This article offers a systematic approach and economic rationale for pruning India's sensitive lists under the South Asian Free Trade Area agreement. The recommended sensitive lists can be used by Indian policymakers in the forthcoming SAFTA negotiations.

COMMENTARY

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An Approach to Prune India’s Sensitive Lists under SAFTA

Nisha Taneja, Saon Ray, Neetika Kaushal, Devjit Roy Chowdhury

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-including inter alia advancing its tariff liberalisation programme and pruning the size of its sensitive lists. However, more concerted efforts are required to reduce the lists further.

Member-countries adopt a variety of criteria to prepare their sensitive lists. A

This article offers a systematic approach and economic rationale for pruning India’s sensitive lists under the South Asian Free Trade Area agreement. The recommended sensitive lists can be used by Indian policymakers in the forthcoming SAFTA negotiations.

This study was funded by the Konrad Adenauer Stiftung, New Delhi.

Nisha Taneja (NTaneja@icrier.res.in), Saon Ray (sray@icrier.res.in), Neetika Kaushal (nkaushal@icrier.res.in) and Devjit Roy Chowdhury (dchowdhury@icrier.res.in) are with the Indian Council for Research on International Economic Relations, New Delhi.

Economic & Political Weekly

march 12, 2011

ndia’s trade with its south Asian partners has remained low and is less than 1% of its total imports from the rest of the world, in spite of implementation of the South Asian Free Trade Area (SAFTA) agreement in 2006. It has been argued that the large sensitive list maintained by member-countries under SAFTA is a major stumbling block inhibiting trade (Baysan et al 2006; Taneja and Sawhney 2007). At the time SAFTA negotiations were initiated in 2004, India had restricted up to 38% of its total imports by value from SAFTA members under the sensitive list category (Weerakoon 2010). One shortcoming of the SAFTA agreement is that it does not have any formal or binding commitments that would require member-countries to reduce their sensitive lists. Recognising that India is the largest economy in south Asia, Prime Minister Manmohan Singh announced at the 14th SAARC Summit that India would accept asymmetrical responsibilities including opening her markets to her south Asian neighbours, without insisting on reciprocity. Since then, India has taken a number of steps in this regard,

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negative list in a preferential or free trade agreement is often justiﬁed on the grounds that it would provide protection to vulnerable sectors such as nascent industries (infant industry argument), small-scale producers (socio-economic arguments) or agricultural producers (food security concerns). However, often, sensitive lists are prepared through stakeholder consultations that result in the inclusion of those sectors where powerful domestic lobbies seek protection. Sensitive lists, particularly in the case of India, have come to be dominated largely by such sectors. Since sensitive lists do not take into account the supply capabilities of exporting countries, they often include items that cannot be supplied by partner countries and are therefore redundant. As part of India’s ongoing reform process, most of the items reserved for exclusive production by small industries have been dereserved to enable ﬁrms to become more competitive. However, India’s sensitive lists under SAFTA continue to have several of the items that were earlier reserved for the small-scale sector but have now been dereserved. There is no rationale any longer for these items to remain on

COMMENTARY

the sensitive list. Agricultural items having food security implications are sensitive and therefore there is a justiﬁcation for retaining such items on the sensitive list. However, many products on the sensitive list need careful examination.

This article offers a systematic approach and economic rationale for pruning India’s sensitive lists under SAFTA. The recommended sensitive lists can be used by Indian policymakers in the forthcoming SAFTA negotiations. It is important to emphasise that while India has separate sensitive lists for less developed countries (LDCs) and non-LDC countries under SAFTA, it has a free trade agreement with Nepal, Bhutan and Sri Lanka and a preferential agreement with Afghanistan. The sensitive lists that India maintains under the bilateral agreements are smaller than under SAFTA. India has also offered tariff concessions to Bangladesh in addition to those offered to LDCs under SAFTA. Since the sensitive lists under the Indo-Nepal and Indo-Bhutan agreement have the most comprehensive trade access to India, the sensitive lists that need to be examined pertain to Sri Lanka, Bangladesh and Pakistan.

