CHAPTER 4 TRADE PERFORMANCE OF SOUTH ASIAN COUNTRIES WITH INDIAN PERSPECTIVE

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1 CHAPTER 4 TRADE PERFORMANCE OF SOUTH ASIAN COUNTRIES WITH INDIAN PERSPECTIVE It has been argued that trade liberalisation and regional economic integration can help a region to increase intra-regional trade by expanding the size of the market. This may in turn yield efficiency and bring benefits not only by exploration of economies of scale but also by dynamic and upward shifts in production function. South Asia has made good progress in liberalising trade regimes and slashing tariffs since the early 1990s when most of the countries started with reforms. The countries have also undertaken considerable industrial deregulation and other structural reforms. In 1991, India adopted LPG policy and measures taken to promote free trade. Sri Lanka began economic liberalisation in 1997 with a move away from socialism. In Pakistan, various initiatives have been announced as a part of the Trade Policy. These measures aimed at reducing cost of doing business and included long-term financing of export-oriented projects. In Maldives, the export and import law of 1979 was changed in Trade and economic liberalisation is considered to be means of promoting private sector investment and development in Maldives. Nepalese trade policy was introduced in 1992 to enhance the contributions of trade sector to national economy by promoting internal and international trade with the increased participation of private sector. In Afghanistan, improving trade policy and customs administration by rationalisation of the tariff structure, introducing use of the market exchange rate has been a high priority for policy agenda. A World Bank study (2004) highlighted that one broad area that has facilitated trade policy reforms in the SAARC region is the move towards more marketbased exchange-rate regimes. India, Pakistan, and Sri Lanka now maintain 99

2 floating exchange rates; Bangladesh, which had a moderately flexible exchange rate system after 1991, floated its currency as of May However, Maldives s currency is pegged to the US dollar, and periodically devalued while Nepal and Bhutan s currencies are pegged to the Indian rupee. Flexibly managed exchange rates have supported trade liberalisation in the South Asian region 17. Liberalization of trade and investment regimes as a part of economic reforms undertaken since early 1990s has deepened the global economic integration of the South Asian economies. 4.1 Emerging Trends and Patterns in Merchandise Trade Performance of South Asian Economies At present, intra-saarc trade is quite low as compared with that of regional forums such as European Union (EU) and Association of South East Asian Nations (ASEAN). Although Bangladesh, India and Pakistan have been continuing trade liberalisation since the early 1990s, the progress is still very slow. Considering tariff levels, South Asia has still been considered one of the most highly protected regions in the world Compared to the rest of the world, this region is not open enough in international trade, rather, it is very much inward oriented. Intra-region s trade flow in this region is also very insignificant. This is partly because the major economies such as India, Pakistan and Bangladesh are not outward-oriented South Asian Countries Growth in Exports and Imports The performance of South Asian economies in terms of trade growth has improved remarkably since The governments and the private sector recognise that strong exports are critical for overall economic growth and 17 Trade Pattern in SAARC Countries: Emerging Trends and Issues Rajeev Jain and J. B. Singh Reserve Bank of India Occasional Papers, Vol. 30, No.3, Winter

3 poverty reduction and export-led growth has become a key thrust in each country. Each country has been integrating with the global economy, as evidenced by the significant increases in the merchandise trade The growth rates of exports and imports of South Asian countries are summarized in Tables. Average growth rate of exports for the South Asian countries (table-4.1) reveal a substantial improvement. It was 4.8 percent in 1997 which increased to 24.1 percent in Looking country-wise, India s share in growth rate of exports in South Asia is highest (31.6 percent in 2010) followed by Sri Lanka (17.3 percent). Table-4.1 Export Growth Rates in South Asia South Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Asia Lanka Source: RIS based on ADB (2008), Asian Development outlook

4 Table-4.2 Import Growth Rates in South Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Source : RIS based on ADB (2008), Asian Development outlook 2011 Growth rate of imports also for the South Asian countries (table 4.2) shows a substantial improvement. It was 3.3 percent in 1997 which increased to 22.5 percent in

