A milestone for SAARC
SAFTA is aimed at creating a single market in the south Asian region and then a possible economic union. 

E.C. Thomas

THE Agreement on South Asian Free Trade Area (SAFTA), with the issue of formal notification on 22 March 2006 by the SAARC Secretariat, has come into force with effect from 1 January 2006.

The Agreement was signed at Islamabad during the Twelfth SAARC Summit on 6 January 2004. The entry into force of the Agreement thus launches the South Asian Free Trade Area, which would be completed by 1st January 2016.

The first round of customs duty reduction under the Trade Liberalization Programme (TLP) would be effected on 1st July 2006 by all member states with the exception of Nepal, which would do so on 1st August 2006.

SAFTA is aimed at creating a single market in the region, and then a possible economic union. Underlying expectations is an awareness that South Asia is a single geo-economic region and economic growth across the region must be meaningful.

The scope for increasing intra regional trade in a big way will be recognized from the fact that its value now is only $7 billion, out of SAFTA’s  total trade of $ 350 billion. There will obviously have to be adjustments in the composition and direction of exports as well as imports, if individual countries are to benefit even with existing operations. The total value may rise to even $500 billion in a short period, with efforts to harness the facilities for hastening industrial and agricultural growth.

Union Commerce and Industry Minister, Shri Kamal Nath has rightly said  that implementation of SAFTA will further strengthen our trade relations with the SAARC Countries.

The economic integration efforts of members in this region, however, will be challenging as India will have to play a major role. Pakistan and Bangladesh, with sizable trade deficits with India, can increase their exports only with adjustments in several directions that include measures to develop the growth potential of their economies. Nepal, Bhutan and Sri Lanka have special problems, though the first two members can earn sizable revenues from exploitation of their vast hydel and forest resources.

SAFTA represents only a ‘modest beginning of our goal of a regional economic Union”, said Prime Minister Manmohan Singh in his address at the last SAARC Summit meeting held in Dacca in November, 2005.

The SAFTA was signed by all SAARC countries during the SAARC Summit held in Islamabad in January, 2004 and the Union Cabinet had thereafter accorded approval for the SAFTA Framework Agreement.

The Agreement stipulated that SAFTA would enter into force from January, 2006, upon completion of formalities including ratification by all the Contracting States and issuance of notification by the SAARC Secretariat. The completion of these formalities included completion of negotiations on Rules of Origin, Sensitive List, Mechanism for Compensation of Revenue Loss for Least Developed Contracting States and Technical Assistance to Least Developed Contracting States in agreed areas.

Since the signing of the Agreement, Committee of Experts (COE) had twelve meetings including the last one held in December, 2005 and finalized all the four Annexes to the Agreement.  For implementation of SAFTA, four Annexes had to be attached with the Agreement and the Union Cabinet accorded approval on all these issues on December 29, 2005.

The basic objective of SAFTA is to reduce existing tariffs to less than 5 per cent within the stipulated time frame to boost trade among the member countries of SAARC, namely Bangladesh, Sri Lanka, Nepal, Pakistan, Bhutan, Maldives and India.

In order to protect the interests of domestic traders and farmers, India has kept 884 items in the Sensitive List for non-LDCs (Least Developed Countries) and 763 items in the Sensitive List for LDCs.  On these items, trade liberalization programme would not be applicable. Our sensitive lists include mainly goods and products from agriculture, textiles, chemicals, leather and sectors reserved for the small scale industries.

India, being the larger and relatively developed economy, will be providing concessions to Least Developed Countries (LDCs) such as Bangladesh, Bhutan and the Maldives, including a mechanism  for compensating revenue loss due to reduction in duties and    technical assistance.

The Union Cabinet had approved an offer to Bangladesh of an additional Tariff Rate Quota (TRQ) of two million pieces of garments besides six million already offered. This will not have any condition of sourcing fabrics from India or Bangladesh.

As per the agreement terms, India, Pakistan and Sri Lanka have to reduce their customs duties to the level of 0-5 per cent by 2013. On the other hand, the four “Least Developed Countries” (LDCs) in the SAARC – Bangladesh, Maldives, Nepal and Bhutan – are expected to follow suit by 2018.The agreement on SAFTA provides for compensation of  revenue loss to LDCs, which would be available to Maldives for six years and the rest for four years. LDCs would also be provided technical assistance in areas like capacity building in standard, product certification, training of human resource, improvement of legal system and administration, custom procedures and trade facilitation.

