[Dr Lohani said that apart from
India, the other economy that has the potential to exert a strong gravitational
pull in South Asia specially for the smaller South Asian countries is China.
Stating that Chinese do not have to do much to make their presence felt, Dr
Lohani said, "The growth in their size means that even if the Chinese do
not do anything deliberately they are becoming a factor in all countries around
the world more or less like the USA." Being big with a dynamic economy
with the general perception of a great future potential has a built in advantage
because it means that other countries, especially the neighbours, will feel its
presence even if there is no deliberate design. ]
By Akanshya Shah*
 Nepal’s former Foreign Minister Dr Prakash Chandra Lohani says India should take the lead in the economic integration of the region and carry the smaller states along with it towards the path of economic prosperity.Participating in a one-day conference on Indo-Nepal trade and investment at Observer Research Foundation on 22 April, 2013, Dr Lohani pointed out that there is unwillingness among the South Asian countries to form a strategic vision of economic cooperation that allows "the gravitational force of the large and dynamic Indian economy to act as a lever to pull all other member states in the path of collective prosperity." The conference was organised as part of the joint study ORF has undertaken along with the South Asian Institute of Management (SAIM), Nepal, on Indo-Nepal trade and investment. Viewed from a gravity model perspective developed by economists and geographers, India is the most important country in the region, Dr Lohani said. The size of the country, the dynamism of its economy and the distance factor involved imply that smaller South Asian countries will find the gravitational pull of the Indian economy a vital element in their quest for prosperity. "In fact this is one important reason to believe that in the years to come economic logic will become increasingly more powerful in India- Pakistan relationship."  Dr Lohani said that apart from India, the other economy that has the potential to exert a strong gravitational pull in South Asia specially for the smaller South Asian countries is China. Stating that Chinese do not have to do much to make their presence felt, Dr Lohani said, "The growth in their size means that even if the Chinese do not do anything deliberately they are becoming a factor in all countries around the world more or less like the USA." Being big with a dynamic economy with the general perception of a great future potential has a built in advantage because it means that other countries, especially the neighbours, will feel its presence even if there is no deliberate design. Ambassador Shiv Mukherjee, while chairing the first session of the conference, too reiterated the point on the rise of Chinese influence in the region. But he pointed at the need to depoliticise economic issues, especially water projects, in Nepal, which has hindered real progress in bilateral trade and investment. He also said that political unrest has taken a toll on the economic scenario of Nepal.Four papers were presented during the conference. The first paper entitled India- Nepal Trade and Investment Enhancement: Economic Integration with PPPP (public-private partnership along the fourth P, meaning people) was presented by Professor Madhukar Rana, who is also the former finance minister of Nepal.  The paper focused on economic development, strategic management and trade theory with the theme to foster 4Ps. The emphasis of the paper was on the role of private sector, which, according to Mr Rana, is the key for growth and employment creation. His methodology was more based on the (applied) consultant’s approach rather than (academic) research approach.The paper examined the vital assumptions needed to move the bilateral economic process forward from mere ’cooperation’ and ’facilitation’ to ’integration’ for mutual benefit. It examined the historical trajectory since 1978 and highlighted main points of the current 2009 Indo-Nepal treaty. His paper also examined the economics of geography and underscored how value and supply chains may be developed by companies like Dabur, GMR and Surya Tobacco, which have huge presence in Nepal, in partnership with the municipalities and the local people themselves.  Dr Jayshree Sengupta spoke on Indo-Nepal trade and investment from the Indian perspective. Stating that Nepal and India with its economic and cultural ties since ancient times are facing many problems on the economic front, she pointed that a huge trade deficit is an area of deep concern for Nepal.She said that Nepal’s economy needs to step up its GDP growth, which has never exceeded six per cent in recent times. This will lead to a rise in incomes and also manufacturing and service sector growth, she added. While presenting statistics, Sengupta said that though poverty levels in Nepal are not as bad as in India, the inequality of incomes and corruption levels seem to be higher in Nepal. The main impediments to trade expansion with India seem to be related to infrastructural constraints and problems with border shipment facilities, she said.  