INTRODUCTION

The South Asian Association for Regional Cooperation (SAARC) is an

organization of South Asian nations, founded in 1985 and dedicated to economic,
technological, social, and cultural development emphasizing collective selfreliance Its seven founding members are Bangladesh, Bhutan, India, the Maldives,
Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization in 2007.
Meetings of heads of state are usually scheduled annually; meetings of foreign
secretaries, twice annually. Headquarters are in Kathmandu, Nepal.
HISTORY OF SAARC
The South Asian Association for Regional Cooperation (SAARC) is an economic
and political organization of eight countries in Southern Asia. In terms
of population, its sp here of influence is the largest of any regional organization:
almost 1.5 billion people, the combined population of its member states. In the late
1970s, Bangladesh President Ziaur. Rahman proposed the creation of a trade blocc
on sisting of South Asian countries. The Bangladeshi proposal was accepted by
India, Pakistan and Sri Lanka during a meeting held in Colombo in 1981. In
August 1983, the leaders adopted the Declaration on South Asian Regional
Cooperation during a summit which was held in New Delhi.
The seven South Asian countries, which also included Nepal, Maldives and
Bhutan, agreed on five areas of cooperation.
Afghanistan was added to the regional grouping at the behest of India
on November 13, 2005, With the addition of Afghanistan, the total number of mem
ber states were raised to eight.

OBJECTIVES

The objectives of SAARC, as defined in its charter, are as follows:

i. Promote the welfare of the peoples of South Asia and improve their quality of
life
ii. Accelerate economic growth, social progress and cultural development in the
region by providing all individuals the opportunity to live in dignity and realise
their full potential
iii. Promote and strengthen collective self-reliance among the countries of South
Asia;
iv. Contribute to mutual trust, understanding and appreciation of one anothers
problems
v. Promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields
vi. Strengthen co-operation with other developing countries
vii. Strengthen co-operation among themselves in international forms on matters of
common interes

PRINCIPLES
- Cooperation within the framework of the Association is based on respect for the
principles of sovereign equality, territorial integrity, political independence, noninterference in the internal affairs of other states and mutual benefit.

- Such cooperation is to complement and not to substitute bilateral or multilateral

cooperation.

- Such cooperation should be consistent with bilateral and multilateral obligations

of the member states.
- Decisions at all levels in SAARC are taken on the basis of unanimity.
In today's world no nation exists 10 economic isolation. A nation's economy, its
industries, service sectors, levels of income and employment and living standards
are linked to the economies of its trading partners. The benefits of international
trade accrue in the forms of lower domestic prices, development of more efficient
methods and new products and a greater range of consumption choices. In an open
trading system, a country will import those commodities that it produces relatively
at a higher cost. Since resources are channeled from uses of low productivity to
that of high productivity, gains from trade are attained permitting higher levels of
consumption and investment.
.Over the past 20 years, world trade has grown twice as fast as real GDP deepening
economic integration and raising living standards . The role of foreign trade in
economic development is considerable and both are intimately connected. Trade
can stimulate growth if exports are tending to increase faster than imports or be a
brake on growth if imports are tending to increase faster than exports. The dramatic
growth of cross-border investment and international trade over the past two
decades combined with explosive growth in global communications and
technology. The FDI4 flow, which was $160 billion in 1991 soared to $1.1 trillion
in 2000. And the volume of international trade also expanded dramatically 1 to 16
fold over the past 50 years, are an evident for well being of the nations through
open trading system.
However, it is generally accepted that the gains to a nation from free international
trade may more than outweigh the losses to particular domestic firms and workers.
Although free trade is often strongly advocated, many countries believe that the
expansion in trade is best accomplished through the establishment of Regional
Economic Association (REA) / Integration (REI). However, the emerging WTO
regime has in no way undermined the process of regionalism. It has wide ranging
implications for the global economy. The South Asian Association for Regional
Co-operation (SAARC) comprises the seven countries of South Asia. i.e.,

Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. SAARC is a
manifestation ofthe determination of the people of South Asia to work together
towards finding solutions to their common problems in a spirit of friendship, trust
and understanding and to create an order based on mutual respect, equity and
shared benefits. The primary objective of the Association is the acceleration of the
process of economic and social development in member states, through collective
action in agreed areas of co-operation South Asian nationsll have not only a shared
culture and a common history, but also, a common destiny in the 21st century.
South Asia constitutes 3% of world area, but houses 22% ofthe world's population.
South Asia also makes anintegrated condominium of common nvers, mountain
system, ocean and a conjoint ecological system. The region suffers from massive
balance of payments burden, mass unemployment, high population growth rate,
large concentration of poverty, low rate of economic growth, constant food
shortage, worsening terms of trade, largely illiterate, considerable malnourished,
and also the least gender sensitive region ofthe globe. The combined GDp4 of
South Asia US $ 609 trillion is only 1.8% ofthe world GDP. Unsurprisingly
therefore, per capita incomes are low.
In 2000 the average per capita income stood at $ 490 and therefore poverty is a
serious problem confronting the south Asian economies. The South Asian
economies differ rather significantly in size. For example", India accounts for more
than three-fourth ofthe region's GDP while Srilanka and Nepal contribute only
2.7% and 0.9% to the regional GDP respectively. Pakistan and Bangladesh
comprise medium sized economies in the region and account for 11.7 and 8 percent
respectively of the regional GDP. There are also sharp variations in per capita
incomes across the countries, SriLanka's per capita income (US$ 860) is over three
times that of Nepal (US$ 241). Whereas Bangladesh, India, and Pakistan's per
capita income is US$ 373, 459, and 516 respectively. 3 The Imports4 of South Asia
increased from $37.7 billion in 1990 to $78.1 billion in 2000, indicating an annual
growth rate of 9.8 percent, but the Exports increased at a more rapid rate of 12.06
percent, from $27.3 billion in 1990 to $65.2 billion in 2000. India's bilateral trade
with the SAARC countries accounts for a small share in her trade. India's Imports
from SAARC countries increased marginally from 0.54% of the total Imports in
1991 to 0.73% in 2000. Whereas, the Exports rose to 4.43% in 2000 compared to
1.78% in 1991 (More than doubled). Due to the growing protectionist tendencies in

the international market and the increasing competition among suppliers,

particularly in the developing world, the need to evolve feasible strategies for
regional economic co-operation in South Asia is becoming more and more
apparent. This is evidenced by the recent tempo of activities in this regard in the
South Asian region. Increased regional economic co-operation would help reduce
the economic dependence of the South Asian countries on the developed countries
in the future. Given the possibilitythat trade with the rest of the world does not
offer very happy prospects in the future, intra regional trade could facilitate growth
and development of the South Asian countries on the basis of the regional selfreliance. Such regional economic cooperation is considered feasible because intra
regional, historical, cultural, geographical and developmental commonalities are
much stronger than intra regional differences in political and economic structures
and perspectives. Besides, the sub continental economy of the South Asian region
offers potentially vast and undeveloped markets, and is blessed with huge
endowments of material and human resources. Against this background, the
present study attempts to review the trade structure and technological flows among
SAARC countries and to indicate a few areas for future co-operation. Also
undertakes a detailed analysis of the pattern of "revealed Comparative" advantage
and the extent of trade complementarity in South Asia, with a view to ascertaining
whether or not the SAPTA (Saarc Preferential Trading Agreement) and the existing
trade structures of individual countries can support the regional economic cooperation initiatives.

