Leveraging India’s Northeast Region for Regional Connectivity

In this edition of Sambandh Scholars Speak, Riya Sinha interviews Sanjay Kathuria and Priya Mathur on their co-edited book, Playing to Strengths: A Policy Framework for Mainstreaming Northeast India, published by The World Bank in 2020.

In the last few years, India’s Northeast Region (NER) has regained policy priority. The region is the gateway for India’s Act East Policy as its strategically significant location acts as the bridge between South Asia and Southeast Asia. The eight landlocked states of the region – Arunachal Pradesh, Assam, Mizoram, Meghalaya, Manipur, Tripura, Sikkim, and Nagaland – share a 5,812 Km border with five neighbouring countries, Bangladesh, Bhutan, China, Myanmar, and Nepal.

For several decades after India’s independence, the NER remained geographically isolated from the mainland, connected only via the 22-km narrow Siliguri corridor. As a result of this isolation, the NER lagged in economic growth. However, the scenario is changing today. Several developmental and connectivity projects are being implemented in the NER, including some supported by external partners such as Japan and other International Financial Institutions (IFIs). Such projects include the development of urban transportation, cross-border roads and railways, and inland waterways, connecting the region to Bangladesh and Myanmar.

Sanjay Kathuria and Priya Mathur’s book is an important contribution to the scholarship on regional connectivity and the NER. Across four chapters, it identifies constraints both at the policy and the ground level in the region by analysing connectivity, logistics, product standards, and infrastructure. It further focuses on the NER’s strengths in various sectors, including agriculture and services such as medical tourism, and identifies high-impact value chains within a sector to create more opportunities for women and other vulnerable groups.

Playing to Strengths: A Policy Framework for Mainstreaming Northeast India consists of four chapters authored by experts in different domains of connectivity. A must-read for development practitioners, the book contains several important policy takeaways for the NER’s development prospects within the wider region sometimes called “East South Asia.”

Riya Sinha: Till the 1950s, India’s NER enjoyed geo-economic centrality and strong connectivity through robust infrastructure, including railway lines and inland waterways. However, the region became geographically isolated thereafter, and this reflected in slow growth. What happened, and how are things changing now?

Sanjay Kathuria and Priya Mathur: Post-1947 history created conditions that stifled NER’s development as it became geographically isolated, connected to the rest of India only through the narrow Siliguri Corridor. Once in the forefront of India’s development, NER gradually began to lag behind other regions, including other comparable hill states in India. The importance of distance is reflected in the higher prices faced by consumers in NER. Compared with West Bengal, the nearest Indian state with a seaport, the NER faces 60 percent higher prices in rural areas and 30 percent higher prices in urban areas.

Over the past decade, connectivity agreements with Bangladesh and accelerating infrastructure investments in NER and its neighbours have begun to reduce the subregion’s economic isolation.

In every state in NER, the average time to reach the nearest city has been cut down from more than three hours in 2000 to one hour in 2015.

Other global trends are also very favourable for NER. These include growing incomes, leisure spending, and consumer awareness in India and neighbouring countries; a rising preference for fresh, healthful, safe, environmentally friendly, and socially responsible products; and the growing role of services in manufacturing, which is increasing demand for skilled resources.

Together, these developments can help NER showcase its strengths in agriculture and services. In fruits and spices, NER has an above-average share of cropped area, higher than the all-India average. NER’s female adult literacy and female labour force participation rates are much higher than those for all-India, and in NER, the share of the tertiary sector in gross state domestic product (GSDP) has been at or above the median for all states in India. In addition, many of the crops are grown in organic or near-organic conditions; the air is fresh; and nature is bountiful.

RS: The book highlights that the growth in NER’s strengths lies in agriculture and services. These sectors can potentially create more job opportunities for women and the poor in the region. What role can better cross-border connectivity play in harnessing this sector, for example, with the emerging Bay of Bengal and ASEAN economies?

SK and PM: NER can leverage its strengths in agriculture, such as fruits, vegetables, and spices, and services, such as education and medical services, to step up its growth. However, this will require a different approach to doing business. Existing product value chains in NER are geared towards serving local and price-conscious consumers. In such traditional value chains, only a fraction of the price reaches women and the poor, and is largely appropriated by others, for example, intermediaries and processors in horticultural products, and doctors and hospitals in medical services. The report identifies examples of new high-impact value chains that can create more job opportunities with greater appropriable margins for women and the poor, as their contribution to value creation is greater. For example, fresh fruits and vegetables for quality-conscious consumers in the fruits and vegetables sector; and long-duration complex medical services clustered in Guwahati (Assam) as the hub, with other cities in NER and neighbouring countries acting as spokes, in medical tourism.