5 Looking country - wise India s share in growth rate of imports in South Asia is (22.6 percent in 2010), Bhutan s share was highest (39 percent in 2010) followed by Nepal (37.0 percent). As a result of the faster trade growth the proportion of trade in South Asian countries GDP has gone up consistently especially for Bangladesh from 18 to 45 percent over and for India from 13.8 to 32.4 percent (Table-4.3). For Maldives, Nepal, Pakistan and Sri Lanka it was already high and has actually declined in the recent years. Table-4.3 Proportion of Trade in GDP of South Asian Countries Year Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Source : RIS based on World Bank (2007, 2008) South Asia s recent growth resurgence has been accompanied by their more vigorous participation in the international trade. South Asia as a region emerged from the past five years with a deeper economic integration with the world economy while displaying its dynamism. 103

6 4.1.2 South Asian Countries Direction of Trade The direction of trade of South Asian countries is changing in favour of developing countries. The share of developing countries in the region s exports has gone up from 38.1 percent to 42.7 percent over 1985 to 2006, and in imports from 43.8 to 49.1 percent, reflecting a faster growth of intra-developing country trade compared to global trade (Table-4.4). Table-4.4 Trends in South Asia s Trade with Major Trade Destinations Destination South Asia Actual (Million) Share (%) Growth (%) Exports World Industrialized Countries Developing Countries Africa Asia Europe Middle East Imports World Industrialized Countries Developing Countries Africa Asia Europe Middle East Note: Developing countries columns do not add up to 100, Source: RIS based on IMF (2008a) 104

7 The table-4.4 shows that the share of industrialized countries and European countries in exports and imports of the region has been declining and the share of Developing countries and Asian countries has increased significantly. Middle East has been an important trade destination for the region where both exports and imports are growing faster in the present decade over the earlier one. Emergence of Asian region as an important trade partner for the South Asian countries underlines the relevance of regional economic integration Trade Openness of SAARC Countries Trade openness of SAARC economies is growing over the years. However, there are large differences within the SAARC region. Table-4.5 shows that among other SAARC nations, Maldives is highly dependent on external sector with 161 per cent trade openness ratio (Trade-GDP ratio) while Pakistan is least open country in the SAARC region. India has a huge domestic market, hence trade forms a substantially smaller percentage of GDP. The rest of the countries are fairly open to trade. Despite growing trade-gdp ratio, the South Asian economies continued to remain least open relative to other groups of developing economies. Table 4.5 Trade Openness in SAARC Countries Country India Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives n.a. n.a n.a. Afghanistan n.a. n.a. n.a. 87.0* * For 2006, n.a. = Not available Source: World Development Indicators, World Bank 105

8 4.1.4 Intra Regional Group Trade Despite growing trade with SAARC region, the intra-saarc trade continues to remain lowest among all the major regional groups. Table- 4.6 shows that despite the formation of regional grouping, trade flows within the SAARC region are not much significant. Table-4.6 Trends in Intra - Regional Group Trade (in percent) Regional Groups EU NAFTA ASEAN MERCOSUR SAARC Source: UNCTAD2008 Intra-regional trade in South Asia is relatively low compared with other regions, such as ASEAN in Asia. The South Asian countries exchange goods principally with countries outside the region. Intra regional trade among SAARC countries is very low. Table 4.7 shows that the intra-regional trade ratio varies from a low of 2.7 per cent for India and 6.6 per cent for Pakistan to a high of 60.5 per cent for Nepal and 43.1 per cent for Afghanistan. However, there is expansion in India s trade with SAARC countries in recent years. 106

9 Table-4.7 Intra Regional Trade Share of South Asia s Total Trade (Percent) Country India Pakistan Bangladesh Nepal Sri Lanka Bhutan n.a. n.a. n.a. n.a. n.a. n.a. Maldives Afghanistan Source: Regional Co-operation Strategy and Programme, South Asia ( ), ADB 4.2 India s Foreign Trade Policy Since independence, India pursued a policy of import substitution, with the public sector playing an important role in the economy. Trade policy was the major instrument of industrial development, with the restrictions proliferating in the form of import licensing and high custom duties, often supplemented with numerous surcharges. The government managed the balance of payments through the import controls, with exports playing a very marginal role. No significant trade reform was undertaken after the first two oil shocks. Strains in the balance of payments were felt for the first time in 1980s and some reforms in trade policy were undertaken, which resulted in significant upsurge in exports. In spite of the increase in exports, the balance of payments deteriorated, 107

