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During the third Summit of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) in Naypyidaw, Myanmar in March 2014, Prime Minister Manmohan Singh urged for an early conclusion of the BIMSTEC Free Trade Agreement (FTA) in goods and its extension to investment and services. He stressed the already existing economic ties among its seven member states, Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal. Yet, the agreement has been postponed again until the end of 2014.
Given the geostrategic location of India's North Eastern region (NER) in BIMSTEC, multiple expositions about its economic potential have been made in terms of trade and investment. Yet, the purported economic remedies to the NER through greater infrastructural connectivity remain low. Instead, economic development in the NER with an annual growth rate in GDP of 6.7 per cent is lagging behind the rest of the country. Ethnic insurgencies and territorial disputes are often cited as a cause for the NER’s developmental neglect. But, according to the Ministry of Development of the NER, the key reasons for its stagnant economy lie in its infrastructural deficits, regional supply-chain constraints and the imposition of artificial trade barriers onto its local border trade especially with Myanmar and Bangladesh. This results in the limited access of local businesses to cross-border markets which would buy back tangible benefits to the region.
Could the NER eventually benefit from a BIMSTEC-FTA through closer border trade especially with Myanmar and Bangladesh by enhancing greater trade creation?
Myanmar: Economic Linkages
Comprising 99 per cent of the border trade, Moreh-Tamu (Manipur) is the main land customs station (LCS) through which trade between the NER and Myanmar's border states is conducted. These share similar economic and business structures with the NER, which are largely agrarian and dependent on the export of unprocessed primary commodities. Compared to the expansion in bilateral trade to US$ 1.92 million in 2012-13, with imports in food grains, vegetables and fruits, the NER is facing a trade deficit to Myanmar of US$ 1 million. These statistics, however, do not factor in the significant informal trade, which suggests a considerable demand in goods beyond the positive list of tradeable items under the 1995 Border Trade Agreement.
Therefore, as a first step to a deeper industrial development of the NER, these items should be revisited under the formulation of the FTA with the objective to bring the informal trade onto the formal channel. Another primary reason for the low level trade is the unfavourable trading environment at Moreh. Official trade suffers due to a lack in quality infrastructure (incomplete Kaladan project, low information technology, etc) and the spiralling of exchange rates of the inflated Kyat. Thus, unless the NER is not able to promote the Rupee as a currency for the settlement of the FTA, these remain a serious hindrance to the NER’s exports, resulting in the loss of economic revenue.
In order to promote greater export to Myanmar, the NER state governments need to prioritise the development of local industries for trade complementarities. For example, there is ample scope for the increase in manufacturing units for pharmaceuticals, rubber goods, edible oils, petroleum products, wood, iron and steel and electrical machinery, etc. While India has already given preferential tariffs on a large number of these items to Myanmar, the FTA could further reduce the NERs trade deficit with Myanmar by creating a viable industrial base that can service external demand. In turn, this could also result in the augmentation of a greater domestic demand in the NER’s industries.
Bangladesh: Economic Linkages
The bilateral trade with Bangladesh is dominated by a huge trade surplus with India. In the NER, the India-Bangladesh border trade at Meghalaya, Assam and Tripura with US$ 47 million export rate over US$ 16 million import rate mirrors this overall picture, except for Tripura, whose import rates of US$ 11 million indicates a significant trade deficit.
A look at the local trade patterns along the border reveals that the FTA bears high potential for the economic development of the NER and Bangladesh. Strong resource-industry linkages are building blocks of the present border trade and indicate the economic complementarities between both regions: the NER is rich in minerals, such as coal, limestone, iron and steel, for which there is a huge demand from the goods-processing industry in Bangladesh. However, there are three reasons why its potential has not been fully utilised.
First, the border trade between the NER and Bangladesh is still underdeveloped, although the 2010 agreement for the establishment of border haats is a first step to further economic integration. Second, the processing sector lacks foreign investment and know-how. The FTA would remedy this by expanding the resource-industry linkages to other sectors, especially the food-processing industries and the textile industry. However, this would be dependent on the strengthening of the processing industries in Bangladesh, especially on a small scale level. Therefore, it is necessary that the government of India and the states of the NER promote capital investment and the transfer of knowledge and technology to support these industries. Third, since natural resources are short-lived, the government should in the long-run utilise the gains of the export of resources for investing in processing industries in the NER as well, in order to diversify its export-basket.
By Special Arrangement with Institute of Peace and Conflict Studies (http://www.ipcs.org)