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Regional Economy

Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi
19th Party Congress: Understanding the Economics in Xi’s Speech
India's Trade Options
Pakistan’s Economy: Significance of MSCI Elevation and FTSE Inclusion
Trump's Trade Scenarios: Implications for India
G20 Summit 2016: A Lost Opportunity?
GST: Facilitating India’s Domestic, Regional and Global Integration
Brexit Consequences: Complexities and Uncertainties
Changing Regional Contours and Imperatives for India
India and the APEC
IPCS Forecast: South Asian Regional Integration
South Asia: Rupee Regionalisation and Intra-regional Trade Enhancement
18th SAARC Summit: An Economic Agenda
Regional Economic Architecture: Is India Ready?
#5385, 30 October 2017
19th Party Congress: Understanding the Economics in Xi’s Speech
Amita Batra
Professor of Economics, Centre for South Asian Studies, SIS, JNU

A big event this October was President Xi’s address to the 19th Congress of the Communist Party of China (CPC). While marking his attainment of cult status, Xi’s speech, as widely reported, is also a definitive statement of China’s ambition to be centre stage in global power. Of note, among other aspects, is the statement made in the context of the economy. There is a clear recognition in the speech about what China needs to do to consolidate its economic might. Xi’s speech included references to further opening the economy to trade and investment, pushing ahead with economic reforms in the financial sector and foreign exchange rate, and encourage innovation to make Chinese industry move up the value chain. While the speech does not lay out a concrete action plan, the recent past provides evidence that it may not be hard for China to convert intent into reality. The following facets of China’s growth and reform may therefore help in better understanding the context and accordingly formulate expectations and future preparedness.

First, even though the macroeconomic outlook for China has for almost a decade now included the possibility of a crisis on account of increasing domestic debt levels, China has continued to be the fastest growing economy for almost the entire period. Dented by the global financial crisis, the Chinese economy has no doubt slowed down and the double digit growth rates are a thing of the past - but the growth trajectory is not derailed. In fact, the Chinese economy has been consistently performing at an annual average rate of growth of around 7 per cent. Recent growth projections by international agencies predict a positive outlook for the next few years. According to the International Monetary Fund (IMF), China is expected to grow at an average rate of growth of 6.4 per cent relative to 2016’s 6.0 per cent, and upwards over the period 2017-2021. The now consistent for many years risk to the outlook of rising government, corporate and household debt remains, and is expected to increase to 300 per cent of GDP by 2021, up from 200 per cent in 2016. Even though this creates the possibility of a sharp decline in growth in the medium-term, the IMF also reports that with a greater emphasis on sustainability of the growth process there is evidence of deleveraging by the Chinese. The ‘credit to GDP gap’ that is excessive relative to historical trend and the required ratio for long-term GDP growth is also reported to be showing signs of narrowing down. In addition, the 13th five year plan (FYP), by addressing corporate debt-related vulnerabilities and financial stability considerations, provided indication of a clear recognition of the problem. Significantly, also to be noted is the fact that banks in China are state-owned so that debt restructuring as and when undertaken may not be difficult and hence may never culminate in an economic crisis for the country. Some restructuring of state-owned enterprises is already underway in China.

Second, innovation-based movement up the value chain has been the Chinese mission for some time. China’s 13th FYP placed significant focus on innovation. The ambitious ‘made in China 2025’ strategy that is aimed at achieving dominance in high tech industry also identifies innovation as the main motivating force. China’s structure of comparative advantage has evolved in recent decades with underlying dynamism, shifting from low value-added to high value-added industries. There is evidence of China evolving from its ‘factory of the world’ status that was achieved through perfecting its assembly line production processes. Recent trade trends for China show a greater decline in imports relative to exports. This is indicative of the fact that China’s participation in global value chains (GVC) is increasingly getting domestically consolidated, and more and more intermediate inputs are being sourced domestically rather than through imports. While in the initial stages of GVC participation, foreign direct investment (FDI) and technology transfers played an important role in the up-gradation of China’s comparative advantage structure, the recent development of domestic intermediate goods replacing imports is based on innovation. In the 2016 World Intellectual Property Organisation (WIPO) Global Innovation Index (GII), China’s performance was among the 25 most innovative economies in a set of 128 countries. According to the GII report this is a first for a middle-income country to join the ranks of highly developed economies that have dominated the index since its inception nine years ago. China has continued its upward movement in the index and ranked higher at 22nd on the GII in 2017. China’s research and development (R&D) investment has grown in the last two decades with the rate of growth being greater than that of the top performing US and EU. As per UNESCO data, China is the second largest performer in terms of absolute amount of R&D spending and accounts for 20 per cent of the world expenditure on R&D following the US, which accounts for a 30 per cent share.

Third, moving towards a floating exchange rate system is imperative for China and has been long overdue. Some movement towards greater market orientation and transparency was initiated in August 2015. Additional reforms towards evolving a mechanism for the central parity rate that reflects the demand-supply conditions in the foreign exchange market, linkages with a basket of currencies, and is based on previous day closing rate were indicated in 2016. However, the introduction later of a ‘countercyclical factor’ has invited criticism. The opacity with regard to its constituents and application to manage market and exchange rate volatility has once again revealed the ever present state control of the market mechanism.

Summing up, while greater transparency and rules-based economic operations are undoubtedly required for China to be truly on the path to greater openness and market orientation, its sustained progress on the ‘Socialism with Chinese characteristics’ path may continue to ensure growth, and hence potential for expanding economic influence.

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#5370, 28 September 2017
India's Trade Options
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU

The Indo-Pacific economic space continues to be open to reconfiguration, triggered as it has been by the US withdrawal from the Trans Pacific Partnership (TPP) earlier this year. There have since been many conjectures on how the region may see a China-led economic order, particularly so as the Japanese attempts for a TPP revival have not yielded any concrete positive outcomes so far. Alternatively, Japan-India relations, that have been in the forefront with Prime Minister Abe’s visit to India earlier this month, are being considered as a possible counter balancing force in the region. It is therefore relevant and worthwhile to examine the relative placement of China and Japan in India’s economic relations and discuss India’s options in the larger regional economic context.

First, while China is India’s top trading partner, Japan is not even among the top ten trading partners for India, and has not been so for almost a decade. In 2016-17, India’s trade with China was US$ 71 billion as against US$ 13 billion with Japan. Interestingly, while India incurs a trade deficit with both countries, it is the deficit with China that attracts attention, even though the deficit with both countries, as a share of total bilateral trade, is almost equal at 70 per cent. With Japan, India has a Comprehensive Economic Partnership Agreement (CEPA) that was signed in 2011. After six years of its implementation, growth in bilateral trade with Japan has been insignificant and in fact the rate of growth of exports registered a significant decline in 2016-17. In contrast, even without a preferential trading arrangement, India’s exports to China have seen a positive growth over the last year.

Importantly, in the pharmaceutical sector, Japan has been insistent on quality and regulatory standards, particularly in respect of pharmaceutical goods which is a major export category for India not just in bilateral but in global trade too. Although China also imposes trade barriers for Indian pharmaceutical exports, a significant difference is to be noted with regard to their membership of regional trade formulations – Japan is a member of both the Regional Comprehensive Economic Partnership (RCEP) and the now in-suspension TPP; China, like India, is a member only of the RCEP and not of the TPP. Japan has been very keen to revive the TPP with or without US membership.

