The Hindu Business Line : SAFTA: India should lead by example

Trade is a two-way street. If India opened up to its neighbours, allowing them to enter the domestic market, they might be liberal in opening up their market place, and ultimately price and quality would settle the demand-supply equations.

AFTER his return from the Hong Kong Ministerial of the World Trade Organisation (WTO), where New Delhi played a key role in unifying the developing world on agriculture, the Commerce Minister, Mr Kamal Nath, grabbed headlines again last week when the Union Cabinet gave him its imprimatur to implement the South Asia Free Trade Area (SAFTA). Billed a historic milestone in the economic annals of the seven-member South Asian Association for Regional Cooperation (SAARC), SAFTA (operational since January 1, 2006) is bound to reinforce India's trade relations with the member-countries.

SAFTA is to eventually lead to a South Asian Economic Union, similar to the European Union (EU).

In keeping with the trend of regional trading agreements and given the success of the India-Sri Lanka Free Trade Agreement (FTA) in the late 1990s, South Asian countries signed the Agreement on South Asia Free Trade Arrangement in January 2004, burying, in the process, the proverbial hatchet.

Regional economic integration in South Asia is one way to leverage the participating members' considerable synergies and complementarities for their mutual advantage.

As India is the dominant member in South Asia, it was involved in the formalities that went into the launch of the SAFTA — the Committee of Experts (COEs) met a dozen times to finalise the nitty-gritty of the FTA.

The end of these formalities involved completing negotiations on the Rules of Origin (ROO), the sensitive list that would keep items of special interest to each country from the Trade Liberalisation Programme (TLP), mechanism for compensation of revenue loss for least developed countries such as Bangladesh, Bhutan, Nepal and Maldives, and technical assistance to LDCs (least developed countries) in agreed areas. The other non-LDCs include India, Pakistan and Sri Lanka.

India's aggregate trade with the SAARC countries rose from $4,816.88 million in 2003-04 to $5,205.57 million in 2004-05, registering an increase of 8.07 per cent, even as New Delhi's overall trade (export and import) was running in double-digit, close to 20 per cent, in dollar terms, during these years.

The two salient features of SAFTA — the ROO and the Sensitive List — illustrate how paranoid India has become of its domestic industries; the negotiators did not display much enterprise in clinching the clauses for FTA in proportion to the size and scale of the India's economy and its diversified nature. Thus, under the ROO, to accord preferential access to the member-countries under SAFTA, the goods have to undergo a substantial manufacturing process in the exporting countries. The substantial manufacturing processes are defined in terms of twin criteria of Change of Tariff Heading (CTH) at four-digit harmonised coding system and domestic value content of 40 per cent for non-LDCs and 30 per cent LDCs.

Besides, Product Specific Rules (PSR) have also been provided for 191 tariff lines on technical grounds where both input and output are on the same four-digit HS level. Are domestic manufacturers churning out a wide array of goods in India in apprehension of cheap substitutes or are they tacitly conceding to the reality that their neighbours produce goods more efficiently? In both cases, the question is at what cost domestic units are being protected?

Again, as per the SAFTA agreement, the trade liberalisation programme would not apply to the tariff lines included in the Sensitive List. The official release issued by the Department of Commerce preens on the finalisation of two separate Sensitive Lists by India in order to protect interest of its domestic stakeholders — a longer list for non-LDCs (Pakistan and Sri Lanka) and a shorter list for LDCs (Bangladesh, Bhutan, Maldives and Nepal).

Accordingly, India has kept 884 tariff lines on the Sensitive List for non-LDCs and 763 for LDCs. Predictably, India's sensitive lists include mainly goods from the agricultural sector, the textile sector, chemicals and leathers, and sectors reserved for small-scale industries.

No wonder, then, that global academicians rail against the paradox that as much as 70 per cent of tariffs paid by developing countries go to other developing countries. That is why they said that Asian countries could, for instance, start helping their poor by lowering regional tariffs on key products.

But in the South Asian region where India is the leader cruising on a high growth trajectory with foreign exchange reserves running at $140 billion dollars, its officials tend to be parsimonious at trade negotiations by withholding benefits to deserving and not equally well-placed neighbours when it comes to giving. After all, the SAARC region is home to the world's poorest countries and poverty reduction is the basis for seeking economic cooperation and integration over the long haul. The continued coyness about preserving domestic stakeholders in the primary sector of 19th century vintage and reserved sector of 20th century genre cannot be a permanent alibi for India when its neighbours look up to it for leadership role.

India, with its continental size and aspirations must look beyond its immediate neighbourhood to scout for economic opportunities while consolidating the South Asian economic integration; India erred on the side of over-caution, which will put paid to its global ambition. India's Look East Policy adopted in 1991 that culminated in the East Asia Summit, held in Kuala Lumpur, in early December, showed India in poor light.

New Delhi's initial proposal for an FTA with the 10-member Asean (Association for South East Asian Nations), that includes several tiger economies of East Asia, sought to exclude as many as 1,414 items worth about $5 billion or 45 per cent of India-Asean trade, from any tariff cuts.

Granted, that some of the products such as oil and gas, were strategically vital; items such as lavatory seats, dolls and chewing gum were also on the excluded list. This despite the fact that at the Summit, the Prime Minister assured the leaders of the East Asian community "to bring down our tariffs to levels prevalent in the Asean countries to dismantle unwarranted barriers and to expand global capital flows". By dangling longer Sensitive Lists to exclude items others want to trade with India in, while simultaneously crowing over India's intention to move towards lower tariff level did not cut much ice with assembled leaders.

Trade is a two-way street and one cannot reserve the privilege to export. If in the process India opened up to its neighbours allowing them to enter the domestic market, they in turn might be liberal in opening up their market place and ultimately price, quality and delivery would settle the demand-supply equations.

Trade has to be free and not hobbled by tariff and non-tariff or para-tariff barriers. The time has come for SAARC or India-Asean members to put in place a plan of action to wrap up pacts on mutual recognition of standards, with a view to facilitate intra-regional trade.

Over and above this, as India takes a comprehensive view of regional cooperation by availing itself of SAFTA and the likely membership of Asean as a stepping stone to an eventual formation of an Asian Economic Community, all member countries of the proposed Community would do well to exchange people in the services sector — air transport, logistics, financial services and telecom — which are now defining the individual economies of this region in a new manner, investing them with the possibility of improving the quality of life for people. India, China and Indonesia hold the maximum number of people and it is to these countries others look up to for backup and Indian authorities should not lose sight of the emerging realities.