Malini Chakravarty IDEAs Presentation for IDEAs-RIS Workshop on Nature and Implications of Expanding Presence of India and China for Developing Asia New Delhi, November 5-6, 2009 India and Developing Asia : Nature, Pattern and Extent of Integration

Broad Outline Indias increased presence in the global economy accompanied by increasing integration with the developing Asia. Other than with China, integration with the most dynamic segment of the region-South East Asia- has increased rapidly in the last few years. But has Indias presence made a significant impact on developing Asian countries trade? If yes, where? What is the nature of integration where India has a large presence? What is the impact of Indias investment on developing Asia?

Indias Increasing Presence in the Global Economy India Relative to the World (Percentage Shares) Exports of goods and services (Constant 2000 US$) India Imports of goods and services (constant 2000 US$) India GDP (Constant 2000 US$) India GDP, PPP (Constant 2005 international $) India

Trends in the direction of trade: Evidence of greater Integration with developing Asia Indias integration with developing Asia evident in both exports and import trends.

Pattern of Integration with Developing Asia Increasing importance of China and South-East Asia in Indias exports and imports. South Asias role much smaller- especially in Indias imports. Integration with China, SE Asia dominating aspect of integration with dev. Asia

Indias Presence in South-East Asian countries Trade Increase in Indias presence in South-East Asian countries trade, especially in recent years. But India has not yet made a big impact in overall trade of the countries of this region- accounts for maximum 3% of trade

Indias Presence in South Asian countries Trade India relatively more important for South Asian countries. Significant increase in Indias share in the case of Sri Lanka, Nepal and Pakistan. Indias importance for Bangladesh more or less constant

Nature and Pattern of South Asian Countries Integration with India: Bangladesh and Sri Lanka

Indias Share in Bangladesh's Export and Import Bilateral trade doubled from 1998 to Large informal trade implies integration with India more than that shown by recorded trade. But, in both, India more important as a source of imports and less as a market for Bangladeshs exports.

Reasons for Ballooning Trade Deficit Bangladeshs trade regime more liberal in terms of the length of time, the coverage of items and pace, compared to India. Level of tariffs and other protective duties on imports in India, higher than in Bangladesh even in 2001 (Islam, 2004). Between 1985 to 1999, 50% appreciation of the Taka vis-à-vis the Rupee (World Bank, 2006), compared to its value in mid 1980s. Bangladeshs exports heavily biased towards textiles and ready made garments. India is itself an exporter of similar products and hence a competitor.

Other reason: Ineffectiveness of SAPTA/SAFTA Restrictions contained in the trade agreements SAPTA & SAFTA (e.g. limited product coverage, existence of negative list, restrictive rules of origin) Also, the preferences accorded by India not much effective - are limited in terms of products that are of Bangladeshs export interests. Para-tariff and non-tariff barriers, including restrictive rules of origin Rules of Origin (ROO) hinder Bangladeshs exports to India. Quota fixed for textile exports by Bangladesh to India under trade agreement recently (since 2007) yet to be fully utilised.

Composition of Bangladeshs Imports from India: and Basic necessities like cereal & other food items form a large part of imports in both periods. Other imports: intermediate goods, (cotton yarn, petroleum products, etc.), machinery, vehicles etc.

Some Salient Features: Disaggregated data Shift towards import of raw cotton and machines for processing textile fibres India is one of the top-3 suppliers of textile machineries to Bangladesh in the world. Bangladesh depends on imports of input and machinery for its textiles exports It seems Bangladesh has been able to effectively use trade with India -by sourcing the required inputs and capital goods - in sustaining export of its most important foreign exchange earner - textiles and ready- made garments (RMG).

Composition of Bangladeshs Export to India: and India is an important market for Bangladeshs export of chemical fertilisers (urea), and its input ; anhydrous ammonia Since 2004, of the important markets-Australia, USA, France, etc. India the single largest market India accounted for nearly 88% of Bangladeshs export of urea in 2007, from 10% in 1998.

FDI Inflow in Bangladesh (US $ Million) FDI India Global Total Indias share (%) Some diversification in Bangladeshs exports to India. But India not a large market in overall exports. Integration confined to mainly cross-border trade. Some increase in investment-but sporadic and not given rise to much trade-investment nexus yet. Some change has begun. Nature of Integration: Shallow

Indias increasing importance for Sri Lanka In 1996, India replaced Japan as the largest source of imports to Sri Lanka. India-Sri Lanka FTA (ISLFTA) implemented in 2000 and duty free access to Indian market by 2003 in many products. India has become even more important both as a destination for Sri Lankas exports as well as a source of imports by Sri Lanka. Growing importance of India in Sri Lankas exports: from 16 th in 2000, 3 rd largest export destination since Growth in export earnings to India has far outstripped total export earnings for the country since 2001 and helped reduce the trade gap, in favour of Sri Lanka

Indias Share in Sri Lanka's Export and Import

Composition of Sri Lankas Exports to India: and Visible shift from agricultural to manufacturing goods. Refined copper products and vansapati, main drivers of export growth in period Some diversification in exports, rise of exports of electrical, electronic equipment - electric conductors and memory chips, between the two sub-periods

Strengths and weaknesses of Sri Lankas export success Momentum in Sri Lankas exports to India, spilled over to items in Indias negative list-plastics, rubber articles, textile articles (Weerakoon, 2008) New products –ceramics, value-added tea entered Sri Lankas exports to India (Kelegama, Mukherjee, 2007). But, export success driven mainly by 2 commodities- copper articles and vanaspati Likely to be more of trade deflection. The recently signed ASEAN-India FTA could pose challenge to Sri Lankas exports of these products to India.

Investment links in Trade Integration with India has lead to inflow of FDI, in copper products, vanaspati, cement, automobile components, chemicals, electrical equipments. India now 5 th largest investor- accounts for 6% p.a. Indian investment with a view to buy back for the duty free Indian market, has contributed to exports also. Increased diversion of investment towards --services -within manufacturing towards, machinery and transport equips. Growing opportunity for intra-industry links- joint ventures already in tyres, plans to set us automobile assembly operations (Kelegama, 2009).

Composition of Indias outward FDI and Indias importance in FDI Inflows in select developing Asian countries Developed countries, together with Channel Islands (22%) and Mauritius (8%) accounted for 70% of Indias outward FDI between Within developing Asia, more developed countries like Singapore and Hong Kong together accounted for another 8%. Therefore, barring countries like, Sri Lanka and Nepal, Indias share in other dev. Asian countries is meager. Increase in Indias investment in Indonesia, Thailand, China in 2007, although very small share.

Some Tentative Observations: Possibilities of Future Integration Indias integration with SE economies is in a nascent phase The high rate of growth in trade (and investment to some extent), in the last few years, perhaps indicates strong potential for future integration. In this, India-ASEAN FTA is also expected to play an important role. But India-ASEAN FTA could pose significant challenge for Sri Lanka –India integration. That could also alter the nature and pattern of integration witnessed thus far.

Some Tentative Observations: Possibilities of Future Integration-contd. The global financial crisis and recession in the Northern markets, also highlight the need for diversification of export markets. Recent trade info, shows the initial signs of this happening. A lot however, depends on whether India can sustain its high growth path in the aftermath of the global crisis. Given increasing protectionism in the major markets of Indias exports, thin chances of exports reaching the heights it had witnessed earlier. In this scenario, India has to depend even more on domestic demand to spur growth. Whether or not that can happen is open to debate.