10 the problem was further aggravated by the sharp deterioration on the fiscal front. GDP growth was maintained with a growing gap between public investment and public savings, largely financed by external borrowing, with a worsening of terms of borrowing over the years. All this resulted into the economic crisis of The period of 1991 has been marked by substantial liberalization of the trade policy. Some trade liberalization measures were the results of the conviction that they were necessary to make exports competitive in the international market, somewhere undertaken under the pressure of international agencies, as a part of stabilization and structural adjustment programme. The Exim policy and other liberalizing measures taken by the government had far reaching implications. The regime of high protection was over and the Indian economy was increasingly exposed to more foreign competition. Indian firms now have to pay due attention to cost and price, quality, after sale services and deliver schedules. Another implication of latest policy is that now Indian firms can access their raw materials and other intermediate goods competitively throughout the world. Government of India has been giving high importance to export promotion. The principle objectives of export promotion measures in India have been to compensate the exporters for the high domestic cost of production; provide necessary assistance to the new and infant exporters to develop the export business and increase the relative profitability of the export business. Government has also established number of sponsored organizations to provide different types of assistance to the exporters. Export incentives like rebate of duties, cash compensation support, income tax concession, interest subsidies, freight subsidies are the widely employed strategy of export promotion. The main aim of these incentives is to increase profitability of the export business. 108

11 Government has also introduced schemes like Export Processing Zones (EPZ s), 100% Export Oriented Units (EOU s) Technology Parks. In 2000 scheme of Special Economic Zones (SEZ s) was also introduced. In order to build marketing infrastructure and expertise promotion, government has started schemes for establishing Export House, Trading House, Star Trading House and Super Star Trading House. Table-4.8 Trends in India s Exports and Imports, GDP at Factor Cost and Trade Openness during the Pre and Post SAARC Period ( to and to ) Year Exports (crore Rs.) Imports (crore Rs.) GDP at factor cost(crore Rs.) Trade openness

12 Year Exports (crore Rs.) Imports (crore Rs.) GDP at factor cost(crore Rs.) Trade openness Source: RBI's Hand Book Statistics on Indian Economy Trade Openness is calculated = {(Total Exports+ Imports)/ GDP}*

13 Mean Standard Deviation C.V. Table-4.9 Summary Statistics: Pre and Post- SAARC Period Variable Pre SAARC SAARC SAPTA SAFTA Exports Imports Total Ex+Im GDP GDP Growth Trade Openness Exports Imports Total Ex+Im GDP GDP Growth Trade Openness Exports Imports Total Ex+Im GDP GDP Growth Trade Openness The above (table-4.8 &4.9) reveals that the mean of exports and imports have increased in the post SAARC period. The same trends are found in the GDP at factor cost and Trade Openness. The mean value of exports during the pre SAARC period ( to ) was Rs crore while in the period of to (before SAPTA Agreement); when there was no preferential agreement it was recorded Rs crore. During the SAPTA 111

14 period ( to ) it boosts up to Rs crore and free trade agreement among the SAARC nations again positively reinforces it to the level of Rs crore. This reveals that there is an upward trend in exports and free trade policies have significantly supported it. The same phenomena have been observed in case of imports for the respective phases. The relationship between the national income (GDP at factor cost) and trade can be better interpreted with the concept of Trade Openness. During the pre SAARC period the trade openness was 1.85 percent of GDP while in the SAARC it increased up to 4.87 percent. In the SAPTA period it was percent and in the free trade phase it significantly increased to percent of GDP. This clearly shows that now the economy is becoming more open and intensely integrated with world economy. Standard deviation which measures the variability or diversity among the variables. It shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data points are spread out over a large range of values. From the above table, during the pre SAARC period the value of S.D. was 0.75 percent in case of trade openness, it further increased to 1.85 and 7.25 for the SAARC and SAPTA period respectively. But for the SAFTA period it decreased to 6.11 percent which shows the less variation from the mean value which also means a consistent growth pattern in exports and imports in comparison of GDP. Variability can also be measured by the coefficient of variation, which is the ratio of the standard deviation to the mean. It is a dimensionless number. C.V. of trade openness for the pre SAARC period was 0.40 percent and during SAFTA period it became

