Look East Policy vis-à-vis Northeast Economy

look-east-policy

Dr.  A.K. Neog

In this post an attempt is made to peep into some aspects of the much publicized Look East Policy and Act East Policy (AEP) with reference to Indian economy in general and North East India (NEI) in particular. The NEI comprises of the eight States viz. Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. Together these States cover an area of 2,63,184.69 sq.km (or 2, 63, 184, 69 hectares), accounting for 8.01% of India’s total geographical area. Populationwise, the region has 45.59 million persons as per 2011 census, accounting for 3.77% of all – India. The Net State Domestic Product (at current prices) of the region stood at Rs. 2,17,961 crore in 2012-13 i.e. 2.60% of all-India Net Domestic Product. The North East India stretches from the foot-hills of the North-Eastern Himalayas and is surrounded by five foreign countries viz., Bangladesh, Bhutan, China, Nepal and Myanmar. About 96% to 98% of the boundary of the region account for international borders, which offers opportunity for cross border trade and tourism.

AEP is India’s foreign policy with the East and South-East Asia. The genesis of AEP, however, is the Look East Policy (LEP) which was initiated in 1991. The two initiatives are also steps forward in laying a strong foundation for the economic trajectory of the laggard North Eastern region to take-off.

 

* Dr A.K. Neog is a former Economic & Statistical Advisor and ex-officio Additional Secretary to the Government of India

Doing Business in States of India : In December 2014, at the Make in India workshop State governments agreed to a 98-point action plan for business reforms. Simplifying regulatory burdens on business at the State level is an important component of doing the Ease of Doing Business in India initiative. The objective of the 98 point action plan has been to lay out the first of a series of recommendations targeted at increasing transparency and improving the efficiency and effectiveness of various government regulatory functions and services for doing business in India.

The  World Bank and the Department of Industrial Policy and Promotion (DIPP), Government of India conducted a study to take stock of reforms implemented by the States, and brought out the report “Assessment of State Implementation of Business Reforms”, which was released in September 2015 at New Delhi. The report covers the reference period from First January to Thirtieth June2015 and covers thirty two states including union territories. It ranks the States after measuring the scores obtained by them on the following eight areas of reform viz. (i) Setting up a business, (ii) Land allotment and obtaining construction permit, (iii) Environment compliance, (iv) Labour compliance, (v) Obtaining utilities connection, (vi) Tax registration and compliance, (vii) Carrying out Inspection, and (viii) Enforcing contracts. On the basis of implementation performance of reforms, the 32 States are classified into 4 categories viz. (a) Leaders i.e. States with an overall implementation status (score) of 75% and above, no State attained this status. (b) Aspiring Leaders (Score between 50% and 75%) Seven States i.e. Andhra Pradesh, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Odisha and Rajasthan. (c) Acceleration Required (Score between 25% and 50%)-Nine States viz. Delhi, Haryana, Karnataka, Maharastra, Punjab, Tamil Nadu, Telengana, Uttar Pradesh and West Bengal. (d) Jump Start Needed (Score between 0% to 25%)- 16 States including seven North Eastern States viz. Assam, Arunachal Pradesh, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. Study was not conducted in Manipur due to the prevailing condition. It is worth noting that none of the states has complied with above 75% implementation of the 98-point action plan. However, Gujarat scored highest at 71.17% ranking first. The scores and rank obtained by the States of the North East are presented in table 1, which are arranged in descending order. All the States of the region are laggards and Arunachal scores the lowest in the country. The findings of the study is a benchmark for future studies.

 

 

Table 1 : Doing Business in North East India-Scores and Ranks, January-June 2015

States Score (%) Rank
Assam 14.84 22
Tripura 9.29 26
Sikkim 7.23 27
Mizoram 6.37 28
Meghalaya 4.38 30
Nagaland 3.41 31
Arunachal Pradesh 1.23 32

Source: The World Bank, http://www.worldbank.org

Table 1 shows that Assam is in the category of states (scoring 14.84% )between 0% to 25%, branded as states where jump start is needed to move the process of reforms so that investors are attracted. Such low scoring is an eye opener to State leadership and governance. It is a reflection of the business-as-usual approach and policy paralysis.

The tyranny of the State and its organs inherited at independence perpetuates, resulting in aversion to reform. Investors in particular and households in general are  forced to take sub-optimal decisions in such a state of affair. Due diligence is required to carry out big-bang reforms in institutions and mindset of the leaders and administrators of the North East. This can help the make-in-India movement to take off in Assam and in the region. The first generation reforms were launched in the country in 1991, and the rest of India is now talking about second generation reforms. It is intriguing that Assam lags desperately behind in the implementation of first generation reforms itself. The silence of opposition voices, trade and industry seems to lend support to the hypothesis that non-reform pays them as well, since the entire North East with no manufacturing base is a buyers’ market and a traders’ paradise. Ordinary consumers pay the prices through their noses. However, one ray of hope is that the young generation wants changes, modernization and wide reforms to usher in development.

Make in North East: The North East India has many inherent strength, and new opportunities are emerging. The new NDA government at the centre has made several promises for the development of the region. It should lay down a road map to fulfil the same. Inclusive development implies ‘make-in-North East India’ to be launched. While inaugurating the hornbill festival in December 2014, Prime Minister Modi has declared the North Eastern region as a Natural Economic Zone. Programme should be brought out linking this with make-in-India. ‘Smart Cities Mission’ should gather momentum in its implementation. Speedy completion of infrastructure projects is vital as geography has denied the region of sea links and transport. Once these are in places, tourism activities can blossom even in villages. Meghalaya’s Mawlynnog village which was recently awarded the Asia’s Cleanest Village award resulting in tourists boom is a role model in this regard. Likewise, Sualkuchi near Guwahati, the largest silk village in Asia is another place of pride which has got potential for ‘make in North East’. New momentum needs to be injected in the development of Sualkuchi weaving industry. New programmes need to be identified in Arunachal Pradesh, Manipur, Mizoram, Sikkim and Tripura.