Better cross-border connectivity and cooperation with neighbours can play an important role in the development of high-impact value chains, which can create win-win opportunities for both NER and neighbours such as Bangladesh, which shares a long border with NER.

First, Bangladesh can serve as a key proximate market for NER products, while Bangladeshi consumers can gain through access to a greater variety of products. Already, for instance, fresh horticultural products from NER reach Bangladesh, with informal exports far exceeding formal exports. In services such as medical tourism, Bangladesh could be an important market for NER, given Bangladesh’s current position as the largest source of medical tourists to India, and its geographic and cultural proximity to NER.

Second, Bangladeshi firms can help NER value chains and businesses scale up, while availing growth opportunities themselves. They would benefit from access to a greater variety of possibly cheaper inputs, as well as access to NER markets for finished products. For example, horticultural produce from NER could provide inputs for Bangladesh’s vibrant food-processing industry, while processed foods could be exported to NER and beyond, with transit through NER; this is already taking place. They could even invest in processing plants in NER, sourcing some inputs locally, and then sell in NER as well as re-export to Bangladesh—PRAN foods of Bangladesh has already set up a plant in Tripura. Investment in NER can also serve as a learning ground for Bangladeshi firms.

Third, Bangladesh and NER can both gain from improved scope and efficiency of logistics and logistics service firms. Movement through Bangladesh and use of Bangladeshi ports can improve NER’s access to markets, reducing transportation costs and time, and making NER products more competitive. At the same time, NER value chains can create business opportunities for Bangladeshi logistics providers. For greater efficiency gains, governments could consider opening the logistics services market in NER to Bangladeshi operators and vice versa.

RS: Investments in improving connectivity and upgrading product quality standards and procedures are necessary steps to link India’s NER to regional and global value chains. However, in themselves, they do little to upgrade product quality and are not sufficient to exploit trading opportunities. What interventions can be made to address this issue?

SK and PM: NER is waking up to improved connectivity as well as greater trading opportunities. Such opportunities are likely to be accompanied by increased pressure on producers from consumers, buyers, and regulators to upgrade the safety and quality of their products. First, the growth of income and awareness is creating a growing segment of discerning consumers who are demanding high-quality products. Second, growing access to regional markets will help NER’s producers to better access global value chains, which tend to use more stringent quality standards to coordinate their trade and satisfy distant customers. Third, regulators in India and other countries in the region are moving toward upgrading food safety and control by tightening legislation and improving the currently often lax and unsystematic enforcement.

In NER, production and trading structures are primarily traditional, dominated by small units and atomistic value chains exercising little vertical coordination.

These structures are not conducive to upgrading quality. The demand for safer and higher-quality products is currently restrained by low incomes and poor connectivity to international markets. Niche products for discerning consumers are developing, although their volumes remain very small.

Value chain interventions, especially in horticultural value chains, are critical for upgrading product quality in NER. NER’s products often suffer from quality problems that will not be solved by focusing on investments in standards and related procedures but by improving production and trading practices. The development of services such as standards, testing, and certification would have the greatest chances of success if they were integrated into broader value chain development projects that also address production and trading practices. The latter is critical to producing a high-quality product and maintaining its quality until it reaches the consumer.

RS: In February 2021, the EAM S. Jaishankar visited Guwahati (Assam) with the Japanese Ambassador to review the progress of a Japanese-funded water supply project. How can India’s relations with other countries be leveraged further to cooperate in the development of the NER?

SK and PM: Countries like Japan can be crucial partners to help develop the NER. Japan has for long played an important role in the development of infrastructure in NER, partly because of its technological and financial strength, but also because its close political ties with India allow it to explore such investments in a sensitive region such as NER.

Ideally, this infrastructure investment should be complemented by Japanese FDI in areas that we have identified as NER’s strengths, such as horticulture and services. Japanese consumers could be the initial target of the output for such ventures. In terms of services, high income Japanese tourists could be attracted by the NER’s open spaces, golf courses, and Buddhist heritage, among other things. Nurses from the NER could be a boon for Japan’s ageing population and NER’s young and educated population could provide significant inputs into Japan’s creative services, including the “Cool Japan” policy initiative.

In time, as business and tourist traffic develops, there might even be scope for a direct air connection between Guwahati and Tokyo, but this will require development of sufficient demand.

Other countries in the NER’s periphery could also become important customers, in due course, especially for horticulture and services such as medical and education tourism.