15 4.3 India s Major Export and Import Markets during pre-saarc Period and post-saarc period India is the largest country in the SAARC region and its exports to countries outside the SAARC region was 96.4 percent of the total exports in 1980 and it marginally increased to 96.7 in 1985 even though, there were fluctuations during the period. The analysis of the percentage of distribution of exports shows that the exports to industrial countries were 48.7 percent of the total exports in 1980 increased to 53.3 percent in The top ten export markets of India were sharing nearly 61.6 percent of the total exports in 1980 and it increased to 71.7 percent in The largest export market of India in 1980 was the USSR followed by the United States, Japan and the United Kingdom. The export to the United States was 11.5 percent of the total exports in Table-4.10 India s Major Export Markets during pre-saarc Period (Value in million $) Country/Year United States Japan Germany U.A.E Belgium France Italy Saudi Arabia U.K USSR Source: Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C 18 Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C 113

16 India s share of imports from the countries outside the SAARC region was more than 99 percent of the total imports during the pre-saarc period. The situation did not change in the post-saarc period also. In 1991, the percentage imports to the countries outside the SAARC region was nearly 99.5 percent while it was 99 percent in This indicates that the import from SAARC countries as a proportion of its total imports was not significant not only in the pre-saarc period, but also in the post-saarc period 19. Table-4.11 India s Major Import Markets during pre-saarc Period (Value in million $) Country/Year United States Japan Germany U.K Saudi Arabia Singapore USSR Iran Iraq Belgium Source: Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C. 19 Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C. 114

17 UAE is the top destination of India s exports (13.4 percent) followed by USA in this is mainly due to India s exports and imports of gems and jewellery items followed by POL to the UAE 20 (table- 4.11) Table-4.12 India s Major Export Markets during post-saarc Period ( ) (Value in million $) Country/Year UAE 8, , , , , China 6, , , , , , USA 17, , , , , , Saudi Arab , , , , , Hong Kong 4, , , , , Germany 3, , , , , , Singapore 5, , , , , , Indonesia , , , , , Belgium 2, , , , , , UK 5, , , , , , Source: Department of commerce Export Import Data Bank The table-4.13 shows that China is the top import partner followed by UAE in China remained the largest source of import with a 12 percent share in India s total imports in 2011 followed by UAE (8.85 percent), Saudi Arab (5.51 percent), USA (5.4 percent) Department of commerce Export Import Data Bank Department of commerce Export Import Data Bank 115

18 Table-4.13 India s Major Import Markets during post-saarc Period ( ) (Value in million $) Country/Year UAE 4, , , , , , China , , , , USA 9, , , , , , Saudi Arab 1, , , , , , Switzerland 6, , , , , , Hong Kong 2, , , , Germany 6, , , , , , Singapore 3, , , , , , Indonesia 3, , , , , , Belgium 4, , , , , , Source: Department of commerce Export Import Data Bank 4.4 India s Merchandise Trade with SAARC Countries India s trade with SAARC countries was not substantial during the pre SAARC period and the position also did not have substantial change in the post SAARC period. There is a potential market for the Indian capital goods in other countries of the region. But the potential remains underutilized because of the fear among the countries of the region that trade with India would become heavily unbalanced, if they allow an unrestricted import of these goods from India. This is because the Indian policy of self-reliance in consumer goods implies that India does not provide market for the consumer goods which these industrially less developed states of the region could provide. 116

