A Glass Half Full AGHF_i-xxii.indd i 20/09/18 4:53 PM AGHF_i-xxii.indd ii 20/09/18 4:53 PM SOUTH ASIA DEVELOPMENT FORUM A Glass Half Full The Promise of Regional Trade in South Asia SANJAY KATHURIA, EDITOR AGHF_i-xxii.indd iii 20/09/18 4:53 PM © 2018 International Bank for Reconstruction and Development / Th e World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 21 20 19 18 Th is work is a product of the staff of Th e World Bank with external contributions. Th e fi ndings, interpretations, and conclusions expressed in this work do not necessarily refl ect the views of Th e World Bank, its Board of Executive Directors, or the governments they represent. Th e World Bank does not guarantee the accuracy of the data included in this work. Th e boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of Th e World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of Th e World Bank, all of which are specifi cally reserved. Rights and Permissions Th is work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http:// creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: Kathuria, Sanjay, editor. 2018. A Glass Half Full: Th e Promise of Regional Trade in South Asia. South Asia Development Forum. Washington, DC: World Bank. doi:10.1596/978-1-4648-1294-1. License: Creative Commons Attribution CC BY 3.0 IGO Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: Th is translation was not created by Th e World Bank and should not be considered an offi cial World Bank translation. Th e World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: Th is is an adaptation of an original work by Th e World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by Th e World Bank. Th ird-party content—Th e World Bank does not necessarily own each component of the content contained within the work. Th e World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. Th e risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, fi gures, or images. All queries on rights and licenses should be addressed to World Bank Publications, Th e World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (paper): 978-1-4648-1294-1 ISBN (electronic): 978-1-4648-1295-8 DOI: 10.1596/978-1-4648-1294-1 Cover photo: © Espinosa Mejía Alejandro / World Bank. Further permission required for reuse. Cover design: Critical Stages Library of Congress Cataloging-in-Publication Data has been requested. AGHF_i-xxii.indd iv 20/09/18 4:53 PM South Asia Development Forum ome to a fi fth of mankind, and to almost half of the people living in poverty, HSouth Asia is also a region of marked contrasts: from confl ict-aff ected areas to vibrant democracies, from demographic bulges to aging societies, from energy crises to global companies. Th is series explores the challenges faced by a region whose fate is critical to the success of global development in the early 21st century, and that can also make a diff erence for global peace. Th e volumes in it organize in an acces- sible way fi ndings from recent research and lessons of experience, across a range of development topics. Th e series is intended to present new ideas and to stimulate debate among practitioners, researchers, and all those interested in public policies. In doing so, it exposes the options faced by decision makers in the region and highlights the enor- mous potential of this fast-changing part of the world. v AGHF_i-xxii.indd v 20/09/18 4:53 PM Note: The study refl ects the views of the World Bank and does not necessarily refl ect the views of the Governments of the countries covered by the study. The fi ndings of the study would, thus, not be binding on the countries covered by the study. AGHF_i-xxii.indd vi 20/09/18 4:53 PM Contents Foreword xv Acknowledgments xvii About the Editor and Authors xix Abbreviations xxi Executive Summary 1 Why Is There Such a Large Gap between the Reality and the Potential? 1 Can We Begin to Imagine the Possibilities? Have There Been Any Actual Breakthroughs? 2 How Can South Asia Turn Its Proximity from a Burden to an Advantage? 3 What Are the Considerations in the Careful Management of Trade Integration? 