Background

The present century is Asian century in which South Asia plays a pivotal role. Though occupying only 3.4 per cent of world’s land surface area, it inhibits 24 per cent of world population¹. Until a few decades earlier, South Asia was regarded as one of the most backward regions in the world, mainly due to its underdevelopment. But now the region has emerged as major economic power center not only in Asia but also, globally. It is the largest economy in the world next only to the United States (US) and China.

South Asia is the fastest growing economy in the world. This is largely attributed to robust economic growth in India, which has created positive environment for the growth of the region as a whole. With this development, there has been perceptible decline in poverty level and improvement in overall socio-economic indicators of people in the region.

Each country of South Asia is in upswing mode of growth. Estimates are that that South Asia would have 7.3 per cent economic growth in 2017, up from 7.1 per cent in 2016. ² However, the countries of the region have been facing major challenges from poverty, terrorism and above all from ‘One Belt, One Road’ project of China.

Size of Economy

Table 1.1 exhibits a great dichotomy in the size of economy among the South Asian countries. With over 2 trillion dollar Gross Domestic Product (GDP), India happens to be the largest economy in South Asia followed by Pakistan (271 billion dollar), Bangladesh (195.1 billion), Sri Lanka (82.32 billion), Nepal (21.19 billion), Afghanistan (19.33 billion), Maldives (3.43 billion) and Bhutan (2.05 billion).

Table 1.1: Size of Economy of South Asian Countries in 2015

Source: The World Bank in http://www.worldbank.org/en/region/sar

South Asian Economy on Move

On account of demonetization of currency notes of higher denominations of Rs. 500 and Rs. 1000 on November 8, 2016 and its subsequent impact on the economy, the rate of economic growth in India somewhat declined from 7.6 per cent to 6.6 per cent in the initial phase in 2016-17,³ but it soon revived. Increased agriculture outputs and civil service pay reforms greatly contributed in accelerating the pace of economic growth in the country.

Bhutan’s performance in economic growth sector remained most encouraging. ⁴ Economy of Bhutan is better than many other countries of the region due to better performance in hydropower sector and higher consumption and spending levels.

The economy of Nepal too is poised to rebound despite the deadly earthquake on April 25, 2015 and cross border trade disruptions during the Madhesh movement in Terai in 2015-16.

In Bangladesh, the rate of economic growth is reasonably well owing to higher consumption and investment levels, improvement in private sector and lowering of regulatory and infrastructure constraints. Sri Lanka’s economic growth rate was promising due to increased level of public investment. ⁵ Even in the fragile economy of Pakistan, the rate of economic growth was sustainable mainly on account of better performance of industrial and service sectors, decline in oil prices and growth in remittances. Afghanistan’s economy also fared well despite the fact the country was plagued by serious security environment. Performance of Maldives in economic sector was also encouraging despite the fact that the country experienced slowdown in tourist arrivals from China and Russia.⁶

Economic Forecasts for South Asia

As a major economic power in South Asia, an improvement in Indian economy seems to have its impact on the surrounding economies of the neighboring countries of the region as well. As the following table denotes, Bhutan has highest rate of economic growth in South Asia, which is expected to more than double to 11.6 per cent in 2019 from 5.5 per cent in 2014. India’s rate of economic growth would be 7.8 per cent in 2019, up from 7.2 per cent in 2014. Similarly, the rate of economic growth of Bangladesh is likely to be 7 per cent in 2019, up from 6.6 per cent in 2014.

Pakistan, too, is likely to have impressive rate of economic growth of 5.8 per cent in 2019, up from 4 per cent in 2014. In the case of Sri Lanka, the rate of economic growth is likely to increase from 4.9 per cent in 2014 to 5.1 per cent in 2019. Nepal’s rate of economic growth which was as low as 2.7 per cent in 2014, is likely to double to 4.7 per cent in 2019. In Afghanistan, the rate of economic growth is expected to increase spectacularly form 1.3 per cent in 2014 to 3.8 per cent in 2019. Maldives is the only country in South Asia that is likely to have lower rate of economic growth of 4.6 per cent in 2019, down from 6.5 per cent in 2014.

