Academic journal article Indian Foreign Affairs Journal

Invigorating India's Economic Diplomacy in South Asia

Academic journal article Indian Foreign Affairs Journal

Invigorating India's Economic Diplomacy in South Asia

Article excerpt

Indian diplomacy has been carving a niche for Indian business overseas since the rise of India's economic power. It has been establishing networks in Africa, Latin America, West, East and South East Asia to boost Indian business, and to secure energy assets abroad. India can now offer large credit lines, frontier technology in many fields, and is among the leading investors across the world.

However, the notable increase in India's trade and total outward investment in recent years has not been reflected it its economic engagements in the South Asian region which is its immediate neighbourhood. India's merchandise exports to South Asia accounted for only 5 per cent of India's total goods exports in 2013. India imports only 0.5 per cent of its total imports from South Asia. On an average, Indian exports constituted less than 13 per cent of South Asian goods imports in 2012. South Asian countries trade less with each other, and more with Western countries like Europe and North America to which they export goods like agricultural products, textiles, garments, and labour while importing capital goods and petroleum. Despite territorial proximity, there has been low regional trade due to high transaction cost, high tariffrates, and a large negative list. They have similar export baskets, and compete with each other for the regional market. Nearly 53 per cent of intra-SAARC imports are currently restricted under the sensitive list.

The focus of India's outward investment has been overwhelmingly outside its neighbouring region. South Asian nations account for less than 3.5 per cent of India's total outward FDI.1 On the recipient side, firm-level data show that between 2002 and 2006, Indian firms invested not more than US $20 million per year in South Asia, which constituted less than four per cent of FDI received by these countries.2 The regional share of Indian outward investment has declined continuously: from 4.5 per cent in 2003-04 to a mere 0.1 per cent in 2006-07.3 However, during the period 2008-10, about 90 per cent of Indian aid was channelled to South Asian countries.

South Asia has constantly remained in conflict due to religion, caste, ethnicity, and border disputes since decades, creating inappropriate backgrounds not only for regional economic integration but also to feed looming security threats to India from non-state actors. India's diplomatic energy is now being directed towards its neighbours in South Asia. While much has been articulated by the present government on the role of India's South Asian neighbours in fostering its growth, a paradigm shiftis required in projecting India as a development partner in the South Asian growth and stability. India encompasses more than 75 per cent of the region's GDP, and more than 70 per cent of the population. It also wields relatively enormous military and economic power in the region. Most South Asian nations have common borders with India, and their territorial dependency on India for regional and international trade is high. Thus, regional integration in South Asia will not succeed without India's active participation and sincere political commitment.

South Asian regional economic integration is critical for the development of mutual trust, economic growth, social cohesion, and shared cultures - all of which could lead to reduced hostility and security threats. The region faces common development challenges of energy security, poverty reduction, unemployment, and the removal of socio-economic disparities. Through its economic diplomacy, India can create mutually beneficial energy assets, generate diverse production capacity by slicing the value chain of skills, capital or technology intensive goods, and shiftthe labour-intensive sections to lowwage locations. Though India is the largest regional investor in some South Asian countries, its investments are largely market seeking. Evolving a regional production structure helps the neighbouring countries to improve their Balance of Payments vs. …

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