X Chapter 8
Trade & Investment Relations between India
and the Countries of South Asia
—EPAs are Effective in Facilitating
Shujiro Urata
Professor, Waseda University Graduate School of Asia-Pacific Studies
Research Fellow, Japan Center for Economic Research

1. The South Asian countries are beginning to draw attention

The Indian economy continues to show healthy growth, while interest in the economies ofcountries neighboring India such as Bangladesh, Pakistan and Sri Lanka is also on the rise. These
countries are commonly thought of as part of a region left behind by economic development andstricken by serious poverty problems. However, recognition that these countries are actually
recording comparatively high levels of growth has spurred the increased interest in recent years. This
chapter will cover current trade and direct investment relations between India and other South Asian
countries, and will point out challenges for closer cooperation. The chapter will conclude byshedding some light on how to address these challenges.

2. The economic situation in South Asian countries

2.1 South Asian economies are overwhelmed by India
The economic situation in South Asian Countries is summarized below. Here, South Asia isdefined including India, Bangladesh, Pakistan and Sri Lanka. Figure 8.1 indicates economic
indicators for these countries. India’s economy is overwhelmingly larger than the other economies,
and in terms of trade, direct investment, population, and GDP, Bangladesh, Pakistan and Sri Lanka
have a much smaller scale compared to India.

Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
91

Table 8.1: The economic situation for South Asian countries (2010)
India
Bangladesh
Population (millions)
1,170.9
148.7
Population growth rate (%)
1.3
1.1
Population structure (ages 0-14)
30.6
31.3
(ages 15-64)
64.5
64.1
(ages 65 and up)
4.9
4.6
GDP (billions of dollars)
1,729.0
100.1
Per capita GDP (dollars)
1477
673
GDP growth rate (%)
2000-2007
7.70
5.74
2007-2008
4.93
6.19
2008-2009
9.10
5.74
2009-2010
9.72
5.83
Exports (billions of dollars)
162.6
15.1
Imports (billions of dollars)
249.6
21.8
Exports-to-GDP ratio (%)
11.8
16.9
Imports-to-GDP ratio (%)
18.1
24.4
Inward direct investment (flow, millions of dollars)
2000-2007
9,761.7547.0
2008
42,545.7
1,086.3
2009
35,648.8
700.2
2010
24,639.9
913.3
Inward direct investment (stock) (millions of dollars)
197,939.3
6,072.1
Outward direct investment (stock) (millions of dollars)
92,406.5
100.0
Inward direct investment (stock)-to-GDP ratio (%)
11.4
6.1
Outward direct investment (stock)-to-GDP ratio (%)
5.3
0.1
Note: Exports, imports, exports-to-GDP ratio, imports-to-GDP ratio are from 2009.

Pakistan
173.6
1.8
35.4
60.3
4.3
174.8
1007

Sri Lanka
20.9
0.9
24.9
67.0
8.2
49.6
2375

5.26
1.60
3.63
4.36
17.7
31.7
10.9
19.6

4.89
5.95
3.54
8.01
7.3
10.2
17.5
24.3

1,903.9
5,438.0
2,338.0
2,016.0
21,494.0
1,727.0
12.3
1.0

294.8
752.2
404.0
477.6
5,008.4
380.2
10.1
0.8

Source: Statistics aside from direct investment are from the World Bank, World Development Indicators on line.
Direct investment statistics are from UNCTAD, FDI Database on line.

The economies of Bangladesh, Pakistan and Sri Lanka appear small in a comparison of absolute
scale (GDP) with respect to India, however, when looking at population, for example, Pakistan has apopulation of 170 million people, while Bangladesh has a population of 150 million people, making
them the 6th and 8th most populous nations in the world, respectively1. Sri Lanka has the highest GDP
per capita of the four, followed by India, Pakistan and then Bangladesh. In terms of external
economic relations, the exports-to-GDP ratio and imports-to-GDP ratio for India, Bangladesh,Pakistan and Sri Lanka all exhibit similar tendencies.