INDIAS CONTRIBUTION

TOWARDS SAARC

India has cooperated actively in SAARC activities and vigorously promoted trade
and other forms of economic, social and technical cooperation within SAARC.
India also actively supports people-to-people initiatives aimed at fostering greater
mutual understanding and goodwill in the region. India is the only SAARC
member that shares land borders with four members and sea borders with two. No
other SAARC country shares a common border with each other. In terms of trade,
commerce, investments etc. India is a source of potential investments and
technology, and a major market for products from all other SAARC members. One
of the foremost challenges facing South Asia is the issue of poverty eradication. At
the Twelfth Summit held in Islamabad in January 2004, India offered to contribute
US$ 100million for Poverty Alleviation projects in SAARC countries (outside
India). India has additionally offered to finance feasibility projects in SAARC
countries in this regard. India has granted the highest number of tariff concessions
to all SAARC MEMBERS.

SAARC TRADE RELATIONS

Member countries have strengthened bilateral trade with eachother. This has
hampered regional trade agreements such as SAFTA. Also, it is not possible to
always predict the success of a FTA for member countries. For example, when
tariffs were cut between India and Sri Lanka, only copper trade increased between
the two initially. India has felt the need to provide economic support to Bhutan for
larger political concerns. However, this relationship is of a different nature and has
existed prior to SAARC. India has not behaved like a strategic benign leader in the
region, and is unsure of its priorities. An 8-9 percent growth rate has had limited
impact on alleviation of poverty in India. Defence expenditure has importance but
geopolitical perspectives are not always beneficial. If economy is given precedence
it can improve relations between states. Expansion of SAARC adds additional
sources of economic and commercial exchange.
The decade of 1990s proves to be a turning point for the South Asian countries
with respect to trade. Most South Asian countries resorted to comprehensive
economic reforms during the 1990s. Besides, number of bilateral and regional
agreements were signed and implemented on a priority basis. The switching of
policy regime in these countries has significantly contributed to outward
orientation of these economies as well as regions trade under the regional process.
The present level of intra-regional trade is low, but it increased significantly in the
1990s. Trade within the region increased at a faster rate as compared to that of the
world. Further intra-regional imports have been growing more rapidly than
exports. However, the growth of regional trade is accompanied by high degree of
instability (RIS 2002). The sectoral pattern of growth in the region shows that the
general increase in the growth of agriculture, industry and services sectors. The
manufacturing and services sectors have been relatively dynamic in most of the
SAARC countries during the 1990s. As the services represent around 40 percent or
more of GDP, growth in this sector along with the better growth performance in the
agricultural sector have significantly contributed to aggregate growth . Intraregional trade performance of individual countries indicates that both exports and
imports grew significantly during the last decade.

During the period 1990-2000, regional trade of most of South Asian countries
have made four-fold increase. The results indicate that there was a down turn in the
trade activities of the region in 1991 and 1999. Except for Maldives, other
countries faced marginal set back either in their exports or imports or both during
these years. However, in the latter half of the 1990s, regional trade has not only
been increasing but also becoming highly volatile. The instability in regional trade
has an adverse impact on the regional trade balance.
The region has witnessed perpetual intra-regional trade deficit during the period.
The trade deficit ofthe region increased between four to ten times during the period
1999-2000. During the last decade, India continued to have favorable trade balance
with the region. Pakistan also enjoyed the similar status except for a few years in
the late 1990s as
On the other hand, Bangladesh, Maldives, Nepal and Sri Lanka have significant
level of trade deficit with the region. The nature of trade deficit in these countries
is quite different from each other. In case of Maldives and Nepal, trade deficit was
very low. In 1994, the level of trade deficit of Bangladesh and Sri Lanka was
almost similar. During the latter half of the 90s, Sri Lanka's trade balance
continued to remain unfavorable, but showed a declining trend during 1996-99. In
2000, it again started rising but the magnitude oftrade deficit was much lower than
that of 1996 level.

BANGLADESH:
The regional trade deficit of Bangladesh more than doubled during the same period
(1990 - 2000). Exports from Bangladesh to the region constitutes about 2-3 per
cent of its global exports, and the corresponding figure for imports is between 7 to
17 percent in the 90s. The trade deficit of Bangladesh with the region constitutes
between 10 to 33 percent of its total trade deficit with the world. The bilateral trade
performances of regional partners indicate that Bangladesh has bilateral trade
imbalances with most of the regional partners during the last decade. Iri the mid90s, Bangladesh had favorable trade with Nepal, but the trend is reversed in the
later years. As far as country's trade balance with Sri Lanka is concerned, it was
either balanced or negative during the period 1990-2000.