19 4.4.1 India s Export to SAARC Region in pre SAARC period and post SAARC period The export to SAARC countries was never above 5 percent of the total exports of India. Table and 4.15 shows that India s exports to SAARC countries during pre- SAARC period, in 1980, were 307 million dollars (3.64 percent of the total exports) which became million dollars in (5.12 percent of the total exports). Table 4.15 and 4.16 shows that imports from SAARC countries during pre- SAARC period, in 1980, were 141 million dollars (0.95 percent of the total imports), which became million dollars in (0.59 percent of the total imports). This shows that in absolute terms India s export and import increased many fold from pre SAARC period to Post SAARC period, but percentage wise increase in exports was marginal and imports came down from 0.95 percent to 0.59 percent. This is due to increase in India s total imports and exports. Table-4.14 India s Exports to SAARC Region in pre SAARC period (in million Dollars) Year India s total Exports to % Share exports SAARC Source: Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C. 117

20 The post SAARC period export to SAARC countries was showing an upward trend (table-4.15). The exports to the region more than doubled during the period. But the proportion to total exports increased only marginally because of the increase in the total exports. Table-4.15 India s export to SAARC Region in post SAARC period ( to ) Year India s total exports Exports to SAARC (in million Dollars) % Share , , , , , , , , , , , , , , , , , , , , , , , Source: Department of commerce Export Import Data Bank 118

21 4.4.2 India s Imports from SAARC Region in pre SAARC period and post SAARC period The imports from SAARC countries were not significant for India (table-4.16) and it amounted to $141 million in 1980 and marginally increased by 6.4 percent over the previous year in But in the following two years the imports declined considerably and the annual negative growth rate was 20 percent and 25.8 percent in 1982 and 1983 respectively. The upward trend shown in the beginning of eighties again bounced back and in 1984 the import increased by 18.7 percent over the previous year. The imports from the region amounted to $ million in 1985 and the annual growth rate came down to 6 percent in that year. Table-4.16 India s Import from SAARC Region in pre SAARC period Year India s Total Imports Imports from SAARC (in million Dollars) % Share Source: Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C. The analysis of the import data (table-4.17) exhibits that unlike the pre SAARC period, the imports in the post SAARC though showed a mixed trend and it actually increased with an average annual growth rate of less than one percent. 119

22 India has favorable balance of payments with SAARC countries. The favourable balance stood at $ 166 million in But due to decline in the exports to the SAARC region and the imports increasing marginally the favourable position declined by 52.4 percent in 1981 and further by 2.5 percent in The upward trend of exports and the marginally declining trend in imports pushed the favourable balance of trade upwards in the subsequent years. Table-4.17 India s Import from SAARC Region in post SAARC period ( to ) (in million Dollars) Year India s Total Imports Imports from SAARC % Share , , , , , , , , , , , , , , , , , Note: The countries total import does not include imports of petroleum products and crude oil. Source: Department of commerce Export Import Data Bank 120

23 This figure shows under estimate of actual trade because there exist considerable unrecorded trade within the region. The informal trade within the region is estimated to be higher than the formal trade within the region. However, even accounting for that actual trade is likely to be well below 10 per cent. Such an informal or rather illegal trade has to some extent distorted the perception of trade in the region and has created certain amount of uncertainty related to its impact on trade of the region Growth rate of India s exports and imports to SAARC Region during pre SAARC period and post SAARC period The exports to SAARC countries (table-4.18) amounted to $ 307 million in 1980 and it was 3.6 percent of the total exports in that year. The exports to the region declined by more than 25 percent in 1981 and by 14 percent in 1982 and it forced the percentage of total exports to decline to 2.6 percent and 2 percent respectively. However, in the following two years the annual growth rate was on an increasing trend. In 1985, the exports to SAARC countries amounted to $ 270 million that was nearly 14.3 percent less than exports of the previous year. The export to SAARC as a percentage of total exports also declined from 3.8 percent in 1984 to 3.3 percent in 1985.The pre - SAARC period, i.e. during , though the exports exhibited a mixed trend, it actually came down by nearly 2 percent and also the percentage to total exports by 0.3 percent. Growth rate of India s import from SAARC countries during pre SAARC period as shown in the table, in 1981 was 6.28 percent, which declined by 20 percent and 26 percent respectively in 1982 and It again increased by 18 percent and 6.6 percent in 1984 and 1985 respectively. 121

