

There are very strong possibilities of cooperation in other forms of energy. India can play an effective role in initiating the Bangladesh and Sri Lanka into the trade in power. For instance, Bangladesh could set up a plant of 2000 MW primarily to supply power to Sri Lanka via India which can also share this power. There is already an example of East Talcher to Kolar to Trivandrum (2200 km) 500 DC system completed in 2.5 years.

However, currently the power trading is in its infancy in the South Asia region. Whatever “trade” takes place as of today is basically bilateral exchanges or apportioning of power from surplus areas to temporarily needy regions. Neither any power purchase agreement (PPA), for the purchase of power by India from these projects, was signed between India and Bhutan/Nepal, nor any principle for fixing the rates for purchase of power has been evolved. In most cases, the tariff has been determined by political consideration, diplomatic goodwill and convenience.

 

Such an adhoc arrangement, based on negotiations and goodwill, could work in the past mainly because the quantum of power purchase was limited. However, in years to come the size of power purchase would be substantial. Power trading will be on a bulk supply basis and will have to have a more detailed framework of contracts and operating procedures.

10.5 Cross-Border Gas Trading

Besides electricity, the four areas which can be identified for cooperation in the oil and gas sector in South Asia region are i) trans-boundary natural gas trade, ii) trade in refined petroleum products, iii) cooperation in oil and gas exploration and iv) cooperation in NGV developments.

 

Sizable gas shortfall is expected in both India and Pakistan unless some major exploration and drilling operations are undertaken. The Tenth Plan of India has projected natural gas demand of 130 MMSCMD in the year 2006/07 which could rise to 175 MMSCMD in 2011/12. Indian Government policy in the recent years has sought to promote the import of natural gas in view of the fact that demand is projected to outstrip production by 62 MMSCMD in 2006/07 taking the intermediate demand forecast by the Tenth Plan. It could be higher if the latent demand for natural gas is taken into account.

Smaller countries like Bhutan, Maldives and Nepal are also likely to record a quantum jump in their gas consumption in the next decade or so. The optimal techno-economic solution is for India, Pakistan and other South Asian countries to jointly pose their demands to potential suppliers in the North and West and other Central Asian countries so that economies of scale result in a substantial reduction in unit cost of supply to both countries.

Though the South Asian countries, particularly India and Pakistan, have been envisaging both on-shore (Iran-Pakistan, Turkemenistan-Pakistan) and off-shore (Qatar-Pakistan, Iran-India and Oman-India) pipelines, nothing concrete has emerged because of. i) huge financial implications, ii) geo-political apprehensions, iii) unsure confirmation of natural gas reserves, iv) pricing of supplied gas, v) third country approval of transit, and vi) environmental fallouts. This has also been the case for the intra-regional gas pipeline between Bangladesh and India.

Indian concerns about the safety of the pipeline and assured supply through the territory of Pakistan can be addressed through a dialogue and legally binding guarantees by multilateral institutions. This can be even ensured by extending this pipeline to Nepal, Bhutan and Sri Lanka. In fact, recent months have seen considerable progress in India in the way of laying gas pipeline into Nepal and Indian Oil Corporation’s (IOC) to sell petroleum products to Sri Lanka. Any of these pipelines, if laid, could change the energy as well as the economic picture of the entire region.

 

If political apprehensions are set aside, there are strong possibilities and scope for bringing gas from Bangladesh through a pipeline. A number of feasibility studies have been done in this regard, including by UNOCAL and Indian gas utilities like Gas Authority of India Limited (GAIL) and Oil and Natural Gas Commission (ONGC) of India. TERI’s estimates suggest a comparatively much higher netback for gas imported from Bangladesh if supplied to North India.

Among the several options available to use the rich gas resource base of Bangladesh, the electricity generation and export of gas through pipelines are considered to be the most viable and profitable ones. There has been a chain of studies carried out to assess the gas reserves and also to examine the possibility of its harnessing for cross-border exchanges. This has generated a lot of interest and speculation as the estimates of gas reserves have varied sharply from one assessment to another.

More recently studies were carried out by two Committees constituted by the Government of Bangladesh. The Committees submitted their reports in June and August 2002. The Gas Reserve Determination Committee concluded that, as of April 2002, the proven as well as probable gas reserve of the country were between 12.04 TCF and 15.55 TCF for 22 gas fields. The possible gas in place was estimated to be in the range of 4.14 TCF to 11.84 TCF. The Gas Utilization Committee “arrived at the finding, after in-depth examination that under the short and mid-term demand- supply projections, there is a problem of short supply which militates against export of gas from the current reserves.”