2.2 The steadily moving South Asian economies
One point that Bangladesh, Pakistan and Sri Lanka all have in common is that their growth rates
have increased since the beginning of the 21st century (figure 8.1). Growth rates in these economies
dropped following the deceleration in the global economy caused by the 9.11 terrorist attacks in the
U.S. in 2001 and the bursting of the dot-com bubble. After that, high levels of growth continued
until declining due to the large downturn in the global economy caused by the global financial crisis,1

The top ten most populous nations in the world excluding Bangladesh and Pakistan are: 1. China, 2. India, 3.
U.S.A., 4. Indonesia, 5. Brazil, 7. Nigeria, 9. Russia, 10. Japan

Japan Center for Economic Research “Asia Research” Report92which was triggered by the collapse of the Lehman Brothers in 2008. Since 2009, there has been a
gradual trend towards recovery.

Figure 8.1: Economic growth rates for South Asian countries

3. Trade and investment in South Asia

3.1 Trends in Recent Years
There have been years during which exports have dropped in Bangladesh, Pakistan and Sri Lanka,
but for the most part they have risen consistently since 1990 (figure 8.2). The value of exports innominal U.S. dollars between 1990 and 2009 increased 9.0-fold in Bangladesh, 3.1-fold for Pakistan,and 3.8-fold for Sri Lanka. There have been larger swings in inward direct investment (flow) thanthere have been in trade, and between 1990 and 2010, that of Bangladesh increased 282-fold, that ofPakistan increased 7.2-fold, and that of Sri Lanka increased 11-fold (figure 8.3).

Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
93

Figure 8.2: South Asian exports

Figure 8.3: Domestic direct investment (flow) for South Asian countries

3.2 India as a Trade Partner
Next is an examination of the importance of India as a trade partner for Bangladesh, Pakistan and
Sri Lanka. Figure 8.4 shows the proportions of these three countries’ exports that were to India

Japan Center for Economic Research “Asia Research” Report94between 1990 and 2009. The figure indicates that Bangladesh and Pakistan each trended at modest
levels around 0.5% to 2.5%, and since the early 2000s have tended to rise, although only slightly. Sri
Lanka also hovered at around the 1% mark, similar to the other two countries, until the beginning of
the 21st century, when the proportion of exports to India shot up dramatically, marking 8.9% in 2005.
Since then, however, that number has been falling.
India is the third largest export destination country for Sri Lanka, but is not in the top ten for
Pakistan and Bangladesh 2. In terms of imports, India is the largest import partner for Sri Lanka, thesecond largest for Bangladesh, and the eighth largest for Pakistan. Meanwhile, the proportions ofIndian exports headed to Bangladesh, Pakistan and Sri Lanka in 2009 were, respectively, 1.3%, 0.9%,
and 1.1%. The proportions of Indian imports from each these countries was no more thanapproximately 0.1%.

Figure 8.4: Proportions of Exports to India from Three South Asian Countries

In evaluating trade relations between Bangladesh, Pakistan, and Sri Lanka in relation to India up
to this point, one aspect that has not yet been addressed is the economic scale of these countries.
Thus, export intensity, a calculation that takes economic scale into consideration, is addressed next
(figure 8.5).3 This figure reveals that while exports to India constitute a typical level for Bangladesh
and Pakistan, the importance of exports to India for Sri Lanka is quite high. On the other hand,exports from India to Bangladesh and Sri Lanka are extremely high when taking into account the2
3

See JETRO (2011) for trade partner rankings
Export intensity is a value from zero to infinity.
being at least standard.

When the values is larger than one, intensity is interpreted as

Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
95

scale of their economies (figure 8.6). These results suggest that exports to India from these three
countries are of a much smaller scale than would be expected by their geographical proximity,
leaving room for expansion.

Figure 8.5: Export intensity for three South Asian countries relative to India

Figure 8.6: Export intensity for India in relation to three South Asian countries

Japan Center for Economic Research “Asia Research” Report96In terms of inward direct investment, India is the largest investor country (2010) in Sri Lanka, theseventh largest investor in Bangladesh, and while India does not fall into the top ten for Pakistan, is
still a principal source of investment4. It is thought that there is still room for investment expansion
in relations between these three countries and India.

