Improving economic ties with smaller neighbours was one of the major objectives of the Modi government.
The government’s outreach to its neighbours included initiatives such as Prime Ministerial visits, resolving long pending issues like Land Boundary Agreement with Bangladesh, opening land visa with Myanmar, implementing decades old connectivity proposals, addressing trade logistics issues and offering soft loans and aid at an unprecedented scale.
Though trade was not the only objective of this initiative, it gained prominence in recent years, despite stiff competition from China.
From 2.86 per cent in 2013-14, India’s combined trade with the seven SAARC nations and Myanmar moved up to 3.56 per cent of total trade. The share of the neighbourhood in total exports increased from 5.72 per cent in FY14 to 7.75 per cent in FY18, with Bangladesh and Nepal pulling up the averages.
In fact, neighbours saved the day for India during the global slowdown. From $314 billion in FY14, India’s total exports are down by 3.5 per cent to $303 billion in FY18. During the period, exports to neighbours went up by 30 per cent from $18.08 billion to $23.71 billion.
But the growth in regional trade was not seamless. India-Sri Lanka trade for example witnessed volatility. But if one looked at the entire region, the trade pattern was stable as volatility in one country was offset by growth in the other. In FY18, for example, India’s vehicle exports to Sri Lanka and Nepal were down 17 per cent and 10 per cent respectively.
But Bangladesh’s demand for Indian vehicles rose 37 per cent. The three countries put together contributed 13 per cent ($2.2 billion) of India’s total vehicle exports of $17 billion in FY18.
The best part of the story is regardless of size, most regional partners contributed to trade growth. India-Maldives trade, for example doubled, from $110 million to $222 million over the last four years.
Despite problems of accessibility, India-Afghanistan trade increased by 67 per cent to $1.14 billion. India-Bhutan trade was up 82 per cent to $0.91 billion.
Only India-Pakistan and India-Myanmar trade didn’t grow, but for different reasons.
While Pakistan is an unwilling trade partner, maintaining bilateral trade at around $2 billion for years; Indo-Myanmar trade, which has also been stagnant at around $2 billion for some time, was affected by India’s restrictions on pulses imports last year.
Myanmar is a new destination for India. While formal trade is yet to gain momentum, the huge movement of goods through the land border remains unaccounted.
However, improved connectivity and project implementation by India is expected to push up goods and services (healthcare) exports in the days to come.
Nepal trade boost
The growth engines of regional trade are Bangladesh and Nepal, together accounting for nearly 58 per cent of India’s $27-billion trade with eight nations and 63 per cent of exports.
India-Nepal trade is a perfect example of business taking precedence over politics.
While the political relations between the two countries have been rocky, both nations worked at improving trade relations over the last four years.
India contributed generously to Nepal’s post-earthquake reconstruction ($750 million aid).
India also made progress in improving trade logistics, invested heavily in cross-country electricity infrastructure that helped mitigate the power shortage in Nepal, lined up investments in oil pipeline, and rail connectivity.
The strategy paid off, as bilateral trade increased by 70 per cent, from $4.1 to $7 billion between FY14 and FY18; riding on 85 per cent growth in India’s exports from $3.5 billion to $6 billion.
Exports grew by 20 per cent in FY18 (when pro-China KP Oli government assumed power in Kathmandu) with demand for petroleum ($1.5 billion), iron and steel ($880 million) and machinery ($618 million) reporting 40 per cent growth.
Analraj Bhattarai, a Kathmandu-based analyst, expects growth in India-Nepal trade to continue, riding on Nepal’s improving economic health, construction boom and easy accessibility to Indian market.
Currency pegging and the limited exchange risk are the added advantages.
India-Bangladesh relations are witnessing a steady improvement since 2010. The momentum gained strength over the last four years, with India stepping up its financial assistance programme from $1 billion to nearly $8 billion.
Between FY14 and FY18, bilateral trade increased by nearly 38 per cent from $6.6 billion to $9.1 billion.
A substantial part of the growth came last year when Indian exports grew by 23 per cent to $8.4 billion, riding primarily on demand for vehicles ($1 billion), petroleum ($764 million), cereals ($799 million) and cotton ($1.8 billion).
Petroleum is a new entrant in the list with India becoming a major supplier to Bangladesh. Cereal (rice) export was triggered by crop loss in Bangladesh last year, which is unlikely to be repeated. But the export figures are likely to surge in FY19 riding on expanding electricity trade and project implementation under the second line of credit ($2 billion).
Project exports will boost bilateral trade in the years to come, helping India recover some of the lost ground from China, says Shaquib Quoreshi of the Dhaka-based Business Intelligence Limited (BisNTel).
India and China supply nine out of Bangladesh’s top 12 import items. But excepting vehicles — where India controlled 48 per cent share (mostly commercial) in 2017 — China is way ahead in the rest, which includes cotton, machinery, fuel and iron and steel.
Quoreshi expects India to consolidate its position in all the categories in the coming years.
Textile, a leveller
India’s imports (though relatively small in value) from smaller neighbours such as Bangladesh (41 per cent), Sri Lanka (17 per cent), Bhutan (146 per cent) and Afghanistan (115 per cent) surged in last four years. It also helped Bhutan to reduce its trade gap.
The balance of trade that is hugely in India’s favour, which is a major heartburn for the neighbouring nations that have limited offerings. Bhutan reversed the trend riding on exports of hydro-electricity and iron and steel items. Nepal may follow suit once its hydro-electricity capacities go on stream over the next couple of years.
Sri Lanka has a wider export basket among the neighbours. However, FY19 may see Bangladesh replacing Sri Lanka as the largest exporter to India, riding on apparels. Bangladesh is the world’s second largest exporter of readymade garments. However, it could hardly make a dent in the Indian market till 2016-17.
The breakthrough came in July 2017 when GST offered additional duty benefits. Between July 2017 and June 2018, Bangladesh’s textile exports to India doubled, paving the way for a 30 per cent jump in total exports.