Constructing the Sensitive Lists

To begin with, sensitive lists that India maintains with Sri Lanka, Bangladesh and Pakistan are constructed since the original sensitive lists, notiﬁed when SAFTA became operational, have not been modiﬁed following additional concessions that India has given at various points of time. Items related to food security are retained on the sensitive list and so are alcohol and tobacco products. The elimination process involves removing those items that have not been exported by the exporting countries to the world. In addition items that have been dereserved for the small-scale sector are also eliminated. Further, the concept of revealed comparative advantage (RCA) is used to identify those products in which the exporting country is competitive in the international market, but India is not. Such items are most vulnerable and are likely to face maximum competition from the exporting country and can therefore be retained on the sensitive list. The remaining items comprising items where either India is competitive or neither India nor the exporting country is competitive are suggested for elimination.

In June 2006, when SAFTA agreement was signed, India maintained a list of 762 items for LDCs and 884 items for non-LDCs. Over the past four years, India has made attempts to reduce the items in the sensitive list. In December 2006 the number of items in the sensitive list was lowered to 744 items for LDCs and 868 for non-LDCs. In October 2008, a further reduction was made in the sensitive list for LDCs from 744 to 480 items. However, India’s sensitive lists have been guided by the bilateral trade arrangements in the region. Under the Indo-Sri Lanka Free Trade Agreement (ISLFTA) which became operational in 2000, the sensitive list consisted of 431 items.1 Of these, 86 items did not feature in the SAFTA list of 868 items applicable to non-LDCs. Amongst the 86 items, 48 belonged to the textile sector. Subsequently in 2008, India allowed duty-free import of 216 readymade garment items thereby reducing the operational sensitive list to 215 items. Further, out of 86 items, 46 have already been removed in 2008 leaving 40 items in the ISLFTA sensitive list which should be removed as they do not appear in the SAFTA sensitive list.2

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Even though India does not have an FTA with Bangladesh, it offered zero duty on 164 readymade garment items up to a limit of eight million pieces in April 2008, ahead of the concessions that India offered to all LDCs. The operational sensitive list for Bangladesh is, therefore, different from the LDC list and consists of 331 items that is applicable to Bangladesh alone. Pakistan is the only country in south Asia to which the non-LDC sensitive list of 868 items is applicable.

Hence, an analysis of India’s sensitive list under SAFTA requires an examination at the bilateral level as the sensitive list for each of the countries – Bangladesh, Sri Lanka and Pakistan – is unique.

While the sensitive lists for Sri Lanka and for LDCs are at the 6-digit harmonised system (HS) of classiﬁcation, that for non-LDCs (i e, Pakistan) are at the 4-digit and 8-digit levels. Hence, for Pakistan all sensitive items at the 4-digit codes were expanded to 6-digits and 8-digit codes were compressed to 6-digits. The modiﬁed list for Pakistan consists of 910 items.

A comparison of the sensitive lists applicable at the time SAFTA became operational (referred to as original sensitive list) with the operational sensitive lists that take into account concessions offered by India over the years indicates sectors where reductions

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Table 1: Sector-wise Distribution of Items in Original and Operational Sensitive List

Ch Description Sri Lanka Bangladesh Pakistan Original Operational Original Operational Original and Sensitive List Sensitive List Sensitive List Sensitive List Operational Sensitive List

1 Live animals 14 11 22

(2005, 2006 and 2007). Items that have not been supplied by these countries to the rest of the world are unlikely to be exported in the near future and will not pose any threat to Indian industry. Such items are, therefore, eliminated. The third step involves identifying and eliminating those