3.3 Breakdown of traded products
Measuring the correlation coefficients for the export structures between India and the three
countries puts Bangladesh at 0.15, Pakistan at 0.32, and Sri Lanka at 0.22, meaning that they are notthat similar, or in other words, not competing that much5. Meanwhile, the correlation coefficient for
the export structure of Bangladesh and Sri Lanka is 0.78, meaning that they are highly similar. The
export structure correlation coefficients for Bangladesh and Pakistan as well as for Pakistan and Sri
Lanka respectively are 0.38 and 0.28, and so their export structures are not particularly similar.
Competitive products have a strong tendency to comprise a large proportion of total exports,
making it possible to evaluate competitiveness for commodities in each country by observing the
breakdown of exported products. A refined and formulated index of this idea is the revealed
comparative advantage (RCA) index6. Table 8.2 charts the top five commodity items for eachcountry from among 97 exported items (HS 2-digit classification) for Bangladesh, Pakistan and Sri
Lanka. The figure illustrates that all three countries have a comparative advantage in textiles.

Table 8.2: Comparative advantage commodities in three South Asian countries
HS
Classification
Bangladesh
53
61
62
65
63
Pakistan
63
52
42
10
57
Sri Lanka
14
9
53
62
61

Product name

RCA

Other vegetable textile fibers; paper yarn and woven fabric of paper yarn
Articles of apparel and clothing accessories, knitted or crocheted
Articles of apparel and clothing accessories, not knitted or crocheted
Headgear and parts thereof
Other made up textile articles; sets; worn clothing and worn textile articles; rags

101.36
32.65
28.78
24.12
11.54

Other made up textile articles; sets; worn clothing and worn textile articles; rags
CottonArticles of leather; saddlery and harness; travel goods, handbags and similar containers; articles
of animal gut (other than silkworm gut)
Cereals
Carpets and other textile floor coverings

56.62
55.32

12.20
11.97

Vegetable plaiting materials; vegetable products not elsewhere specified or included
Coffee, tea, maté and spices
Other vegetable textile fibers; paper yarn and woven fabric of paper yarn
Articles of apparel and clothing accessories, not knitted or crocheted
Articles of apparel and clothing accessories, knitted or crocheted

81.95
47.37
25.86
18.38
17.97

12.90

4

JETRO (2011).
Correlation coefficients were measured with respect to the 96 HS 2-digit products.
6
RCAij = (Xij/Xwj)/(Xi/Xw). Xij is exports of good j by country i, Xwj is exports of good j to the world (w), Xi is
overall exports by country i, and Xw is overall exports of the world. If RCAij is greater than 1, country i can beinterpreted to have a comparative advantage in good j.

5

Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
97

Next is an examination of the bilateral trade patterns of Bangladesh, Pakistan and Sri Lanka with
India (table 8.3). One major difference in trade between these countries and India compared to theirtrade with the rest of the world is that with respect to India, Pakistan and Sri Lanka have a higher
proportion of both imports and exports of animal products such as dairy products, while they have acomparatively low proportion of textiles. A comparison of trade between Bangladesh and India
versus trade between Bangladesh and the rest of the world shows that in terms of exports to India,
the proportion of textiles is low, and the proportions of mineral products and chemical industrial
products is high.

4. South Asian trade policy: Promoting broad-region FTAs

Beginning in 1991 as a response to the economic crisis, India has furthered economic reforms,
liberalized the economy, and implemented outward-oriented policies. In Bangladesh, Pakistan and
Sri Lanka, trade and investment liberalization policies also began to be adopted when liberalizationof trade and investment was called for as a condition for receiving aid from the World Bank and theInternational Monetary Fund as a response to the grave economic situation caused by increases inexternal debt. Average import tariff rates (effective rate, arithmetic mean) for all commodities
dropped in Bangladesh from 106.5% (1989) to 14.5% (2007), in Pakistan from 50.1% (1995) to
14.0% (2008), and in Sri Lanka from 27.4% (1990) to 11.3% (2006) 7.

