THE northeastern region of India has often been visualised 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 neighbours 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 have 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 neighbours. 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
neighbouring 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 liberalisation
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 neighbouring countries.
Historically,
the North East had extensive links with the neighbouring 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 neighbouring 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 neighbouring 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 meagre 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 neighbouring 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 industrialisation 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 neighbours. India’s economic ties with
the smaller neighbours 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 neighbouring
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 neighbouring 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 neighbouring 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 neighbouring 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 neighbours. 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 neighbouring 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 neighbouring 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 neighbours.
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 neighbours 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 neighbouring 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 neighbours, 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 neighbouring 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 neighbouring 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 emphasised 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 neighbours.
India’s
immediate neighbours 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 neighbours 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 marginalised. India is Looking East,
but not through its contagious borders!
Table
India’s Trade with Asia and North East Neighbours*
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
Neighbours |
1.7 |
2.6 |
4.6 |
8.0 |
* North East Neighbours include Bhutan, Nepal,
Bangladesh, China and Thailand
It
needs to be emphasised that the physical infrastructure for facilitating
trade and economic links between the North East and the neighbouring
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 neighbours.
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 neighbouring 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 coloured 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 coloured 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 neighbours. 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 neighbouring countries,
its policy-makers are downright suspicious of such links. Yet, in the
absence of such an initiative to open borders with neighbouring 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 neighbouring 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. Investment in large plants catering not only to the North
East but to the neighbouring markets in Bangladesh, Nepal, Tibet-Yunnan
are also possible. But so far there seems to be no such initiative on
the horizon.