A consequence of this differential membership is that Japan, in the spirit of TPP trade rules, seeks higher and World Trade Organisation (WTO)-plus standards in its bilateral trade transactions that would be very hard for India to comply with presently and in the near future. In fact, given that the RCEP is an ASEAN-centred pan-Asian trade arrangement with greater flexibility on trade-related issues, and that India has a differential trade liberalisation offer for its FTA and non-FTA trade partners (including China), it may be in India’s interest to work towards an accelerated finalisation of its negotiation process and to see it emerge as the predominant trade initiative in the region.

Second, growth in global trade for over a decade prior to the global financial crisis was led by trade concentration in regional production networks. Among these, China was the hub of the East Asian production networks, specialising in parts and components trade. In the last five years or so and significantly from 2011-2014, global trade has slowed down, and in 2015 global trade contracted by 10 per cent. For East Asia, the rate of decline in imports has been greater than that in exports. To a large extent this change in trade pattern reflects the consolidation and shortening of global value chains. For China and other regional economies the value chains are getting centred domestically As the East Asian regional integration process deepens, India has the opportunity to strengthen trade with China and ASEAN through the RCEP, and thereby realise its ‘Act East’ Policy. Increased trade liberalisation under the RCEP will allow for India’s integration in regional value chains. The process will involve production up-gradation, manufacturing sector growth, employment and skill enhancement – all the objectives already embodied in the ‘Make in India’ initiative.

Lastly, if the RCEP does not gain momentum it is possible that China may like to push for the Free Trade Area of the Asia Pacific (FTAAP), which draws its membership from the Asia Pacific Economic Cooperation (APEC). China proposed a roadmap towards FTAAP at the 2014 APEC summit meeting with the support and commitment of APEC members. India has not been successful, so far, in securing membership of the APEC. Strengthening India’s relations with Japan could help in this regard. However, irrespective of Japanese support, India will have to expedite implementation of the Trade Facilitation Agreement of the WTO, including the more difficult regulatory and institutional reforms, as the trade facilitation action plans of the APEC have been among its more successful programmes.

It may therefore be in India’s best interest to contribute to an early finalisation of the RCEP negotiations, consolidate its participation in the East Asian regional value chains as also further its export growth with China. The alternatives may be both long drawn out and harder to implement for India.

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#5248, 20 March 2017
Pakistan’s Economy: Significance of MSCI Elevation and FTSE Inclusion
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU

Two positive developments that have been announced and will see implementation in the coming week and in the month of May augur rather well for an economy that has for long shown below average economic performance and weak macroeconomic fundamentals. Six companies listed on the Pakistan Stock Exchange have been included by FTSE in its Global Equity Index Asia Pacific Series for the first time, on 17 March, and Pakistan will be upgraded to the MSCI Emerging Markets (MSCI EM) index from the earlier higher risk Frontier Market index category later, in May. Pakistan was downgraded from the MSCI EM in 2008 following a temporary closure of the Karachi Stock Exchange. So, while this is not a first for Pakistan, when combined with other developments it contributes to positive investor sentiment, both domestic and foreign, and potential for a more economically sound Pakistan economy.

The MSCI indices provide a broad measure of equity market performance. MSCI EM is a free float adjusted market capitalisation index that is designed to measure equity markets’ performance of emerging markets. Index inclusion may have positive consequences in terms of increased integration with global financial markets, diversification of risk, and hence reduced capital costs. Essentially the stock market developments will give Pakistani firms the benefit of greater visibility and potentially positive returns. As an economy, this will imply easier access to global finance and foreign direct investment. This is a huge advantage for an economy for which financial constraint has been an overriding concern in its growth process. In the last decade, within a span of five years, Pakistan borrowed twice from the IMF. In 2008, Pakistan was given a loan of US$ 7.5 billion, and then US$ 6.6 billion in 2013 for economic stabilisation and growth. The situation may be in for a positive change now.

The other development that has initiated the build-up towards economic strength is the expansive investment plan towards infrastructure and energy sector as part of the China-Pakistan Economic Corridor (CPEC). The CPEC, which is a part of China’s ‘One Belt One Road’ initiative, a network of highways, railways and pipelines to connect Western China to Pakistan’s Gwadar Port on the Arabian sea, is expected to contribute to growth by reducing transportation and electricity bottlenecks. Owing to the US$ 46 billion investment by China in CPEC, Pakistan has shown a surge in investment since 2015 as against the deceleration in investment observed on an average in South Asia since 2011 (Global Economic Prospects, 2017). Also, power outages and electricity cuts have been major constraints in Pakistan’s growth process. Many studies have pointed towards the loss of GDP on account of energy shortage in Pakistan. Across these studies the economic costs on account of power and electricity shortage are estimated in the range of 4-10 per cent of GDP. The CPEC will help overcome these infrastructural constraints to growth in Pakistan.

In addition to the investment surge, the CPEC is expected, through its connectivity projects, to facilitate people, resource and goods movement. Put together, this is likely to translate into more employment and trade opportunities for Pakistan. Though, undoubtedly, the CPEC projects are at a nascent stage and there are doubts about their completion given the domestic and regional political equations as also the security situation along the corridor. But, reports of evident progress are also seen. In November 2016, China started operating the Gwadar Port by dispatching ships with goods brought by trucks from China to West Asia. Other projects, including the second phase of upgrading the Karakoram Highway and the highway linking Karachi to Lahore as also in the energy sector, have also reportedly progressed.

Improved economic health is further evident from the conclusion, by Pakistan, of the SDR 4.393 billion IMF Extended Fund Facility (EFF) programme specifically aimed at supporting reform and fiscal consolidation. Pakistan has been credited with undertaking reforms in easing out the energy constraint and it is expected that improvements in infrastructure will contribute to growth. Over the past three years the macroeconomic fundamentals have improved, fiscal and trade deficit reduced, and forex reserve position enahnced though largely on account of global oil price movement. The stock market has increased by 50 per cent since 2015. Growth projections for Pakistan are higher for both the fiscal year (FY) 2017 and 2018 relative to its FY 2016 performance. Notwithstanding the downside risks of political instability and slide back in the pace of reforms, Pakistan, with a projected rate of growth of over 5 per cent (Global Economic Prospects, 2017) for both years, is now expected to contribute to regional growth in South Asia.

Put in perspective, it is not that Pakistan has not seen episodes of high growth earlier in its economic history. There have been positive growth periods in the 1960s, 1970s and 1980s when Pakistan was among the faster growing economies in South Asia. However, growth has been in spurts and economic policy more ad-hoc than sustainable. Alternating between political regimes, democratic and military, meant frequent policy reversals and political and economic instability. Growth slowed down in the 1990s and over the last decade with increasing debt burden characterising the Pakistan economy. As geostrategic and geopolitical factors came to dominate economic policy and functioning, there was a steady deterioration in governance and institutions in the country.

However, the turnaround in Pakistan’s economic health this time appears to hold more promise given the simultaneity of positive developments. The potential for investment that the MSCI elevation and FTSE inclusion holds is significant. The weakness of repeated borrowings from the IMF is claimed to be diminishing with the loan facility having been concluded and tangible progress in domestic economic reforms. The underlying support from the Chinese investment in CPEC with its manifold beneficial implications is unprecedented.

So, anchored to the CPEC investment and supplemented by positive stock market and domestic liquidity developments, there is potentially an opportunity for Pakistan to strengthen its economy. On a stronger economic footing, will Pakistan make for a more stable South Asia or a more aggressive opponent to India? It may be time to reflect on the possibilities.