Table 1.2: South Asia Economic Forecasts

Source: The World Bank

Per Capita GDP and Ranking

The rate of economic growth, however, does not ensure that a country that has higher rate of economic growth would also have higher per capita GDP. It is basically the size of population along with the GDP that determines the per capita GDP in a country. In this context, Table 1.3below shows that among the countries of the region Maldives has the highest per capita GDP of US $ 8,342. Sri Lanka is next only to Maldives in terms of higher per capita GDP (US $ 3,558). Bhutan’s per capita GDP is US $ 2,730; while India’s per capita GDP is US $ 1, 627. The per capita GDP of Pakistan, Nepal and Afghanistan are US $ 1,343, US $699 and US $ 649 respectively. Only Maldives has per capita GDP above average per capita GDP of Asian countries of US $ 6,090. All other countries of the region have lesser per capita GDP in comparison to the Asian average. If the per capita GDP of South Asian countries are compared with that of Asia and global levels, Maldives seems to be at 17^th position at the Asian level and 72^nd at the global level. In terms of per capita GDP, Sri Lanka stands at 26^th position at the Asian level and 116^th at the global level; whereas Bhutan stands at 29^th position at the Asian level and 131^st at the global level. India occupies 33rd position in terms of per capita GDP at the Asian level and 145th at the global level. Pakistan, Bangladesh, Nepal and Afghanistan have still lower ranking in per capita GDP both at the Asian and global levels.

Table 1.3: Per Capita GDP and Ranking in Asian and Global Perspective

Source: International Monetary Fund World Economic Outlook, October 2014 in http://statisticstimes.com/economy/asian-countries-by-gdp-per-capita.php

Rise of BIMSTEC and BBIN after Shadow over SAARC

It was nearly after three decades that the South Asian countries became aware of the spoiler element in the regional body called South Asian Association for Region Cooperation (SAARC). SAARC was established in 1985 for the upliftment in socio-economic conditions of the people of this region through cooperation in trade, investment and connectivity sectors. Unfortunately, SAARC could not deliver satisfaction to the people of South Asia mainly on account of non-cooperation from Pakistan. As it is well known, the last 19th SAARC Summit that was planned to be organized in Islamabad in November 2016 could not materialize, as India along with Bangladesh, Afghanistan and Bhutan boycotted it as a mark of protest against the alleged involvement of Pakistan in Uri attack on Indian army camp on September 18, 2018 in which 19 Indian soldiers were killed. Following this event the future of SAARC is in limbo. Ever since the isolation of Pakistan, the growing focus of the seven countries of South Asia and South East Asia has been on the Bay of Bengal Initiative on Multi Sectoral Technical and Economic Cooperation (BIMSTEC). Over the years, Pakistan’s role in SAARC was dubious. In the 18th SAARC Summit held in Kathmandu in November 2014, Pakistan blocked such important connectivity proposals as SAARC Motor Vehicles and Railways Agreements. It also refused to cooperate on combating cross-border terrorism in South Asia.⁷

Therefore, in the wake of the Brazil, Russia, India, China and South Africa (BRICS) Summit in Goa in October, 2016, India took major initiative in hosting leaders of Nepal, Bhutan, Bangladesh, Sri Lanka, Myanmar and Thailand to give new dynamism to BIMSTEC. With its headquarters in Dhaka, BIMSTEC was established on June 6, 1997 in Bangladesh at the initiative of seven countries of South Asia and South East Asia, which lie on littoral and adjacent areas of Bay of Bengal. Whereas Bangladesh, Bhutan, India, Nepal and Sri Lanka in BIMSTEC are from South Asian region; Myanmar and Thailand are from South East Asia. Now Nepal is gearing up to host the fourth BIMSTEC Summit in 2017.⁸ Hopes are high that the South Asian unity will not only remain intact following SAARC’s debacle in 2016, but it would gain further momentum through cooperation in trade, investment and connectivity in the days to come through BIMSTEC. It was only on account on non-cooperation by Pakistan in SAARC regional cooperation that the concept of ‘SAARC minus Pakistan’ gained new currency. Perhaps, this was one of the reasons why India took major initiative in forming Bhutan-Bangladesh-India-Nepal (BBIN) sub-regional grouping as well by signing Motor Vehicle Agreement in 2015 in Thimbu, the capital of Bhutan. A test run of the truck from Dhaka to Delhi was also successfully launched under this initiative. ⁹

