South Asia: Can India & Neighbours Replace Conflicting Mistrust With Investment?

South Asia is home to cash-rich regional pioneers, yet it is a part of struggling third-world economies.

(Photo: Chetan Bhakuni/The Quint)

Here’s a quick quiz. What would be the GDP of a country home to an investor company, that opened the maximum number of hotel properties in 2020 in India after Tata-owned IHCL and Wyndham, and commands the third-largest market share in instant noodles only after Nestle’s Maggi and ITC’s Sunfeast Yippee?

Surprisingly, the GDP in question is of ‘poor’ Nepal at $33.98 billion as compared to India’s $2.6 trillion and the investor company in question is the $1.7 Billion Chaudhary Group of Nepal.

India is the undisputed leading economy of South Asia. Yet, who manufactures for Victoria’s Secret, the brand that once ruled over 31 percent of the global lingerie market? It is a Sri Lankan company, MAS Holdings.

Welcome to South Asia, home of a surprising dichotomy – of global leaders and regional pioneers, who are cash-rich, yet a part of struggling third-world economies, which are home to a fifth of humankind with almost half of its people living in poverty.

A region of marked contrasts. Yet, nobody in the region quite understood the necessity to look inwards as successful businesses would fly out to the Middle East, Europe or the Americas.

Along came the pandemic as trading costs rose, global air transport capacity dropped, and the struggles of remote investment hit world economy and global investment cycles. Suddenly, the need for solutions nearer to home finds importance.

As South Asian consumer markets continue to grow, regional economies and businesses are feeling the pressure to diversify as well as relocate their global value chains at home or nearer home.

As world trade seems muted, it is the potential for regional trade that would provide the buoyancy for vibrant economies to make a comeback.

An Eye-Opener 

'The solution lies in the neighbourhood,' says a World Bank Report titled Regional Investment Pioneers in South Asia - The Payoff of Knowing Your Neighbors by Sanjay Kathuria, Ravindra A Yatawara and Xiao’ou Zhu.

The report that builds on the World Bank program of promoting, engaging and reinforcing stronger intra-regional cooperation and connectivity makes some startling discoveries.

• A complement and follow-up to an earlier report on trade titled A Glass Half Full: The Promise of Regional Trade in South Asia, the report dwells on the need to intensively and extensively engage regional economies beyond trade to active investments too.

• The report makes some startling revelations that outline the potential and scope for South Asian countries including India, Bangladesh, Pakistan, Sri Lanka, Nepal, Bhutan and Afghanistan and teases them to look beyond regional conflicts, towards a vibrant and prosperous neighbourhood.

Dual Components of Intra-regional Trade 

Amongst the fastest-growing regions of the world, South Asia shows intra-regional trade proof that there are non-regional spillovers from an individual country’s growth.

This basically means that Bangladesh, India and Sri Lanka may witness exemplary growth but its effect does not reflect on Nepal, Pakistan, Afghanistan or Bhutan – their immediate neighbours across the border.

The universe of intra-regional investment is made up of two components – OFDI (Outwards Foreign Direct Investment) and IFDI (Inwards Foreign Direct Investment).

The South Asian intra-regional stock of investment is just $3 billion. The total intra-regional inwards investment or IFDI accounts for only 0.6 percent of all FDI into the region from the world and while OFDI into the region makes just 2.7 percent of OFDI to the world.

Even though intra-regional exports stand at a higher 7.9 percent of exports, that does not stop South Asia from being ranked lowest among developing regions in intra-regional investment as a share of total regional inward investments or outward investments.

In sharp contrast, Sub-Saharan Africa has the highest shares of intra- regional inward and outward investment stocks as compared to other developing economies. Even other regions including East Asia, Latin America and the Caribbean, and Europe and Central Asia have higher shares, showing more matured development of regional value chains in these areas.

Back in South Asia, India alone accounts for 75 percent of intra-regional investment funds flow (from India) but that is just 2 percent of India’s total outward investment.

But for Sri Lanka and Pakistan, the next largest outward investors, the neighbouring region is a more important destination – accounting for 26 percent and 19 percent of total outward investments.

The Bottleneck 

Intra-regional goods trade in South Asia is less than one-third of its potential. Trade leads to growth, job creation and poverty reduction on one hand and caters to the rising demand for goods and services from the expanding middle classes in the region on the other.

Yet, significant opportunities for trade and investment expansion and diversification remains unexplored more due to human reasons.

• Even as news trickled in days ago of 2,783 foreign companies shutting down their India operations since 2014, the World Bank Report emphasises that South Asian businesses exhibit ‘limited and polarised knowledge connectivity and low bilateral trust.’

• Over 1,274 firms across eight countries of the region echoed the regional divide marked by bilateral mistrust and information and network frictions. This information divide has been reflected in the high costs of search, matching, and contracting across borders and the failure of the markets to address and neutralise these frictions.

What seems like just a walk across no man’s land physically, is impossible practically for intra-regional investment and trade. Ironically, social and ethnic networks increase cross-border investment.

For instance, Nepal’s only billionaires, the Chaudharys hail from Rajasthan, Sri Lankan apparel pioneers Amaleans of MAS Holdings, Omars of Brandix and Sattars of T & FG have their ancestral origins in Gujarat; and Bangladesh’s Rahim family of Rahimafrooz had roots in Kolkata.

Steps to Becoming a Superpower 

The South Asia Report offers four bold steps to make for a borderless and seamless business ecosystem.

1. Firstly, relaxation of OFDI regimes both for competitiveness and agility in crises such as pandemics.

2. Secondly, smart IFDI promotion strategies and investment facilitation by tapping affiliates of larger global firms for investments in smaller countries from larger invested neighbours.

3. Thirdly, enhance cross-border information exchange and network development activities, distinct from traditional connectivity, that can support intraregional investment as well as trade.

4. Finally, enhance digital connectivity and consistently intervene to reduce trade costs to increase investment as well as trade flows.

As Jim Carrey would say, “Desperation is a necessary ingredient to learning anything or creating anything.” The pandemic could well be the end to new beginnings and force us to look around in the neighbourhood, for a change.

(Ajay Thakur is a multimedia journalist who writes for PixStory and has reported for STAR News, BBC, the Times Of India, The Goan and O Heraldo, among other publications. He tweets at @EagleEyeAT.)