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#5181, 15 November 2016
Trump's Trade Scenarios: Implications for India
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, & Columnist, IPCS

The year 2016 has sprung many a surprise, not the least of which has been the outcome of the US presidential elections. The economic policy stance of the president-elect Donald Trump has been evident in his oft-repeated ‘inward-looking’/isolationist pronouncements in the course of the election campaign. These though, have not been substantiated with any policy detail for a serious analysis. Much commentary therefore remains in the realm of speculation. There is, however, no doubt that the globalisation engendered inequities have been at the heart of Trump’s economic policy declarations. Expectations of a reversal of some of the earlier trade agreements and policies may therefore not be entirely misplaced.

If the expression of an aversion to trade as reflected in the pre-election speeches was to turn into reality then it is possible that the largest trading economy becomes more protectionist in its trade policy. The core elements of trade policy as specified in the course of the election campaign include imposition of higher tariffs on imports from China and Mexico specifically, and a general increase in tariffs otherwise. Mega regional trade agreements such as the Trans Pacific Partnership (TPP) will in all likelihood not be taken forward. Trade agreements in general seen as instruments of unfair concessions breeding inequities may also be subject to re-negotiation; the intention of building a wall between the US and Mexico being most symptomatic of this impending trend. There have also been indications of a US pull-out from the multi-lateral rule making trade organisation, the World Trade Organisation (WTO), in case there is any resistance to its imposition of protectionist policies. Other stated intentions have been with regard to changes in immigration policies with a more restrictive visa regime. The broad objective of the policy changes being bringing manufacturing back to the US, greater employment and hence greater prosperity, and in the process, recovery of losses in global trade for the US economy, in particular vis-à-vis the Chinese economy. 

As has been predicted by many analysts already, any attempt by the US economy towards the use of protectionist instruments will be countered by retaliatory measures by other economies, including China, with the likely impact being serious in terms of not just the initiation of a trade war with China but that of applying brakes to international trade in general. The WTO has already expressed concern at the slowdown of world trade in 2016 as the pace of growth has been slower than that of the global economy, unlike the trend over the last decade and a half. The US being the world’s largest importer with a share of almost 14 per cent in world imports, the imposition of higher tariffs will naturally be detrimental to world trade. In addition, the US economy may not gain as the attempt to push domestic manufacturing may imply higher costs and inefficient production, as long established comparative advantages will be altered in the process. While aimed at some, costs of the re-adjustment may be spread across to other economies as well. India, for example, will find it difficult for its ‘make in India’ programme to yield substantive benefits in such an adverse global trade environment. Higher tariff walls will be detrimental to manufacturing exports. As the largest export market for India with a share of 15 per cent in India’s total exports in 2015-16, higher tariffs in the US may prove to be a difficult hurdle for India to surmount and to convert its potential comparative advantage through the ‘make in India’ initiative into higher exports.

The US is also a major destination for India’s IT, ITeS and BPO services exports. Together, these accounted for US$ 82 billion-worth of exports in the financial year ending in March 2015, according to the Reserve Bank of India (RBI) data. If Trump, again as per the campaign rhetoric against immigrants, decides to adopt a restrictive H-1B visa regime, India’s existing comparative advantage in the services sector would be diluted.

The pull- out from the mega regional trade agreement, the TPP, may have multiple effects on the Asia Pacific trade architecture. It is likely that the Regional Comprehensive Economic Partnership (RCEP) agreement, which is seen as an alternative trade configuration to the TPP for the Asian economies, including India, may now emerge as the main trade agreement for regional economies. The higher trade standards (WTO plus) of the TPP, it is possible, will now be sought in the RCEP by those economies that are members of both the RCEP and TPP. India, with its persistent stance of differentiated tariff liberalisation offers to the RCEP economies, may then find negotiations more difficult. In the absence of the US-led agreement from the region, there may even be the possibility of China acquiring a pre-eminent position not just in the RCEP but also in the Asia Pacific region, to the extent of pushing forward its own proposal of a Free Trade Area of the Asia Pacific (FTAAP). In fact, in the absence of the US counter, the China-led FTAAP - first proposed in the 2014 APEC meeting -may even become the lead trade configuration in the Asia Pacific region. India may have to rethink its strategy for participation in the regional trade architecture if this APEC members’ configuration gains traction in the near term. India is not yet a member of the APEC. 

A possible alternative, though, to accepting Chinese leadership in global and/or regional trade deals, would be a return to the multilateral system and the rise of the WTO, where it may be difficult for China to emerge as the dominant player. This may even be a favourable outcome for India, a longstanding WTO loyalist. But for this, the WTO needs to reassert itself as the international body that deals with trade issues in a more inclusive manner. Given the dragging of the Doha Development Agenda (DDA) now for a decade and a half, this seems like a humongous task. But if developing country coalitions comprising the more dynamic economies could pave the way, this may just be the time for a resurrection of the WTO and the DDA. And, India could actually take the lead in this process.

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#5131, 19 September 2016
G20 Summit 2016: A Lost Opportunity?
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

The eleventh meeting of the Group of 20 countries (G20) was held in the city of Hangzhou in China, 4-5 September. This was the first ever meeting of the group in China and the second in Asia after the 2010 meeting in Seoul. The theme of the 2016 G20 summit meeting was “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy.” The agenda was all encompassing and consistent with China’s own priorities and vision, as outlined in the proposal for its 13th five year plan that identifies innovation as the main growth driver.  A blueprint for innovation, digital economy development and cooperation initiative was adopted by the leaders at the summit. The joint communiqué similarly emphasized the role of innovation in providing a push to the sluggish world economy and also in the resolution of global imbalances, ensuring along the way a cleaner environment by giving a call for ratification of the Paris agreement to all member countries.  Long running issues of global governance like quota reform at the IMF were included alongside others that have found place on the agenda, of and on, in earlier years, like those related to the Doha Development agenda of the WTO as also those seeking cooperation among existing international financial organizations and the emerging regional financial initiatives. The spirit of inclusiveness was well reflected not just in the development context but also in the larger than ever before guest participation from many non member developing country representatives invited to the summit. 
As such, therefore, the G20 Summit in China is seen as successfully having discussed the many diverse issues that are currently of concern to the developed and developing countries. But, is that really the objective of the G20? Is the expanding agenda of the summit not a deviation from the original motivation with which the G20 was created? In fact, the specific task of ensuring global financial stability continues to be as relevant and important in the current context as it was when the group was set up. And perhaps, it would have been most appropriate to address the issue of global financial stability and contagion with the Chinese as hosts of the Summit this year.  A brief reflection below on these aspects may help us better review the scope and direction of the recently held G20 Summit.
The G20 was set up as an informal dialogue forum in 1999 primarily to address the challenges to international financial stability that had arisen in the wake of the East Asian financial crisis in 1997. The composition of the forum was not just representative of all regions of the world and the Bretton Woods institutions but also an acknowledgement of the growing contribution of the emerging market economies to global growth and trade. As a consequence it was considered an innovative step forward in global financial governance despite the constant debate on its legitimacy. Subsequent G20 meetings retained the focus on financial stability but did not shy away from discussing regional economic integration, financial markets, capital inflows, banking sector norms and other such issues in support of the process of globalization. In 2008, when the world was struck by the onset of global financial crisis, the G20 underwent a transition from a meeting of the finance ministers and central bank governors to a summit level meeting of the heads of state.  The 2008 summit, called by the US President, not just lent greater legitimacy to the forum but also to the institutionalization of a cooperative framework to confront and combat financial challenges of a global magnitude. Over three quick and successive summits that were held in a span of a year in 2008-2009, the G20 member economies were able to evolve a cooperative and coordinated response to the contagion impact of the financial crisis. Alongside, global financial regulatory reform and resolution of global imbalances continued to be a part of the agenda in these meetings.
Today, as the world continues to grapple with the consequences of the global financial crisis and uncertain growth, it would only have been fair for the 2016 meeting to take up for discussion the slowdown of the fastest growing economy prior to the crisis, that is the Chinese economy, and its spill-over implications for the Asia Pacific region.  China’s economic slowdown, with structural changes accompanying the move away from an investment led growth strategy towards a consumption led growth path and the underlying shifts in comparative advantage are bound to have spill-over implications for the region and the global economy. Financial sector weaknesses, particularly in the banking sector may also be reinforced as the Chinese economy moves to a new normal. The Asia-Pacific region is most likely to feel the impact as trade and production links with China-centric value chains are intense and complex for the member economies. While the impact may differ across the region depending on the nature and extent of inter-linkages with the Chinese economy and of the real and financial sector, there is no doubt that the developments need to be closely watched and the world needs to be prepared for any eventualities. Having been caught unawares when China chose to undertake a currency devaluation exercise earlier in this year and middle of last year, a coordinated approach to containing and preventing financial volatility as also seeking transparency of policy reform in China as an outcome of the G20 2016 Summit would have done justice not just to the objectives of the G20 but also to its representative character vis-à-vis the world economy.