Look East Policy: Prior to 1991, India’s foreign policy was pro-West and the East was neglected. After 1991, the policy tends to focus on pro-East and South-East Asia. The Look East Policy (LEP) has been one of the latest buzzwords in the context of economic development of the North Eastern Region of India, even though the policy was initiated by then Prime Minister Narasimha Rao in 1991 i.e. almost more than two decades and a half ago. The policy was inaugurated in 1992 when Dr. Manmohan Singh was the Finance minister. Geographically, India is located in South Asia. However, the LEP is a turning point in India’s focus towards East Asia, South-East Asia and the countries in the Pacific Region; although India’s relationship with the countries of the Association of South Asian Nations (ASEAN) is said to be central to the LEP, with Thailand occupying a central place. The major objective of India’s LEP is stated to be to develop economic relationship with the ASEAN. However, in the context of India’s North Eastern Region its primary objective is said to be to take advantage of the new opportunities in trade and investment by improving socio-economic and political relationship with the neighbouring countries. The region is a springboard platform for the LEP to takeoff as there are geographic and economic advantages due to its proximity to ASEAN.

The LEP has passed several phases, the first phase from 1992 to October, 2003; while the second phase started from November, 2004. In the first phase India sought trade, political cooperation and institutional links with ASEAN (viz. Indonesia, Malayasia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar and Cambodia). In October 2002, the first India-ASEAN business summit was held at Delhi which was addressed by then Prime Minister Atal Bihari Vajpayee. Since then, the summit became an annual affair. However, the Policy could not make much head way during its first phase.

The second phase of LEP started with the India-ASEAN car rally (covering its nine countries other than Philippines) from Guwahati to Batam island in Indonesia covering about 8000 km road distance in 20 days during November- December, 2004, aiming at promoting trade, investment and tourism and culture. The rally was ceremoniously flagged off by Prime Minister Dr. Manmohan Singh on 22 November, 2004 at Guwahati. The rally had demonstrated not only the feasibility of direct physical connectivity but also the keenness towards India as there were over 250 participants from the ASEAN countries and 3 teams from India. LEP was thus successful in its attraction.

The second Indo-ASEAN car rally was kicked-off on 26.11.2012 at Yogyakarta in Indonesia. This is the second edition of the rally. It was organized jointly by the Ministry of External Affairs (MEA) and Confederation of Indian Industry (CII). The rally was performed to commemorate 20 years of ASEAN-India relationship in the run-up to the India –ASEAN commemorative Summit. The motto of 2012 car rally was “accelerating growth exhilarating possibilities.” The rally made a stopover at Golaghat town (Assam) on 16.12.2012 along the National Highway 39 and 37. There was ceremonial flag down at Sarusajai Stadium in Guwahati  on 17.12.2012.

It is worthwhile to briefly take stock of some important milestones in regard to ASEAN since the start of second phase of LEP. These are:

  • Signing of first framework for bilateral Free Trade Agreement (FTA) with Thailand in October, 2003.
  • Comprehensive Economic Cooperation Agreement (CECA) with Malaysia during Prime Minister’s visit to Malaysia in December, 2004.
  • Strategic Partnership Agreement with Indonesia signed in November, 2005.
  • Process of bilateral agreements with Myanmar since 2004.
  • CECA with Singapore signed on 29th June 2005, came into force from First August, 2005.
  • Ten days State visit to Laos and Cambodia by President Pratibha Patil in September 2010 as an effort to boost India’s Look East Policy.
  • India has constructed some major projects in Cambodia.
  • Several bilateral agreements with Laos.
  • A number of bilateral treaties and agreements with Vietnam.

 

There are however, other engagements of LEP than those with the ASEAN. Important among these are – BIMSTEC (Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation) instituted on 6th June, 1997. Its members are Bangladesh, India, Sri Lanka, Thailand and Myanmar. The first summit of BIMSTEC was held in July, 2004. The MGC project (Mekong-Ganga Cooperation) is another engagement instituted in 2000 at Vientiane in which India, Myanmar, Thailand, Laos, Cambodia and Vietnam are involved. This project aims at revitalizing and developing overland trade, tourism, communications and transport. There is a proposal under this project to set up a railway line from Delhi to Hanoi.

It may be mentioned that in the North East – and East Asia, the major economies are China, Japan and Republic of Korea (ROK) and it would be worthwhile to glimpse at them also. The year 2006 was celebrated as the India-China Friendship Year. The state visit by Chinese President Hu Jintao during November 2006 was the highlight, in which a joint declaration was issued on strategic and cooperative partnership between India and China. Comprehensive economic engagement, bilateral investment protection and promotion agreement and the agreement to enhance trans-border connectivity and cooperation through expansion of border trade by strengthening of existing routes and exploring additional routes are major aspects of the declaration. In fact, border trade through Nathu-La was resumed during the year.

It may be added that an ASEAN-China accord was entered in November 2004, but China preferred smaller ASEAN Group, without US, India, Australia and New Zealand. India is preferred in the ASEAN because it is a democracy.

India’s relation with Japan to involve in the LEP has been one of its weaknesses. However, the relation got a fillip since the visit of India’s Prime Minister to Japan during December 2006. The two countries agreed on Special Economic Partnership Initiative, which has Dedicated Freight Corridor and Delhi-Mumbai Industrial Corridor as its principal components.