7

See the World Bank (each year’s edition)

Japan Center for Economic Research “Asia Research” Report98Table 8.3: Trade between India and Three South Asian Countries: Commodity Breakdown
Comparison (2007, %)Bangladesh
1.5
2.6
0.1
0.3
18.0
19.4

Exports
Pakistan
67.4
16.5
0.9
3.4
0.3
3.6

Animal ProductsPlant Products
Animal/Plant Oils
Food Products
Mineral Products
Chemical Engineering
Products
Plastics/Rubbers
0.5
0.2
Leather/Fur Products
1.0
1.0
Wood/Timber Products
0.2
0.1
Paper Materials, Paper
0.1
0.9
Products
Textile Products
47.1
0.3
Footwear, Umbrellas
0.1
0.0
Mineral Goods
0.5
0.0
Precious Stones, Rare
0.0
0.0
MetalsBase Metal Products
4.2
5.4
General Machinery
1.5
0.0Electrical Machinery
2.5
0.0
Transport Equipment
0.4
0.0
Precision Machinery
0.0
0.0
Other Manufactured
0.1
0.0
Goods
Other
0.0
0.0
Total
100.0
100.0
Source: Calculated by author using COMTRADE data

Sri Lanka
32.3
14.6
1.1
8.5
1.0
4.4

Bangladesh
0.9
20.8
0.3
9.6
9.2
10.3

Imports
Pakistan
65.0
21.5
1.0
3.9
1.2
6.3

Sri Lanka
63.8
17.4
1.1
9.3
0.9
3.0

0.3
0.6
0.6
0.2

4.3
0.0
0.0
1.1

0.2
0.0
0.2
0.1

0.2
0.5
0.4
0.2

35.8
0.1
0.3
0.0

18.2
0.1
0.5
0.1

0.4
0.0
0.0
0.0

2.2
0.6
0.1
0.0

0.2
0.0
0.0
0.0
0.0
0.0

8.2
6.0
2.7
6.5
0.4
0.5

0.0
0.0
0.0
0.0
0.1
0.0

0.1
0.0
0.0
0.0
0.0
0.0

0.0
100.0

0.1
100.0

0.0
100.0

0.0
100.0

That said, compared to countries in East Asia, the tariff rates of countries in South Asia are stillhigh. The effective rates reported by the WTO for agricultural products are 7% in Pakistan and26.3% in Sri Lanka, while for industrial products are 13.4% and 8.2%, respectively. In addition,
tariff concessions are set much higher than the effective rates in all these countries, meaning that
there is plenty of room to legally raise effective rates.
Although South Asian countries were later in concluding Free Trade Agreements (FTAs) thanthose in other regions, in recent years FTAs are now being concluded in the region (table 8.4). India
has taken the most positive stance toward FTAs of the four countries (India, Bangladesh, Pakistan,
Sri Lanka), and as of October 2011 had thirteen FTAs in effect, and an additional eight FTAs being
negotiated. Pakistan is the next country in this group in terms of the number of FTAs in effect withsix, while Sri Lanka and Bangladesh trail behind with four and two, respectively.

Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
99

Table 8.4: South Asian nations and FTAs

Proposed

Framework
Agreement
Signed,Under
Negotiation

Under
SignedNegotiation

In Effect

Total

India

8

4

8

0

13

33

Bangladesh

0

2

1

1

2

6

Pakistan

10

5

3

2

6

26

Sri Lanka

2

1

0

1

4

8

Source: Asian Development Bank, Asian Regional Integration Center

The South Asian Free Trade Area (SAFTA), a broad-region FTA including the South Asian nations,came into effect in January 2006. The seven member states include India, Bangladesh, Pakistan and
Sri Lanka. India, Pakistan and Sri Lanka, the more developed countries in the region, planned tolower the maximum tariff to 20% or below, excluding some sensitive-list items, between July 1,
2006, and the end of 2007. Following this, they planned to reduce tariffs to 0-5% during thefive-year period ending at the end of 2012 (the end of 2013 for Sri Lanka). Bangladesh, Nepal,
Bhutan and Maldives, which are the least-developed nations in the region, planned to reduce themaximum tariff to 30% or less between July 1, 2006, and the end of 2007, after which they would
lower tariffs to 0-5% during the eight-year period ending at the end of 2016.
The limited number of harbors at which duty-free benefits can be enjoyed, and the numerous
sensitive-list items are factors hampering trade expansion in SAFTA. As of November 1, 2011, thenumber of items excepted from liberalization is planned to be 993 (19%) for Bangladesh, 695 (13%)
for India, 936 (17%) for Pakistan, and 834 (16%) for Sri Lanka8. In November 2011, however,Pakistan decided to grant India most-favored nation status, which will likely contribute to the
expansion of trade. India has given most-favored nation status to Pakistan since 1996, but forpolitical reasons Pakistan had not yet granted the same status in return.
By analyzing the traded commodity breakdown between Bangladesh, Pakistan, Sri Lanka andIndia, it is possible to consider the advantages of establishing FTAs. Table 8.5 displays values fromthe Trade Complementarity Index (TCI), measured using 2007 statistics9. The breakdown of exports
for India and the breakdown of imports for Bangladesh, Pakistan and Sri Lanka have a fair bit ofoverlap, which means that we could expect a great deal of expansion in exports from India to thesecountries if bilateral trade liberalization is implemented. A similar trend would also be expected for
8
9

The figures in parantheses are percentages of the total number of products (HS6 classification, 5224)
TCij = 100 – sum(|mik – xij| / 2). TCij is the trade complementarity coefficient of country i and country j, mik is thecommodity component ratio in the imports of country i, and xij is the commodity component ratio in country j.
TCij takes values from zero to 100. When there is absolutely no overlap in the import/export makeup between
country i and country j, TCij is zero, and when the import structure and export structure completely coincide
between the two countries, it is 100.

Japan Center for Economic Research “Asia Research” Report100

exports from Pakistan to Bangladesh and Sri Lanka. Contrastingly, expansion in exports from
Bangladesh to India, Pakistan and Sri Lanka is unlikely. These figures reflect analysis performed
using only actually observed trade patterns, and trade barriers (import tariff rates), which are themost important factor for estimating the impact of an FTA, have not explicitly been taken into
account. Analyzing the impact of an FTA with an explicit focus on this important factor requires asimulation using an economic model such as a computable general equilibrium (CGE) model.

Table 8.5: Trade Complementarity Index between South Asian Countries
Importing Country
Exporting Country

India

India

Bangladesh

Pakistan

Sri Lanka

44.4

52.3

60.5

7.4

7.6

Bangladesh

5.3

Pakistan

18.6

36.8

Sri Lanka

22.3

18.8

31.6
21.6

Source: UN ESCAP, ARTNet on line

5. Promoting Economic Growth in South Asia

The four South Asian countries of India, Bangladesh, Pakistan and Sri Lanka have all marked
steady economic growth in recent years. In order to achieve further growth, it is important to expand
between South Asian countries, and to expand economic relations with other regions of the world,
particularly with East Asian nations, which are expected to experience high levels of growth in the
future. To this end, obstacles to direct investment invitations and to trade expansion must be reduced
and eliminated. Obstacles to trade expansion include institutional barriers such as tariffs as well aspractices that are targets for trade facilitation, including customs clearance systems and proceduresthat lack both efficiency and transparency. Barriers to investment expansion include not only issues
related to investment systems such as capitalization limitations and visa issuance for non-citizen
employees working at foreign corporations, but also issues such as an undeveloped infrastructure
and a shortage of capable, local human resources. Establishment of a comprehensive free trade
agreement (economic partnership agreement) that includes not only trade liberalization, but also
economic cooperation such as investment liberalization and human resource development, would be
effective in response to these issues. As the nation in a position to lead South Asia, there are highhopes for India to promote trade liberalization within the framework of SAFTA, which is currently inprogress, to play a constructive role toward achieving the Comprehensive Economic Partnership for
East Asia (CEPEA), the members of which include India, the ten members of ASEAN, Japan, China,
South Korea, Australia, and New Zealand, and to serve as a bridge between South Asia and East
Asia.
Chapter 8: Trade & Investment Relations between India and the Countries of South Asia
101

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