5 Mineral products 16 8 16 items that have been dereserved from the

6 Chemical and allied industries 46 4 48 list of items reserved exclusively for man

7	Plastics and rubber	100	100	98	11	98 ufacturing by the small-scale sector.5 This
9	Wood and articles of wood	5	5	5	6	5 list comprising 1,025 items is provided in
10	Paper products	12	12	15	3	15 Hussain (1997). On the basis of the HS
11	Textiles and textile articles	295	79	197	8	325 codes provided in the report, the items are
12	Footwear, headgear, etc			17	1	17 identiﬁed in the sensitive lists and elimi
13	Stone, plaster, glassware, etc			5		10 nated. The fourth step involves categoris
15	Base metals and related articles			60	41	60
16 17 18 19 20	Machinery and mechanical appliances; electrical equipment Transport equipment Optical, medical instruments and apparatus, etc Arms and ammunitions Miscellaneous Total number of items	431	215	27 4 2 0 2 762	4 331	27 4 2 1 2 910	ing the remaining items on the sensitive list on the basis of the RCA index of the exporting and importing countries and then eliminating those items where India is not competitive in the international market, but the exporting country is. The RCA index for 2005, 2006 and 2007 are
Table 2: Elimination Summary					calculated. The RCA index is a ratio of the
Step 1 Step 2 Step 3 Step 4	Category Items in bilateral sensitive list but not in SAFTA sensitive list Zero export items De-reserved items RCA categories		Sri Lanka 38 17 65	Bangladesh -158 25	Pakistan -125 274	share of a given product in a country’s exports relative to its share in world exports (Balassa 1965). RCA is computed using the following formula:
	Category I: IRCA > 1; ERCA < 1 Category II: IRCA > 1; ERCA > 1 Category III: IRCA < 1; ERCA < 1		26 13 31	27 13 67	84 109 218	RCAij = (Xij / XI) / (Xwj / XW) where Xij represents country i’s export of
	Category IV: IRCA < 1; ERCA > 1		9	8	67	commodity j, Xwj represents world exports

Pruned/recommended sensitive list (category IV) 9 8 67

Food security items and items with revenue considerations have been excluded here.

have taken place (Table 1). Under ISLFTA, 92% of the items in the original sensitive list belonged to plastics and rubber, and textiles and related products. With concessions being granted to several products in the latter category, the former accounted for 47% of the products in the operational sensitive list. Bangladesh received concessions from India in almost all categories unlike Sri Lanka. These included textiles and textile products, rubber and plastic products and machinery and electrical equipment. Since India did not offer any concessions to non-LDCs, the sensitive list for Pakistan has remained the same. Textiles and related products alone accounted for 37%

– a category where India has offered concessions to Sri Lanka and Bangladesh.

Methodology

Trade data on items on the sensitive list (HS classiﬁcation system) has been obtained from United Nations Commodity Trade

Economic & Political Weekly

march 12, 2011

Statistics Database (UN COMTRADE) WITS3 data base. One limitation of our analysis is that it is based on data for the period 2005-07 due to unavailability of data beyond 2007 for all countries.

At the 6-digit level there are eight items pertaining to food security and 25 items pertaining to alcohol and tobacco.4 Excluding these items, the sensitive list under consideration for the elimination exercise is reduced to 199 items for Sri Lanka, 298 items for Bangladesh and 877 items for Pakistan.

The ﬁrst step in the elimination process involves ensuring that items appearing under the bilateral sensitive list but not under the regional sensitive list are removed as is the case in ISLFTA. The second step in the elimination process requires identiﬁcation of those items on the sensitive list that have not been exported by the exporting country (Sri Lanka, Bangladesh and Pakistan) for three consecutive years

vol xlvI no 11

of commodity j, XI represents the total exports of country I, and XW represents total world exports. RCAs have been computed for each of the years 2005, 2006, and 2007 and the average of the three years taken. The RCA index value of greater than unity implies that the country is competitive in exporting a product. Computing the RCA for a pair of countries, i e, India with each of the exporting countries – Sri Lanka, Bangladesh and Pakistan, the following four categories are generated: Category I: IRCA > 1, ERCA < 1; Category II: IRCA > 1, ERCA > 1; Category III: IRCA < 1, ERCA < 1; Category IV : IRCA < 1, ERCA > 1

Here, IRCA denotes India’s revealed comparative advantage and ERCA denotes the exporting country’s revealed comparative advantage. Category I comprises items in which India is competitive but the exporting country is not competitive. Such items should be removed from the sensitive list as the importing country is competitive in the international market, and hence, can face competition in the domestic

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Table 3: Sector-wise Distribution of Items on Recommended Sensitive List sensitive list shows that in concerns and items that have revenue con-