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#5105, 16 August 2016
GST: Facilitating India’s Domestic, Regional and Global Integration
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

After being first suggested by the Kelkar Task Force on indirect taxes over a decade ago, the Goods and Services Tax (GST) is now ready to see the light of day, thus marking a major step forward in indirect tax reform in India; and thereby facilitating India’s business environment and trade efficiency. 

The GST is a single tax, essentially on value addition at each stage of manufacturing, allowing credit of input tax at the previous stage. The single GST will subsume major central and state indirect taxes - including the central excise duty, additional excise duty, service tax, countervailing duty, special additional duty of customs, state VAT, entertainment tax, octroi and entry tax - so that, as multiple taxes and taxation points are replaced, tax payment and compliance will be simplified and transparent. It is expected, therefore, that the GST will not only be revenue enhancing but also capable of eliminating cascading effect. Both producers and consumers are potential beneficiaries of the GST. The former, through ease of movement of goods across states, will benefit from improved logistics performance and scope for consolidating supply chains, and reduced transaction costs; and the latter, through reduced burden of tax translated eventually into reduced prices. Investors and manufacturing enterprises will find doing business to be tax neutral irrespective of its location anywhere in the country. Effectively, the GST will facilitate the creation of unhindered and predictable domestic commodity supply chains in India as also a unified market.

In the international context, the GST induced enhanced ease of doing business and logistics performance is better understood when viewed against the performance of a comparator country set. Of the 189 countries surveyed for the 2016 World Bank for Ease of Doing Business report, India ranked 130th. While this was an improvement of four ranks from India’s ranking from the previous year, there was no change in the rank for the constituent element of ‘trading across borders’ (that includes documentary compliance and domestic transport). It also shows a negative change or a fall from its 2015 ranking vis-a-vis the constituent element of ‘paying taxes’ (indicative of the overall tax environment of an economy that includes, among other aspects, the administrative burden in complying with the processes).

In the South Asian region, India has an overall rank of five among the region’s eight economies, and rank six and four respectively for the two constituent elements of  ‘trading across borders’ and ‘paying taxes’. India has gained by 9.94 per cent with respect to its distance from frontier (measure of best practice), for procedures to start a business. And, the distance of 71.59 per cent in 2016 as against 61.65 per cent in 2015, is higher relative to the regional South Asian average. 

However, of the 14 procedures that are required to start a business in India, as against an average of 7.9 in South Asia and 4.7 in OECD countries, the procedure for registering for VAT online, even though simultaneous with other procedures, takes ten days. As VAT (centre and state) gets subsumed in the GST and as tax implementation calls for a prior IT infrastructure to be in place, not only will the procedures get reduced in number, there will be a decline in time consumption as well.

Multiple taxes and procedures, differentiation across states and taxes makes compliance a complex task for domestic as well as external trade. With the introduction of the GST, almost all these procedural delays and encumbrances are likely to be eliminated, making India’s tax environment more conducive to business and India, a more attractive destination for investment with increased productive efficiency. Overall, the implementation of the GST will contribute to greater supply chain reliability, which is a critical input in a country’s global integration.

Reduced business costs and more efficient manufacturing supply chains can boost Indian exports that have over the past year experienced a downward growth trend. More importantly, the GST facilitated domestic market integration and supply chain predictability can be a major positive development for the ‘Make in India’ initiative. As international trade has slowed post the global financial crisis, logistics performance in the domestic context has acquired greater relevance than border issues in trade. The GST could thus be the innovative step forward for India in evolving its domestic supply chain in these critical times.

India’s domestic economic integration through the GST may also augur well for regional trade integration in South Asia. A more reliable domestic supply chain creates possibilities of India becoming the production and trade hub for South Asia. As South Asian economies struggle with the global growth slowdown and hence subdued demand for their exports, India could provide some succour by facilitating movement of goods within and across the South Asian region. The GST created unified Indian market could be a first step towards visualising the creation of a regional trade corridor.

Of course, the GST Bill creates only an enabling environment for the implementation of tax reform; and there remain political, administrative and infrastructure gaps that have to be appropriately filled for the transition to be complete. However, once this is accomplished, which, given the government’s announcement of a time schedule, is in all probability, likely to be in the next financial year, India will have a better chance of being integrated not just domestically but also in the regional and global economic context.

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#5082, 13 July 2016
Brexit Consequences: Complexities and Uncertainties
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

Brexit, that is, Britain’s decision to leave the European Union was announced on the 23rd of June. The announcement led to an immediate and sharp decline in the value of the British Pound (GBP). The stock markets in Britain and around the world followed suit with major losses incurred in the initial couple of days after the announcement. While pressure on the GBP continued, the stock markets recovered partially by the end of the working week. The political scenario in the UK is now in the process of getting reconfigured. The timing of the initiation of Brexit from the EU is not yet known even though the EU has shown a firm response and desired that the UK actualise its decision at the earliest. From announcement to initiation to exit, the time it may take to accomplish the task of Britain’s withdrawal from the EU may be long drawn and uncertainty may prevail in the interim. How is the Brexit decision likely to impact the UK economy, its trade and economic cooperation with the EU in future, EU stability and its integration in the global economy, are among the many questions that the world has since been grappling with.

As an immediate consequence of the weakened GBP and associated economic uncertainty, global investors in a risk-off mode are seeking safer currencies like the US Dollar (USD) and Yen. In the process, the USD has strengthened and allowed the Chinese to undertake depreciation of the Renminbi (RMB). The magnitude of RMB depreciation has been small so far. However, if USD continues to gain strength and there is corresponding and large depreciation in the RMB, speculative forces may trigger potentially destabilising capital outflows not unlike those experienced earlier in the year in January-February. The stability of many emerging market economies could be further endangered by appreciation in their large USD denomination debts. As a positive for the Chinese economy, RMB devaluation may help push Chinese exports in the immediate short run but over the longer run may lead to competitive devaluation in the region. Indian exports that have seen a steady decline for over a year now may find it difficult to reverse the trend under these circumstances. Capital outflows may also impact the Indian economy and it could as a consequence see lower portfolio inflows. Uncertainty in general will dampen investor sentiment, postpone large investment decisions such as in infrastructure projects and consequently adversely impact growth prospects in the region.