Republic of Korea (ROK) is an important economic partner of India. India’s relation with ROK acquired momentum after the visit of the then President of India Dr. A.P.J Adbul Kalam during February 2006 at the invitation of the President of ROK. This was the first ever visit of an Indian President to ROK. Four agreements were signed during Dr. Kalam’s visit.

A Comprehensive Economic Partnership Agreement (CEPA) between India and ROK has come into effect from the First January, 2010. In fact, South Korean President Lee Myung-bak was the Chief Guest at India’s Republic Day celebration on 26th January, 2010. Prime Minister Manmohan Singh and President Lee also agreed to enhance the bilateral relations between the two countries to a Strategic Partnership. It may be added that, to the Indian industry ROK can provide an important gateway into the Asia-Pacific Economic Cooperation (APEC) region.

 

The third phase of LEP can be said to have started from 2014.

ASEAN – A Hub-and-Spoke Model : Asean developed pattern can be described as a hub-and-spoke model, where ASEAN countries are the hub, and India along with China, Japan, Korea, Australia and New Zeland  are the spokes.

India- ASEAN Trade : India-ASEAN trade has emerged as the cornerstone of India’s Look East Policy. In this regard, it may be worthwhile to look at India’s trade data on exports, imports and trade balance with ASEAN. Data originally available from the World Bank show that between 2003 (the year of India’s engagement with ASEAN) and 2013, India’s trade deficit with the ASEAN rose from 1,615.4 million dollars to 4, 423.8 million dollars, rising by 2.74 times during the said ten years. Countrywise trade balances are given in table 2.

 

Table 2: India’s Trade Balance (in million dollars) with ASEAN in 2003 and 2013

Country 2003 2013 Change
Brunei (+) 4.5 (-) 725.8 Deficit
Cambodia (+) 20.0 (+) 124.0 Surplus
Philippines (+) 212.0 (+)1060.0 Surplus
Thailand (+)193.0 (-)1272.0 Deficit
Vietnam (+)345.0 (+)3161.0 Surplus
Singapore (-)165.0 (+)7162.0 Surplus
Indonesia (-) 840.2 (-)9426.0 Deficit
Lao PDR (+)0.3 (-)50.0 Deficit
Malayasia (-)1101.0 (-)3834.0 Deficit
Myanmar (-)284.0 (-)623.0 Deficit
Total ASEAN (-)1615.4 (-)4423.8 Deficit

Source : The Financial Express, 11.9.2014 (Page 7).

Note :  (+) indicates surplus trade balance.

(-) indicates deficit trade balance.

lt is observed that in 2003 India had surplus trade balance (exports greater than imports) with 6 ASEAN members, which declined to 4 in 2013. These nations were Cambodia, Philippines, Singapore and Vietnam. India’s trade balance with the remaining six Nations were in deficit, and was more than the surplus with the four. Hence the overall trade balance with the ASEAN had not been in India’s favour. It is a cause of concern. The reasons for the adverse trade balance are –ASEAN is enjoying more market access in India, lack of India’s competitiveness in manufactured goods, high cost of Indian infrastructure, labour market inefficiency and high cost of doing business in India.

India-China Trade: India-China trade is a part and parcel of Look East Policy. Infact, China which is the largest economy of Asia and second largest global economy is now India’s largest trading partner. It is also the fastest growing economy. India’s imports from China in 2013-14 accounted for 18.7% of India’s total imports, while India’s exports to China accounted for 13.1% of India’s total exports to the world. India’s imports from China during 2000-01 and 2013-14 increased at an annual compound growth rate of 31.2% which was higher than 24.9% growth rate of exports to China. India’s export-import ratio with respect to China for 2013-14 stood at 0.29 (value of the ratio below one indicates imports more than exports). In 2012-13, India recorded the largest bilateral trade deficit of 39.4 billion dollars with China, which raised major concerns. This, however, had fallen to 36.0 billion dollars in 2013-14. In 2014-15, the trade deficit jumped to 48 billion dollars or four times India’s exports to China. The deficit was 1.1 billion dollar in 2003-04.

India-China Initiatives : Epoch making initiatives are taking place in India-China economic relations with the landmark visit of Chinese President Xi Jinping to India in the third week of September 2014. Important outcomes are the signing of agreements for setting up of Chinese industrial parks in India which will facilitate 7 billion dollar investment, bilateral cooperation in railway infrastructure (modernisaiton of Indian railway stations, platforms, enhancing of speed of trains etc.), and signing of buying orders by Chinese companies with Indian firms to buy about 740 million dollars of Indian products. It is important to mention here that the goal set by Prime Minster Narendra Modi is “INCH (India-China) towards MILES (Millennium of Exceptional Synergy)”.

During Modi’s three-day visit (14-16 May, 2015) to China, as many as 26 business agreements worth over 22 billion dollars were signed between Indian firms and their Chinese counter parts. The agreements and Memorandum of Understanding (MOU) covered a wide range of sectors including power, renewable energy, infrastructure, steel, small and medium industries.

India-Mongolia Initiatives: During the two day visit to Mongolia, Prime Minister Modi announced on 17 May 2015 a one billion dollar credit line to that country for infrastructure development and expansion of economic capacity.

