Report

1 Introduction
THE CONTEXT
South Asia comprises eight economies – Afghanistan,
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka – which are members of the South Asian
Association for Regional Cooperation (SAARC).
Afghanistan is the newest entrant to SAARC. The seven
SAARC countries concluded the South Asian Free Trade
Agreement (SAFTA) on 6 January 2004 which marked
the consolidation of their efforts to pursue and greater
economic integration in the region.
The objectives of the treaty are sought to be
achieved in the following ways:
• Eliminating barriers to trade and facilitating crossborder
movement of goods.
• Promoting conditions of fair competition and
ensuring equitable benefits, taking into account
their respective levels and patterns of economic
development
• Creating effective mechanisms for the implementation
and application of the agreement, for its joint
administration and the resolution of disputes
• Establishing a framework for further regional
cooperation to expand and enhance mutual
benefits.
While the steps towards regional cooperation began
with the setting up of SAARC, it did not cover issues
specifically pertaining to greater trade and economic
cooperation. Initially, SAARC’s focus was confined to
nine areas of regional cooperation which included
transport, communication, science and technology,
education, culture, health, population, sports and arts.
However, with the rise in regional agreements and
economic cooperation around the world and the
reforms in the region towards liberalisation, there was
increased consensus on the need to deepen economic
relations and specifically increase trade integration
among economies in South Asia. This led to the signing
of the South Asian Preferential Trading Agreement
(SAPTA) in 1993 at the seventh SAARC summit held
in Dhaka. SAPTA came into force in December 1995
after the first round of negotiations was concluded in
April 1995. Though concessions were agreed on a large
number of products under this agreement, there was
no substantial increase in trade under this agreement.
The idea of creating SAFTA came about at the 19th
session of the SAARC Ministerial Council in December
1995. The SAFTA was duly signed on 6 January 2004
during the 12th SAARC Summit.
This study aims to provide an in-depth assessment
of the likely changes induced by SAFTA on South Asian
countries and South Asia region as a whole. The emphasis
of the analysis has been based on three criteria:
• Whether the trade-affected areas are already under
stress or boom
• Whether significant economic impacts are likely to
be linked to trade measures
• Whether there are likely to be cumulative impacts
that could be significant
An assessment of the economic rationale of SAFTA
is made and likely consequences of various tariff reduction
scenarios on the region as a whole and on individual
member countries of SAARC is computed. The
impact of SAFTA on variables such as trade, inflows
and outflows of investments, production, prices, revenues,
income and welfare has been estimated. The
impacts of SAFTA on trade and foreign direct investments
into the region have been estimated using the
gravity model and panel data estimations. The study
also examines the revenue implications for the region
and assesses the possibilities of whether trade creation
and consequent revenue generation will offset losses
due to reductions in tariffs. The implications of SAFTA
for less developed countries (LDCs) of the region, in
particular, have been examined.
Econometric modelling has been used to assess the
quantitative impacts of SAFTA. Different econometric/
statistical techniques, like revealed comparative
advantage (RCA); complementarity index; intraindustry
trade (IIT) index; computable general