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Economic Opportunities Or Continuing Stagnation

THE northeastern region of India has often been visualized as the remote landlocked backward region of a dynamic economy on the march. The difference between the potential and actual economic performance is most startling for the region that has large international borders with several neighbors like Bangladesh, Bhutan, China and Myanmar and is close to Nepal and Indo-China. It has the potential to serve as the entrepot for the entire Indian hinterland. Yet, the reality is vastly disappointing.

Is this gap between potential and achievement due to the backward nature of the economy of the north-eastern region or does it has anything to do with the process of incorporation of the region into Indian Union? Did India’s economic and foreign policy impose costs on the region that were significantly different from those borne by the rest of the country?

In the recent decade, India has opened its economy to international trade and has launched initiatives to forge closer trade and economic ties with immediate neighbors. This paper looks at the economic opportunities for the states of the North East in India’s emerging trade strategy in the region, especially its ‘˜Look East’ policy and the spate of preferential trading arrangements (PTA) and the free trade arrangements (FTA) with neighboring countries like Nepal, Bangladesh, Sri Lanka, Myanmar and Thailand. If isolation was the cause of economic backwardness, will not these treaties benefit the North East? Or are there constraints or policies due to which North East will once again be left in the lurch.

The first section of the paper reviews the integration of the northeastern region in the economy of independent India and the resulting backwardness in the region. The next section reviews the recent policies of liberalization and promotion of regional trading arrangements like Free Trade (FTA) and Preferential Trading Arrangements (PTA). The last section evaluates the prospect for the North East through regional trade and economic exchanges with the neighboring countries.

Historically, the North East had extensive links with the neighboring region of Tibet, Bhutan, Burma and Indo-China. It formed the southern trail of the silk road.1 However, as India became an important colony for Great Britain; barriers were erected between Bhutan and Assam, while traditional links with other countries acquired a strategic hue. Soon Burma and Tibet became the Empire’s buffer against the French in Indo-China and Russia in the north, disrupting economic ties (Baruah, 2004). Baruah calls this disruption of old trade routes as ‘˜colonialism‘s most enduring negative legacy.’

Despite this legacy, prior to 1947, the region comprising the North East had substantial economic and social intercourse with the neighboring countries. East Bengal (later called East Pakistan and ultimately Bangladesh) was well integrated with the North East. There is evidence that trade and migration into territories today comprising Tibet, Myanmar, Yunnan province of China, Nepal, Bhutan and Sikkim were important to the economy of the region (Baruah, 2004).

However, partition and independence ended whatever remained of this intercourse. The partition transformed the region at the crossroad of emerging Asia, into a landlocked outpost of a large continental economy. The huge landmass comprising the seven states (Assam, Arunachal, Manipur, Meghalaya, Mizoram, Nagaland and Tripura), approximately 225,000 sq. km., was now cut off from its hinterland by the creation of East Pakistan. Linked by 37 km. wide Siliguri corridor with the rest of India, it soon lost its natural advantage as its integration with the economy in the south and the west was disrupted by trade and industrial policies pursued by independent India.

The partition of the country and the slow decay of rail, road and river links with the territories of East Pakistan, due to increasing hostilities, further disrupted trade and economic activity in the North East. This isolation was accentuated during the mid-1960s as war on Kashmir, communal violence in East Pakistan led to tearing of rail lines and closure of bus routes.

In the first two decades of planned development, the region was transformed from being a potential outpost for trade with neighboring countries emerging from colonial rule and war, into a small captive market for the produce of the Indian hinterland. Its exports of tea and forest produce, though an important source of export earnings initially for India, soon lost their importance as Indian exports diversified towards manufactures. Its petroleum, whether in crude form or processed, ultimately found its way to the major markets in the north and western states of India.

Though there is little research on the link between the effect of isolation and trade disruption on the extent of poverty in the North East, there is little doubt that the impact on the region was highly regressive (Verghese, 2001).

Today, the region also has very high levels of absolute poverty, measured as number of persons with income below US$ one per day. The eastern region of India has poverty levels ranging between 41% for West Bengal to 58% for Bihar while the North East states fall in between this range. In other words, the eastern region has absolute poverty ranging between 42-58% making this one of the most backward regions in India. Its per capita income too is far below the national average, with Assam having a per capita income of Rs. 10,000 in 2001-02, compared to Rs. 18,000 for India.

The structure of the economy in the region resembles the economy of the least developed parts of the globe, with the primary sector accounting for 55-60% of the income, and underdeveloped secondary and tertiary sectors. The secondary sector constitutes only a meager 11-16% of the total income, making it India’s industrially most backward region (India, 2004).