India-Japan Initiatives : A new chapter has been written in India’s bilateral ties with Japan with the visit of Prime Minister Modi there during August 30 and September 1, 2014. A pact called “Partner City Affiliation” Memorandum of Understanding (MOU) was signed between the two countries. The MOU provides for cooperation in heritage cooperation, city modernization and cooperation in the field of art, culture and academics. Under the pact, Varanasi will be developed as a “Smart city” with cooperation and experience of Kyoto the Japanese “Smart city” which is a confluence of heritage and modernity. The pact is in line with Modi’s vision of building 100 smart cities across India. Mr. Modi’s Japan visit concluded with an assurance of 35 billion dollar investment for India over five years in bullet trains, smart cities, cleaning Ganga, development of industrial township; and tie-ups in oil and gas sector including joint procurement of LNG.

India-Japan Trade : India is a marginal player in the foreign trade of Japan. As per provisional data, India’s exports to Japan in 2013-14 accounted for about 2.2% of India’s total exports’ while imports from Japan accounted for 2.1%. The bilateral trade in 2013-14 was about 16,294 million dollars (exports 6814 million dollars and imports 9,480 million dollars). Trade balance is not favourable to India, export-import ratio being 0.72 in 2013-14.

India-South Korea Trade and Initiatives: South Korea is an important partner (15th rank) of India having free trade agreement (FTA) effective from 2010. According to Economic Survey 2013-14, the share of South Korea in India’s total trade in 2013-14 stood at 2.18% with an export-import ratio of 0.34 indicating India’s trade deficit.

South Korea is an indispensable partner in India’s Act East Policy and in its economic modernization. Prime Minister Modi visited South Korea on 18-19 May 2015 during which seven agreements and MOU including one on Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income were signed between the two countries. South Korea agreed to give 10 billion dollar to India for infrastructure development including smart cities, railways, power generation and transmission.

India-Myanmar Trade : Myanmar is India’s most immediate ASEAN member. India’s imports from Myanmar in 2013-14 stood at around 1392 million dollars compared to 1018 million dollars in 2010-11, accounting for 0.3% of India’s total imports in both the years. As against, India’s exports to Myanmar during the said years were very low, being 785 million and 321 million dollars respectively. The share of India’s exports to Myanmar as a percentage to India’s total exports also happened to be 0.3%; the export-import ratio being 0.56.

Emerging Opportunities from Look (Act) East Policy to North East India : The agricultural and  manufacturing base of the North East (NE) India is too weak to generate an exportable surplus, except for tea in Assam. The region does not have any Special Economic Zone (SEZ), National Investment and Manufacturing Zone (NIMZ) or industrial corridor. India’s Economic Survey 2013-14 presents data on percentage shares of 14 states out of 35 states of the country which have an individual share of at least one percent in India’s total exports of 3,12,610 million dollar exports in 2013-14. None of the NE states figure in the list, which shows the insignificance of the region in the export market. West Indian States Gujarat tops in exports with a share of 23.5% followed by Maharashtra with 22.9% and Tamil Nadu with 8.6%.

Myanmar is the ASEAN country bordering with India. Myanmar government had indicated in August 2014 that the country could be used by India as a corridor for inland trade, or its sea-route. Myanmar is a strategic trading partner of India in terms of both imports and exports in the NE region.

NE India is a food-deficient region even after sixty seven years of independence despite fertile soil and abundant rain water. India is a net exporter of food grains like rice and wheat. Procuring foodgrains to the NE region from surplus States like Punjab or Andhra Pradesh is very costly due to high cost of long transportation. Myanmar is an exporter of rice and pulses like lentil at the global level. Experts have suggested that import of rice from Myanmar to States like Mizoram, Tripura, etc can result in cost saving ranging from 55% to 25% per quintal. It would not only be cost saving in financial terms but also time saving, hence economically optimal. This would benefit the government to reduce subsidy and consumers. However, encouraging local production will be more beneficial in the long run.

Emerging New Visions and Initiatives: Look East Policy was launched in the last decade of the 20th century. Since then some new permutations and combinations are coming up over and above the engazement with the ASEAN. Some such visions and initiatives are indicated below.

BCIM Economic Corridor: BCIM stands for Bangladsh-China-India-Myanmar. Initiated in 1999, originally it was known as “Kunming Initiative”. The idea is to link Kunming (south-west-China) with Kolkata (West Bengal), passing through Dhaka (Bangladesh) and Mandalay (Myanmar). It is also called ‘K to K’ initiative or K 2 K i.e. Kunming to Kolkata. If it materializes, peripheral benefits may touch NE consumers through availability of cheaper Chinese Imports.  However, restoring the Stillwell road would be beneficial for the North East.

Kunming city is the capital of Southwest Yunan province of China. Each year, South Asian Expo is held by China in the city and a South Asian country is made the ‘country of honour’ to highlight its business potential. A five-day Expo was held from June 12, 2015 where India was announced to be  made the ‘country of honour’. (FE, 10.6.2015 P2). This is the third consecutive year that the Expo was held by China to expand its trade and business footprints in South Asia where it is looking to firm up influence with huge investments. India took part in the said event and said that it is committed to improve trade relations with China as it would the mutually beneficial and help (FE 14.6.15) further the ‘Make in India’ initiative that provides a golden opportunity for Chinese investors. Minister of State for external affairs V.K. Singh led a 200 member business delegation to the China-South Asia Expo, where about 300 deals worth 55 billion dollar were said to have been signed. It would be interesting to know how many of the delegation team were from North East India and how many of the deals were to benefit it.

Regional Comprehensive Economic Partnership (RECEP) Agreement: The RECEP Agreement is between ASEAN plus six Free Trade Agreement (FTA) Partners. The six partners are Australia, China, India, Japan, South Korea, and Newzeland. Negotiations between these two sets of countries commenced in May 2013  and is going on.

