Decomposing the Dynamics of Intra-Regional Investments in South Asia

Decomposing the Dynamics of Intra-Regional Investments in South Asia

by

Dr. Vighneswara Swamy

The potential for faster growth in South Asia, through greater intra – regional investment flows is substantial. South Asia has many unexploited opportunities for embodied knowledge transfer and supply-chain linkages. Liberalizing policy constraints in both trade and investment, and improving the enabling business conditions through minimum government and maximum governance with transparency could help to substantially improve the regional economic cooperation and integration in South Asia. Nevertheless, compared to other regions, why South Asia has very little intra-regional cross-border investments? While ASEAN in the neighborhood is growing at significant pace with considerable intra-regional investments, what ails the South Asia in this regard? Why has South Asia failed to recognize the potential gains from intra-regional investments? Which are the barriers that hinder these investment flows in the region? Why South Asia is unique?

South Asia, home to a population of 1.671 billion with human density of 400 persons per square kilometer, accounts for almost 23.45 % of the world’s population, but only 3.1% of the world’s GDP. Though South Asia has experienced a long period of robust economic growth, averaging 6% a year over the past 20 years, yet poverty remains widespread with the world’s largest concentration of poor — more than 500 million who live on less than $1.25 a day. The explanation in part could be attributed to the inward looking policies pursued by the South Asian governments, the overt dominance of the state in almost all spheres of economic activity, and the singular lack of emphasis on human and social development.

World Development Indicators reveal that growth in South Asia weakened to an estimated 4.86% in 2012 (6.32% in 2011) from 7.4% in 2010, mainly as a result of a slowdown in India, where GDP growth was forecast to be 5.4% in March 2013 (refer Table 1).Weak global demand has exacerbated region-specific factors, including subdued investment growth, electricity shortages, policy uncertainties, and a weak monsoon. Regional GDP is projected to grow by 5.7% in the 2013 calendar year, 6.4% in 2014, and 6.7% in 2015, driven by improvement in export demand, policy reforms in India, stronger investment activity, and normal agricultural production.

Table 1: Growth in South Asia

Country/Region	GDP growth
	2011	2012
Afghanistan	6.11	14.39
Bangladesh	6.71	6.23
Bhutan	8.51	9.44
India	6.64	4.74
Maldives	7.05	3.42
Nepal	3.42	4.85
Pakistan	2.79	4.02
Sri Lanka	8.25	6.41
South Asia	6.32	4.86
World	2.88	2.37
Source: World Development Indicators May 2014  – World Bank Data

Growth in South Asia has been disappointing and although vulnerabilities are declining, they remain. While further (disorderly) adjustment of long term interest rates remains as a tail risk for macroeconomic stability and growth, the weight is shifting towards domestic challenges.

Table 2: South Asia’s Macro Indicators

Region	Indicator	2011	2012	2011    SA/World	2012   SA/World
World	Exports of goods and services (current US$ bn)	22509	22769
SA	Exports of goods and services (current US$ bn)	524	520	2.33	2.29
World	GDP per capita (current US$)	10224	10318
SA	GDP per capita (current US$)	1416	1396	13.85	13.53
World	Imports of goods and services (current US$ bn)	21889	22138
SA	Imports of goods and services (current US$ bn)	684	694	3.12	3.13
World	Merchandise exports (current US$ bn)	18415	18447
SA	Merchandise exports (current US$ bn)	365	355	1.98	1.92
World	Merchandise imports (current US$)	18490	18559
SA	Merchandise imports (current US$ bn)	580	602	3.13	3.24
World	Merchandise trade (% of GDP)	51.63	50.69
SA	Merchandise trade  (% of GDP)	40.98	41.54
World	Portfolio equity, net inflows (BoP, current US$ bn)	268	776
SA	Portfolio equity, net inflows (BoP, current US$ bn)	(4)	23	-1.60	3.01
World	Service exports (BoP, current US$ bn)	4353	4438
SA	Service exports (BoP, current US$ bn)	154	163	3.55	3.68
World	Service imports (BoP, current US$)	4118	4222
SA	Service imports (BoP, current US$)	146	153	3.55	3.62
World	Trade (% of GDP)	61.19	60.56
SA	Trade (% of GDP)	52.04	52.49
World	Trade in services (% of GDP)	11.83	11.84
SA	Trade in services (% of GDP)	13.04	13.73

Source: World Development Indicators - May 2014

According to the World Development Indicators (May 2014), South Asia’s GDP per capita (US$ 1416) is a meager 13.85 percent  of the world’s per capita GDP (US$ 10224) in 2011 and indeed declined to (US$ 1396) 13.53 percent of the world’s per capita GDP (US$ 10318) in 2012 (refer Table 2). Further, South Asia’s share of export of goods and services in the world has decreased from 2.33 percent (US$ 524 bn) in 2011 to 2.29 percent (US$ 524 bn) in 2012. The share of import of goods and services has slightly moved from 3.12 percent (US$ 684 bn) in 2011 to 3.13 percent (US$ 694 bn) in 2012. Share of South Asia in the world’s merchandise exports is a meager 1.98 percent (US$ 365 bn) in 2011, which further declined to 1.92 percent (US$ 355 bn) in 2012. However, the share in merchandise imports grew from 3.13 percent (US$ 580 bn) in 2011 to 3.24 percent (US$ 602 bn) in 2012. The share of service exports has moved from 3.55 percent (US$ 154 bn) in 2011 to 3.68 percent (US$ 163 bn) in 2012. On the financial front, the equity portfolio flows, the share of South Asia is -1.6 percent (minus US$ 4 bn) in 2011, which in turn has turned positive to 3.01 percent (US$ 23 bn) in 2012.