 

Swapping of Indian gas with Bangladesh gas is another proposal that also stands as a mutually gainful project. The proposal is that ONGC will sell the gas found in North East India, which could not be brought to mainland India since it would be too costly a proposition, to Bangladesh that would sell an equivalent quantity of gas to India in return. However, nothing much has happened on this front. Yet another proposal is to allow the right-of-way to lay a gas pipeline across Bangladesh to bring Indian gas, stranded in North East, to mainland India. This will bring transit fees to Bangladesh without any gas sales from the country. However, progress on this proposal is also very slow. More than this, the delay in any deals has been very costly for the South Asian countries. Some expert views suggest that recent discoveries in the East Coast (Godavari) in India may thwart the plans to import natural gas into the country.

 

One of the attractive options of this trans-boundary natural gas trade is to undertake the Iran-Afghanistan-Pakistan-India Pipeline. Iran has shown urgent interest (particularly after the discovery of gas field at Tabnak) in supplying gas overland through Pakistan to India. The Pakistan government also formally announced its agreement to such a facility to India. Annually over $500-700 million is likely to accrue to Pakistan as transit fees and royalty, if the deal is clinched.

Any of these pipelines, if laid, could change the energy as well as the economic picture of the entire region besides providing a robust Confidence Building Measure (CBM) between India and Pakistan. These projects will substitute expensive imported liquid fuels which will improve the balance of payment, bring relief to the hard-pressed infrastructure of ports, roads and railways used in movement of liquid petroleum, improve the environment, and reduce the cost of electricity generation, besides several other direct and indirect benefits as a result of multi-billion dollar investments in the gas pipeline as well as in the downstream industry using the gas. As neither India nor Pakistan possess the necessary finances and technology to build such a pipeline, multinational and multilateral resources will have to be tapped.

 

Committee Report on Utilization of Natural Gas in Bangladesh, submitted to Government of Bangladesh, Ministry of Energy and Mineral Resources, in August 2002.

 

The economies of scale will substantially reduce the cost of a unit of gas energy imported jointly rather than individually. According to an economic analysis conducted for a UNDP sponsored project on Energy-Environment Cooperation in South Asia, based on the then prevailing prices in March 1998, the tariff cost of the pipeline project could be reduced by about 26 per cent by having a joint pipeline for India and Pakistan as compared to having separate pipelines.

 

In order, therefore, to promote regional energy cooperation through trade of natural gas via trans-boundary gas pipelines in South Asia, these countries need to work on four major directions. This could be done only if an appropriate climate of trust is progressively created. This will require:

 

  • Full-fledged preparatory techno-economic work
  • Intergovernmental agreement
  • Informed public opinion
  • Promotion of international commercial and financial interest in the proposed projects

Conclusion

South Asian countries continue to be characterized by low per capita consumption of energy, poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy availability. These countries have largely remained energy importers and increasingly face a serious energy shortfall. All these have adversely affected their productive activities, social development and investment climate. There has been a realization that availability and accessibility to energy can transform the quality of life and work substantially, help raise health and educational standards and slow down rural-urban and cross-border migration by enhancing the level and pace of income and employment generation.

Creation of a South Asian energy market and cooperative development of the available diverse energy sources in the region can help increase the level of energy security in the region and thus can subsequently contribute to achieving a sustained higher economic growth. There are distinct advantages for South Asian countries to cooperate in the energy sector. There have been negotiations going on among the South Asian countries on the possibility of power trading and gas pipelines. Given the demand and supply situations in the sub-continent, it is rational to believe that the trade in power and gas will be mutually beneficial in terms of both economic and political gains. The studies conducted to date reveal some important regional projects that merit serious consideration. They also provide a range of options.

However, there are several challenges ranging from trust and confidence building to investment and technology transfer, demand centres locations, to really integrating the energy market and sustaining the effort to match the regional aspirations with such efforts. The 12th SAARC Summit held in Islamabad in 2004 clearly indicated the need to consolidate energy cooperation by creating an “energy ring”. What is required is a breakthrough project that can be set as an example for other regional energy and other ventures. In all these efforts and strategisation, the key element should be understanding the neighbours, strengthening both the traditional and freshly emerging ties with them and making a much more concerted regional effort in consolidating a regional identity. The projects need to be depoliticized through sensitizing the general mass about the gains that accrue and providing options and alternatives to the policymakers. An equally critical task is to build the capacities of the policymakers in the energy sector across the region by re-skilling and reorienting them to the advantages of energy cooperation.

At the same time the South Asian countries should realize that cooperation is a goal-oriented action wherein not only the goal but also certain resources are shared together by the participants. This implies sharing of national control over these resources which is taken as a loss of national sovereignty. Whenever these countries have felt like this, they have tended to withdraw from the regional cooperation process. States are reluctant to cooperate on merely economic goals. Therefore, tackling of this perception of national sovereignty itself is a major question as it demands extending a new form of cooperation, sacrifice and contribution which the countries in this region invariably lack. That is why initiatives like “beneficial bilateralism” and “unilateral gestures” have really worked in case of the region.

 

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