India – ASEAN Comprehensive Economic Cooperation Agreement (CECA)- Services and Investment Agreement: Conclusion of this agreement was announced at the ASEAN-India Commemorative Summit on 20.12.2012. The FTA on services and investment was scheduled to be signed by the end of August 2014. In the 12th India-ASEAN Meeting held at Nay Pyi Taw (Myanmar), India’s external affairs Minister Sushma Swaraj stated that India would soon draft a 5 years action plan starting from 2016 for enhancing connectivity and cooperation in diverse fields.

Act East Policy : It is  obvious that India has been spending very long time in translating the Look East Policy into practice. Time has come to act upon it. It is therefore no surprise that Sushma Swaraj, external affairs minister during her visit to Vietnam in the last week of August 2014 stated that “We will have an Act East Policy”. Its progress must be monitored. ‘Make in India’ is a key  component of Act East Policy as announced by Prime Minister Narendra Modi during his South Korea visit in May 2015. Act East Policy is India’s foreign policy with the East and South East Asia. Act East Policy is a step forward in laying a strong foundation for the progress and economic trajectory of North East India. It is envisaged to bring new investment, future development and larger value creation opportunity. This will also insulate the region from the trend of cross-border radicalization and insurgency. The Policy will lead to new export-import opportunities and a lower cost of living.

 

The Union Budget 2015-16 in its para 67 states the following:

“The ‘Act East’ policy of the Government of India endeavours to cultivate extensive economic and strategic relations in South –East Asia. In order to catalyze investments from the Indian Private Sector in this region, a Project Development Company will, through separate Special Purpose Vehicles (SPVs), set up manufacturing hubs in CMLV countries, namely Combodia, Myanmar, Laos and Vietnam.” In October 2015, the NDA government has mooted the idea of integrating the North East with regional production and value chain as the region is a natural partner in the Act East Policy. Reportedly, it has chalked out a composite long-term plan for successful implementation of the Policy. The plan includes improving relations with the neighbouring countries, augmenting communication network, developing infrastructure in the North-East region, among other things. The implementation of the plan is said to be monitored by the Prime Minster himself.

Look East, Link West Vision: Prime Minister Modi while launching the “Make in India” worldwide campaign in the third week of September 2014 added the term ‘Link West’ to the expression ‘Look East’ Policy. It is said to be India’s global vision. He said that foreign direct investment (FDI) should be understood as “First Develop India”. Investors should not view India merely as a market, but consider it as an opportunity to develop India by investing in manufacturing and other projects as well as creating jobs, in turn, increasing the people’s purchasing power to boost demand for their products. In this context, Modi’s 3 Ds i.e. Democracy, Demographic Dividend and Demand for domestic goods are relevant.

 

Emulating the Models of Development of East Asia:

At the heart of successful industrialization of the East Asia lies two famous models. One is the model of “labour-intensive and resource-saving industrious path to economic development”, attributed to Karou Sugihara (EPW, August 21, 2004 pp3854-3860). The other is “bamboo capitalism” or “parallel development” based on Foreign Direct Investment (FDI) flows, which create intricate intra-regional production networks through linkages like exchange of parts, components and other intermediate products, and hence a horizontal network of trade and capital (Eric Teo Chu Cheow, Strategic Relevance of Asian Economic Integration; RIS Discussion Paper, March 2005). Integrating with East Asia is to dovetail these models, which in essence are based on the economic virtues like industriousness, diligence, hardworking giving farewell to laziness, indolence, slothness etc. In other words, ‘business as usual’ will not do. This has special significance for the laggard regions like the North East India.

Constitutional Framework for Trade, Commerce and Exchange in India : The framework for foreign affairs, trade, commerce, etc. is enshrined in the Constitution of India (Part XI) regarding the Distribution of Legislative Powers between the Union and States under Article, 246; and more particularly in its Seventh Schedule, which embodies three lists viz.-List I- Union List, List II-State List, and List III-Concurrent List.

Items like foreign affairs, diplomatic-consular-and trade representation, participation in international conferences, treaties and agreements with foreign countries, trade & commerce with foreign countries, import & export across customs frontiers, inter-state trade & commerce, currency, foreign exchange, banking, insurance, financial instruments, railways, highways, airways, shipping, telecommunications, internet etc. come under the jurisdiction of the Union Government. On the other hand as prescribed in the State List, the States are concerned with internal trade & commerce, markets & fairs and industries (except defence industries and the industries the control of which is declared by the Parliament). Agriculture, animal husbandry and fishery, maintenance of State law and order, good governance etc. come under the State List.

Announcement of LEP, per se, is only a necessary condition for market access by the entrepreneurs in the North East but cannot be a sufficient condition. The sufficient conditions are mostly the provision of the items mainly infrastructure, listed above, which are primarily in the domain of the Government of India. Hence availability of word-class infrastructure embodied with the state of the art technology is a sine qua non for the successful implementation of the LEP. This should be made available in right quantity, at right place and in right time. Trade presupposes both exports and imports. Exports and industrialization are synonymous. Exports is not possible if there is no industrialization. Under the Industrial Policy of July 1991, the basic responsibility for industrial development lies primarily with the State governments. The Union government supplements their efforts through various schemes and incentives, as already mentioned elsewhere. Hence the States have a larger role to play. The governments have to develop export environment, be investor- and exporter-friendly. They have to be pro-active to formulate their action plan for exports and timely execution.

 

Exportability of the North East India : In dealing with regional analysis of the NER, it is desirable to keep in view two general laws-one from Economics and the other from Geography. The general law of Economic Equilibrium states that “everything depends upon everything”. The first law of Geography, according to Waldo Tobler (1970) states that “everything is related to everything else, but near things are more related than distant”. In fact, the two laws are similar.