The human development indicators (HDI) too are equally dismal. In terms of infant mortality the states of the North East are ranked far below the national average. States like Arunachal and Tripura have child mortality rates above 1002 (NCAER, 2004). In terms of HDI, the only exception to this dismal situation seems to be the high rates of literacy in many of the states of the North East. It would not be unfair to say that the social and economic trends in the North East diverge radically from the rest of the country.

The fact that North East is today the most backward region in the country is fairly well known. That this backwardness is the direct result of policies pursued by the Central government is inadequately appreciated. The impact of the development strategy followed by independent India was highly regressive to the region. India’s industrialization strategy during the period of 1956-1991 was based on import substitution and was biased against exports. During this period India erected high tariff walls and quotas were put in place under the import licensing regime to foster industrial growth.

The border conflict with China in 1962 and the deterioration in India’s relations with Pakistan led to a disruption of rail, road and river links between the North East and other eastern states and the neighboring countries. Here was the North East region with a 37 km. link with India, but with 4500 km. of border with the newly emerging nations of Asia, comprising, of China, Burma (Myanmar), East Pakistan, Bhutan, and Nepal. Yet the trade and industrial policies failed to use these links and potential access to its advantage.

The policies promoting import substituting industrialization and high tariff walls and regime of strict import licensing not only shut out so-called non-essential imports from western countries, but also barred simple consumer goods from traditional neighbors. India’s economic ties with the smaller neighbors like Nepal, Bangladesh, Burma and Tibet dwindled significantly, with regressive impact on economic agents engaged in such trade. The impact on states of the North East varied, but all were affected negatively.

In other words, the government of India’s policies on trade and industry and its inward looking economic strategy deprived the northeastern states of their natural markets and access to products produced in the neighboring countries just across the border. All products consumed in the North East came to be imported from distant manufacturing regions in India. The cement came from Orissa and Madhya Pradesh while chemicals came from Gujarat and Maharashtra, adding substantially to the landed cost. A World Bank study estimated that costs of logistics and damages added 60% to the cost of a bag of cement and 14% to general cargo, moved from Calcutta to the North East (World Bank, 2001).

The Central government has tried to compensate for this high transport and logistics costs by providing some transport subsidy. Thus the railways were asked to carry goods at a marginally concessional rate while products produced in the North East were offered similar transport subsidy. These subsidies have, however, failed to offset the disadvantage of the region. The northeastern states could easily procure many of these goods from across the border at a fraction of the cost goods transported from distant Indian sources. But the policy induced isolation that barred access to the neighboring sources of commodities and markets for its produce subjected the region to very high economic cost.

The Indian government also offered backward area subsidies and concessions for locating new industries in the states comprising the North East region. Given the fact that the neighboring markets were cut off, all produce (e.g. refined petroleum products from refineries at Digboi, Guwahati and Numaligarh) had to be shipped at high cost and delays to the markets in the Indian hinterland. In the presence of free trade and open borders, the North East would have attracted industry to cater to the emerging markets in Bangladesh, south-west China, and Indo-China. With closed borders, there would be little economic justification for locating industry in this remote corner as local markets were small and consumer spending too low to provide economies of scale.

It is hardly surprising that though India has made rapid industrial progress, the entire northeastern region has remained largely an agrarian economy. The only industries that came up were set up by the public sector. The North East’s ties with the Indian hinterland have been expensive and regressive.

However, even more significant is the social and political tension nurtured by isolation and lack of economic opportunities amongst the youth. The North East was soon transformed into a troublesome region, with fissiparous trends that needed to be curbed with the armed might of an emerging Indian state; a region whose future did not fit into the vision India had set for itself. Economic engagements with the neighboring countries came to be based on the strategic and military posture of the governments in New Delhi, rather than a development paradigm.

The successive regimes in Delhi have been unable to appreciate the consequences of their isolationist policies as they curtailed social and economic links of the North East region with its neighbors. To disinterested regimes consolidating power in the remote centre of Delhi and with grand designs of independent industrialization, the North East was best left to army and police to manage, while the only development objective seemed to be to build infrastructure to militarily secure its frontiers.

As mentioned above, from 1991 the Indian state made a radical shift in its economic policies. Trade barriers have been dismantled, import licensing abolished and foreign investment welcomed in most sectors of the economy. In addition, India has tried to promote Preferential Trade Arrangements (PTAs) with the neighboring countries, even by going outside the SAPTA/SAARC framework and entering into bilateral trade agreements. India is also committed to regional trade through initiatives like South Asia Growth Quadrangle (SAGQ), South Asian Subregion for Economic Cooperation (SASEC), Bangladesh-India-Myanmar-Sri Lanka-Thailand-Economic Cooperation (BIMSTEC), etc. India is trying to link up with the Greater Mekong Subregion of which China is a partner along with Myanmar, Thailand, Laos, Cambodia and Vietnam, and has renewed its trade ties with Myanmar. Last year, India signed a Free Trade Agreement with Thailand.