24 Table-4.18 Growth rate of India s exports and imports to SAARC region during Year pre SAARC period Growth rate of India s exports to SAARC (%) Growth rate of India s imports from SAARC (%) Source: Direction of Trade Statistics Year Book, 1985 and 1992, International Monetary Fund, Washington D.C. In the years , , and , growth rate of India s exports to SAARC region was in negative (Table- 4.19) and in all remaining years it was in positive and it was highest during , (54 percent) followed by percent in Similarly, growth rate of India s imports from SAARC region was in negative during the period , and and in all remaining years it was in positive and it was highest during ( percent) followed by percent in Table-4.19 Growth rate of India s exports and imports to SAARC region during post- SAARC period ( ) Year Growth rate of India s exports to SAARC(%) Growth rate of India s imports from SAARC(%)

25 Year Growth rate of India s exports to SAARC(%) Growth rate of India s imports from SAARC(%) Source: Department of commerce Export Import Data Bank Percentage Share of SAARC Nations in India s Total Export and Imports Table-4.20 and Table-4.21 shows that share of Afghanistan in India s total exports has increased over the period from 0.06 percent in to 0.16 percent in and it s share in imports also shown an increasing trend from 0.02 percent to 0.03 percent over the period. Bangladesh s share in India s export and import over the period has been reduced from 2.59 percent in to 1.43 percent in and 0.15 in to 0.12 percent in 2010 to 2011 respectively. Share of Bhutan in India s exports has increased over the period from 0.03 percent in to 0.07 percent in and its share in imports also shown an increasing trend from 0.03 percent to 0.5 percent over the period. Share of Maldives in India s exports has increased over the period from 0.02 percent in to 0.04 percent in and its share in imports also shown an increasing trend from percent to percent over the period. 123

26 Share of Nepal in India s exports has increased over the period from 0.48 percent in to 0.87 percent in and its share in imports has shown a decreasing trend from 0.22 percent to 0.13 percent over the period. Share of Pakistan in India s exports has increased over the period from 0.46 percent in to 0.92 percent in and its share in imports also shown an increasing trend from 0.01 percent to 0.08 percent over the period. Share of Sri Lanka in India s exports has increased over the period from 1.40 percent in to 1.60 percent in and its share in imports have also shown an increasing trend from percent to 0.13 percent over the period. Table-4.20 Percentage share of SAARC nations in India s total export Years Pakistan Bangladesh Nepal Sri Lanka Source: Department of commerce Export Import Data Bank Bhutan Maldives Afghanistan

27 Table-4.21 Percentage share of SAARC nations in India s total import Years Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives Afghanistan n.a Source: Department of commerce Export Import Data Bank 125

28 The analysis of the table shows that, among other South Asian economies, Sri Lanka had highest share in India s total export (1.60 percent) and import (0.13 percent) in , followed by Bangladesh, 1.43 and 0.12 percent respectively, in Existing and potential items of India s trade with SAARC countries Existing and potential items of Indian exports to SAARC countries: Telecommunication equipment, electrical equipments, drugs and pharmaceuticals, transport equipments, silk, coffee, cotton, yarn textiles, fishing equipments, iron ore, mango pulp, spices, beer and soft drinks, aluminums, nonelectrical machinery, agricultural machinery and implements, civil engineering equipments, vegetable products, prepared food stuffs, mineral products, base metals, coconut shell, coking coal, grey Portland cement, white cement, ayurvedic and unani medicine, etc. Existing and potential items of India s imports from SAARC countries: Bamboo, wood, fruits and vegetables, animal and vegetable oil, woolen items, marine products, shark liver oil, handicraft goods, fresh and processed fruit, fruit juice, calcium carbide, handloom, jamdani sarees, paper and board, raw jute and jute yarn, unani medicine, leather, raw cotton, raw wool, dry fruits, precious and semi precious stones, natural rubber, glycerin, pluses, carbide of calcium, gypsum, cardamoms, fresh ginger, cordage, plant parts, refined cane sugar, almonds, refined sugar, oil products, ferrous waste and scrap, scrap of copper and copper alloys, etc. 4.5 Trade in Services Among South Asian Economies South Asia has a fast and growing trade in services. With the enhancement in the quality of service delivery across the region this trade in services will grow and may do so exponentially, since this is an area where South Asia has some 126