6 Overview 7 Sanjay Kathuria and Priya Mathur The Issue 7 The Symptoms 9 The Barriers 10 Toward Realizing South Asia’s Trade Potential 13 A Synopsis 24 Note 26 vii AGHF_i-xxii.indd vii 20/09/18 4:53 PM viii l CONTENTS 1 South Asia: A Work in Progress 27 Sanjay Kathuria and Priya Mathur Introduction 27 Establishing the Context for Intraregional Trade in South Asia 32 The Untapped Trade Potential 35 Barriers to Intraregional Trade and Investment 39 The Benefi ts of Current Trade Patterns 53 Conclusions 64 Annex 1A: Tables 65 Notes 77 References 81 2 Border Tax Distortions in South Asia: The Impact on Regional Integration 87 Sanjay Kathuria and Guillermo Arenas Introduction 87 Trade Protection in South Asia 88 Tariff-Related Constraints on SAFTA’s Effectiveness 97 Conclusions and Directions for Reform 100 Notes 102 References 104 3 A Granular Approach to Addressing Nontariff Barriers: India’s Trade with Bangladesh and Nepal 105 Nisha Taneja Introduction 105 Approach of the Chapter 106 Institutional Framework and Regulations Governing NTMs 109 NTM Restrictiveness, Regulations, and Procedural Obstacles 117 Conclusion and Policy Recommendations 138 Annex 3A: Classifi cation of Nontariff Measures by Chapter 141 Annex 3B: Sanitary and Phytosanitary Measures and Technical Barriers to Trade 142 Annex 3C: Classifi cation of Procedural Obstacles 143 Annex 3D: Harmonized System Codes, Selected Items 144 Annex 3E: Questionnaire for the NTM Survey: India and Nepal 145 AGHF_i-xxii.indd viii 20/09/18 4:53 PM CONTENTS l ix Annex 3F: Plant Material in Nepal Requiring Pest Risk Analysis 149 Annex 3G: Summary of NTM Findings 151 Notes 155 References 156 4 Reducing Connectivity Costs: Air Travel Liberalization between India and Sri Lanka 159 Sanjay Kathuria, Mauro Boffa, Nadeem Rizwan, Raveen Ekanayake, Visvanathan Subramaniam, and Janaka Wijayasiri Introduction 159 Air Services Agreements 160 Evolution of the Regional Market for Air Services 166 Impact of Air Services Liberalization on Traffi c between India and Sri Lanka 173 Changes in Competition and Market Composition 181 Conclusion 183 Notes 185 References 187 5 Bangladesh–India Border Markets: Borders as Meeting Points 189 Mohini Datt, Prithviraj Nath, Indranil Bose, and Sayandeep Chattopadhyay Introduction 189 Border Markets Elsewhere Range in Size and Degree of Formality 190 The Scope for Scaling-Up 192 Main Findings 193 Conclusions and Policy Recommendations 213 Annex 5A: Market Details 216 Annex 5B: Haat Regulations and Procedures 217 Annex 5C: Study Structure 218 Annex 5D: Number and Type of Respondents 219 Annex 5E: Detailed Suggestions to Improve the Border Haat Initiative 220 Notes 226 References 226 AGHF_i-xxii.indd ix 20/09/18 4:53 PM x l CONTENTS Boxes 1.1 The Gravity Model Approach: Evidence of Untapped Trade Potential in South Asia 36 1.2 South Asia: Overall Trade Restrictiveness Indexes Are Higher in Regional Trade 44 1.3 Nontariff Barrier Resolution Mechanism: A Possibility in South Asia? 46 1.4 A Tale of Two Free Trade Agreements 49 1.5 Trade and Lagging Regions: The Case of Northeast India 62 3.1 Xanthan Gum Case Study 128 3.2 Packaging Information Case Study 128 3.3 Labeling and Packaging Case Study: Ready-Made Garments 131 3.4 Case Study: Import Requirements for Pharmaceuticals 135 4.1 Freedoms of the Air 161 4.2 Impact of Air Service Liberalization on Tourism, India and Sri Lanka 175 5.1 The Success of Haats 194 5.2 Regulatory and Other Obstacles to Haat Sales 199 5.3 Border Haats Provide Avenues for Woman-Led Households 204 5.4 Constraints on Entrepreneurship Among Women 204 5.5 Bringing People Together 209 5.6 The Views of Border Security Forces 213 Figures O.1 Intraregional Trade as a Share of Regional GDP 8 O.2 Intraregional Trade Potential in South Asia 10 O.3 Average Intraregional and Interregional Trade Costs, 2010–15 12 O.4 Growth in Airline Seats Available between India and Selected Countries, 2004–17 19 O.5 Ratings of Income Increases from Haat Trade 22 O.6 The Views of Neighbors 23 1.1 Intraregional Trade as a Share of Regional GDP 29 1.2 South Asia Continues to be the Most Rapidly Growing Region in the World 29 B1.1.1 Intraregional Trade in South Asia 36 1.3 Average Intraregional