India and Developing Asia

:

Nature, Pattern and Extent of Integration

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

Broad Outline

• India’s 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 India’s 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 India’s investment on developing Asia?

India’s Increasing Presence in the Global Economy

India Relative to the World (Percentage Shares) India India India 1985 1995 2000 2005 Exports of goods and services (Constant 2000 US$) 0.4

0.7

0.7

1.07

Imports of goods and services (constant 2000 US$) 0.49

0.81

0.81

GDP (Constant 2000 US$) 1.00

1 1.3

1.4

GDP, PPP (Constant 2005 international $) 1.8

2006 1.05

1.9

India 2.6

3.3

3.7

4.4

4.5

Trends in the direction of trade: Evidence of greater Integration with developing Asia

Share of India's exports

60.0

55.0

50.0

25.0

20.0

15.0

10.0

45.0

40.0

35.0

30.0

1998 1999 2000 2001 Industrial countries 2002 2003 2004 Asian developing countries 2005 2006

Share of India's imports

20.0

10.0

0.0

60.0

50.0

40.0

30.0

1998 1999 2000 2001 Industrial countries 2002 2003 2004 Asian developing countries 2005 2006  India’s integration with developing Asia evident in both exports and import trends.

12,0 10,0 8,0 6,0 4,0 2,0 0,0 1998

Pattern of Integration with Developing Asia

Share of India's Exports Share of India's Imports 12,0 10,0 8,0 6,0 4,0 2,0 0,0 1999 2000 2001 2002 2004 2006 1998 2000 2002 2003 2006 South Asia SE Asia China South Asia SE Asia China   Increasing importance of China and South-East Asia in India’s exports and imports.

South Asia’s role much smaller- especially in India’s imports.

 Integration with China, SE Asia dominating aspect of integration with dev. Asia

India’s Presence in South-East Asian countries’ Trade

3,0 2,5 2,0 1,5 1,0 0,5 0,0 1,9 2,6 0,4 0,5 1,5 2,0 0,8 1,0 1,6 2,0 1,5 2,1 1998-2002 2003-2006  Increase in India’s 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

India’s Presence in South Asian countries’ Trade

70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 8,0 7,1 8,8 8,8 39,5 61,0 1,4 2,7 7,1 14,9 1998-2003 2004-2006  India relatively more important for South Asian countries.

  Significant increase in India’s share in the case of Sri Lanka, Nepal and Pakistan.

India’s importance for Bangladesh more or less constant

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

India’s Share in Bangladesh's Export and Import

$160 $140 $120 $100 $80 $60 $40 $20 $0

12,3

$50

1,1 10,5

$50

0,9

$61

13,3 1,1 14,6

$39

0,7 15,2

$55

0,9 15,1

$66

0,9 14,1

$119

1,4

$147

12,5 1,2

8,0 6,0 4,0 2,0 16,0 14,0 12,0 10,0 0,0 Exports (in US mill $) Share in Exports Share in Imports   Bilateral trade doubled from 1998 to 2006. 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 Bangladesh’s exports.



Reasons for Ballooning Trade Deficit

Bangladesh’s 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.

 Bangladesh’s 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 Bangladesh’s export interests.

 Para-tariff and non-tariff barriers, including restrictive rules of origin Rules of Origin (ROO) hinder Bangladesh’s 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 Bangladesh’s Imports from India: 1998-2003 and 2004-2006

Edible vegs. etc.

2% Rubber etc manmade staple fibres 2% Residues of food ind. Etc 3% Sugars & confec 2% 2% Aluminium artcls 3% Other Commoditie s 22% Organic chem.

3% Cement etc.

4% Electrical/ele ctronic equipments 4% Cereals 18% Cotton textls 16% Non electrical machinery Transport vehicles etc 6% 8% Iron & steel prodcts 5% Residues of food ind. Etc 2% manmade staple fibres 2% Other Commodities 22% Aluminium artcls 3% Cotton textls 14% Edible vegs. etc.