South Asia’s Economic Challenges

Despite the fact that the South Asian countries in general are set to improve their economies, though in varying degrees, they suffer from extreme form of poverty. Terrorism is a matter of major concern in the region. And, of late the effort made by China to increase its influence in South Asia is posing major challenge for the long-term growth, peace and stability in the region.

Poverty

Millions of people in South Asia continue to suffer from hunger and malnutrition. Nearly 200 million people in the region are compelled to live in slums. About 500 million people have no access to electricity even until today.¹⁰ Extreme forms of social exclusion are quite distinct in the region. Infrastructure facilities are awfully poor, and on top of all this inequality in income, wealth and opportunities is rampant and on the rise.

Additionally, capital flows in the region from outside is on the decline. Remittances especially from the oil exporting countries are shrinking. Fuel and food prices that remained under control for quite some time in the past have started increasing. Production of goods has somewhat slowed down.¹¹ And, inflation has gradually started creeping up.

Terrorism

Each country of South Asia is plagued by terrorism, though in varying degrees. Along with India, both Afghanistan and Pakistan are hardest hit by terrorism. In the recent years, however, Pakistan is criticized by several countries for its involvement in exporting terrorism. Until recently, Sri Lanka was also victim of worst form of terrorism. India and Bangladesh have been facing serious trouble on account of terrorist activities in various parts of the country. Even such smaller countries as Nepal, Bhutan and Maldives are not immune from this rogue. As a result, much of the economic resources that could have been spent for socio-economic development of the people of the region, are spent on security. Political instability in different South Asian countries is also one of the principal factors for the growth of terrorism.

OBOR Initiative

The Silk Road Economic Belt and the Maritime Silk Road also called ‘One Belt, One Road’ (OBOR) is the brain child of Chinese President Xi Jinping that he proposed in 2013. The project intends to develop connectivity and cooperation between China and Eurasian countries through land-based Silk Road Economic belt and ocean-based Maritime Silk Road. Through this US $1 trillion-OBOR Initiative, China wants to promote its geostrategic interests at the global level.

Under OBOR Initiative, hefty amount of loans are being pumped into the developing countries. This is intended to generate demand for the sale of products of Chinese steel mills, cement plants and construction companies, which could help this country to maintain employment at home intact. It is believed that this will also help China to bring the neighbouring countries within its economic orbit and thereby maintain regional hegemony. ¹²

Recent statistics show that China produces 1.1 billion tonnes of metal annually, but its domestic demand is only 700 million tonnes. It is unlikely that China’s extra production of 300 tonnes of steel would be absorbed by the infrastructure projects like the roads, ports and pipelines in developing countries under OBOR projects.¹³ If it is so, OBOR Initiative is likely to crash.

In 1990s, Japanese Prime Minister Keizo Obuchi had also floated similar initiative as OBOR to promote Japan-funded infrastructure projects in Asia. For this, a proposal was mooted to create Asian Monetary Fund to provide loans to the recipient governments at more concessional terms than the International Monetary Fund (IMF) or even the World Bank. But the Japanese plan was never realized.¹⁴ In certain quarters, it is feared that the OBOR initiative would meet the same fate as it was with Japan-funded infrastructure projects.

Significantly, the loans that are made available to the developing countries under OBOR at concessional terms for the development of infrastructural projects are not wrong in itself. What is wrong is China’s intentions to exploit the natural resources of the concerned countries and open market for its own goods that often is of cheaper and of low grade rather than to help the recipient country’s economy.¹⁵ China also promotes its own manpower to work in such projects rather than employing the local manpower.

