How Indian economy spillovers to South Asia…

A nice paper from Ding Ding and Iyabo Masha.

It seems India’s reforms and high growth have led to rise in spillover to South Asian economy as well.  So from 1995 onwards if India grows by 1%, it has a +ve spillover effect to South Asia of 0.37%.

Some history and basics:

Many South Asian countries share a common history and culture, and until 1947 the three largest – India, Pakistan and Bangladesh – had a common market with integrated  monetary and communication systems. Though the economies share similar developmental challenges, India’s economy is disproportionately larger than its  neighbors’. Currently, India accounts for about 80 percent of the region’s GDP, Pakistan accounts for about 10 percent, Bangladesh 6 percent, Sri Lanka 2 percent, and the rest less than 2 percent.

Economic growth in the region accelerated since the late 1990s, a period that coincides with the opening up of the Indian economy. On average, the rate of growth of real per capita GDP rose from 3.5 percent in 1990–1995 to 4.5 percent in 2005–2009. This was the case even though Afghanistan, Nepal and Sri Lanka faced considerable political challenges that likely negatively affected macroeconomic performance for part of the period under study. India’s granting of duty-free access to goods from five SAARC countries in November 2011 is expected to strengthen intraregional links and there is a framework  agreement to reduce custom duties of all traded goods to zero by 2016.

How does Indian economy help SAR?  Official financial flows from India are the main source:

Unlike some regional powers such as South Africa, India does not operate an economic union with its neighbors4. For the smaller economies like Bhutan and Nepal, India is the single-largest trading partner, and a fixed peg with the Indian rupee provides a source of stability and has helped anchor inflation. For Bangladesh, trade with India as a share of total trade remains around 10 percent since mid-1990s (Chart 4); while Sri Lanka’s trade with India has picked up following a bilateral trade agreement, with exports to India quadrupling since the full implementation of the agreement in 2000. The recent increase in Maldives’s trade with India was boosted by increasing demand for tourism, with India supplying round 3 percent of tourists.

India’s official financial flows, especially to the smaller economies, are key transmission channels for spillover effects to the region. More than 70 percent of Bhutan’s budgetary grants are from the Government of India, and almost all (98 percent)  of Bhutan’s external debt is owed to India and serviced automatically from the proceeds of joint venture hydroelectric power receipts. In Maldives, loans from India account for about 20 percent of external debt outstanding, and the State Bank of India is the second largest bank operating in Maldives. In Afghanistan, India recently committed to US$ 650– 750 million (about 4 percent of GDP) in aid through direct and indirect budget support. In 2010, EXIM Bank of India extended a line of credit of $1 billion to the Government of Bangladesh for financing eligible goods and services, including project exports and consultancy services. While these flows allow these countries to bridge the gap between domestic savings and investment, enabling higher levels of consumption, they could also make the economies susceptible to adverse developments in India. 

However private financial flows are not as big. Remittances have also become a major source lately:

Remittances provide another channel through which India’s growth may affect growth in SAC. Although not recorded by official data, it is believed both Nepal and Bangladesh have a sizable number of emigrants in India. Their remittances are important in financing domestic consumption and moderating the impact of exogenous shocks.

Another interesting source of spillover is SAsian students coming to India for education. THis is human capital spillover. In spillover research one hardly discusses human capital spillover:

India’s contribution to human capital development in South Asia is mainly through education and health. It has long been a destination for higher education in the region. From 1992 to 2007, the number of SAC students studying in India’s universities  has more than doubled to almost 5000 (Dongaonkar and Negi 2009). Both officially and through private sector driven initiatives, India is investing in health and education sectors in other countries. India is also assisting to train Afghan civil servants, diplomats and police, while in Bangladesh and Bhutan it is providing technical assistance for the implementation of power projects.

So these are possible sources of spillover. However, empirically it is difficult to identify the sources of spillover:

This growth spillover though does not seem to depend on the traditional trade channel, consistent with the stylized facts on the key trade indicators. Nevertheless, the modest impact in the post reform era indicates that India is able to influence growth in the region. It is likely that India’s growth spillovers are transmitted through a combination of direct and indirect channels in  different countries, in which case the panel analysis may not be able to pinpoint a particular channel as being the most important. It is possible that the productivity and efficiency of SAC have been enhanced by increased availability of technical knowhow from India and increases in human capital development. The achievements of India in the post-reform era may also have increased business confidence across the region, and contributed to the implementation of policies that eventually affected SAC’s growth positively.

Hmmm…

Though spillover from India to SAsian region is lower than Safrica to Africa region and China to SEAsian region:

Although India’s growth has good explanatory power for growth in its South Asia neighbors after 1995, the level of the spillover impact is less than those found in other large economies. While a 1 percentage point increase in India’s growth translates into  0.37 percentage point increase for SAC, Arora and Vamvakidis (2005) show that a 1 percentage point increase in GDP per capita growth in South Africa is correlated with a 0.5–0.7 percentage point rise in growth in the rest of Africa for the period 1980–99. They also find a 1 percentage point increase in China’s growth is correlated with an average of 0.5 percentage point  increase in the growth of the rest of the world for the last two decades, with potentially larger effects for Asian countries (Arora and Vamvakidis 2010).

There are certain issues which need to be worked upon to increase spillovers effect:

  • Infrastructural constraints and institutional restrictions.
  • High levels of overall protection.
  • Challenging business environment.
  • Restrictive rules of origin and destination.
  • Limited revealed comparative advantage
  • Substantial informal or illegal trade.
A nice paper. Interesting to note that Indian economy is having spillover effect on SAsian economies. And this should rise over a period of time if the political environment remains healthy..
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One Response to “How Indian economy spillovers to South Asia…”

  1. How BRIC economies differ in their development financing philosophy? « Mostly Economics Says:

    […] nice paper from Nkunde Mwase and Yongzheng Yang of IMF. I had just pointed to a paper on how Indian economy spillover to South Asia. This one is more about India’s development […]

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