South Asia's trading prospects

By Sunil Raman
BBC South Asia analyst

India's decision this week to allow domestic private airlines to fly to neighbouring countries in South Asia is the latest step towards pushing free trade with its neighbours.

Countries in the region are trying to forge closer economic ties, despite many deep-seated differences.

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Tensions between India and Pakistan, in particular, have long stymied attempts to improve the economic atmosphere.

So individual countries have been setting up separate trade pacts among themselves, with India taking the lead.

It has been the motivating force behind the seven-nation South Asia Association for Regional Cooperation (Saarc) established in 1985.

Saarc set up a preferential trade agreement in 1993.

It had planned to set up a free trade zone by 2001, but mutual suspicion between India and Pakistan has prevented that from happening.

Initial opposition

In recent weeks, Indian officials have visited Bangladesh, Nepal and Sri

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Lanka to bolster trade ties.

As south Asia's biggest economy and trading partner, India has free trade agreements (FTAs) with Nepal, Bhutan and Sri Lanka.

India wants the success of its FTA with Sri Lanka to be replicated with other countries like Bangladesh and the Maldives.

That leaves out Pakistan.

Smaller countries have benefited tangibly from the FTAs - in the last three years, Sri Lanka's exports to India rose by 40 per cent.

This has caught the imagination of other nations.

But the process was not initially easy.

Tea and textile exporters from India and Sri Lanka opposed the agreement, fearing their business would suffer.

Three years on, India imports a fixed amount of Sri Lankan tea, while Indian companies promote their products in the island nation.

Now there is talk of allowing the Indian currency to be used in Sri Lanka.

At present, only Nepal allows Indian currency to be used freely.

Righting the imbalance

Professor Charan Wadhwa, of the Delhi-based Centre of Policy Studies, argues that India has decided not to wait for Pakistan to understand the changing economic realities in the region.

Pakistan's Government remains adamant that it cannot grant India the status of a preferred trading partner under current circumstances.

In 1993, India gave the most favoured nation (MFN) status to Pakistan.

That ensured that a large number of Pakistan's exports to India were on zero duty.

Pakistan has not reciprocated the gesture, despite claims by India that it violates norms set by the World Trade Organisation (WTO).

India has a trade surplus with all countries of the region - its exports to them exceed its imports.

There is also a huge informal trade with both Pakistan and Bangladesh, facilitated by third countries through which Indian goods get smuggled in.

This has led to a clamour for righting the trade imbalance.

Hope on the horizon

But the dispute over Kashmir continues to affect trade relations between the big two of Saarc.

India and Sri Lanka have struck a balance over their trade in tea

With the Saarc summit scheduled for January in Pakistan, India has increased its demand for economic concessions.

But Pakistan's Government remains adamant that it cannot grant India the status of a preferred trading partner under current circumstances.

The Pakistani Government's perception is not shared by its business community.

Pakistan's business community wants "politics and economic relations to be separated", says S M Muneer, the former president of the Federation of Pakistan Chambers of Commerce and Industry.

Mr Muneer says Pakistan's exports to India have increased in the last few months and India offers a big market for them.

Several Pakistani trade delegations have also visited India in the past few months.

For decades, Pakistan chose to import iron-ore, rice and sugar from Australia, Indonesia and Brazil respectively.

Instead, it could have been imported these from India, and enjoyed lower transport costs.

This seems to be changing as well.

Though many in the government oppose increasing trade ties with India, last month a delegation from Pakistan signed a contract to import one million tonnes of tea.

After a competitive bid, Pakistan Steel has decided to buy 1.3 million tonne iron-ore from India next year.

This led to some protests as the traditional supplier from Australia was not given the contract.

But politics remains a problem for easing trade ties.