As the UK pulls out of the EU, losing its advantage of access to the single EU market and large investments are postponed owing to the uncertain economic environment the possibility of a slowdown in the UK economy looms large.  In the process, the EU’s growth prospects are also likely to be adversely impacted. The EU is a major trade partner for the UK even though the UK’s trade with non-EU countries has been increasing since 1999. The EU is also a major investor and a major recipient of UK investment. In 2014, the EU accounted for 44.6 per cent and 53.2 per cent of UK exports and imports of goods and services respectively. In 2013, 43.2 per cent of UK overseas assets were held in the EU, whereas 46.4 per cent of assets held in the UK by overseas residents and businesses were attributable to the EU (Office for National Statistics, Government of UK). The economic slowdown will exacerbate the existing woes of the EU which is still struggling with the post 2008 financial crisis outcomes, the travails of the periphery economies and the more recent migration crisis as also of the world economy that has yet to register a sustained recovery from the global financial crisis. For Asia, the slowdown will imply further loss of export demand in its traditional EU market. Transaction costs of trade with, and investment in, the UK and EU will now be higher as both will have to be dealt with as independent economic entities. This may not be so easy. In the case of trade and investment, EU laws, standards and rules are likely to remain the same but the UK will have to negotiate afresh with the WTO. The nationalistic sentiments that have defined the exit campaign may now imply the imposition of higher tariff and other trade barriers by the UK. Asian exports may suffer as a consequence. Stricter provisions with regard to movement of people could be another consequence of the Brexit. Asian economies could be particularly adversely affected with a change in these provisions. A majority of the 42 million international migrants born in Asia were living in Europe in 2015 (International Migration Report 2015 Highlights, UN, 2016).

For India, Brexit may not be an immediate concern. The central bank made careful interventions in the currency market allaying fears of volatility induced costs and it is expected that stable macroeconomic fundamentals and its fastest growing economy status will help India sail through the uncertain economic environment post Brexit. While among the top twenty trading partners for India, UK has a small share of about 2 per cent in India’s total trade. This has not changed much in the last half a decade. How tariffs and other trade regulations alter in the wake of Brexit and hence impact on India’s trade with the UK, while not immediately clear, may also not be immediately critical for India’s trade prospects. EU is a more significant trade partner for India, with a 16 per cent share in exports and around 11 per cent in imports in 2015 (Directorate General of Foreign Trade, GoI). Finalising the India-EU FTA, under negotiation now for almost a decade, should be India’s priority. The issues that have been at the heart of prolonged negotiations such as IPR, migration and movement of people may now acquire new dimensions. At the same time, a separate FTA with the UK may not be immediately possible and certainly not till the UK undertakes its negotiations with the WTO on trade treaties and rules.

For all South Asian economies that are beneficiaries of the non-reciprocal preferential trade treatment under the EU General Scheme of Preferences/Everything But Arms/General Scheme of Preferences Plus (GSP/EBA/GSP Plus) scheme/s, benefits will continue. Though, without the friendly supporting voice of the UK, continued GSP plus preferences to South Asian exports by the EU may not be easily ensured in the future. This is significant as the EU is a major export market for South Asian exports in the labour intensive and revenue generating textiles and apparel sector. Also, in the absence of the UK, Sri Lanka which has been keen on getting back the GSP plus status (suspended in 2013) with the EU may now find it more difficult. Additionally, a slowdown in the UK economy may lead to depressed grants and remittances for the Pakistan economy with consequent adverse implications for its external position. As for trade with UK, much would depend on how far the UK will retain its pre-exit trade rules once the exit is formally complete.

Of course, all of the above uncertainties would be compounded and the ramifications far more complex were instability in the EU to become reality and if the Brexit was to trigger other such reactions from significant other members of the EU. It is also possible that Brexit may play out differently; and as many are hoping, the invocation of Article 50 may be indefinitely delayed or the UK may retain access to the EU. What can however be said without doubt is that the Brexit outcomes are complex, not yet fully comprehensible and uncertainty reigns supreme. In these circumstances it would be best for Asia to strengthen its intra-regional growth impulses, supply chain networks and trade agreements to successfully counter global uncertainties.

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#5057, 13 June 2016
Changing Regional Contours and Imperatives for India
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

That the centre of gravity of the global economy has shifted to Asia over the last decade and a half is known and accepted. China, India and some emerging market economies from Southeast/East Asia contributed significantly to this shift. Over the same period, global trade led by production fragmentation across borders increased manifold. China emerged as a systematically important trading hub in this network-led trade pattern and a major trading partner for most countries including India.

However, in the period since 2008, that is post the global financial crisis, it appears that this growth and trade pattern may yet be undergoing another shift. Recovery in the advanced economies that remains weak, uneven and uncertain is coupled with the slowdown and rebalancing of the Chinese economy. Constrained thus by sluggish traditional markets and trade impulses, developing countries have had to look inwards and strengthen regional inter-linkages. In Asia, this is evident in the accelerated pace of creation of the ASEAN economic community (AEC) as also through the formulation of mega regional trade arrangements. Explored below are these changing regional economic contours and in the context, the imperatives for India.

China’s Slowdown and Growth Reorientation

Post the global financial crisis, as China rebalances towards a lower trade surplus and a new growth strategy with increased emphasis on domestic consumption, services and innovation, the spillover effects of excess capacity created in some sectors under the earlier investment-led growth model continue to impinge on its economic outcomes. In recent years the Chinese economy has slowed down, registering a modest growth of 6-7 per cent relative to its pre-crisis double digit rates of growth. This may not augur well for Asian economies tied to Chinese export demand through supply chain linkages. In addition, the ad hoc depreciation of the renminbi between August 2015 and January 2016 without corresponding capital account liberalisation and financial sector reforms has led to confusion among investors and transmission of volatility through closely interlinked trade channels in the region.


The ASEAN economic community is fast moving towards its objective of creating a single market and production base that is globally competitive. Liberalisation of trade in goods through reduced tariffs has been largely accomplished. Movement of intermediate goods across borders and strengthening of regional value chains is thereby further facilitated. While the final formation of the AEC will depend on the pace of progress of the remaining agenda of services and investment liberalisation, the existing integration levels and continued economic dynamism of some ASEAN economies are expected to generate positive growth impulses for the region.

Mega Regional Trade Arrangements

Global trade rules are in the process of being rewritten primarily by mega regional trade arrangements with provisions that go well beyond liberalisation of goods and services trade and investment. Of the three mega regional trade agreements signed or under negotiation namely the Trans Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP) and Regional Comprehensive Economic Partnership (RCEP), Asian economies are members of the RCEP and TPP. TPP with negotiations complete and trade deal signed awaits parliamentary ratification by individual member countries. While sceptics have expressed doubts as regards the US post election scenario, it would be difficult for any member country to forego the potential benefits of not just the TPP, but through it, of the US-EU TTIP as well.

Some of the TPP member economies are also members of the RCEP. RCEP is relatively less ambitious than the TPP. It is initially focused on trade and investment liberalisation even though it mentions intellectual property, competition policy and other regulatory measures. Like the TPP, the RCEP through reduced tariffs and preferential access will also be facilitating greater movement of intermediate goods across borders and hence value chain integration in the region. Overlapping membership of the RCEP with the TPP will imply spillover advantages, subject to rules of origin (RoOs), in terms of preferential access to markets as well as make inevitable increased exposure to competition for all members of the agreements.

Imperatives for India

India’s ‘make in India’ push to its manufacturing sector has to factor in these regional realities. Presently, India’s linkages with the regional value chains are marginal. Earlier free trade agreements (FTAs) at the bilateral and regional level with the ASEAN and East Asian economies have resulted in limited economic gains for India. Among the mega regional trade agreements, India is a member of only the RCEP. India’s offers for tariff liberalisation at the RCEP are not just the lowest among all members but also differentiated for its FTA and non-FTA partners. India through its participation in bilateral FTAs, RCEP and owing to overlapping RCEP-TPP membership will eventually be open to preferential access by many of its trade partners including China.

