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---

### I. Introduction
- Since the mid-1990s, the size of the Indian economy has increased nearly twenty-fold in U.S. dollar terms.
- Real GDP growth averaged 5 percent annually.
- India’s share in global exports has more than doubled.
- Key transmission channels for cross-country effects identified in the study: trade, financial flows, human capital, and terms of trade.
- Study objective: analyze spillover effects of India’s growth to other South Asian countries (SAC: Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka) by estimating panel growth regressions with India’s growth as an explanatory variable and including trade and other standard growth-model variables.
- Principal result: India’s growth has good explanatory power for growth in SAC after 1995, controlling for human capital, size of government, inflation, and other trading partners’ growth.

### II. India’s growth: Stylized facts (trade, financial linkages, memoranda)
- Trade and external integration
  - Prior to 1991, India was largely a closed economy with high tariff and non-tariff barriers and a tightly controlled capital account.
  - Reforms since 1991 included a unified exchange rate system, lowering of tariffs across the board, and substantial reductions in regulation of, and restrictions on, trade.
  - Exports growth doubled in the first ten years after the reform, from an annual growth of around 11.4 percent average during 1995–2000, to 25 percent by 2006.
  - Exports of goods and services now account for around 22 percent of India’s GDP, up from around 8 percent at the eve of the reforms.
  - Services exports, especially software and information technology (IT), grew rapidly; between 1995 and 2010 India’s share of services exports in world trade more than quadrupled, while goods exports doubled.
  - India’s exports of IT have grown consistently above the global average since 2000.
  - India’s share of world and regional trade: India 1.7 percent, China 7.1 percent, ASEAN-4 8.7 percent.
  - Tariff and non-tariff restrictiveness remain higher in India compared to regional partners; India has higher import duty revenue in percent of goods imported relative to comparators.
- Financial linkages and external assets/liabilities (Table 3 series excerpts)
  - Total External Reserves: 6.0, 8.4, 17.5, 19.5, 20.5, 22.4, 18.2 (percent of GDP).
  - Total External Debt: 0.03, 0.02, 0.02, 0.02, 0.02, 0.02, 0.02 (percent of GDP).
  - Portfolio Flows: 1.1, 0.0, 1.2, -0.3, -2.9, 1.9, 0.6 (percent of GDP).
  - Foreign Direct Investment: 0.6, 0.8, 0.7, 2.2, 3.0, 2.7, 1.6 (percent of GDP).
- Memoranda and trade performance (Table 1 excerpts)
  - Export value annual percentage change series excerpt: 5.4, 8.9, 9.5, 11.4, 20.7, 25.1, 24.4, 18.5, -1.1, 26.3.
  - Export of Goods and Services (percent of GDP): 5.9, 5.8, 8.5, 11.1, 14.9, 21.3, 20.9, 22.8, 22.3, 21.8.
  - Imports of Goods and Services (percent of GDP): 8.7, 8.4, 10.1, 14.2, 17.0, 25.0, 24.4, 27.8, 28.5, 26.9.

### III. India’s economic linkages to South Asia (regional scale, trade shares, financial and real links)
- Regional scale and trade shares
  - India accounts for about 80 percent of the region’s GDP; Pakistan about 10 percent; Bangladesh 6 percent; Sri Lanka 2 percent; the rest less than 2 percent.
  - South Asia per capita real GDP growth averaged 3.5 percent in 1990–1995 and 4.5 percent in 2005–2009.
  - India granted duty-free access to goods from five SAARC countries in November 2011; framework agreement to reduce custom duties of all traded goods to zero by 2016.
- Bilateral trade dependence (Trade with India, percent of total; GDP and GDP per capita)
  - Afghanistan: Imports from India 5.3; Exports to India 22.4; GDP US$ 10.6 billion; GDP per capita US$ 517.0.
  - Bangladesh: Imports from India 13.9; Exports to India 2.2; GDP US$ 89.4 billion; GDP per capita US$ 638.0.
  - Bhutan: Imports from India 41.4; Exports to India 93.5; GDP US$ 1.3 billion; GDP per capita US$ 1,978.0.
  - Maldives: Imports from India 8.9; Exports to India 21.5; GDP US$ 2.2 billion; GDP per capita US$ 3,363.0.
  - Nepal: Imports from India 56.7; Exports to India 5.6; GDP US$ 12.5 billion; GDP per capita US$ 652.0.
  - Pakistan: Imports from India 5.7; Exports to India 1.3; GDP US$ 166.5 billion; GDP per capita US$ 1,050.0.
  - Sri Lanka: Imports from India 23.6; Exports to India 5.3; GDP US$ 42.0 billion; GDP per capita US$ 2,435.0.
  - India (memo): Imports from SAC 0.6; Exports to SAC 4.7; GDP US$ 3,130.2 billion; GDP per capita US$ 2,265.0.
- Financial and official flows within the region
  - Bhutan: more than 70 percent of Bhutan’s budgetary grants are from the Government of India; 98 percent of Bhutan’s external debt is owed to India and serviced automatically from joint venture hydroelectric power receipts.
  - Maldives: loans from India account for about 20 percent of external debt outstanding; State Bank of India is the second largest bank operating in Maldives.
  - Afghanistan: India committed to US$ 650–750 million (about 4 percent of GDP) in aid through direct and indirect budget support.
  - EXIM Bank of India extended a line of credit of $1 billion to the Government of Bangladesh in 2010 for financing eligible goods and services.
  - Private outward FDI from Indian enterprises to South Asia averaged about $20 million a year in 2002–2006 (firm-level sample); applying that percentage to aggregate FDI outflows suggests India’s FDI to SAC would account for less than 4 percent of the total FDI inflows received by SAC.
  - FDI Flows (selected India entries, $ millions): 29,85; 14285; 17234; 19397; 15929; 14626.
- Real-sector links and infrastructure
  - Hydroelectric power projects in Bhutan jointly developed with grants and loans from India provide a surge in export earnings for Bhutan and supply power to India.
  - Joint development of thermal power generation and planned electricity transmission interconnection with India expected to supply at least 250 MW of power to Bangladesh.
  - Bangladesh to allow use of its seaports for movement of goods to/from India by road and rail.
  - India constructing major road in Afghanistan; additional development cooperation includes rebuilding air links and power plants.
- Human capital and migration
  - From 1992 to 2007, the number of SAC students studying in India’s universities more than doubled to almost 5,000.
  - Remittances channel: Nepal and Bangladesh have sizable numbers of emigrants in India (not fully recorded in official data). Indian migrant workers are a large proportion of expatriate labor force in Bhutan and Maldives, especially in construction.
- Key empirical conclusion reiterated
  - India’s growth has good explanatory power for growth in SAC after 1995, implying meaningful spillovers transmitted through trade, financial flows, human capital, and infrastructure/investment linkages.