Once a country falls in China’s debt trap, it becomes far difficult to get out of it. Mattala Rajapaksa International Airport as well as the Hambantota Magampura Mahinda Rajapaksa Port in Sri Lanka are contributing the least to the local economy. The submarines provided by China to Sri Lanka will have to go a long way to prove their worth.

China’s leverage on loan receiving countries increases after they become debt ridden. Sometimes, China uses its clout on the aid receiving countries to pressurize them to work in its own interest. It was on this ground that Cambodia, Laos, Myanmar and Thailand were pressurized by China to desist from forming common stand against its territorial claims in South China Sea.

Some countries are even forced to hand over the management of their projects to the Chinese companies under duress. In Nepal, the Three Gorges Corporation of China managed to take 75 per cent stake for building ‘Chinese-owned dam.” ¹⁶ Sri Lanka’s government decided to sell 80 per cent stakes in Hambantota port to China for US $ 1.1 billion.¹⁷ In order to ensure that the aid-recipient countries do not escape its debt trap, China reschedules repayment in exchange for major new contracts. Fearing the consequences, certain countries have already started avoiding Chinese loans. Often, dumping of goods by China in the loan-recipient countries negatively impact the growth of local industries, which takes away the jobs of the local workers. Bribery by the Chinese companies in the loan-recipient countries is well known. A number of countries, including Nigeria and Sri Lanka have commissioned enquiry into the alleged bribery of leadership of previous regimes. OBOR initiative is more as a means of commercial penetration and attaining strategic leverage with neo-colonial designs. Therefore, sometimes experts warn those countries that have not yet fallen into Chinese debt trap to take any step within their means to avoid it. ¹⁸

However, Pakistan finds the 3,000 km-long China-Pakistan Economic Corridor (CPEC) under OBOR initiative as flagship project to ensure greater connectivity between Pakistan and China. It connects Kashgar and Gwadar through the construction of highways, railways, optical fiber and pipelines.¹⁹ It may be mentioned here that now China Overseas Port Holding Company (COPHC) would carry out all the development work on the Gwadar port for 40 years. This effectively means that China has taken over management of Pakistan’s Gwadar port. The cost estimate of the project is $ 54 billion. China intends to import oil from the Middle and Africa through this route and export its goods to those destinations. It provided two maritime patrol vessels to Pakistan Navy for joint security along the sea route of the CPEC. Pakistan created a new division of army to provide security to CPEC route.

Of late, discontentment has started breeding in certain circles in Pakistan and also in its neighbourhood against the OBOR project. The share of grant element in CPEC is only 4 per cent and the rest amount is in the form of commercial loans made available from the Chinese banks.²⁰ Therefore, S. Jayshankar, India’s Foreign Secretary finds this project as “theater of present-day geopolitics,” which intends to build China’s influence in its neigbourhood.²¹ In its annual report submitted to Parliament, the Union Defence Ministry of India criticized CPEC for it challenged India’s sovereignty as it passes through Pakistan-occupied Kashmir.²²

China and India in South Asia

Because of its size, comparative economic advantage and hosts of historical and cultural factors, India remains a dominant factor in South Asia. India holds 72 per cent of total land area, 77 per cent of population and 72 per cent of GDP in South Asia.²³ China’s entry into South Asian affairs is comparatively a recent phenomenon. Pakistan is the only exception in South Asia where China has outwitted India and all other forces on account of geo-strategic factors.

Nevertheless, China has been trying to catch up India by forging relations with countries other than Pakistan as well through trade, diplomacy, aid and investment. China left India behind in trade with Bangladesh.²⁴ China’s maritime projects at Chittagong Port in Bangladesh, Gwadar Port in Pakistan, and Hambantota in Sri Lanka is a matter of concern for India.²⁵