Therefore, it is imperative that India shed its defensive stance in preferential trade agreements. Domestic industry must be prepared to confront competitive pressures from imports and in international markets. While domestic policies must be formulated and legislated to ease investment conditions, FTAs must be utilised as trade policy instruments with significant potential economic benefits rather than as mere strategic policy instruments. Rigorous prior technical analysis to identify core sectors of comparative advantage and monitoring during implementation should be included in carefully designed FTAs. Safeguards must be used where necessary to protect weaker manufacturing units but not in response to protectionist lobbies. A more ‘open to competition’ stance should be adopted in RCEP negotiations. As comparative advantage evolves and shifts among regional economies, India must seek to take advantage in consonance with its skill set and strengthen its participation in regional value chains. Finally, India cannot take too long to evolve towards global regulatory standards and practices. Indian industry must utilise the time that remains for mega regionals to become a reality to prepare for the eventual change in the global trade regime.

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#4834, 13 February 2015
India and the APEC
Amita Batra
Chairperson and Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

The foreign ministers of Russia, China and India at the end of their deliberations in Beijing last week issued a comprehensive joint communiqué that included a recommendation for India’s inclusion in the Asia Pacific Economic Cooperation (APEC) grouping. Earlier in January, a joint strategic vision document that was issued during US President Obama’s visit to India on its 66th Republic day also contained a line welcoming India’s interest in joining APEC. While this was the first formal statement of support by the US for India’s membership in APEC, the Chinese President Xi Jinping had extended an invitation to India in July last year to attend the Beijing APEC summit.

APEC is a twenty one member regional economic grouping that was established in 1989 with its main focus on trade and investment liberalisation and facilitation. The grouping follows the principle of ‘open regionalism’. There are no binding commitments and treaty obligations. Commitments are undertaken on a voluntary basis and capacity-building projects help members implement APEC initiatives. Representing 40 per cent of the world population, 47 per cent of global trade and 57 per cent of global GDP in 2012, the grouping aims at leveraging the economic strength of the 21 member economies for regional prosperity and economic integration. As the world’s third largest economy in PPP terms India would no doubt be a valuable addition to the economic grouping and announcements towards positive support for its inclusion in the APEC are therefore not surprising. What needs emphasis and due recognition is the fact that India’s application for membership to the regional body has been pending for long and even after the moratorium was lifted in 2010. Over this period India has undertaken systemic economic reforms including trade and investment, the positive outcome of which was amply reflected in close to a double digit rate of growth in India accompanied by stable macroeconomic fundamentals. During this period India has also made progress with its regional economic integration agenda participating in not just bilateral trade agreements across sub-regions but also as a member of regional groupings like the East Asia summit and RCEP alongside a plurilateral FTA with the ASEAN.

It may be pertinent to ask therefore if membership of the APEC, for which India has waited for long, now holds any significance, particularly when there is an ongoing debate about the relevance of APEC in the process of regional economic integration. 

As discussed in some of the earlier columns in this series, the Asian region is witnessing a consolidation of competing mega regional trade agreements. The US led Trans Pacific Partnership (TPP) agreement with twelve members aimed at ‘WTO plus’ provisions is in the final stages of its negotiations. The RCEP, the other regional economic formulation that brings together the six FTA partners of the ASEAN, with the latter as its nucleus, is expected to be complete its negotiation process by end 2015. In the context, the APEC with its soft institutional structure and voluntary action programmes, having missed its first deadline towards achieving free trade and investment between the advanced economies of APEC by 2010 under the Bogor goals and no closer to achieving the second, of member-wide trade liberalisation agreement by 2020, is yet far from its declared objective of taking forward the idea of economic integration in the region through the ‘next generation’ free trade area of the Asia-Pacific (FTAAP). Slow progress of and internal weaknesses in the APEC appear to be clearing the way for alternative mechanisms like the RCEP and TPP to emerge as predominant formulations in the regional economic integration process. There is in fact a prevailing view that the slow moving APEC has pushed its more committed members to embark on the TPP.

Notwithstanding the challenges that APEC is faced with, India can gain through what can be identified as a core objective and achievement of the APEC, that is, trade facilitation. According to official APEC data, the region’s total trade has increased seven times over the period 1989 to 2012, with two-thirds of this trade occurring between member economies. APEC’s Trade Facilitation Action plan that includes streamlining customs procedures led to a successive reduction of 5 per cent in region-wide costs at the border between 2004 and 2006 and 2007 and 2010. Since the launch of the single window clearance initiative APEC has been able to significantly accelerate the movement of goods across borders. The trade facilitation reforms of the APEC can thus be of great assistance to India now that it is required to ease out the customs procedures and other barriers ‘at’ and ‘behind the border’ as part of implementing the Trade Facilitation Agreement accomplished at the ninth ministerial meeting of the WTO in December 2013. According to the Asia Pacific Trade and Investment Report 2014, single window clearance is not just one of the most far reaching of trade facilitation reforms but also the most complex measures in the TFA. The APEC experience will thus help India design and monitor a national trade facilitation programme.

Much, of course, will depend upon APEC’s ability to sort its long standing dilemma over expansion and appropriate representation of different sub-regions in the forum as also India’s ability to take advantage of possible future membership through prior domestic trade reform. 

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#4803, 12 January 2015
IPCS Forecast: South Asian Regional Integration
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

In May 2014, when India made the unprecedented gesture of inviting the heads of all SAARC member-countries for the oath taking ceremony of its new Prime Minister, hopes were raised that a new beginning for regional cooperation in South Asia was now in the offing. A few months later, both days of the 18th SAARC Summit were spent speculating about the possibility of a breakthrough in the cold vibes shared by the heads of India and Pakistan. While the Summit was rescued with a last-minute agreement on energy cooperation, two other agreements, on road and rail connectivity were left languishing.

The much-expected revival of SAARC did not happen; but there was a hint among SAARC members of moving ahead with interested partners. The first month of 2015 has seen interesting developments with the West Bengal Chief Minister accepting Bangladesh’s invitation for a visit and a surprise outcome of presidential elections in Sri Lanka. What do these three developments mean for South Asia?  

South Asia: Open and Differentiated Regionalism
First, it is time to reformulate the idea of regional cooperation in South Asia as open and differentiated regionalism. Member-countries should come together in smaller sub-regional groups with a focussed agenda comprising both common challenges and aspirations that are cross-border in nature. Once they are successful in attaining the limited agenda, the aims and objectives can expand and so can the membership as non-members would begin incurring the costs of non-accession. In due course, sub-regionalism would serve as a preparatory ground for merging into larger groupings as it would be indicative of the members’ willingness to act in a cooperative framework with their neighbours and a readiness to join larger groupings in the region that go beyond these members.

Within South Asia, sub-regional groups already exist. Membership in some of these sub-regional groupings extends beyond South Asia to Southeast Asian/East Asian countries. These include the BBIN with Bangladesh Bhutan, India and Nepal as members; the BCIM with Bangladesh, China, India and Myanmar; and the BIMSTEC with Bangladesh, Bhutan, India, Nepal, Myanmar, Sri Lanka and Thailand, as member economies.

Instead of the existing overlapping and all-encompassing objectives of these sub-groupings, it would be better to delineate a workable agenda based on an area of comparative advantage for each and adopt a focussed approach towards its achievement. Issues of hydropower, movements of peoples, transit rights etc. could be primary areas for the BBIN; connectivity and economic corridors for the BCIM; and supply chains in textiles and clothing and gas pipelines could constitute the working agenda for the BIMSTEC.