INDIA:
South Asia has become an important trade destination of India. Exports from the
country to region constitutes between 3 to 6 percent ofits global exports, whereas
import from the region is relatively lower than exports. India has maintained
favorable balance oftrade with the whole of South Asia. The level of positive trade
balance is quite significant in case of Bangladesh and Sri Lanka: and moderate
with Nepal and Maldives. However, India's bilateral trade balance remained
adverse with Bhutan. Up to 1994, India had positive trade balance with Bhutan, but
the trend reversed in the subsequent years due to significant rise in Bhutanese
exports to India. The trade surplus with Bangladesh is however subject to
fluctuations and that with Nepal increased by four times between 1995 and 1996,
largely due to its trade and transit treaty with India. In the subsequent years, the
magnitude oftrade imbalanceswith India started receding. Commodity
Composition of India's trade under SAPTA The imports of India under first three
Rounds of SAPTA made a six-fold increase from 1994-95 t? 2000-01 as shown in
Except for three sections (gems and jewelleries, vehicles and arms &
ammunitions), India is importing sizable number of products covering all other
broad product segments from the region. Agricultural imports constitute about onethird of India's total imports from the region under the SAPTA process in 2000-01.
Traditionally import of vegetable products is the most important import, but
currently import of fats and oils are becoming important for India.
Imports are quite substantive in case of chemical and textiles. Besides, it has
sizable imports in broad product groups like animal products, prepared foodstuffs,
plastic products, wood products, base metal and mechanical appliances. The highly
concentrated exporting areas are processed food products, chemicals, textile
products and base metals. In some areas, India's exports are quite substantial such
as vegetable products, mineral products, and vehicles. In other areas, the
concession exports from India have been at a low-key level. They are animal
products, plastic products, leather products, mechanical appliances, optical
products and other manufactured items. In certain important product segments,
India is consistently improving its market presence in the region. They are
processed food products, chemicals, textiles and base metals. In some other
product segments, the export performance is quite alarming. Those areas are
vegetable products and vehicles. India's exports to the region have been subject to

high degree of fluctuations, particularly in those products, which are falling with in
the purview of SAPTA. If we compare the growth rate of India's exports to the
region in different product groups under the SAPTA process, only a few important
product groups show relatively stability in growth during the period 1994-95/200001

PAKISTAN:
Pakistan exported 3 to 5 percent of its total exports to the South Asia and imported
between 2 to 4 percent of the total imports from the region in the last decade. The
most important export destinations of Pakistan in the South Asian region are
Bangladesh, Sri Lanka and India. These three countries absorb about more than 95
percent of country's exports to the region. India's share in the total imports of
Pakistan from the region reached 72.4 percent in 1996, and started declining to
touch the rock bottom of 42.8 percent in 2000. The declining share of Pakistan's
imports from India has resulted in surge in Sri Lanka's exports to Pakistan in a
significant manner. Pakistan continued to maintain favorable trade with the region,
except for that in 1996-99. In 2000, country's adverse trade balance with the region
increased to more than 7 percent of its total trade deficit with the world.
SRI LANKA :
Sri Lanka has been depending on the South Asian region more on imports than
exports. The regional exports of Sri Lanka are about 2 to 4 percent of its total
exports. Though Sri Lanka's import from the region is very high as compared to
other non-LDCs of the region, country's dependence on the region has been
gradually declining in recent years. Sri Lanka's largest trading partner is India in
the region, and other important partners are Maldives, Pakistan, Bangladesh and
Nepal. The magnitude of country's trade deficit with the region is much larger than
that with global trade in the 1990s. With the reduction of imports from the region,
the trade imbalances with the region have declined significantly. The bilateral trade
balance of the country remains favorable with Maldives and Bangladesh: and
continues to be adverse with other South Asian countries in the region.