Her paper examined the new tariff quota structure that is in place in recent times which according to the Nepalese authorities is unfair and biased against agricultural and other exports. She discussed trade facilitation measures that could be undertaken and how to to expand the range of Nepal’s exports and capacity building.During the discussion, participants raised queries on what kind of investment guarantees would lead to more investment inflows into Nepal and what kind of private investment ventures are possible from India into Nepal. Sengupta said that making Nepal a more prosperous and stable country would be to India’s and the South Asian region’s advantage. She said focus should be on how to use the surplus labour force in Nepal to India’s investment advantage and how to protect the investment interests.  The third paper was on economic linkages between South Asia and East Asia and its implications for India-Nepal relations. The paper presented by Dr Pradumna Rana, Associate Professor at the S. Rajaratnam School of International Studies (RSIS) of the Nanyang Technological University (NTU), argued that South Asian countries need to embark on a second round of "Look East" Policies (LEP2) to (i) link themselves to production networks and supply chains in East Asia and (ii) develop production networks in manufacturing and services within their region. Professor Rana said that such policies would allow both regions to benefit mutually and in a shared manner not only from the static complementarities of the Ricardian or the Hecksher-Ohlin trade models but also the dynamic complementarities associated with newer theories of product fragmentation pioneered by Jones and Kierzkowski (1990). Like in East Asia, economic integration between the two regions would increase and so would economic growth and welfare, he stated.He said that these policies would reinvigorate economic integration in South Asia which has remained among the lowest in the world. LEP2 would also poise South Asia to benefit from the gradual but encouraging opening of Myanmar, a node for South Asia-East Asia relations and connectivity. The key components of LEP2 in South Asia should comprise (i) improving business environment by completing the economic reform process begun in the early 1990s (ii) reducing communication and coordination costs between supply chains by improving ICT (iii) reducing logistic costs including "at the border" through trade facilitation (iv) enhancing regional physical connectivity with East Asia and (v) lobbying and negotiating to participate in various on-going regional trade and financial cooperation efforts in East Asia. At the request of the East Asia Summit, the Economic Research Institute for ASEAN and East has come up with two projects for ASEAN-India Connectivity. Professor Rana proposed that for China-ASEAN-South Asia Connectivity an Yunnan-Myanmar-India-Nepal-Tibet-Yunnan Economic Corridor or the Circular Economic Corridor be considered.  Prof. S K Mohanty of the Research and Information System for developing countries (RIS) presented the fourth paper titled ’Chinese Trade Engagement with South Asia: Implications for Nepal and India’.He said that South Asia is emerging as a vibrant region in the world economy during the past decade, with external sector as the driver of growth for most of the regional economies. This has attracted the global interest for trade with the region, including China. As an immediate neighbouring country, Chinese engagement with South Asia has been more impressive during the last decade than decades before. China is deeply engaged with the South Asian regional economies, particularly more with exports than imports, leading to widening of trade gap with many economies. With many of them, China is emerging as the most important partner in recent years. It became the largest export partner of India since 2008, replacing the US during the period of recession, though India witnessed unsustainable trade imbalance with China. Such trade imbalances are seen in several sectors, and also in the trade sector as a whole, he said. These trends are also similar with many regional economies in South Asia. Prof. Mohanty argued that bilateral trade imbalance in the trade literature is not always construed as a negative entity when bilateral trade imbalance contributes to reduction of overall trade deficit of a country. He also argued that empirical evidences suggest that large number of products, exported by China to the regional economies including India is not competitive as compared to many other competitive foreign suppliers in the domestic economy, because of numerous trade strategies adopted by Chinese exporter supported by their state.  Implications of large exports to South Asian economies by China can be seen in two distinct areas, he said. Firstly, Chinese exports are reducing space for exports within the regional economies as these export opportunities are grabbed by China, and this may end up with reduction in IRT. Secondly, Chinese exports to South Asian countries are rising without any commensurate imports from these economies, resulting in widening of trade gaps with them.On Nepal, he said that it is critically placed between India and China, having large trade deficit with them. While trade deficit with India is narrowing down, it is rather enlarging with China. Nepal’s bilateral export to import ratio is relatively better with India in comparison with China. If the present trend continues, Prof. Mohanty said, the overall trade deficit of Nepal is likely to increase with its further integration with China. * Akanshya Shah is Associate Fellow at Observer Research Foundation, Delhi, India. @ Observer Research Foundation |