Investment Cooperation in South Asia
Despite relatively rapid economic growth as a region in the past couple of decades, South Asia remains among the least integrated regions in the world, with intraregional trade hovering around 5%. It is 20% cheaper for India to trade with Brazil than its own neighbour Pakistan. Development challenges of the region span from, inter alia, vulnerabilities stemming from climate change and environmental degradation, and increasing inequalities – within and among South Asian countries – which pose serious threats to South Asia’s sustainable development. Against this background, regional economic cooperation and integration can be the route to economic prosperity.
South Asian countries differ significantly when it comes to level of economic development and institutional capabilities such as technological and managerial capability stock. In this backdrop, India attracts almost USD 40 billion of FDI while it is also a major investor abroad (FDI outflow of around USD 10 billion in 2014). While evidence is that Foreign Direct Investment (FDI), through capital, technology and networks enhances growth prospects, countries such as Nepal are starved of FDI even though countries like India are relatively advanced and resourced countries. Regional FDI can in fact be a major driver for functional regional value chains, regional economic cooperation and integration. If we look at East Asia, investment linkages are playing an important role in the development of regionally integrated production systems.
Trade integration has always been prioritized over other as a major means for regional cooperation and economic integration in South Asia. The South Asian Free Trade Area (SAFTA) agreement, signed in 2004, was a pivotal step towards trade liberalization in SAARC nations. However, a large negative list coupled with exclusion of investment has enervated SAFTA in a significant way.
Intra-regional FDI has the potential to act as a key driver for both fostering economic growth, and deepening economic cooperation in South Asia. However, the share of intra-regional FDI flow has increased modestly from two to three per cent in relation to total foreign investment of the region. Just like intra-regional trade, the value and share of intra-regional FDI and total FDI inflow is lower in least developed nations than the developing nations of the region. In 2014, India ranks first in FDI inflows with almost 34 billion US$ among all SAARC nations. In contrast, Nepal’s FDI inflows was a meager 30 million US$ in 2014. Similar is the case with FDI outflows from South Asia with India posting the highest FDI outflows, at almost 10 billion US$ while many other nations such as Bhutan, Afghanistan, Maldives, and Nepal posting zero outflows.
Apart from a few resource-rich countries, India’s outward FDI has been generally directed towards developed economies and has been motivated by the market size. One of the reasons behind India’s impressive FDI outflows shying away from the countries of South Asia can be the relatively small size of individual country markets and the relative failure of regional integration efforts in unifying these markets. Most South Asian countries rank low in indicators of the ease of doing business although they still possess the comparative advantage of low labour costs. Therefore, it is high time to make investment liberalization a priority item on the SAARC agenda if more Indian outward FDI is to be seen in the region. The launch of the “Make in India” Initiative in mid-2014 also expects to raise the FDI inflows in India. At the moment investors and unemployed resources elsewhere appear to be promised a place in the Indian Value Chain by the “Make in India” policy.
Policy responses
The region is slowly improving its legislative framework regarding investment. FDI is open in most of the sectors and mostly no government approval is required in all the countries of the region. There is equal treatment to foreign and local investors. Government ensures legal protection to foreign investment against nationalization and expropriation and allows repatriation of proceeds from sales of shares and profit. SAARC agreement on Trade in Services (SATIS), signed in 16th SAARC summit in Thimpu (2010), is one important move towards service related investment cooperation in South Asia. SAARC Chamber of Commerce and Industry (SAARC CCI) was established with the intention of promoting trade and industry in South Asia by providing a common officially recognized platform at the apex level for promotion of economic activities between businessmen and industrialists of the member countries. It acts as a regular forum for businessmen of Member States to meet, discuss and explore business opportunities in trade, investment, transfer of technology and all other economic activities. Similarly, the establishment of SAARC Arbitration Council (SARCO) in 2010 following the adoption of SARCO charter during 13th SAARC summit (2005) is relevant for effective settlement of disputes that might occur in deepening intra-regional investments.
The “SAARC Investment Promotion and Protection Agreement” has been drafted, but is yet to be signed by the member countries. It is believed to be promoted as regional investment cooperation mechanism of South Asia. This agreement may consider establishing a body for united effort to attract foreign direct investment (FDI) into the SAARC states based on respective competitive advantages of different member countries. Bilateral Investment Treaties (BITs) have become primary source of international investment law to protect and promote cross-border investment cooperation along with Treaties with Investment Provisions (TIPs). However, there exist very few BITs among South Asian countries in comparison to their BITs with rest of the world. Afghanistan, Bhutan and Maldives do not have any BITs with other SAARC nations.
Moving Forward
The major sectors for trade and investment in the SAARC region are information-technology (IT), pharmaceuticals, biotech, micro biology sophisticated metallurgy, manufacturing items, infrastructure improvement etc. But SAARC lacks brand recognition. The establishment of South Asian Regional Standard Organization (SARSO) is a significant step towards creating a South Asian value chain. It has contributed in identifying products with massive trade potential and harmonizing national standards into a distinctive SAARC standard. The identified sectors for harmonization of standards include food and agricultural products, jute; textile and leather; building materials; chemicals and chemical products and electrical and electronic products. All Member States have different ability in developing different sectors, thus South Asian nations need to cooperate better for being able to enjoy the comparative advantage of each other in attracting FDI. A long history of mutual mistrust and negative stereotypes cast a shadow over cooperation efforts. This is evident by the cancellation of 19th SAARC summit to be held in Islamabad, Pakistan on 15–16 November 2016. However, there have been many instances of positive development as well among SAARC nations. Recent successes in implementing cross border projects and increasing people to people contact have created a positive environment and trust for attracting intra-regional FDI. India’s investment in Bhutan’s programme of hydropower development is contributing to economic growth and development on both sides of the border. Similarly, in the case of India-Sri Lanka Free Trade Agreement (ISFTA), Sri Lanka and India both have been able to reap benefits from the FTA. India has been Sri Lanka’s major development partner in the South Asian region for more than 40 years. Over the past years India’s investment in Sri Lanka has expanded considerably.
Deeper integration that encourages cross border investment by improving the business environment and reducing uncertainty is perhaps a necessary condition. This requires greater investment in regional public goods and expansion of productive capacities in the framework of regional production networks that will facilitate the growth of intra-industry trade (IIT). Promotion of IIT provides with the opportunities for increasing production scale by joint ventures making it easier to meet each other’s demands. Linking it with value chains will improve the efficiency and competitiveness of the end product and thus will be an effective way of promoting investment cooperation in South Asia. Hence, it is a high time for South Asian nations to shift their focus into Investment cooperation along with trade integration for deeper economic integration of South Asia.