The resource and expertise-constrained South Asian economies may then be able to contribute to and benefit from these groupings in accordance with their potential. A necessary prior requirement in this context would be the establishment of an institutional mechanism that includes a secretariat, working groups with requisite expertise, regular meetings, coordination and periodic exchange of information and reports. Over time, a merger or expansion of the sub-regional groupings could shape into regional formulation.

Accessing India's Northeast through Bangladesh
Second, apart from the Teesta water sharing arrangement and the land boundary agreement – two significant issues that might see a resolution during the West Bengal chief minister’s February 2015 visit to Bangladesh – the two countries may also like to consider the issue of full transit to India’s Northeast via Bangladesh. Preliminary action on this front was evident in 2014 when Bangladesh, under a special transit arrangement, allowed transport of food grains to Tripura through its territory. The certainty of a full transit agreement will facilitate connectivity of the Northeast Indian states with the rest of India and as a consequence, allow them to take advantage of the Indian economic dynamism.

India, Sri Lanka and CEPA
Third, the political change that Sri Lanka recently saw augurs well for the India- Sri Lanka Comprehensive Economic Partnership Agreement (CEPA) negotiations for which, beginning 2005, led to a framework agreement scheduled to be signed in 2008. Reservations regarding the services sector liberalisation, particularly mode 4 related movement of professionals, investment and non- tariff barriers (NTBs) coupled with lack of political will have prevented the CEPA from being signed and operationalised. In order for this to happen, the CEPA must uphold the same principles of non-reciprocity and differential treatment as was the case in the India-Sri Lanka Free Trade Agreement (FTA).

The India-Sri Lanka FTA is an example of a south-south trade agreement that has taken into account the asymmetry of the two economies in its provisions and yet been successful in generating a positive outcome of increased trade for both economies. Deeper integration via the CEPA may be particularly opportune when India is attempting to revive its manufacturing sector; and fears with regard to NTBs and services liberalisation may be better combated with more rational assessments of alternative liberalisation scenarios.

Strengthening developing country linkages is an imperative in the post-global financial crisis period when several traditional Western markets are unable to generate sufficient growth and hence demand for exports of these economies. Regionalism is being actively pursued by the rest of the world. South Asia must therefore make best of the available opportunities in this direction in 2015.

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#4784, 23 December 2014
South Asia: Rupee Regionalisation and Intra-regional Trade Enhancement
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi

The year 2014 is likely to close with the Indian rupee among the best performing major emerging market currencies against the US dollar. The fall in rupee value over the year has been marginal even while some of the other emerging market currencies have seen a free fall. Improved macro fundamentals including the current account deficit, domestic inflation along with prospects of positive and stable growth have helped contain capital outflows from India even as expectations of higher interest rates in the US draw money back from other emerging markets. It may be time therefore to consider using the rupee as the regional currency, a move that can contribute to enhancement of intra regional trade in South Asia. In neighbouring East Asia, China initiated the process in 2009 and is well on its way to internationalising the renminbi. India formed a task force for the purpose in 2013 with little progress thereafter.

Currency internationalisation involves the use of a currency instead of national currencies, by residents and non-residents, for all international transactions whether they be purchases in goods, services or financial assets and requires full capital account convertibility and a flexible monetary management framework. As seen appropriate for South Asia, a limited version of the concept that involves the currency usage, in this case, of the rupee, in trade invoicing and settlement within the region, could be useful. Rupee regionalisation in this manner will help enhance regional and bilateral trade through reduced transaction costs and exchange rate risk, the latter having been significantly brought forth vis-à-vis advanced market currencies during the global financial crisis. Countries with a trade surplus can maintain rupee receipts as rupee bank deposits which can subsequently be invested in rupee denominated financial assets through offshore/onshore markets. In case of a trade deficit, bilateral rupee-local currency swap lines between the Reserve Bank of India and the central bank of a regional economy can be negotiated to enhance their liquidity position. Additionally, South Asian economies can maintain smaller dollar reserves or allow for greater currency diversification in reserve accumulation. This will imply lower risk exposure and hence costs given that ‘store of value’ properties of advanced economies’ currencies are increasingly being questioned.

Some facilitating factors in this regard such as India’s centrality to regional trade, its economic size, macroeconomic stability and use of rupee in cross-border trade with Nepal and Bhutan already exist.  Further, India has already assumed the role of liquidity provider with its regional swap arrangements. India and Bhutan have a currency swap agreement signed between the Reserve Bank of India and the Royal Monetary Authority of Bhutan (RMAB) for US$100 million. It enables RMAB to make withdrawals of US dollar, euro or Indian rupee in multiple tranches up to a maximum of US$100 million or its equivalent. In May 2012, RBI had announced it would offer swap facilities aggregating US$2 billion, both in foreign currency and Indian rupee, to SAARC member countries. The arrangement would be for a three-year period and would help bring financial stability in the region. However, these swaps are denominated in dollars and earmarked only as a line of reserve for partner countries during a balance-of-payment crisis; it is not for enabling trade payment.

India is also in the process of developing local currency offshore bond markets. The International Finance Corporation (IFC), an arm of the World Bank Group, in 2013 launched a US$1 billion off shore rupee linked bond programme. The bonds to be bought and sold in dollars are denominated in rupees and offer returns linked to rupee interest and exchange rates. They have a triple-A rating guaranteed by the IFC. A series of these bonds are to be issued by the IFC and proceeds will be invested in government and corporate bonds. The bilateral swap arrangements and the offshore market activity are both indicators of the strength and credibility of the Indian rupee.

China has a far more ambitious programme and aims at internationalisation of its currency with regionalisation as only a step in the process. The centrality of China in the regional trade and production networks has been at the base of the expanding ease and use of its currency in trade settlements throughout East Asia. China initiated a pilot program for renminbi internationalisation in 2009 with renminbi (RMB) settlement of cross-border trade in a limited number of cities and regions that was later expanded in geographical coverage and scope of eligible transactions. Linkages between offshore market and onshore market have been set up. Onshore financial markets have been steadily opened to foreign investors. Banks outside mainland China participating in cross-border trade settlement transactions can invest their RMB funds in the interbank bond market in mainland China. China has also signed bilateral RMB-local currency swap agreements with central banks or monetary authorities of 23 countries. Even while negotiating FTAs with regional partners, China has been vigorous in elevating the status of its currency, the renminbi (RMB), to a regional unit of accounting and exchange.

While internationalisation of Chinese currency would need to be supported by large scale domestic financial sector reforms and call for some serious pondering on its implications for international currency and reserve mechanisms, India can move ahead with regionalisation of the rupee with the available financial infrastructure in its limited task of trade enhancement in a region specific context.

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#4734, 11 November 2014
18th SAARC Summit: An Economic Agenda
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU

The 18th SAARC summit is scheduled to be held in Kathmandu, Nepal, in a little less than three weeks from now. The theme of the summit is ‘deeper integration for peace and prosperity’.  Deeper integration, in addition to the creation of a free trade area, entails liberalisation of services, investment, elimination of non-tariff barriers, and in general, going beyond traditional market access issues.

The theme is appropriately timed, given that the neighbouring ASEAN bloc is expected to achieve the formulation of an economic community by 2015 and the larger region of the ASEAN+3 (China, Japan, Korea) +3 (Australia, New Zealand, India) is negotiating a Comprehensive Economic Partnership Agreement (CEPA), also to be finalised by 2015. Compelling regional forces therefore exist for South Asia to accelerate towards deeper integration. 

What could be a possible agenda for the SAARC to take forward the idea of deeper integration in South Asia? 