Moreover, there are some countries, further off, that can play a role akin to Japan, including Korea, Australia and Singapore, among others. The Government of India and the NER states could together do some concerted promotion of the NER as an investment destination in these countries.

RS: While the NER boasts abundant natural and workforce resources, private sector participation in the NER has been very low due to high costs. What role can International Financial Institutions (IFIs) such as the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, play in supporting private sector participation in the region?

SK and PM: The IFIs have some unique strengths which make them an important partner in subregional and cross-border development. These can be grouped around identification, convening, financing, and staying power.

Let’s start with identification. This means rigorous analysis of the issue being examined, informed by local contexts and unique global experience of IFIs, on the nature of the problem, possible solutions, cost-benefit analysis of different approaches, and prioritisation of actions. Nowadays, IFIs usually undertake such analysis in collaboration with local partners, which is a mutually beneficial arrangement and strengthens the overall product.

Convening is a highly underestimated activity. When there is a lack of trust between countries, IFIs can convene meaningful bilateral or subregional meetings, informed by their own expertise on the subject. We have personally witnessed how such dialogues convened by the World Bank, riding on its reputation as an honest broker, resulted in important breakthroughs in cross-border economic relationships.

Of course, IFIs bring financing to the table, although this is less important than it used to be in the past. Even so, financing for connectivity projects in the NER can be important because of the long loan maturity periods and technical expertise that informs project preparation. The latter can help build capacity of different stakeholders involved and generate positive spillovers for subsequent projects.

Finally, IFIs have staying power, beyond political cycles and private sector time horizons. Sometimes, projects can be complex and/or politically sensitive, especially if they have a cross-border angle to them. In such cases, even governments can sometimes lose patience and give up. A great example is the World-Bank-backed CASA-1000 project, which supports sustainable electricity trade between the Central Asian countries of Tajikistan and the Kyrgyz Republic and the South Asian countries of Afghanistan and Pakistan. This project was ten years in the making. It is doubtful if anyone other than the IFIs could have pulled this off.

The underlying vision that informs the IFI approach is to support the private sector, i.e., back activities that can help create a conducive framework for private sector investment and sustainable job creation.

RS: You have worked extensively on regional integration in South Asia. What is your assessment of the progress made over the last decade in improving regional connectivity? What are the threats to its progress and how can they be overcome?

SK and PM: The answer to this question can take at least a book chapter! But let’s take a crack at it. Broadly speaking, South Asia’s western and eastern fronts are moving at quite different speeds, as we know.

On the eastern side, where one can include Bangladesh, Bhutan, India and Nepal (BBIN), as well as Sri Lanka, things are moving swiftly, especially in the last 3-5 years. The bedrock of this movement is the steady progress in the multi-faceted Bangladesh-India relationship. The NER can be a major beneficiary of this progress.

We believe that if there can be greater emphasis now on soft measures, such as operationalising the BBIN Motor Vehicle Agreement, addressing non-tariff barriers, etc., it would complement the infrastructure investments.

On the western front, there has been backsliding in trade linkages. Tensions between Pakistan and India, and Pakistan and Afghanistan, have resulted in a virtual ban on trade in the former case, and, in the latter case, frequent closures of the all-important border trading points, including Torkham and Chaman. On Afghanistan-India trade, the long-running dispute on transit trade via Pakistan continues to be a source of friction between all three countries, but especially between Afghanistan and Pakistan. At the same time, Pakistan is implementing a massive connectivity project as part of the China Pakistan Economic Corridor. However, the extent to which CPEC can help connect Pakistan and its neighbours depends entirely on the softer side of the equation, such as transit trade agreements, where there has been no progress.

About the contributors:

Sanjay Kathuria is a Senior Visiting Fellow at CPR. He is also a Non-Resident Senior Fellow at the Institute of South Asian Studies in the National University of Singapore; Adjunct Professor, Georgetown University; and Visiting Faculty, Ashoka University. Earlier, he was a Lead Economist at the World Bank in Washington DC. Dr Kathuria is one of the leading thinkers and commentators on economic integration in South Asia and the economic development of the region. For 27 years at the World Bank, he worked in South Asia, Latin America and the Caribbean, and Eastern Europe, including field assignments in New Delhi and Dhaka.

Priya Mathur has been working in development as an economist. Currently, she works with the World Bank on international trade and regional integration, global value chains, and entrepreneurship. She has also worked in the private sector as a strategy consultant with the Boston Consulting Group. In that role, she has worked with firms in telecommunications and in banking and asset management.

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