THE gravity model of international trade, in its simplest form, predicts that trade between two countries/regions is a function of the distance between these two regions. By this metric, there should be substantial trade flows between India and Central Asia because even though India does not share a border with any Central Asian country, it remains extremely close to the region. Most Central Asian capitals are closer to New Delhi in radial distance than a few Indian cities in the South and the North East. So, do existing trade flows and economic engagement between India and Central Asia fall in line with the prediction of the gravity model?

Historically, cultural linkages between India and Central Asia date back to the heyday of the ancient Silk Route, when trade flourished between the two regions. The Mughal Empire, which shaped India’s medieval (and early modern) history, also drew its origins from the Central Asian region. However, the discovery of a sea route from Europe to India via the Cape of Good Hope reduced the significance of the Silk Route as a trade and transit hub for India. In addition, the imperial Russian conquest of Central Asia and the British conquest of India erected further barriers between the regions due to mutual suspicions among those rival imperial powers.

The stage for re-engagement was set in June 2012, at the first India-Central Asia dialogue, a track II initiative to enhance cooperation, which was held in Bishkek. During his keynote address, then Indian Minister of State for External Affairs, E. Ahamed, for the first time expounded a coherent Indian foreign policy approach towards the Central Asian region. Stating that India’s economic engagement with Central Asia had not kept up with the country’s political and cultural interaction with the region, Ahamed stated that India would be looking at the Central Asian region through its renewed ‘Connect Central Asia’ policy, based on ‘pro-active political, economic and people-to-people engagement.’¹ He added that, given the challenge of rebuilding Afghanistan, including it in a ‘more meaningful regional economic and security framework’, would have benefits for the entire Central Asia and South Asia region.

All in all, India’s 2012 ‘Connect Central Asia’ policy set out to reset ties between India and Central Asia and was to be consonant with India’s overall policy of deepening engagement with Eurasia. He emphasized the importance of strengthening political engagement, committing to exchange high level visits and interact in bilateral and multilateral formats. His keynote identified areas that offer potential for cooperation including energy and natural resources, agriculture, food processing, education, health, finance, construction, metallurgy and connectivity. He also underlined the importance of the International North South Transport Corridor, a trade corridor linking Russia with South Asia.

 

After close to seven years since the launch of the Connect Central Asia policy, has there been a drastic improvement in ties between the two regions? There has been an increase in high-level visits from India to Central Asia, which indicates growing interest in furthering cooperation. After coming to power in 2014, the Indian Prime Minister, Narendra Modi, visited Central Asia twice. In August 2018, former Indian External Affairs Minister Sushma Swaraj visited Kazakhstan, Kyrgyzstan and Uzbekistan in August 2018, along with making a ‘transit halt’² in Turkmenistan. In early 2019, Swaraj met the region’s leaders again at the first Central Asia-India dialogue at the level of Foreign Ministers, which explored how India’s economic involvement in the business and development sector of Central Asia could be enhanced.³

 

In terms of economic relations, India has the most comprehensive economic ties with Kazakhstan and, more recently, Uzbekistan. India and Kazakhstan signed a trade agreement in 1992 following the creation of the independent republic of Kazakhstan. Indian trade and investment in Central Asia has mostly been directed towards Kazakhstan (although the scale pales in comparison with Chinese investment in the country). During Indian Prime Minister Modi’s visit to Nur-Sultan (formerly Astana) in 2015, a business forum was held following which both sides signed a road map on trade as well as economic and investment cooperation.⁴

Since then, bilateral trade has doubled between 2015 and 2018.⁵ Foreign Direct Investment (FDI) from India totalled US$ 245 million between 2005-2017.⁶ In 2018, net FDI inflows from India to Kazakhstan stood at US$ 46.4m, equivalent to 1.2% of total FDI inflow into the country.⁷ A significant portion of Indian investment focuses on the oil sector. In 2009, Kaz Munay Gas, the Kazakh state oil and gas company, and India’s ONGC Videsh, signed an agreement to develop the Satpayev oil block in the northern part of the Caspian Sea. Two years later, ONGC Videsh bought a 25% stake in the oil block⁸ with ONGC Videsh funding all the exploration activity in the block. However, in September 2018 the company announced that it would be exiting the Satpayev block project owing to a lack of success in finding commercially exploitable oil.⁹

 

India signed an agreement on trade and cooperation with Uzbekistan in 1993 and the two countries have also signed a treaty on bilateral investment. According to the Indian Ministry of External Affairs, there are 113 companies with Indian capital operating in Uzbekistan, 19 of which are wholly backed by Indian investment. However, most of these companies are small with total investment limited to a few million US dollars. In terms of trade, Indian exports to Uzbekistan have been on the rise in recent years, with the opening up of the Uzbek economy. In 2017, Indian exports to Uzbekistan were US$ 131 million, overtaking Indian exports to Kazakhstan, which totalled just under US$ 120 million. Exports to Uzbekistan grew by 48% in 2018, amounting to US$ 193 million, significantly more than for Kazakhstan.¹⁰