First, evaluate the South Asian Free Trade Agreement (SAFTA) for its continued relevance in the region. There are overlapping trade agreements and unilateral policy announcements among member countries that undermine the regional agreement. The bilateral agreement between India and Sri Lanka is operating successfully with both sides desirous of its elevation to a CEPA. India has a preferential trade agreement with Afghanistan, and trade treaties operating like de facto free trade agreements with Bhutan and Nepal. Exports of all Least Developed Countries (LDCs) are allowed to enter India free of duty and quota restrictions.

A major proportion of regional trade is thus covered by preferential terms of trade, independent of the SAFTA. India-Pakistan trade will remain below potential as a natural outcome of traders’ risk-return calculations in an atmosphere of constant friction, and Pakistan’s continued hesitation to grant India the Most Favoured Nation (MFN) status (euphemistically termed as Non Discriminatory Market Access). Eight years of implementation of the SAFTA have not led to intra-regional trade expanding beyond 6 per cent of the region’s total trade.

The 2010 SAARC Agreement on Trade in Services (SATIS) has made less than impressive progress. Resource-constrained South Asian economies must therefore make future calculations with due recognition of existing conditions and past performance of regional agreements.

Second, focus on factors that could facilitate trade in South Asia. An aspect that has drawn relatively less attention but is of critical importance is the lack of financial connectivity in the region. As banking channels are limited in many areas, financial support measures for trade capacity build-up could be of major assistance. Local currency swap arrangements, with assistance from central banks for settling payments in local currencies of cross-border charges and fee for cross-border movement of goods could be a feasible option in the near future. India and Bhutan signed a currency swap arrangement whereby the Royal Monetary Authority of Bhutan (RMAB) is enabled to make withdrawals of US dollars, Euros or Indian rupees in multiple tranches up to a maximum of $100 million or its equivalent.

In 2012, the Reserve Bank of India (RBI) announced it would offer swap facilities aggregating $2 billion in both foreign currencies and Indian rupees to SAARC member countries for a three-year period to help bring financial stability in the region. However, these swaps are denominated in dollars and earmarked only as a line of reserve for partner countries during a balance-of-payment crisis and not for enabling trade payment. India’s Exim Bank could also extend operations in context-suitable trade finance instruments, provide export credit insurance and undertake risk assessment of small producers and exporters. Countries could also evolve ways and means of joint information access and exchange for better risk assessment of individual traders and general financial environment.

Lack of financial connectivity is a particularly severe constraint for border trade that therefore remains confined to a limited number of commodities and barter systems.  Border regions and communities are amongst the poorest in South Asia. Setting up a regional fund or a bilateral fund for border trade could be taken up for consideration at the SAARC summit. Trade finance could help border regions develop in a manner such that they become channels of absorbing and transmitting economic dynamism of neighbouring countries rather than being solely dependent on the their own countries.

The last item on my agenda for the upcoming SAARC summit is to review the involvement of the nine SAARC observer nations. Do we share a common agenda? Could we involve these states to strengthen the regional voice at international fora? There must be a broader vision to utilise the expertise of these nations to build a more substantive association on a regional basis – given that some of these observer nations are our co- participants in emerging regional economic formulations – as also their expertise in achieving peaceful co-existence via economic integration in their respective regions.

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#4704, 20 October 2014
Regional Economic Architecture: Is India Ready?
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi.

Two mega regional trade agreements – the Regional Comprehensive Economic Partnership (RCEP) and the Trans Pacific Partnership (TPP) – are currently under negotiation in Asia. The RCEP, launched at the East Asia Summit in November 2012, is a comprehensive goods, services and investment agreement among the 10-member ASEAN and its six Free Trade Agreement (FTA) partners, namely Australia, New Zealand, China, Japan, Korea, and India. Aimed at deeper integration, the RCEP is accommodative of developmental differentials among the member economies and allows for open accession according to the level of preparation.

The ASEAN is central to the RCEP process. The TPP that began as a four-member FTA with Brunei, Chile, New Zealand and Singapore now includes eight more countries: the US, Australia, Canada, Japan, Malaysia, Mexico, Peru and Vietnam. The TPP is a far more ambitious agreement with an agenda beyond liberalisation to include regulatory compatibility and facilitating investment and business climate. The initiative, now in its final rounds of negotiations is aimed at achieving ‘WTO plus provisions’ in areas like goods, services, investment, Intellectual Property Rights (IPR), competition, dispute resolution, trade remedies, customs procedures, government procurement, labour standards and environment.  India is a member of the RCEP but not of the TPP. The RCEP will hold its fifth round of negotiations in New Delhi in December 2014, preceded by the India-ASEAN and East Asia Summits in November 2014 in Myanmar.

The RCEP will help India integrate into the regional production networks. This is a significant advantage as global trade patterns are changing in response to production fragmentation across borders and India’s parts and components trade, that is integral to regional production networks, is currently less than 10 per cent of its total trade with the ASEAN. Also, as the ASEAN moves closer to achieving its vision of an economic community and becoming a globally integrated, highly competitive, single market and production base by 2015, India will gain through its membership of the mega-regional agreement. The 2010 ASEAN-India FTA will further contribute to this process of economic integration.

There are, however, the following concerns regarding India’s preparedness to take on the challenges of participation in the evolving regional economic architecture: 

First is the challenge that overlapping members of the RCEP and TPP will pose for India. Notwithstanding the large-scale differences in the agenda of the two agreements, the spill-over effects of the TPP on the RCEP will be evident in terms of the higher liberalisation and regulatory standards that the common members having accepted in the TPP, would demand of their RCEP partners. This would imply necessary cost-bearing reforms in the non-TPP member economies of the RCEP like India. In the past, New Delhi has put up a stiff resistance or found it difficult to negotiate regulatory issues in agreements at both global and regional levels. In that context, the stance that has been evident on issues involving IPR may not be sustainable once the mega regional agreements conclude. Vis-à-vis customs procedures, the Word Bank’s 2014 global logistics performance index shows India with the lowest score among all common members across the RCEP and the TPP. While India may have concrete reasons to not accept the WTO trade facilitation deal, credible domestic reforms on this front cannot be deferred for too long.

Second, is the inevitability of giving preferential market access to China under the RCEP, a prospect that India, fearing an import surge, has otherwise resisted. In 2014, India had a $ 36.2 billion with China, even as bilateral trade stood at $66 billion. While India’s proposed ‘safeguard duty’ on Chinese imports can only be a short-term corrective measure, China’s offer to take up tariff cuts for some products under the Asia-Pacific Trade Agreement (APTA) may not even happen. The APTA has been a slow-moving agreement with less than satisfactory performance in terms of goods coverage and consequent trade enhancement. Its fourth round of product negotiations that started in 2007 is yet to be concluded. It may be a far better strategy for India to aim at export diversification through enhanced domestic manufacturing capabilities. 

Third, the success of the RCEP would to a large extent be a function of the credibility of the ASEAN objective of creating an integrated economic community by 2015 and the reconciliation among its FTAs with the other RCEP members. While the former involves further liberalisation in the services and FDI sectors alongside overcoming the internal development differentials among ASEAN member nations, the latter demands grappling with the not-so-easy task of overlapping rules and differential rates and timing of tariff elimination of the ‘plus one’ FTAs. For India, that has among the lowest tariff coverage relative to the ASEAN’s other FTA partners, this will require a rationalising of its tariff structure beyond the current ASEAN-India FTA levels. Again, the domestic manufacturing sector needs to be prepared to face the outcome of the thus-increased competition.

India must therefore take its membership of the RCEP as an opportunity to lock in domestic reforms that will then make it more capable of benefiting from the evolving regional economic architecture in Asia.

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