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 logistic 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 Subregion 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 Subregion, 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
crore.
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.
***
Presented as part of the "Gateway to the
East"- a symposium on NorthEast India and the
Look East Policy, June 2005 |