This reflects a structural change – Kazakhstan, being the largest economy (in terms of overall GDP) was traditionally the largest destination of Indian exports. However, the latter remains the most important Central Asian exporter to India, and by a fair margin: Uzbekistan’s US$ 100 million in exports to India pale in comparison with Kazakh exports of US$ 750 million, mainly crude oil. Both Kazakhstan and Uzbekistan also export uranium to India.¹¹

 

This positive trend in Indian exports to Uzbekistan is likely to continue in the future and holds promise. India mainly exports pharmaceutical products and machinery to Uzbekistan, the most populous country in Central Asia, with a population of more than 32 million. With Shavkat Mirziyoyev’s government continuing to highlight the manufacturing sector as an important sector for growth, and Uzbekistan’s automotive industry serving as an important industry for the economy, there is promise that demand for machinery imports should maintain growth.

India’s economic ties with other Central Asian republics remain limited. In terms of trade relations, total trade turnover between India and Central Asia remains below potential and is significantly smaller than their trade with China. This is especially true for Indian exports to Central Asia. Although total exports breached the US$ 500 million mark in 2012 and reached a high of US$ 625 million in 2014, it started falling again in 2015.¹² This was due to a contraction in demand from Central Asia as a result of the regional economic slowdown in 2015-16, driven by falling global oil prices. While Kazakhstan, Turkmenistan and Uzbekistan depend on hydrocarbons exports to drive their economy, Tajikistan and Kyrgyzstan depend on remittances from Russia, which also in turn exports hydrocarbons.

 

The much touted International North South Transport Corridor (INSTC), a land and sea route connecting Mumbai, through Iran and Azerbaijan to Russia, is one of the few transport corridors in Eurasia that includes India. Initiated in September 2000, progress has been made in certain transport corridors within the participating countries (for example there has been progress in transport infrastructure upgrades in Azerbaijan and between Iran and Azerbaijan). However, missing links remain as the INSTC is plagued by the lack of a coordinated approach.

One of the few areas in which relations between Central Asian countries and India has had relative success is capacity building: there is steady engagement between Central Asian republics and India through the Indian Technical and Economic Cooperation programme. The ITEC, which is India’s development partnership programme, involves both capacity building as well as development assistance through limited lines of credit and disaster aid has generated participation even from isolationist Turkmenistan. In total, more than 400 Turkmen citizens have been involved in the ITEC programme since 1994.¹³ India has also been forthcoming with development assistance and project financing in Tajikistan. In the past, Indian companies have been involved in projects in Tajikistan’s power sector, but were superseded by Chinese financing.

The lack of natural gas trade between Turkmenistan, which has the world’s fourth largest gas reserves,¹⁴ and India reflects a glaring disregard of their trade complementarity. India’s demand for natural gas is significant and growing, with imports of natural gas increasing by 12.1% per year between 2007-2017. India imported US$ 12.2bn of petroleum gas in 2017.¹⁵ Seventy six per cent of this petroleum gas was imported from the GCC countries, with 43% of these imports coming from Qatar. In addition, India also imports petroleum gas from geographically distant locations such as Nigeria (6.8%), Australia (5.6%) and Angola (2.9%). These take the form of LNG imports and the country does not currently receive any gas via pipelines.¹⁶

 

Projects to increase energy trade (both hydrocarbons and electricity) between Central and South Asia have faced consistent delays and are unlikely to be completed in the near future. Take the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline for instance; the pipeline is supposed to transfer 33 billion cubic metres of gas to India per year. However, the project has met consistent delays owing to difficulties in obtaining financing.¹⁷ The economic retrenchment in Turkmenistan over the past few years is also likely to have hit the government’s capacity to fund the project.

Another project that could increase trade links between India and Central Asia is the CASA-1000 project, which aims to transport electricity generated in Tajikistan and Kyrgyzstan to South Asian countries. Although international financial institutions such as the Asian Development Bank and the World Bank support this project, progress has been slow.¹⁸ However, compared with the TAPI project, this is more likely to see the light of day. It bears mentioning that one of the factors impeding quick completion of these infrastructure projects is that they transit through Afghanistan. The resultant security concerns in Afghanistan discourages investors.