The North Eastern Region (NER) is at the periphery of the National geography but nearer to trans-border countries. The region is a part of the country. The regional economy is embedded in the national economy. World Development Report, 2009             (P. 119) has documented that “openness and integration are most beneficial for smaller or landlocked countries, whose access to world markets depends on neighboring  countries”. Land lock character of the NER is often cited as one of the causes of its underdevelopment. As a corollary to the above observation of the Report, it can be said that since a country embodies its backward areas, opening of such areas, ipso facto, would benefit from openness and integration. Hence, LEP would benefit the NER in trade and development.

In this context, it may be worthwhile to see what the mainline trade theory says. Heckscher-Ohlin theorem is one such theory which predicts that with trade, a region would specialize in the production of those goods which uses its most abundant factor and export the same. Accordingly, there would be shift in factor employment in different industries that will ultimately lead to factor price equalization across trading countries. As a corollary to this theorem, in the context of a country like India, it can be hypothesized that as a State engages more and more in foreign trade its factors of production will tend to shift from the import competing activities where factor returns are lower to the export activity where it is higher. This will result in higher development of those States, which align their production structure to foreign demand. In other words, it is envisaged that greater the degree of openness of a State economy, the greater its level of development.

Further, it is also worthwhile to mention gravity models of Regional Economics. A Key factor in horizontal growth or expansion is interaction between major cities, which form the nucleus of the development pole. In an open economy (i.e. without physical and manmade barriers), closer is the distance between two cities, more is the interaction (or influence or gravitational pull or attraction), hence contribution. In other words, distance is inversely related to interaction. But interaction would be directly related to the size of two cities. Gravity models predict that the expected influence of a trade centre (say) j upon trade centre i is directly related to the size (product) of i and j and inversely related to the distance between them. Gravity models also reflect that low-value commodities are supplied over shorter distances.

Trade takes place in space and time. Geographically, North Eastern Region is ideally and advantageously located between the rest of India and East/South-East Asia as it offers shorter distance and time for international trade. With the internet breaking physical boundaries, this advantage can only increase. The ASEAN countries too are looking towards Indian economy for trade and investment.

It is to be kept in view that distance is also a function of quality of means and modes of transportation. Distance over space and time improves with the improvement of roads, railways, river/water transport, air service, telecommunications, terminal and handling facilities at ports/depots, customs warehouse etc. These are also the factors which determine the degree of openness of Indian States to trade. This is a weak point in the geography of the NER, which needs to be eliminated or bring to an optimal level in order to enable the NER to reap the benefits of LEP and openness. This calls for creating a ‘level playing field’ in infrastructure and connectivity which is of global standard. Otherwise, the entrepreneurs of the NER would be forced to take on international competition from a position of weakness.

One may now ask a question – how much open is the NER? When geographical boundaries are aggravated by conflicts within the region or between India and bordering countries involving State action, economic transaction costs tend to rise because of insecurity and risk to life, property and investment, and jurisdictional and political uncertainty. Conflicts and territorial disputes reduce openness. Since such conflicts/disputes are not uncommon  in the NER, to that extent it hampers openness.

To know ‘openness’ from economic angle,one needs information on economic parameters. Direct data are not available for the region. However, an exploratory study with indirect data (Sugata Marjit, et.al: EPW March 3, 2007) has found that in 2002-03 Assam was the “Least Open” State in the Indian economy. This, of course, needs further research as Assam’s exports of tea, jute, etc had been going from the pre-independence times. The above study has further revealed that exporting States (eg. Tamil Nadu, Punjab, etc.) are getting richer over the years and the others falling behind. It has also highlighted that inter-regional income disparity of Indian States are more correlated with the openness of the States over the years. This is in line with the truism viz. ‘early bird  catches the worm’. In competition, one must keep this in mind.

If one asks a question on the major items of exports from the NER, historically the answer is tea and jute. Within NER, Assam is the only State that has got a long history of exports, particularly, of tea and jute. State wise data on exports and imports are not readily available. However, as per data of the Directorate General of Commercial Intelligence & Statistics (DGCIS), Assam’s share in total exports within India in 2002-03 has been 0.19 percent of India’s total exports (against highest Maharashtra’s 21.55 percent), the year in which India’s share itself in the world export was only 0.8 percent. This data show that the NER is on the periphery in the export space, and Assam itself is but a marginal player. Some economist observes that in the tea sector India will be price uncompetitive in a globalised world. However, tea can be both exported and imported. As per a source, India accounted for 28 percent of world tea output and 15 percent of world tea trade till 2002. Given that NER’s tea production accounts for over 50 percent of all India, the above forecast has great significance for the NER’s tea industry.

The government of India liberalised the Foreign Direct Investment (FDI) regime in the tea sector by allowing 100 percent FDI in it including tea plantation with effect from 5th July, 2002. It is worthwhile to suggest here that the tea industry in the NER should come forward with proposals to set up Special Economic Zone (SEZ) for tea sector to reap the advantages of economies of scale and global benefits. It has to reduce unit cost of production through productivity gains, capacity building of small growers, streamlining export marketing channels, propagating ‘organic tea benefits’ for health, improving infrastructure etc. All this is feasible through SEZ. This would help not only in the rejuvenation of the tea industry but also in boosting exports. It may be mentioned that according to Chinese experts, tea is tipped to replace coffee and cocoa as the most popular and healthy drink of the 21st century. The Indian tea industry should capitalize on this. The region has potentiality in other agri-products also. According to some estimates, NER is going to be the strongest market, within next 5 to 6 years, for horticulture, passion fruits, organic food, floriculture, orchids, aromatics, medicinal plants and herbs, and fishery products in the South East Asian region. The region should gear up for this opportunity. Nothing, however, is an unmixed blessing. Open trade is a two-way traffic. Some traditional industry like Muga Silk would face threat form Tassar Silk coming form China. The local industry has to undergo improvement in technology and productivity.

