SAARC (South Asian Association for Regional Cooperation) is the largest populated region where the middle class is fast growing. It has an impressive array of natural resources. With attractive growth market and strategic location it has largest skilled manpower and professional managers available at competitive costs. The ‘macro’ natures of the region signify optimism for trade and investment.
Although, it has high potential to increase trade but with intra-regional trade at less than 5% of total trade, South Asia is the least integrated region in the world, dwarfed by East Asia’s 35% and Europe’s 60%. It’s 20% cheaper for India to trade with Brazil than with its neighbor Pakistan, the World Bank report 2015 says.
As far FDI is concerned its inflows to India surged by 22 per cent to about USD 34 billion improving its position to 9th top host country for FDI in 2014, over its rank of 15th in 2013, the UNCTAD’s World Investment Report 2015 says.
The top four recipients in South Asia of FDI inflows were India, followed by Pakistan and Bangladesh (USD 2 billion each) and Sri Lanka (USD 1 billion).
The physical infrastructures of most of the SAARC countries are not well developed. Border and customs are inefﬁcient with congested border crossings. Moreover the circuitous routes to enter markets of the region have caused high cost to the traders and investors. There are not adequate trade agreements among the countries of the region.
There are also problems to trade due to cold relation between some SAARC countries, internal strife, violent exchange rate shifts, shifts in business regulations, non-tariff barriers and quota imposition, standards issue of the product, natural risk of ﬂood, draught and tsunami etc.
It is utmost necessary to increase interregional trade, which will bring shared economic benefit to all countries of the region. Reduced trade frictions could increase India-Pakistan trade from less than$3billion to $20 billion and there is high possibility to raise Bangladesh export to India by 300%
Gas and oil deposits of Bangladesh and India have in fact yet to make an important impact. Maldives has a record in world renowned tuna business and world-class tourism. The tourism industry in Nepal is ﬂourishing. Export structure of garment of various kinds and export of frozen food (shrimps and prawns) of Bangladesh are getting recognition in the international market. Bhutan has been successful in producing and exporting hydroelectric power. Pakistan has made good base for manufacturing industry and Afghanistan is also in process to regain its interrupted economic base.
The region is slowly improving its investment legislation features. Investors have to follow the national bank’s regulations and the Board of Revenue. And investment is increasing tremendously in India compared to other countries of the region,FDI inflows to India reached to $34 billion. In terms of sectoral composition, manufacturing is gaining strength, as policy efforts to revitalize the sector are sustained, including for instance the launch of the “Make in India” Initiative in mid-2014. The major sources of FDI in India are Japan, United States and the Republic of Korea.
A number of South Asian countries saw rising FDI from China. FDI inflows to Pakistan increased by 31 per cent to $1.7 billion as a result of rising Chinese FDI flows in services. In Sri Lanka, FDI flows from China rose as well. A joint venture between two local companies and China Merchants Holdings (International) Company has invested $500 million in Colombo International Container Terminals, the country’s largest foreign investment project.
FDI inflows to Bangladesh remained relatively high at $1.5 billion. As one of the most important foreign investors and the largest producer of natural gas in Bangladesh, Chevron (United States) invested $500 million in the Bibiyana Expansion Project and prepared to invest another $650 million to Petrobangla, the local State-owned oil company.
Nepal began to attract some FDI in hydropower and manufacture industry. Dangote Cement Nepal plans to start production within three years with an investment of US$550m. Nepal has endorsed a US$360m Foreign Direct Investment (FDI) proposal made by China’s Hongshi Holdings to establish a cement plant in Nepal in partnership with Nepal’s Shiva Cement. In recent years, India and China have attraction investing in Nepal’s hydropower sector, bringing in investors from electricity-hungry neighboring countries.
FDI is open in most of the sectors and mostly no government approval is required in all the countries of the region. There is equal treatment to foreign and local investors. Government ensures legal protection to foreign investment against nationalization and expropriation and allows repatriation of proceeds from sales of shares and proﬁt. Signiﬁcant investment incentives exist in most of the countries.
The major sectors for trade and investment in the SAARC region are information-technology (IT), pharmaceuticals, biotech, micro biology sophisticated metallurgy, manufacturing items, infrastructure improvement etc. But SAARC lacks brand recognition.
Except Bhutan, SAARC countries have increased their bilateral agreements with global countries. A South Asian Free Trade Agreement is being eyed for coordinated regional trade.
South Asia can do to achieve better integration and boost its regional trade. To go forward, it is urgently needed to reduce tariffs and non-tariff barriers, no quota imposition, leverage private and intergovernmental investment. Moreover investing in efficient connectivity and border crossings and liberalize services such as logistics, shipping, air travel etc. are also very essential.
Author: Hari Prasad Shrestha
*The author is a former Under Secretary at Ministry of Finance and was associated with United Nations Development Program Sierra Leone and South Sudan. He is also writer of a novella – The Violent Nile