Regional inflation in South Asia remains the highest among developing regions, even though monetary policy has been broadly tightened. Fiscal deficits and public debt in the region remain large, thereby constraining the policy space. The aver­age fiscal deficit across South Asian countries was estimated to be 6.7 percent of GDP in 2013, down from 7.5 percent in 2012. The gross public debt as an average annual percent of GDP particularly that of India and Pakistan has already crossed the threshold levels and is a cause of concern (refer Table 3).

Table 3: Fiscal Indicators of South Asian Economies

Country	CPI inflation rate (Average annual % growth)	Gross public debt (Average annual % of GDP)		International reserves (Average annual % of GDP)
	2010–2012	2005–2007	2010–2012	2005–2007	2010–2012
Afghanistan	6.2	..	..	..	33.8
Bangladesh	9.7	..	..	6.2	9.9
India	9.1	78.4	67.2	19.2	16.1
Nepal	9.5	48.1	34.0	20.1	18.7
Pakistan	10.8	59.4	61.4	10.4	7.5
Sri Lanka	6.8	..	..	10.7	12.2

Source: World Development Report 2014

Investment flows into South Asia has not gained the requisite momentum in the last two years. FDI net inflows as percent of GDP for the world were at the level of 2.50 percent in 2011 and 2.08 percent in 2012 (refer Table 4). However, South Asia received net inflows at 1.75 percent to GDP in 2011 and at 1.19 percent in 2012. Maldives (11.91%; 12.78%) is the only country to perform above average net inflows during 2011 and 2012. The major economy in the region – India could experience 1.94 % in 2011 and 1.29% in 2012. Sri Lanka with1.51 % in 2012 performed better than India though with a background of politically destabilized past.

Table 4: FDI Inflows into South Asia

Country	FDI Flows
	2011	2012
Afghanistan	0.51	0.46
Bangladesh	1.02	1.01
Bhutan	1.42	0.54
India	1.94	1.29
Maldives	11.91	12.78
Nepal	0.49	0.49
Pakistan	0.61	0.38
Sri Lanka	1.62	1.51
South Asia	1.75	1.19
World	2.50	2.08
Source: World Development Indicators May 2014  – World Bank Data Note: Foreign direct investment, net inflows (% of GDP)

Despite the establishment of the South Asian Association for Regional Cooperation (SAARC) in1985 to promote economic growth and development through active regional collaboration and cooperation, and the SAARC Preferential Trading Arrangement (SAPTA) and the South Asian Free Trade Area (SAFTA) which took effect in 1995 and 2006, respectively, to accelerate trade and foster deeper integration and regional cooperation, full liberalization and cooperation is yet to take off. High levels of protectionism by the participating countries continue to persist. South Asia yet suffers from prohibitive tariffs and high inter-state barriers to trade. Interstate mobility is hampered by stringent visa rules. Furthermore, the exclusion of services and investment from SAFTA renders the agreement toothless in major areas as the intra-regional investment, as well as trade, within the region remains meager.

The above-portrayed big picture necessitates an increased attention and focused cooperation by the South Asian governments to increase their economic cooperation and speedier integration of South Asian economies for faster growth and economic prosperity. The promotion of growth through increased trade and investment and deeper regional economic integration, hold much promise towards further reductions in poverty in the South Asian region. As the World is globalizing, South Asia too is changing its perspective on globalization and is adopting a more outward economic orientation. Though there is some resistance to South Asian regional cooperation particularly because of the region’s long history of political conflict and a somewhat unyielding protectionist stance, South Asia is warming up to the policies of liberalization and openness and hence the reforms are under way.

The political environment in South Asia has taken a new look after the Indian Prime Minister Mr. Modi’s invitation to SAARC heads of governments for his swearing-in-ceremony following his decisive victory in May 2014. Mr. Modi has put new life into SAARC and has conveyed the message that all SAARC nations need to develop, survive, and prosper together. He followed his South Asia initiative by making his first foreign visit to Bhutan. Further, after witnessing the successful launch of the India’s Polar Satellite Launch Vehicle (PSLV-C23), Mr. Modi called upon the Indian space community to take up the challenge of developing a SAARC satellite that can be dedicated to our neighborhood as a gift from India. Mr. Modi’s government is mooting the idea of a SAARC bank in the lines of BRICS bank to take forward its South Asia initiative. This renewed vigor in South Asian cooperation needs to be exploited for the betterment of millions of poor in the region.

Given this context, we derive compelling motivation to undertake a comprehensive study to decompose the dynamics of intra-regional investments in South Asia apart from showcasing the benefits of regional cooperation and integration to present policy recommendations to realize such gains. South Asia needs to go beyond its history and look toward the immense potential of regional cooperation and integration in the areas of trade & investment, employment, and development. To make the study holistic, we propose to undertake country investment studies to address the issues surrounding intra-regional foreign direct investment in all the South Asian countries, duly address the specific constraints, and assess the potential for intra-regional investments in each country. There is also a need to present an informed latent viewpoint about these flows by examining emerging trends and patterns of intra-regional investments in South Asia. Though, there exists a large strand of literature that investigate the cross-border investment flows, we find very few studies that examine the intra-regional investments particularly in South Asia. The researcher has a strong intuition to bring out a Theory of Osmotic Movement of Intra-Regional Investments (TOMIRI) by providing empirical evidence to the hypothesis.