29 comparative advantage. Service sector has emerged as a engine of growth in the South Asian economies. It has emerged as an important source of employment Percentage share of service sector in GDP and it s growth rate in South Asia Services play an increasingly important role in South Asian economies, overtaking industries and agriculture as the largest contributor to GDP in most instances and a highest share in Maldives lowest in Bhutan. Nonetheless, liberalization of services has proceeded much more cautiously, due in large part to the complexities involved in the process. The SAFTA countries have different comparative advantages in different services sectors in region. For example, in transport services, Pakistan and Sri Lanka have competitive advantage. India has a competitive advantage in construction services, computer and information services and other commercial services. Maldives and Nepal are found to be more competitive in travel services. Bangladesh has a higher competitive edge in financial services. Table-4.22 Services, value added (% of GDP) Years India Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives Afghanistan n.a. n.a. n.a n.a. n.a n.a. n.a n.a. n.a n.a. n.a. 127

30 n.a n.a n.a n.a n.a n.a n.a n.a. Source: World development indicators 2010,12 Due to the different geographical profile, boom in travel and tourism and increasing importance of services, the share of service sector in GDP is increasing in most of the SAARC countries and even more than 50% in India, Pakistan, Bangladesh, Sri Lanka and Maldives (Table-4.22). In Nepal it is almost 50% and in Afghanistan it is more than 42% in However, in Bhutan it was on the decreasing side, perhaps not government but it is more or less more than one-third between The region could gain greatly if South Asian countries cooperate strategically to enhance efficiency, improve product quality, and increase value. As India shares borders with most of the member countries in the region and has good marketing capability and linkages in the major importing countries, it could become a hub for spurring the growth of intra-industry trade in the region. With 128

31 its central location and size, India could serve as an assembly and exit point of high value South Asian goods, as well as services in international trade. Against the background of growth of global service trade exceeding merchandise trade and leading role of services in the South Asian economies, a relatively poorer performance by South Asian countries in terms of services trade suggests the unexploited potential of trade in services. The services should therefore be on the active policy agenda of South Asian countries ranging from liberalization to promotional efforts to regulation at national, regional, and international levels SAARC Country s Exports of Services The structure of service exports shows that computer, communications, and other services dominate the export of commercial services in India and Bangladesh. These services comprise a significant proportion of commercial services exports from Nepal, Pakistan and Sri Lanka as well although transport and travel services dominate the commercial services exports for these countries. Maldives derives almost all of its service export earnings from travel services. Exports of computer and communications services comprising Information Technology (IT) software and business process outsourcing rapid growth of India s services exports over the past decade. The services sector growth has been accompanied by rise in services trade of the region. South Asia achieved a robust growth in trade in services surpassing the growth recorded by merchandise trade. However, the growth in services trade (as percentage of GDP) across countries is uneven. 129

32 Table-4.23 SAARC Country s Exports of Services: during (in US dollars at current prices and current exchange rates in millions) YEAR Afgha nistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka SAARC Source: UNCTAD Data Base 130

33 Table-4.24 Share of different SAARC Countries in total exports of Services from SAARC Region during (in Percent) YEAR Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka (SAARC)

34 From the above table (Table-4.23 & 4.24) it is clear that India is major player in service sector export in pre-saarc period and post-saarc period also. In the year 1980 India s share in export of services from South Asia was 69.0 percent which increased significantly up to 90.7 percent in The relative share of Bangladesh, Pakistan, Nepal and Sri Lanka have decreased over the years while the share of Maldives is stagnant over the years. This shows that the during the post-saarc period India s share has been increased India is becoming the major hub for services export from the SAARC Region. 132