Will these initiatives open up a new chapter for the North East? Or, will these initiatives once again result in economic trends that will bypass the North East? To answer these questions we need to review India’s recent experience with regional trade initiatives and the result this has had on India’s trade with its neighboring countries and the impact of this trade on the backward region of eastern and north eastern India.

During the 1990s, India offered Preferential Trade Arrangements (PTA) to all the member countries of SAARC/SAPTA. Under this the SAPTA members were required to pay only 50% of the custom duty levied on imports. However, given the high tariffs and numerous non-tariff barriers there was little increase in exports to India under the PTA. There were also a large number of non-trade barriers and transit restrictions that aborted possibilities of rapid expansion of trade (Khanna, 2002). The most significant of the non-tariff barriers was the restrictions on transit, visas and custom regulations. Local content requirements (stipulation that at least 30% value addition in domestic market) and quarantine regulations on agriculture commodities meant that the so-called PTA was a smoke screen behind which India protected its market from even its weak neighbors.

However, from the mid-1990s, the government led by I.K. Gujral made a serious attempt to promote regional trade. India offered unilateral trade concessions to its neighbors and encouraged them to export to India. Indian firms were encouraged to invest and source from these countries. Nepali goods were granted duty free access to the Indian market in 1996 and Sri Lanka in 2000. Other members of SAARC were offered lower tariffs and possibilities of FTA if they signed bilateral treaties with India (Khanna, 2002).

In 1995, India made attempts to improve its political and economic ties with the military regime in Myanmar. The Indo-Myanmar border trade was inaugurated in April 1995 with the opening of the border trade along the Tamu (Myanmar)-Moreh (Manipur) sector. Recently, more trading routes, especially at Longwa, Rih and Pangsau Pass, have been opened.

A developed trade across Indo-Myanmar border will be of advantage mainly in reduced costs while accessing the market of South East and even East Asian countries. Despite this potential, the trade through the Manipur-Myanmar route has remained small and insignificant, amounting to a few crores per year and with little impact on the regional economy.

For the first time, India has initiated FTA with Thailand and is in the process of negotiating similar agreements with Singapore and Malaysia. In other words, India is keen to expand its free trade initiative to countries outside the SAARC region. FTA with Thailand is likely to facilitate Indian access to the Indo-China region and become a partner in the Greater Mekong Sub region initiative as well as the rapidly growing ASEAN region.

The PTAs, on the other hand, have failed to foster trade as shown by the Indo-Bangladesh and Indo-Myanmar experience. The slow progress in economic ties with these countries is due to the military and security establishment playing a major role in shaping India’s foreign policy to these two countries. Trade with both these countries has been stagnant and there seem to be differences with Bangladesh over transit arrangements that India seeks for its links to the North East, about the existence of training camps for insurgents in their territory. Similarly, trade with Tibet and Yunnan provinces of China have been totally absent, though India and China have agreed to initiate border trade through the Himalayan pass between Tibet and Sikkim. It needs to be noted that trade routes between Arunachal Pradesh and Tibet are still closed in the absence of a border agreement and links to Yunnan through Manipur, Mizoram or via Myanmar is not on the horizon.

This dramatic expansion of India’s trade and economic ties with Nepal and Sri Lanka, where with FTA trade has expanded several fold, points to the potential gains from trade that were undermined by restrictive policies. It also points to the gains that North East states can reap if they too are encouraged to tap neighboring markets across the border rather than manufacture for the distant Indian consumer.

It is clear that in the days to come India is willing to pursue closer trade and economic ties with its eastern neighbors, and there are possibilities for the entire north eastern region to seize its place as India’s eastern entrepot.

We have argued above that the closure of the borders between the North East and the neighboring countries to the north, east and south (Tibet/China, Myanmar and Bangladesh) has been regressive on the economy and society in the North East. The question to ask is: Will the North East gain from India’s opening to the neighboring countries in the east? In other words, will India’s Look East policy usher in a new era of economic growth and increasing trade and commerce in the region?

The accompanying table provides data on India’s direction of trade during the last 15 years. It needs to be emphasized that with outward looking policies, India’s foreign trade, which was below $ 40 billion in the early nineties, has risen dramatically to US$ 140 bn. by 2003. Foreign trade as a ratio of Indian GDP has risen from 12% in early ’90s to more than 23% by 2003, pointing to increasing openness of the economy.

There has also been substantial progress in India’s trade with other developing countries and with Asia, thanks to the ‘˜Look East’ policy. The share of developing counties has doubled to about 30% of India’s trade, while Asia’s share has doubled to 24.2%. In other words, about a quarter of India foreign trade now comes from its Asian neighbors.