On the other hand, the concept of Agri-Export Zone (AEZ) was announced by the government of India in its EXIM Policy of 2001-2002 for the purpose of developing, sourcing and processing of raw materials, leading the finished products to final exports. The AEZ concept envisages ‘partnership’ approach among the players viz. Central government, State government, farmer, processor and the exporter. The AEZs that have been sanctioned for the NER include one AEZ for fresh & processed ginger in Assam, one for pineapple in Tripura and one for flowers (orchids) & cherry pepper in Sikkim. However, the present status of these AEZs are not readily available. It is suggested that the projects should be completed in all respects with a definite roadmap and be made vibrant. The other States should also come up with AEZs on the basis of their inherent comparative cost advantage. There are also four Export Promotion Industrial Parks in the NER, sanctioned till year 1999, one each in Assam, Meghalaya, Manipur and Nagaland but their status is not known. One good sign is that all these are directed towards capacity building to enable the NER to be competitive in the exports market.

Case for entire NER as a SEZ:  Given that geographically (boundary, topography and climate) and economically (in terms of backwardness) the States of the NER share common characteristics/identities, and also given that some export base already exists and new capacity building is coming up, it would be advisable to bring the entire NER into a single mega Special Economic Zone (SEZ) to actualise the vision of LEP (AEP). This would offer economies of large scale, opportunities for specialization, attract FDI, minimize risk and uncertainties, increase the chances of exports of the produce thereby turning the NER into an ‘export hub’, and giving a brand new image to the region. This would also be in line with inclusive growth in geographical sense. Such a concept is also justified from the following point. After the launching of liberalisation policy, the onus of attracting capital and job opportunities lies on each State government of the country. But the States of the NER are too poor to attract capital individually. In the absence of a mega SEZ, it may be surmised that the region may turn up as an EXIM-corridor rather than as an export-hub. Hence the government of India must take investment initiative

Observations and Suggestions : Though the Look East Policy (LEP) was announced in the last decade of the 20-th century, it virtually became visible in the North Eastern Region (NER) of India only from October, 2004 with the launching of India-ASEAN car rally from Guwahati to Batam Island in Indonesia. It has now got a new push with its new Avatar called Act East Policy.

 

LEP is a paradigm shift in India’s foreign policy. It is an inclusive, outward-looking and trade-creating model of trade and development. The policy offers new opportunities of market access, specialization, economies of scale, transfer of state-of-art knowledge and technology, sharing of development experiences and strategies. LEP would attract East Asian investors and traders to consider NER as a short-cut window to access vast Indian market for trade and investment. LEP has been heralded as the harbinger of change and development. It would act as a mechanism to integrate the economy of the NER with the global economy. However, some shortcomings of LEP have been noticeable. These are failure to involve major players and build economic relationship with them, slow progress of implementation, apprehension of some sections of Indian industry and their nervousness for cheaper imports competing with Indian products etc.

LEP recognizes that major East Asian economies are significantly competitive global producers having complementaries with Indian economy in resources, capabilities and policies. The centre of economic gravity is East Asia and India’s future economic fortune lies in it. However, unless infrastructure and connectivity is improved, governance is responsive and other reforms are undertaken up-front, then Indian entrepreneurs would be unable to take on global competition on an unequal term. The government policies must address these problems to enable the enterprises to compete at local, regional and global levels. To accelerate the forces of economic integration and reap optimal benefits from openness, the followings are essential – institutions of global standard, infrastructure (including information technology with state of the art technology), intervention at the State level to correct the deficits, incentives (in appropriate quantity) to propel up entrepreneurs, and inclusiveness.

In the context of integration of NER, launching of Look (Act) East Policy is, no doubt, a necessary condition but by itself cannot be a sufficient condition. Besides the aforesaid general suggestions, the followings are pertinent for the North East India:

  • Under LEP/AEP, the government should focus on free border trade, long term investment, wider economic partnership, and promotion of mutual commercial interests, tourism and culture to get win-win outcome. NER should be developed both as a tourism and trade hub. Services should also be developed.
  • To woo trade and investment, the governments have to be trade and investment-friendly by creating optimal environment, drawing up roadmap, action plan. Law and order situation should be made congenial.
  • To speed up the process of integration and for outreach the concerned Ministries and Departments of the Government of India (like DONER, Home, Civil Aviation, Finance etc.) should show physical visibility in the NER through regional/field offices at the State capitals.
  • Connectivity through direct flights to the country’s capitals in which India has not made presence so far, be established.
  • The Government of India should encourage foreign diplomatic missions to extend diplomatic/consular jurisdiction by setting up consular offices, branch embassies in the NER to facilitate issuance of Visa.
  • Government should take pro-active initiative in fostering cooperation with universities of ASEAN countries.
  • Setting up of cross-border facilities (including visas), mutual recognition of driving license, vehicle permits, etc.
  • Ministry of Finance and the RBI should expand banking facility with foreign exchange dealings in all the customs points. Customs warehouses, testing facilities etc. should be set up/expanded for better trade facilitation. Foreign Exchange Dealers, currency changers (vendors) from local areas should be encouraged for due registration.
  • Branches of EXIM Bank, Export Credit and Guarantee Corporation (ECGC), etc should be set up in all the State capitals of North East.
  • MNCs including Indian MNCs should be encouraged to widen and deepen their presence in the NER to avail emerging opportunities from LEP.
  • All India Trade & Commerce Associations should make their visibility by setting up their regional branches.
  • Associations of foreign exchange dealers, currency changers, exporters, importers, trans-border entrepreneurs be encouraged.
  • For entrepreneurial capacity building, trans-border entrepreneurial institutes be set up. Asian language departments should be set up at the Universities/institutes of the NER and scholarships/stipends should be given to learn the same, also courses on Asian economy be introduced. Teachers & students exchange programmes, educational excursions should be promoted between the North-East and ASEAN.
  • Overland road connectivity should be improved on both sides of the border. India should revive the Stillwell Road (also known as Ledo-Burma Road) which connects Ledo with Kunming in Yunnan Province in China through Myanmar.
  • Treatment/recognition of the entire NER as a SEZ. Set up a SEZ at the Indo-Myanmar border for resource-based industries like newsprint, wood & its products, agriculture & food processing.
  • Efforts should be made to “sell North-East India” in ASEAN territory.
  • ASEAN food also should be served in hotels and eateries of the North-East.
  • The North East M.P. forum, State governments of N.E. India and the Central Ministers from the N.E. should demand that a dedicated ASEAN –India Trade and Investment Centre with its Secretariat should be setup within the N.E. region.
  • Think Tanks and Civil Society Organisations should watch the progress and momentum of implementation of the Act East Policy so that time overrun can be avoided.