In Nepal, Chinese investment has increased three times more than the Indian investment. Additionally, China is trying to expand its railway network deeper into Nepalese territory through Kerung after 2020. Such activities of China in India’s neighbourhood have already intensifiedits discomfiture. But India doesn’t lack in countering China’s move to expand its influence in the region. It has intensified its outreach in South Asian countries through soft power diplomacy, infrastructural development and people-to-people connectivity. It signed landmark land boundary agreement with Bangladesh in June 2015 in its resolve to maintain peace with neighbours. In case of Nepal, it did not stop the supply of essential goods, including cooking gas and oil to the country when the Madheshi Morcha leaders imposed economic blockade at Birgunj-Raxaul and some other border points in 2015-16. Such strategy was adopted to ensure that the people in Nepal did not suffer much from the economic blockade. Pakistan was the only case in which India used surgical strike and tried to isolate it in SAARC forum after it found that the terrorists from across the country had attacked the army camp in Uri and earlier in Pathankot in 2016.

India’s neighbouring countries have been given due prominence under ‘neighbourhood first’ policy of Indian Prime Minister Narendra Modi’s government. Under the SAARC umbrella, India has been influencing its neighbours to dilute bilateral differences in their bid to open common front in war against poverty, underdevelopment and unemployment.²⁶ Modi’s thrust for making peace and prosperity in South Asian region is well reflected through his move to invite the heads of state/government of the region in his oath-taking ceremony and thereafter, by making visits to all the countries of the region except Maldives that was put on hold due to certain political upheavals in the country.

Until today, India is the largest trading partner of Nepal, Sri Lanka and Bhutan. On account of its cultural and economic ties, India’s neighbours are benefiting more from their ties with India than China. Estimates are that five million South Asian migrant workers in India sent over $7.5 billion in remittances in their home countries in 2014. However, South Asian workers, including the Indians figured only twenty thousand in China who could send only $107 million as remittance back to their homes.²⁷ Interestingly, Indian workers earned nearly $9 billion in South Asian countries, but China could earn only $1 billion in the region in 2014.

India provides significant aid and assistance to its neighbouring countries. Of India’s total volume of aid of $1.6 billion in 2014, Bhutan is the largest recipient of Indian aid (63 per cent) followed by Afghanistan (7 per cent), Sri Lanka (5 per cent), Nepal (4 per cent) and Maldives (2 per cent).²⁸

Over and above, India provided credit worth US $ 2 billion to Bangladesh in 2015.²⁹ It provided $ 1 billion credit to Nepal during Indian Prime Minister Narendra Modi’s visit to Nepal in August 2014.³⁰ Moreover, it offered additional US $ 1 billion assistance to Nepal after the earthquake in June 2015; of which one-fourth were grants.³¹ Among the countries of South Asia, Afghanistan, Sri Lanka, Maldives and Bhutan are major recipient of Indian aid.

In general, the Chinese projects in South Asia are ‘flashy,’ which has lesser impact on the socio-economic life of the people. On the other hand, the Indian projects particularly in housing, roadways and railways in the region are comparatively far more beneficial to the local people.³²

The Way Forward

Despite the disparities among the South Asian countries in terms of size, population and economic growth, prospects for further economic growth is higher in all the countries of the region. This is also due to the fact that the region has limited exposure to global turbulence. Nevertheless, the countries of this region are far behind in the race of economic development as compared to Asian or global average of per capita GDP. Cooperation among the countries of the region is key to their success and removal of poverty. The SAARC had potentiality to make meaningful contribution in this area. But this regional body failed to deliver desired result owing to the spoiler element in the region. Though late, such element has been exposed and so largely getting isolated.

With this change in the situation, there is a growing interest among the seven South Asian and South East Asian countries in such sub-regional groupings like BIMSTEC and BBIN initiative. These countries have exhibited greater commitment in expanding trade, investment and connectivity among themselves through such bodies. South Asian unity is more strengthened now than ever before.

However, the South Asian countries can’t afford to be complacent. In the name of promoting connectivity, China is not only trying to compete with India in expanding its influence in the region through trade and investment, but it is also trying to get control over the economic resources of the of the countries of the region. Probability is high that the Chinese OBOR initiative like the Japanese initiative is likely to crash in between as the absorption capacity of the South Asian countries in infrastructure projects is lower. Nevertheless, the South Asian countries need to avoid Chinese debt trap through OBOR Initiative, which is building white elephants and wasting time and money on corrupt practices.

