Trade in Services and Investment Flows in South Asia

Rajesh Chadha, Geethanjali Nataraj
JEL codes: 
EABER and PAFTAD working papers

Despite being a group of contiguous countries South Asia is one of the least integrated regions in terms of intra-regional investment and trade relations. The share of services in GDP of South Asian countries has increased substantially with South Asia exhibiting a high revealed comparative advantage in commercial services and more particularly in other services including computer and information technology enabled services. Analysis of the FDI inflows in South Asia reveals that the number of total sale deals including Greenfield investments and Mergers and Acquisitions (M&A) have increased in recent years. Though India is ranked as the second most attractive destination for FDI, South Asian countries, including India, do not rank
high in terms of the FDI performance and potential indices and are also ranked low in the global competitiveness index. The study points out the investment constraints in South Asia and cites poor infrastructure and labour market inefficiencies as the bottlenecks in attracting higher FDI inflows. Emphasising the importance of Doha Development Agenda on the one hand, the paper lays out the importance of larger and broader RTAs like Pan Asia Free Trade Agreement (PAFTA) instead of narrow RTAs like SAFTA. The success of SAFTA in enabling regional integration would depend on turning its current shallow constitution in favour of a deep agreement taking into account various behind the border issues.