On the significance of SAFTA, Kamal Nath said that over 90 per cent requirements of South Asian countries were sourced from outside the region and a major part of exports were destined for countries outside the grouping. Besides, South Asia was not only demographically the largest regional block on the planet but also one of the fastest growing regions for several decades – demographically and now economically. “But the challenges it faces are perhaps also the most serious.

South Asia today is home to almost two-thirds of the world’s poor. Nearly one out of every three people, or over 600 million people, struggle to survive on income of less than one dollar a day. Wide income disparities existed within and between countries, which needs to be redressed”, he said.

India sees SAFTA as a platform to use trade, its growing economy and industrial base for its strategic objectives – economic union, open borders and free movement of goods, services, people and investment across border. Says Foreign Secretary Shyam Sharan: “SAFTA is a quantum leap in the efforts of the regional countries for achieving economic integration in the region”.

Indian industry is confident that the formation of  SAFTA will lead to a steep rise in intra-regional trade, but has suggested formation of joint ventures to create “trade complementaries”.

Estimates made by the Associated Chambers of Commerce and Industry of India (Assocham) are that India’s annual trade with SAARC countries can touch Rs. 50,000 crore by 2010 and Rs. 1,00,000 crore by 2015 from the present Rs. 25,000 crore.

Assocham President Anil K. Agarwal said that future projections for trade could be achieved, if trade competitiveness among SAARC countries was turned into “trade complementaries” for which political will of all countries was essential.

In a statement, Anil Agarwal proposed that trade compelentaries could be created by way of setting up joint ventures in the SAARC region in which the interests of each partner should be equally protected. In addition, he felt the rules of origin needed to be framed in such a manner that these were neither stringent nor cumbersome to ensure smoother movement of goods from one country to another.

The industry body has prepared a paper on SAFTA which suggests that the top areas of cooperation among the SAARC countries can be textiles, rubber, leather, jute and tea blending.  In addition, it says, harnessing of natural resources can be a major source for generating energy requirements of members countries, besides tourism.

The process of integrating the trade and economies of the seven founding members of SAARC has been painfully slow. It is not an easy task when many of the countries remain in the ‘Least Developed’ category and two or three of them have moved on to a much higher level of growth and development. Political differences between  some major member countries had also slowed down  the process.

Because of the undue delay in implementing SAFTA, India went ahead and signed a bilateral Free Trade Agreement (FTA) with Sri Lanka in this region and a few other countries as well. With the neighbouring Southeast Asian forum, the ASEAN, already having an FTA in operation, it was high time a South Asian version got off to a start.

 Implementing SAFTA is going to be a two-stage process. In the first stage, India, Pakistan and Sri Lanka are to bring their tariffs in line by 2013 and in the second, the rest of the region will follow suit by 2018.

South Asian Governments have also been under tremendous pressure from domestic industry to stall the process so that it can protect itself from cheaper goods entering the country through the FTA route.

During the negotiations, the Governments have paid particular attention to the Rules of Origin to ensure that goods that are not manufactured or do not undergo value addition in one of the member – states is not “dumped” on the neighbouring country.

India has also responded to the demands of Bangladesh with a special Tariff Rate Quota regime to provide limited access to the textiles sector which comes under the ‘sensitive list’. With all this, India’s trade with the rest of South Asia is a mere $5 billion.

It makes so much more sense for SAARC countries to look at ways and means of substantially increasing intra-regional trade by sourcing some of their requirements from the neighbours. At a time when India’s trade with South East Asia  has risen to $15 billion, such a low volume of transactions within South Asia reflects poorly on the state of SAARC.

SAFTA is bound to change the picture and provide a springboard for boosting intra-regional trade.  But the three ‘more developed’ countries (India, Pakistan and Sri Lanka) have also the responsibility to compensate the less developed ones in South Asia for the loss in revenue they will suffer on account of tariff reductions. The new regime can succeed only through a process of consensus and compromise.

India, the largest country in the region and its most sophisticated economy, has the most to gain from the success of SAFTA. It also has the greatest responsibility in ensuring that it works so that the south Asian people may have better standard of living.

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