India’s immediate neighbors in South Asia too have found easier access to the Indian market and have trebled their share, though it is still very small and far below the potential. India’s trade with countries bordering the North East has seen the most dramatic expansion, with the share going up more the five times (from 1.7% to 8% (see table). This dramatic expansion of trade with India’s eastern neighbors has had little or no impact on the North East. Most of this trade expansion has taken place through the seaports. It would not be incorrect to argue that the North East has once again been marginalized. India is Looking East, but not through its contagious borders!

TABLE

India’s Trade with Asia and North East Neighbors*

1987-88 1992-93 1997-98 2003-04(p)
India Total Trade ($ mill) 29244.2 40418.8 76490.9 140486
Percentage Share
Share of Developing Countries 16.0 21.1 26.1 30.3
Share of Asia 12.0 16.5 19.9 24.2
Share of SAARC 1.3 2.3 2.4 3.3
NE Neighbors 1.7 2.6 4.6 8.0

* North East Neighbors include Bhutan, Nepal, Bangladesh, China and Thailand

It needs to be emphasized that the physical infrastructure for facilitating trade and economic links between the North East and the neighboring countries is largely absent. Indeed, one can argue that the links are weaker today than they were in 1947. The Stilwell Road is now a mere muddy track and the rail links with Bangladesh stand severed. Infrastructure bottlenecks and delays at border points add substantially to the transaction cost in international trade. It is hardly surprising that with closed borders and open ports, the North East is not part of India’s trade expansion strategy with eastern neighbors.

Hence, in all probability the bulk of trade with the Greater Mekong Sub region, Bangladesh and ASEAN is likely to move through the international sea lanes, completely bypassing the North East region. The regions gaining so far are the hinterlands of Chennai, Vizag and the Calcutta port on the eastern flank. It would be reasonable to argue that given the state of infrastructure and the poor state of road, rail and air links with the neighboring countries in the North East, the bulk of the trade is likely to move through the sea ports of India.

For the North East to gain from India’s PTA and FTA with the economies of the east, the key variables are transit arrangements, proliferation of trade routes and custom check post, easy visa regime making it possible for traders, businessmen and transport operators to move in and out of the region. For this to be possible would require substantial investments in infrastructure, construction of highways and bridges, re-establishment of rail links and communication facilities. The Shukla Committee on ‘˜Transforming the Northeast’, estimated such investment to exceed Rs. 25,000 crores.

However, it is not the investment that is the key issue. It is colored glasses through which policy-makers perceive the region and its problems that is the main road block. India’s entire policy towards the North East region has been heavily colored by the security establishment and the armed forces in the name of fighting insurgency and securing its eastern frontier. They are suspicious not only of the region’s economic, but also ethnic and social ties with the neighbors. Not only is India’s Look East policy totally devoid of any plans to seriously end the isolation of the North East and open up the region to the neighboring countries, its policy-makers are downright suspicious of such links. Yet, in the absence of such an initiative to open borders with neighboring countries, it is unlikely that the North East will gain in any material sense from India’s Look East policy.

A serious attempt to integrate the North East provides innumerable possibilities of economic transformation. The vast hydroelectric resources can be harnessed to export electricity to the neighboring countries. An integrated plan of harnessing hydrocarbon resources with a grid of pipelines to move gas and petroleum products into the entire region is another possibility. Harnessing the vast river networks to move goods cheaply in and out of the region would substantially add to its attractiveness as an investment destination. Investments in large plants catering not only to the North East but to the neighboring markets in Bangladesh, Nepal, Tibet-Yunnan are also possible. But so far there seems to be no such initiative on the horizon.

Footnotes:

1. The term refers to trails that connected western China with central and South Asia.

2. Manipur is an exception, with child mortality below 35.

References:

Sanjib Baruah (2004), ‘˜Between South and Southeast Asia Northeast India and Look East Policy’, Ceniseas Paper 4, Guwahati.

India (2004), Economic Survey, Delhi.

India (1997), Transforming the North East, High Level Committee Report, Planning Commission, New Delhi.

Sushil Khanna (2002), ‘˜Trade and Investment in South Asia Sub Region: Barriers and Opportunities’, IIM Calcutta, mimeo.

NCAER (2004), East India: Human Development Report, New Delhi, OUP.

B.G. Verghese (2001), ‘˜Unfinished Business in the Northeast: Pointers Towards Restructuring, Reconciliation and Resurgence’, Seventh Kamal Kumari Memorial Lecture, http://www.freeindiamedia.com/economy/19_june_economy.htm

John Walley (1996), ‘˜Why Do Countries Seek Regional Trade Arrangements’, NBER Working Paper 5552, Washington.

World Bank (2001), Forging Subregional Links in Transportation and Logistics in South Asia, Washington.

*The paper is written by Sushil Khanna

*Presented as part of the “Gateway to the East”- a symposium on North-East India and the Look East Policy, June 2005

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