 

Looking Forward: People of the NER are famous for their hospitality. The region has a good English educated workforce. With higher share of working age population, the region is entering into demographics gift phase. In 2011 census, 35.65% of the total population of Assam (3.12 crore) is under 15-35 years age group. The North East Industrial and Investment Promotion Policy and various incentives have made NER the least-cost investment destination in the country and allows tax-free returns. The 21st century is declared as ‘Asian century’. Geographical location of NER offers it an unique opportunity under the Look (Act) East Policy to be the doorway to the countries of South East and East Asia, and vice versa a doorway for them into India. Entrepreneurs, investors and MNCs should avail these benefits and opportunities and convert NER into an economic/export hub, not merely an EXIM corridor. Beneath the spectacular success of major economies of ASEAN and ‘Eastasia’ lies the ‘industrious’ model of development which implies practising Asian economic virtues like industriousness, diligence, labouriousness and quickest delivery. Integrating with Asian economy and to stay ahead in competition with them implies not only imbibing the above virtues but also to excel at the global level. Hence ‘business as usual’ work culture and ethics would have to be given bye bye. The workers, entrepreneurs, civil society and governance must awake up. Diligence is at the root of all progress. Given FDI, LEP and new markets, faster work culture only can set in motion a virtuous circle of development which can take off the economy of the NER into a new trajectory of growth.

North East is a natural partner in India’s Act East Policy (AEP). Prior to AEP, East used to start from Delhi though de-jure from NER. It is pointed out by experts that LEP has been implemented by India’s coastal States (i.e West Bengal, Odisha, Andhra Pradesh, Tamil Nadu) already. These states have gained tangible benefits from the policy at the cost of the North-East. Under the AEP, reorientation of thinking is taking place at Delhi. Focus should now be on the development of the North Eastern States. The Central government along with State government must gear up to improve the state of ease of doing business by implementing action plans.

Select References :

Office of the Economic Adviser,         :    Handbook of Industrial Policy and Statistics, Govt. of                   India, New Delhi. 2006-07.

World Bank, Washington                      :    World Development Report 2009 Reshaping Economic Geography (See p.76, 340-342, 351-353, 356-360)

Sugihara, Karou                                     :    ‘East Asian Path’ in Economic and Political Weekly (EPW), August 21, 2004 (pp 3855-3858), Mumbai.

Cheow, Eric Teo Chu                            :    Strategic Relevance of Asian Economic Integration, RIS Discussion Paper (March, 2005)

Marjit, Sugata et.al                                :    Regional Trade Openness Index and Income Disparity – A New Methodology and the Indian Experiment (Special article) in EPW; March3, 2007.

Richardson, H.W.                                  :    Elements of Regional Economics (1969), Penguin Books.

Jha, Veena(ed), UNCTAD                    :    India & the Doha Work Programme–Opportunities and Challenges, 2006, Macmillan India Ltd. (See p. 9. Table 1.1)

Jha, Veena (UNCTAD)                         :    Background & Methodology Note on ‘ India-ASEAN FTA Negotiations: Wrap up Meeting’ 13th March 2006, [Page 3, reference to World Bank Study, 2002 by Ferranti).

fe Bureau                                                :    The Financial Express, January 26, 2010 (See p. 2), 24-7-2014, 10.8.14, 2.9.14, 3.9.14, 23.9.14 & 26.9.14.

Passah, P.M. (ed.)                                  :    In Defence of Regional Economic Development in India, (2006), Akansha Publishing House, New Delhi (See the paper by A.K. Neog)

Neog, A.K.                                            :    ‘India’s Look East Policy- Economic Opportunities and Challenges’ in Abstracts of National Seminar on Look East Policy and North East India held on 26-27 March 2010, organized by NEICSSR, Shillong.

Neog, A.K.                                            :    Prof. N.C. Das Memorial Lecture on Economic Development of North East India : A Glimpse (14th March, 2013) Department of Commerce, Gauhati University.

 

 

 

 

 

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northeastias

North East Institute of Advanced Studies (NE-IAS) has been founded with a vision to make high quality professional education and training available at doorstep with the guidance and assistance of nationally acclaimed trainers and mentors who have achieved benchmark in their fields by consistent success records. NE-IAS aims to develop a quality and result-oriented coaching and training institute in NE India. The institute currently offers courses for preparation of UPSC and state level civil services.

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