MALDIVES:
The economy of Maldives is highly dependent on regional trade. Its exports
depend on the region to the extent of 13 to 25 percent ofits global exports whereas
dependence for imports varies between 10 to 21 percent in the 90s. The trade
imbalance ofthe country is almost proportionate to its regional trade. The most
important trading partner ofMaldives is Sri Lanka, and the trade deficit with the
country is increasing alarmingly in recent years. With high dependence on India
forf. its domestic import requirements, trade deficit with India, is high in the late
1990s. Maldives trade with Pakistan shows no significant improvements in the
1990s.
NEPAL:
Nepal's dependence on South Asia has increased substantially following the IndoNepal Trade and transit Treat in 1996. The share of Nepal's regional exports to total
export increased from 9.3 percent in 1995 to 36.5 percent in 1998. Similarly the
share of imports from the region jumped up from 17.5 percent in 1995 to 33.1
percent in 2000. India is the largest regional trading partner of Nepal, and other
important trade partners are Bangladesh and Sri Lanka. The surge of economic ties
with the region has widened its trade imbalances with the region. It has large
adverse trade balance with India. With Bangladesh and Sri Lanka, the nature
oftrade balance varies from one year to another
World export ofservices currently around 25 percent ofworld export of goods
reached a level of 1260 billion US dollars in 1996 and growing at a rate of over 13
percent. The SAARC member countries, together, account for about 0.8 percent of
total global export of services as compared to the ASEAN countries, which account
for about 4 percent ofsuch exports. It is found that one ofthe major drawbacks of
SAPTA is exclusion of Services Trade from the agreement. Even though there are
no published data on intraregion service trade flows amongst SAARC countries.
One can derive a rough 152 estimate on a conservative basis taking 20% to 30% of
merchandise trade within SAARC region; the trade ofservices would amounts US
$ 500 billions. A range of reasons can be offered for extending SAPTA to trade in
services. The major ones are indicated below: There is a growing demand within
SAARC member countries for a whole range ofservices due to new technological

advancements, buyer needs for specialized services, opening of new markets,

demand for service-based inputs, globalisation strategies and economic
liberalization policies. Comparatively, goods exports, both within and from the
SAARC region, are not that robust. It is essential to explore new avenues, new
products and new dimensions for augmenting SAARC trade and in this context;
services would not only add to the list of tradable commodities but also lend
support for higher levels ofgoods trade. Although trade in services of SAARC
member countries constitutes a small proportion of world trade in services, it
appears feasible to have "trade creation" impact and mitigate "trade diversion"
impact through extension of SAPTA to services. Strengthening of service trade
through SAPTA would enable the SAARC countries gear up towards the enormous
changes taking place in world trade in services. Such exports are expected to take a
big leaf forward essentially on account of three factors, (i) advancements in generic
technology of computers and telecommunications: (ii) multilateral trading system
of the world Trading Organisation in services: (iii) a growing world demand for a
variety of services, it is important that all such changes are reckoned with for
strengthening intra-flow of services taking place within the S~C region. SAPTA
needs to include those services, which are expected to boom in world trade, for
instance, telecom, and software services, professional services, consultancy
services, financial and tourism services, insurance services, banking 153 services,
communication services etc., Ways can be found for mutually enforcing standards
and strengthening quality ofsuch services. A regional preferential trading
arrangement in services is an important starting point for nurturing such trade and
countering fierce competition from the multinationals. It will make space for
service trade of developing south Asian countries to grow and create its niche.
Regional trading arrangements of SAARC countries have their own advantage in
today's world ridden with trade barriers and with proliferation of such trading
arrangements in different parts of the globe. A preferential trading arrangement in
services can provide a critical route to economies of scale and scope, up gradation
oftechnology, infrastructure, product quality and rest ofthe world is moving in the
sphere oftrade in services.