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India, China and Neighbourhood
Context:
As the Maldives implements its Free Trade Agreement (FTA) with China after years of delay, India faces a critical juncture in shaping its economic strategy in South Asia.
Key Challenges in Regional Trade
- Protectionism and Barriers: South Asian countries continue to adopt protectionist policies, limiting the impact of existing FTAs such as the India-Sri Lanka Free Trade Agreement (ISFTA) and the South Asian Free Trade Agreement (SAFTA).
- Issues like para-tariffs, non-tariff barriers, and similar production bases hinder regional trade.
- Infrastructure and Connectivity Deficits: High logistics costs and inadequate infrastructure hamper effective trade integration.
- Initiatives like the BIMSTEC FTA have been delayed, leaving South Asia as one of the least connected regions globally, with regional trade accounting for less than 5% of total trade.
China’s Economic Influence
- FTAs and Investments: China has signed FTAs with Pakistan (2006) and the Maldives and is negotiating similar agreements with Bangladesh and Sri Lanka.
- Its distinct manufacturing capabilities, low-cost goods, and well-established supply chains make it a dominant trading partner.
- Strategic Ambitions: Through the Belt and Road Initiative (BRI), China aligns its economic agreements with geopolitical goals, facilitating cheaper exports and accelerating infrastructure projects in South Asia.
Regional Economic Aspirations
- Economic Needs: Countries like the Maldives, Bangladesh, and Sri Lanka are turning to FTAs to address challenges such as rising import costs, limited production capacity, and low foreign reserves.
- Bangladesh, set to graduate from least-developed country status in 2026, seeks alternatives to retain trade competitiveness.
- Engagement with India: South Asian nations express strong interest in deeper integration with India, drawn by its economic growth.
- Maldives and Bangladesh are exploring FTAs with India, while Sri Lanka seeks to upgrade its FTA into an Economic and Technology Cooperation Agreement (ETCA).
India’s Response and Concerns
- Rising Chinese Influence: India fears Chinese FTAs will allow cheap goods to flood South Asian markets, undermining local economies and replacing Indian exports.
- Trade data highlights China’s growing dominance, with significant increases in exports to Sri Lanka, the Maldives, and Bangladesh between 2010 and 2022.
- Hesitation on FTAs: India’s scepticism over Chinese imports has reportedly led to a pause in FTA negotiations with Bangladesh, highlighting the need for a recalibrated approach.
Way Forward: A Proactive Strategy
- Accelerate FTA Negotiations: Expedite talks with Bangladesh, the Maldives, and Sri Lanka to strengthen economic ties and counterbalance Chinese influence.
- Reduce Protectionist Barriers: Open Indian markets to smaller South Asian economies while safeguarding against an influx of Chinese goods.
- Enhance Connectivity: Invest in regional connectivity projects, leveraging concessional loans and grants to solidify economic interdependence.
- Promote Regional Trade Integration: Reinvigorate stalled initiatives like the BIMSTEC FTA and encourage greater trade within South Asia.
India’s scepticism toward Chinese FTAs, while justified, must not translate into inaction. By adopting a proactive, inclusive approach and engaging its neighbours more robustly, India can reinforce its role as a regional economic leader and prevent its markets from being overshadowed by Chinese goods. Emphasising collaboration, connectivity, and competitive trade policies will be pivotal in shaping South Asia’s economic future.