Jha is Executive Director of Centre for Economic and Technical Studies in Nepal

References

1. Wikipedia, “South Asia,” in https://en.wikipedia.org/wiki/South_Asia.
2. Press Release, “South Asia Remains World’s Fastest Growing Region, but Should Be Vigilant to Fading Tailwinds,” The World Bank, April 10, 2016.
3. Editorial, “For a Big Bang – On its 68th Republic Day, What are the Prospects for India’s Rise?,” The Times of India, January 26, 2017.
4. Press Release, no ii.
5. Press Release, no. ii.
6. Ibid.
7. Dipanjan Roy Chaudhury, “India to Say at Kathmandu Meet on Feb 1-2: Onus on Pak to Create Saarc Meet scenario,” The Economic Times, January 27, 2017.
8. GK Today, “Nepal to host 4th BIMSTEC Summit 2017,” February 7, 2017 in http://currentaffairs.gktoday.in/nepal-host-4th-bimstec-summit-2017-02201740959.html.
9. Ibid.
10. The World Bank, South Asia Overview, November 8, 2016 in http: //www.worldbank.org/en/region/sar/overview.
11. CAL, PETER, NO. 111.
12. Holland, Tom, “Why China’s ‘One Belt, One Road Plan is Doomed to Fall,” August 6, 2016 inhttp://www.scmp.com/week-asia/article/1999544/why-chinas-one-belt-one-road-plan-doomed-fail.
13. Ibid.
14. Ibid.
15. Chellaney, Brahma, “China’s debt-trap,” My Republica , January 25, 2017.
16. Ibid.
17. Ibid,
18. Ibid.
19. TNN, “China gives Pakistan two ships for security of CPEC sea eroute,” The Times of India, January 15, 2017.
20. Indrani Bagchi, “India Can’t Be Mongoloa: New Delhi’s China strategy must apply Chinese dictum ‘build your strength, bide your time,’ “ The Times of India, March 10, 2017.
21. Cal, Peter, “Why India Is Wary of China’s Silk Road Initiative, “ The World Post, September 7, 2016 in http://www.huffingtonpost.com/peter-cai/india-china-silk-road-initiative_b_11894038.html.
22. Pandit, Rajat, “Pak-China economic corridor challenge to India sovereignty,” The Times of India, March 16, 2017.
23. Sahoo, Prasanta, “A History of India’s Neighbourhood Policy,” World Affairs – The Journal of International Issues, Volume Twenty, Number Three, July-September 2016, p. 73.
24. Anderson, Ashlyn and Ayres, Alyssa “Economics of Influence: China and India in South Asia,” Council on Foreign Relations, August 7, 2015 in http://www.cfr.org/economics/economics-influence-china-india-south-asia/p36862.
25. Saighal, Vinod, “Jointly Building The Maritime Silk Road in the Twenty-First Century,” World Affairs – The Journal of International Issues, Volume Twenty, Number Three, July-September 2016, p. 33.
26. Sahoo, Prasanta, no xxiii.
27. Anderson, Ashlyn and Ayres, Alyssa, no, xxiv.
28. Ibid.
29. Sharma, Rajeev, “Will Narendra Modi’s $2 billion loan to Bangladesh be a setback to China?” FIRSTPOST, June 7, 2015 in http://www.firstpost.com/world/will-narendra-modis-2-billion-loan-to-bangladesh-be-a-setback-for-china-2283194.html.
30. Sharma, Gopal, “Modi offers Nepal $ 1 billion loan in regional diplomacy push,” Reuters, August 3, 2014 in http://in.reuters.com/article/india-nepal-idINKBN0G303T20140803.
31. Sharma, Gopal “Donors pledge $ 4.4 billion in Nepal quake aid,” Reuters, June 25, 2015 in http://in.reuters.com/article/quake-nepal-india-idINKBN0P50CJ20150625.
32. Anderson, Ashlyn and Ayres, Alyssa, no, xxiv.