Ch Description Sri Lanka Bangladesh Pakistan

the former there are no

1 Live animals 1 2

items belonging to seven

2 Vegetable products 1 3 11

product categories in the

3 Animal/ vegetable fats and oils 1

sensitive list. For Sri Lanka

4 Prepared foodstuffs 2 1 5 Mineral products 2

seven out of nine items are

6 Chemical and allied industries 1 rubber products, while for

7 Plastics and rubber 7 Bangladesh a total of nine

9	Wood and articles of wood		1		items is distributed over ﬁve
10	Paper products	1			sectors. The pruned sensitive
11	Textiles and textile articles			47	list for Pakistan has 75% of
12 13	Footwear, headgear, etc Base metals and related articles			1 2	the items in vegetable and
	Pruned/recommended sensitive list items	9	8	67	textile products (Table 3).

market too. Category II indicates a situation where both India and the exporting country are competitive. These items can also be removed from the sensitive list since India is already competing with the exporting country in the international market. Category III comprises items where neither India nor the exporting country is competitive. Therefore, there is no threat to India in these products. Category IV comprises items where the exporting country is competitive, but India is not. Such items can be retained on the sensitive list as they are most vulnerable.

Results of the Elimination Process

The four steps outlined above are applied to the operational sensitive lists to arrive at the pruned sensitive list. The results of the elimination exercise are shown in Table 2 (p 17).

ISLFTA has 38 items which do not appear in the SAFTA non-LDC sensitive list. These items should be removed as the bilateral sensitive lists should be shorter than the regional sensitive lists. Bangladesh has the maximum number of items with zero exports. In the dereserved criterion, maximum products appear for Pakistan. The categorisation of the remaining items on the basis of RCAs shows that in Categories I to III, 70 products for Sri Lanka, 107 for Bangladesh and 411 for Pakistan can be eliminated from the sensitive list. Products in Category IV, where India is likely to face competition from the exporting countries can be retained in the sensitive list. The recommended sensitive list has nine items for Sri Lanka, eight for Bangladesh and 67 for Pakistan.

A comparison of the pruned/recommended sensitive list with the operational

Conclusions

This article offers an approach to prune India’s sensitive lists for Sri Lanka, Bangladesh, and Pakistan. The elimination exercise identiﬁed items that are included in the bilateral sensitive list, but not under SAFTA, items that cannot be supplied by the exporting countries to the world, items that have been dereserved, items where India is competitive and items where neither India nor the exporting country is competitive. The pruned sensitive list consists of items where India is not competitive, but the exporting country is. The elimination exercise helps in arriving at a very small sensitive list for Sri Lanka, Bangladesh and Pakistan. As discussed earlier, the pruned sensitive list may then be expanded to include items that are of food security siderations.

It may be pointed out that since India has not offered any concessions to Pakistan the sensitive list is the largest for Pakistan. However, Pakistan has not given India most favoured nation (MFN) status as it permits imports from India only in 1,934 products. India can offer to prune Pakistan’s sensitive list provided Pakistan gives India MFN status. India can give concessions to Pakistan in the textiles and related products category which accounts for the bulk of the pruned sensitive list.

Notes

1 There are 429 items as two items are double counted. 2 Of the 40 items two were textile items. 3 World Integrated Trade Solutions, World Bank 4 The original and the operational sensitive lists for

Sri Lanka do not contain any tobacco products. 5 At present there are only 21 items in the reserved list.

References

Balassa, B (1965): “Trade Liberalisation and Revealed Comparative”, The Manchester School of Economic and Social Studies, Vol 33, 99-123.

Baysan, T, A Panagariya and N Pitigala (2006): “Preferential Trading in South Asia”, Policy Research Working Paper Series 3813 (Washington DC: World Bank).

Hussain, A (1997): “Report of the Expert Committee on Small Enterprises”, Government of India.

Taneja, N and A Sawhney (2007): “Revitalising SAARC Trade: India’s Role at the 2007 Summit”, Economic & Political Weekly, 31 March, 1081-84.

Weerakoon, D (2010): “The Political Economy of Trade Integration in South Asia: The Role of India”, The World Economy, 916-27.

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