On January 1, 2025, the Maldives lastly carried out its free commerce settlement (FTA) with China after it got here into being seven years in the past. The opposition then was very vital of the settlement because it was rushed by parliament with out a lot debate. India voiced its issues, fearing the FTA would enable Chinese language items into Indian markets. As China continues its talks with Bangladesh and Sri Lanka about comparable agreements, India wants a coherent financial technique to interact with its neighbours.
South Asian international locations, having embraced financial nationalism and protectionist insurance policies, have cautiously opened their economies to regional commerce. The India-Sri Lanka Free Commerce Settlement (ISFTA) was carried out in 2000, adopted by the South Asian Free Commerce Settlement (SAFTA) in 2006. Nonetheless, components comparable to protectionism, comparable manufacturing bases, para-tariffs, non-tariff limitations, insufficient infrastructure, excessive logistics prices, and political mistrust have restricted the effectiveness of those agreements. Different regional initiatives, such because the BIMSTEC free commerce settlement, have additionally been delayed, with negotiations dragging on for years. Consequently, South Asia stays one of many least linked areas on this planet, with regional commerce accounting for lower than 5% of its international commerce.
China Is Competing For Affect
In distinction, China has emerged as a significant buying and selling accomplice within the area, competing with India’s conventional financial affect. China signed an FTA with Pakistan in 2006, and over time, it has elevated investments and commerce linkages with India’s smaller neighbours, changing into considered one of their prime commerce companions. Properly-established provide chains, distinct manufacturing bases, manufacturing capacities, and low-cost items have facilitated China’s financial growth, aligning with its geopolitical and geo-economic ambitions. Following the launch of the Belt and Street Initiative (BRI), China supplied to signal FTAs with the Maldives, Sri Lanka, and Bangladesh. For Beijing, these agreements would assist promote cheaper exports, expedite BRI tasks, and create financial leverage.
Amongst South Asian international locations, there’s a rising demand to develop financial engagements to deal with structural points. They view FTAs as a chance to entry low-cost items, scale back import prices, increase exports and native manufacturing and alleviate stress on overseas reserves. For example, the Maldives has restricted manufacturing capability, faces rising import prices, and struggles with low overseas reserves. Bangladesh is about to graduate from its least-developed nation standing in 2026, which can outcome within the lack of preferential entry to international markets. After experiencing an financial disaster, Sri Lanka can also be desirous to develop its financial engagements, seeing them as important to its restoration. Bangladesh and Sri Lanka are negotiating FTAs with China and have expressed curiosity in becoming a member of the China-led Regional Complete Financial Partnership (RCEP).
India Ought to Make Use Of Momentum
These international locations have additionally expressed a powerful curiosity in deeper financial integration with India, hoping to profit from its financial progress and ascent. Lately, South Asia has seen a surge in land, maritime, waterways, air connectivity, and border infrastructure, in addition to commerce. For example, the Maldives and Bangladesh are keen to barter an FTA with India, whereas Sri Lanka intends to improve its current FTA to an Financial and Expertise Cooperation Settlement (ETCA). On its half, India views these FTAs and connectivity efforts as a way to reinforce its financial interdependence with its neighbours. India is at present engaged on over 100 connectivity tasks within the area, a few of that are funded by concessional loans and grants.
Nonetheless, India stays involved about Chinese language FTAs within the area. India fears that Chinese language imports will flood South Asian markets, undermine native economies, and finally exchange Indian exports. Over the past 20 years, India and China have been the highest exporters to the Maldives, Sri Lanka, and Bangladesh, with commerce steadily growing. Between 2010 and 2022, India’s exports to Sri Lanka grew from $2.5 to $4.6 billion, to the Maldives from $126 million to $485 million, and to Bangladesh from $3.5 to $9.4 billion. Nonetheless, this progress pales compared to China’s vital improve in exports to Sri Lanka ($1.2 billion to $3.5 billion), the Maldives (lower than $60 million to $562 million), and Bangladesh (from $5.3 billion to $17.8 billion). This pattern could additional intensify with the implementation of the FTA with China.
Drop The Scepticism
Neither India nor China is among the many prime 5 export locations for the Maldives and Bangladesh. This established order may change if the FTAs with China are carried out. India additionally fears that if these FTAs are signed, low-cost Chinese language commodities may enter India by way of its connectivity tasks and FTAs with neighbouring international locations. This scepticism has led India to reportedly pause negotiations on the FTA with Bangladesh.
India’s issues about Chinese language FTAs seem to have come full circle. At a time when international locations are desirous to develop their financial engagements, India should faucet into this momentum. New Delhi should realise that it may possibly counter China’s financial advances within the neighbourhood solely by proactively partaking its neighbours. Slightly than pausing the FTAs, India should expedite negotiations, scale back protectionist measures, and open its markets to smaller international locations. India’s technique ought to deal with stopping Chinese language items from flooding its markets whereas concurrently enhancing connectivity and commerce with its neighbours.
(The writer is Affiliate Fellow, Neighbourhood Research, Observer Analysis Basis)
Disclaimer: These are the private opinions of the writer