South Asia’s trade architecture matters

The year 2023 witnessed a continuation of the multi-faced polycrisis ranging from lingering effects of the Covid-19 pandemic and tightening monetary policies across countries to the rise of geopolitical tensions linked to the Russia-Ukraine and Israel-Hamas conflicts, as mentioned by Finance Minister Nirmala Sitharaman while presenting the Interim Budget of 2024-25. This clouds global trade, which will have significant implications for South Asia in the background of the slowing down economies of U.S. and China.

In this decade of navigating global divergences with the world economy changing, and trade patterns shifting, India aspires to become a top five global economy by 2030 as it develops as a manufacturing hub, moving towards export-driven growth. The time seems right for India as multinational companies reduce their reliance on China due to factors internal to China like rising wages, domestic supply chain bottlenecks, and investor concerns about tighter regulation of foreign firms, coupled with the country’s escalating trade war with the U.S.

China-centric global supply chains have been being disrupted. Vietnam and Thailand are big winners in supply chain shifting. India too has the ambition to become a complementary Asian manufacturing hub to China by reaping gains from the recently announced India-Middle East-Europe Economic Corridor; foreign technology transfers and creating value-adding jobs. This is seen by Apple ramping up its manufacturing of iPhones in the country, Toyota stepping up its investment by setting up a new plant in Karnataka and Hyundai increasing its capacity and fostering technological advancement by its recent investment in Maharashtra. Clearly, the manufacturing sectors in India such as automotives, pharmaceuticals and electronics assembly are already fairly sophisticated and may benefit from a series of policy initiatives – from Make in India and Atmanirbhar Bharat to the Production Linked Incentive (PLI) Scheme – which increased FDI equity inflow in the manufacturing sector by 57% between 2014-2022 compared with 2006-2014.

India’s attractiveness to foreign investors is linked to geopolitical and economic factors. The World Trade Organisation (WTO) listed India as the fifth largest importer of intermediate goods, parts, and components, in the second quarter of 2023 — up from 10^th rank in the second quarter of 2021, suggesting that supply chain pessimism on India may be altering. Indian services can also gain, including in information and communications technology, financial and professional services, and transport and logistics.

Since 2022, the Modi-government has placed renewed emphasis on preferential opening with trading partners through a flurry of bilateral trade deals such as the UAE-India Comprehensive Economic Partnership Agreement and the Australia-India Economic Cooperation and Trade Agreement (ECTA) and joining big regional trade frameworks like the Indo-Pacific Economic Framework (IPEF). It makes economic sense for India to spread the gains from this trade regionally, for South Asia to have resilient and cost-effective regional supply chains. It will thereby stabilise the region, increase jobs, and make the region less vulnerable to Chinese investments.

Currently, South Asia is not much part of India’s trade story even though some countries have economic potential. South Asia’s growth story so far can be divided into three parts. India and Bangladesh have better growth prospects; Nepal, Bhutan and Maldives are reasonable; and Pakistan and Sri Lanka have weaker growth prospects (see Table 1).

Source: World Bank World Development Indicators  https://databank.worldbank.org/source/world-development-indicators

A sure way for South Asia to have resilient and cost-effective regional supply chains, is for Indian business to invest in the region and foster significant local linkages and spillovers for its South Asian partners. Some of this is happening in Sri Lanka and Bangladesh but in a limited and tentative way.  Greater private investment in consumer-oriented sectors, and in start-ups in fintech, healthcare and agri-tech can help develop a local ecosystem- with access to seed funding and technology transfer from India.

Hence the need to rethink South Asia’s trade architecture.

The bandwagon of FTAs saw a high in 2020s and much of it took place in East Asia with Japan, China, Korea, Singapore, being at the forefront. Over time, these deals can provide for increased trade and foreign investment gains for India, thus leading to more foreign exchange, technology transfer, better energy security, cheaper food and market access.

It will be useful for India to carefully re-evaluate the gains from mega FTAs in Asia such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Regional Comprehensive Economic Partnership (RCEP) which include agendas for services trade, investment rules, intellectual property rights, government procurement and other pertinent issues to support the spread of supply chains. Consultations with business in FTA negotiations and providing business development services for FTA implementation is also a must as trade and investment does not necessary pick up because an FTA is signed.

Along with trade deals, regional institutions which shape local diplomatic and technical discussions are another facet of South Asia’s trade architecture. Sadly, initial hopes for the South Asian Association for Regional Cooperation (SAARC) have failed to materialise and its outlook seems bleak. Recognising this, India is switching its diplomatic efforts to bilateral engagement and other mini-lateral approaches such as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the Indian Ocean Rim Association (IORA) which are more relevant to South Asia. But, unlike ASEAN these institutions lack substantive mandates and capacity to be effective. For now. An Indian diplomat assuming the Secretary-General of BIMSTEC, provides an opportunity for India to shape BIMSTEC’s mandate and better resource it.

There is a new global buzz around a rising India in an uncertain global era.  A more regionally focused India which includes the rest of South Asia in the process through regional supply chains and a better trade architecture is a win for India and its South Asian neighbourhood.

Ganeshan Wignaraja is Professorial Fellow for Economics and Trade, Gateway House.

Aliasger Bootwalla is Manager for Research, Media and Partnerships, Gateway House.

This article was first published by The Financial Express.

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