3% Sugars & confectionery 3% Plastics etc 3% Organic chem.

4% Electricl/elect ronic equips 4% Cereals 13% Non electrical machinery 8% Mineral oil/fuels etc 7% Iron & steel prodcts 5% Transport vehicles etc 7%

• 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 Bangladesh’s Export to India: 1998-2003 and 2004-2006

Apparel/a ccessories, not knit 3% Cotton textiles 2% Raw hides, leather etc 3% Other commodit ies 11% Fertilizers 38% Electrical, electronic equipment 3% Non-electrical machinery, etc Copper & articles 3% Fish, etc 4% 1% Raw hides, leather etc 1% Other commodities 10% Jute fibres, yarn etc 17% Cotton textiles 15% Mineral fuels/oils etc 5% Inorganic chemicals, etc 38% Jute bags, sacks, hessian etc 6% Edible fruit, etc 7% Fertilizers 10% Inorganic chemicals etc Mineral fuels/oils etc 10% 13%

• India is an important market for Bangladesh’s 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 Bangladesh’s export of urea in 2007, from 10% in 1998.

Nature of Integration: Shallow

   Some diversification in Bangladesh’s 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.

FDI

FDI Inflow in Bangladesh (US $ Million)

2000 2005 2006 India 8.4 2.7 1 Global Total 578.6

845.3

490.3

India’s share (%) 1.45

0.32

0.20

India’s 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 Lanka’s exports as well as a source of imports by Sri Lanka.

• Growing importance of India in Sri Lanka’s exports: from 16 th in 2000, 3 rd largest export destination since 2003.

• 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

India’s Share in Sri Lanka's Export and Import

20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

9.5

1.1

11.1

1.5

13.8

3.6

16.5

5.0

17.3

7.0

9.1

17.3

5.0

4.0

3.0

2.0

1.0

0.0

10.0

9.0

8.0

7.0

6.0

India's Share in Sri Lanka's Import from World India's Share in Sri Lanka's Export to World

Composition of Sri Lanka’s Exports to India: 1999-2002 and 2003-2005

Veg fat Vanaspati oil; 1,9 Non electrical machinery ; 2,9 Plastics & articles; 3,4 Rubber & articles; 1,8 Other commoditi es ; 16,5 Coffee, tea, spices ; 27,1 Copper & articles; 25,6 Rubber & articles; 1,9 Wood & articles of wood ; 2,0 Non electrical machinery ; 2,3 Wood pulp, fibrous material; 2,4 cement, etc ; 1,8 Other commoditi es ; 15,1 Copper & articles; 33,5 Veg fat Vanaspati oil; 14,0 Electrical, electronic equipment ; 8,4 Edible fruit, etc; 3,8 Wood pulp, fibrous material; 4,0 Iron & steel products; 4,3 Mineral fuels/oils ; 8,7 Organic chemicals ; 3,2 Iron and steel ; 3,3 Aluminiu m & articles; 5,3 Coffee, tea, spices ; 6,6

•Visible shift from agricultural to manufacturing goods. •Refined copper products and vansapati, main drivers of export growth in period 2003-2005.

•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 Lanka’s export success

• Momentum in Sri Lanka’s exports to India, spilled over to items in India’s ‘negative list’-plastics, rubber articles, textile articles (Weerakoon, 2008) • New products –ceramics, value-added tea entered Sri Lanka’s 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 Lanka’s 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 India’s outward FDI and India’s importance in FDI Inflows in select developing Asian countries

•Developed countries, together with Channel Islands (22%) and Mauritius (8%) accounted for 70% of India’s outward FDI between 2003-2007.

•Within developing Asia, more developed countries like Singapore and Hong Kong together accounted for another 8%.

•Therefore, barring countries like, Sri Lanka and Nepal, India’s share in other dev. Asian countries is meager. •Increase in India’s investment in Indonesia, Thailand, China in 2007, although very small share.

Some Tentative Observations: Possibilities of Future Integration

 India’s 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 India’s 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.