At a time adverse headwinds are buffeting global trade, India must step up its engagement with the neighbourhood. Unfortunately, this has been a diminishing priority focus as its two-way trade with the region amounted to $33.5 billion or 2.9% of its global trade in FY23. In sharp contrast, China has notched up 1.8-times larger trade volumes of $61.4 billion with South Asia in 2022 according to IMF’s Direction of Trade Statistics. The dragon trades more with Bangladesh and Pakistan, which is a painful reminder to India of its failure to deepen regional integration.
An additional serious ground for concern is the interest expressed by Bangladesh, Sri Lanka and possibly Maldives to join, at some point, the Sino-centric Regional Comprehensive Economic Partnership (RCEP), from which India had literally walked out at the eleventh hour. All of this entails the enlargement of a China-dominated network of trade rules and relations around India, as has been rightly argued in an FE column by Amitendu Palit of the Institute of South Asian Studies in Singapore.
The worry is that this would also lead to a substantial part of the Indo-Pacific region becoming part of rule-based trade and investment framework that excludes India. For such reasons, the economic and political implications of the neighbours’ interest in RCEP deserve careful attention. India is understandably wary as the very same factors that led it to not join this grouping, which comprises 10 members of the Association of Southeast Asian Nations together with China, Japan, South Korea, Australia and New Zealand, would also bedevil its closer engagement with Bangladesh and Sri Lanka.
India’s apprehensions regarding RCEP had a good deal to do with fears of a surge in Chinese imports or that China would dump its goods through other countries. Equally important are long-standing issues relating to the limited market access of Indian goods due to non-tariff barriers in China. India sought in vain tighter rules of origin that determine the national source of a product to ensure that dumping would not happen. For such reasons, the government is apprehensive of Bangladesh’s greater dependence on China for imports, which may increase further should it join RCEP. It would, therefore, prefer to evaluate the impact of Bangladesh’s or Sri Lanka’s entry into this regional grouping on the Indian economy before it inks a comprehensive economic partnership agreement with the former and a more ambitious economic and technical co-operation agreement with the island nation.
Bangladesh and Sri Lanka’s interest in looking eastwards have a good deal to do with the stalled process of regional integration due to Indo-Pakistan tensions. Bangladesh’s compulsions also include the fact that it will graduate out of its least developing country status in 2026 and will need to give up concessions associated with it. As an LDC member of the South Asia Free Trade Agreement, Bangladesh enjoys duty-free quota free access for most of its items into the Indian market which it would lose after 2026. India cannot match China in chequebook diplomacy but it can shore up its diminishing regional influence by allowing these countries to have a greater stake in its growth story. To re-engage with the region, India must follow up with unilateral trade liberalisation that ensures greater market access for their goods. Doing so will blunt the edge of some of their resentment of only registering massive trade deficits with India.
