Financial Express, India, 10 April 2004

SAFTA Is On Track, But FTA...?

The Indo-Bangla secretarial-level meet in 4-5 months is expected to iron out some problems

SHEBONTI RAY DADWAL

When the seven SAARC members signed the free trade agreement (SAFTA) in January 2004, there was some scepticism regarding its progress and implementation, given that SAARC itself had been mired under inter-state tensions. Moreover, the signing of the draft agreement had been deferred twice already, and although a preferential trade agreement (SAPTA) had been wrapped up almost 10 years ago, its implementation in terms of tariff liberalisation has been lethargic, mainly because of the adoption of the product-by-product approach. As a result, India had decided that it should negotiate bilateral FTAs with other countries and groupings, both within the region as well as outside. Subsequently, India has gone on to sign FTAs with Nepal, Sri Lanka and Thailand; it has also signed a comprehensive economic cooperation agreement (CECA) with Singapore in April 2003 and a draft FTA with BIMSTEC in February 2004. Now it is pursuing an FTA with Bangladesh and ASEAN.

However, now that SAFTA has been signed, there is renewed optimism that it may come into force on the designated date, i.e, January 1, 2006, given that some negotiations have already begun at different levels. For instance, the first meeting of the group of experts has already taken place, as well as one on investment promotion and protection, and developments in tourism have already taken place.

That there are enormous benefits to be reaped from the SAFTA process is undoubted. For instance, the SAARC leaders realised that openness to trade and investment among themslves alone would lead to development and make a dent on poverty and backwardness. The adoption of SAFTA, both for developing countries (India, Pakistan and Sri Lanka) in seven years and the less developed countries or LDCs (Bangladesh, Nepal, Bhutan and the Maldives) in 10 years would also help to bring down customs duty, promote cross-border investment and, more crucially, formalise the unofficial trade that is taking place through third countries and surreptitious channels. For instance, while current India-Bangladesh bilateral trade is around $1.2 billion, unofficial trade is almost double that figure. According to estimates cited in the South Asia Development and Cooperation Report 2004, published by Research and Information System (RIS) for the non-aligned and other developing countries, while the complete elimination of tariffs under SAFTA could increase intra-regional trade - currently around $6 billion - by 1.6 times from existing levels, the gains would largely accrue to the smaller members of SAARC as they would gain access to the relatively larger markets of the larger members.

However, despite the optimism being expressed vis-a-vis the SAFTA process, bilateral free trade agreements between India and some of its neighbours, particularly Bangladesh, are still facing problems. New Delhi had hoped that with the FTAs with Nepal and Sri Lanka having been declared a success, despite initial reservations, it could smoothen the way for a similar agreement with Dhaka.

For instance, under the India-Nepal agreement, Nepal’s exports to India have grown consecutively over the last three years, with Nepal’s central bank reporting a 32 per cent rise in total exports between 1997-98 and 1998-99, thereby allowing Nepal to register a trade surplus vis-a vis India. Moreover, a large number of joint ventures have been set up in Nepal, particularly in the garments and textiles sectors.

Similarly, following the operationalisation of the India-Sri Lanka FTA in 2000, there has been a substantial increase in bilateral trade, with Lankan exports that doubled from $71 million in 2001 to 168 million in 2002, allowing Colombo to narrow its trade deficit substantially. Indian exports to Sri Lanka, too, have increased from $604 million to $831 million within the same period.

India has also expressed its keenness in a FTA with Bangladesh, and talks on the same were begun in October 2003. Negotiations are underway to resolve the main bottlenecks such as conformity of standards, pre- and post-shipment inspections, laboratory testings and negative list items. However, while there is hope that the next secretarial level meeting to be held in four to five months would iron out some of these problems, some Bangladeshi officials feel that unless the bilateral FTA could improve on the facilities being offered under the SAFTA regime, there would be no incentives on Dhaka’s part to sign a bilateral agreement with New Delhi.

However, some informed Bangladeshi sources feel while SAFTA would be successfully implemented, an FTA with India is not likely to take place. According to them, the biggest problem was the existence of non-tariff barriers imposed on Bangladeshi goods, like cement and batteries, by India. They were sceptical of India’s commitment to free trade on the grounds that though an agreement had been arrived at five years ago on withdrawal of tariffs on several items, so far, tariff had been withdrawn on only 18 categories of items. Dhaka is also demanding that New Delhi provide Special and Differential Treatment (SDT) to it on the grounds of its LDC status. However, India has expressed some reservations on the grounds that it would then have to grant the same status to other small countries as well. Some other grievances, like refusal of work permits to Bangladeshi nationals in India, and refusal on an export outlet for its ceramic products were also expressed. According to them, since Bangladeshi exports to India comprise only $80 million of the $1.2 billion overall bilateral trade, and India being a much bigger market and economy, even if it allowed free access to almost all Bangladeshi exports, it would not really be adversely affected.

Under the circumstances, should India continue to pursue a bilateral FTA with a reluctant neighbour, even if the resultant benefits are substantial? As a trade expert put it: “The bilateral process feeds into the regional process, and a regional process feeds into the multilateral one; they are mutually reinforcing paradigms, and not exclusive of one another. If problems are being faced on the bilateral front, one should concentrate on the other fronts.”