 

Evidence points out that countries and regions that share a common land border tend to trade more with each other than with those that do not. Therefore, the absence of a land border between India and Central Asia has hampered efforts to improve economic linkages. Although they share trade complementarities and proximity, trade between the two regions has remained far below potential. This contrasts sharply with the burgeoning trade and economic relations that Central Asian countries enjoy with China. As an emerging regional power in Asia, India’s relations with other Asian countries will always be compared with the relations that these countries have with China.

In terms of its engagement with Central Asia, China enjoys several advantages. First is the shared border with the Central Asian region across which goods can flow: the country shares a 1,783 km border with Kazakhstan and also shares borders with Tajikistan and Kyrgyzstan. Second, China also enjoys a ‘first mover’ advantage in Central Asia: Chinese state owned enterprises started signing contracts with Central Asian governments to explore natural resources in the early 2000s.¹⁹ Third, Chinese involvement in Central Asia has been driven by more immediate concerns – on the economic side, from the need for energy (80% of China’s natural gas imports via pipeline and 51% of total gas imports in 2017 were sourced from Turkmenistan),²⁰ and on the security side, to contain ‘extremist’ elements in China’s restive Xinjiang province which shares cultural and historic ties with Central Asian civilizations. In contrast, in the absence of a shared border, there has not been a similar necessity and urgency for India to cooperate closely with the Central Asian countries.

 

An improvement in economic ties between India and Central Asian countries would benefit all of the countries involved. For Central Asian nations, this would help reduce their reliance on China as an export destination. In the case of Turkmenistan, imports from China account for more than 80% of Turkmenistan’s total exports.²¹ This affords China considerable bargaining power in setting the prices at which Turkmenistan’s natural gas is sold. For India, improving ties with Central Asian countries would help secure a source of key commodities, such as oil and natural gas, and an attractive market for Indian goods, particular pharmaceuticals.

 

Footnotes:

1. Ministry of External Affairs, Government of India, https://www.mea.gov.in/Speeches-Statements.htm?dtl/19791/Keynote+ address+by+ MOS+Shri+E+Ahamed+at+ First+IndiaCentral+Asia+Dialogue

2. Ministry of External Affairs, Government of India, https://www.mea.gov.in/Portal/CountryNews/9884_Transit_halt__of_ External_Affairs_Minister_at_Ashgabat_ on___ August_02___2018.pdf

3. Ministry of External Affairs, Government of India, https://mea.gov.in/press-releases. htm?dtl/30897/Visit+of+External+Affairs+Minister+to+Samarkand+Uzbekistan+for+the+First+IndiaCentral+Asia+Dialogue+January+1213+2019

4. Ministry of External Affairs, Government of India, https://mea.gov.in/bilateral-documents.htm?dtl/25437/Tej_Kadam_India_Kazakhstan_Joint_Statement

5. IMF Direction of Trade Statistics, http://data.imf.org/regular.aspx?key=61013712

6. Embassy of the Republic of Kazakhstan in India, http://mfa.gov.kz/en/delhi/content-view/torgovo-ekonomiceskoe-sotrnicestvo-mezdu-kazahstanom-i-indiej

7. National Bank of Kazakhstan, https://nationalbank.kz/?docid=469&switch=english

8. ROTEC – Russian Oil & Gas Technologies, https://rogtecmagazine.com/ongc-videsh-to-invest-400m-on-satpayev/

9. ‘ONGC Videsh to Exit Kazakhastan’s Satpayev Oil Block’, The Economic Times, https://energy.economictimes.indiatimes.com/news/oil-and-gas/ongc-videsh-to-exit-kazakhstans-satpayev-oil-block/65856935

10. IMF Directions of Trade Statistics data, https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85

11. IMF Directions of Trade Statistics data, https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85

12. IMF Directions of Trade Statistics data, https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85

13. Ministry of External Affairs, Govern- ment of India, https://mea.gov.in/Portal/ForeignRelation/Turkmenistan_ bilateral_Dec_2018.pdf

14. BP Statistical Review of World Energy 2019, https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf

15. The Observatory of Economic Complexity, https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/ind/show/2711/2017/

16. The Observatory of Economic Complexity, https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/ind/show/2711/2017/

17. Turkmenistan-Afghanistan-Pakistan-India (TAPI) Gas Pipeline Project, Hydro carbons Technology, https://www. hydrocarbons-technology.com/projects/turkmenistan-afghanistan-pakistan-india-tapi-gas-pipeline- project/

18. CASA 1000, http://www.casa-1000.org/MainPages/CASAAbout.php

19. S. Peyrouse, ‘Chinese Economic Presence in Kazakhstan: China’s Resolve and Central Asia’s Apprehension’, China Perspectives, 2008/3, pp. 34-49.

20. BP Statistical Review of World Energy 2018.

21. IMF Directions of Trade Statistics data, https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85