### Box 1 — South Asia, Southern Africa and East Asia: Comparison (overview and stylized contrasts)
- Summary of comparative patterns
  - Growth and integration patterns between South Africa and Southern Africa (SAR) and between China and East Asia produced similar outcomes to those of India in South Asia, though the magnitude of the impact differs.
  - Southern Africa: average GDP growth rose from 2.7 percent in 1990-1994 to 3.4 percent in 2006-2010; South Africa accounts for more than 80 percent of SAR imports; SACU aided integration; strong financial integration via CMA and South African banks; currency pegs reduce transaction costs.
  - East Asia (China–ASEAN): ASEAN’s share in China’s trade nearly doubled to nearly 10 percent by 2010; ASEAN–China Free Trade Area effective January 1, 2010; export composition shifted toward ICT goods and intermediate capital goods; ASEAN’s FDI to China accounted for about 6 percent of total FDI received by China in 2008.
- Reasons for stronger linkages in SAR and East Asia versus South Asia
  - Southern Africa’s relative economic homogeneity and South Africa’s larger size relative to neighbors; ASEAN economies attained higher development before China’s opening enabling integration into production sharing; China–ASEAN trade characterized by cross-border production networks and intra-industry trade.
  - India’s exports driven by services with limited scope for integrating South Asian neighbors into value chains.
- Potential for increased integration from India to South Asia
  - India’s economic reforms started about 10 years later than China’s; India may be in an earlier stage of integration with its region.
  - India’s trade with the rest of the world on average grew twice as fast in the last ten years as in 1991-2000.
  - A supportive policy framework (lower trade restrictiveness, improved infrastructure, streamlined borders, SAFTA implementation) could significantly increase intra-South Asia trade linkages.
- Identified barriers and stylized statistics
  - Improving South Asia’s infrastructure to around 50 percent of East Asia’s could improve intra-regional trade by about 60 percent.
  - South Asia’s average weighted tariff is relatively high compared to the world average; India is less open in weighted average applied tariff rate than Sri Lanka, Pakistan or Nepal.
  - In 2011, India is ranked 100th in “Ease of trading across borders” compared to China’s rank of 50th.
  - Substantial informal or illegal trade: extra-legal trade estimated to be nearly one third of the value of legal trade between India and Sri Lanka; India’s formal trade with Pakistan is less than 10 percent of their estimated informal trade of USD 2 billion.

### Empirical model, estimation results and numeric findings
- Model specification and estimation
  - Panel regression following Arora and Vamvakidis (2004, 2005 and 2010) using 3-year averages for 1961–2009; initial GDP per capita uses value in the first year of each three-year period.
  - Dependent variable: real GDP per capita growth.
  - Independent variables: convergence (log of real GDP per capita initial year), age dependence ratio, investment/GDP, secondary school enrollment, trade/GDP, government consumption/GDP, inflation, per capita real GDP growth in India, per capita real GDP growth in other trading partners (trade-weighted).
  - Estimation: panel regression with fixed country effects; Hausman test strongly rejects the random effect assumption in favor of fixed effects.
- Key empirical finding (post-1995)
  - A 1 percentage point increase in India’s growth translates into 0.37 percentage point increase for SAC in the post-1995 period.
- Regression results (Table 6: selected coefficients and t-statistics)
  - Sample columns: (1) 1963-2007; (2) 1995-2007; (3) 1995-2007.
  - Per capita real GDP growth in India:
    - Column (1): -0.02 (-0.12)
    - Column (2): 0.37 (2.44)
    - Column (3): 0.77 (2.73)
  - (Per capita real GDP growth in India) x (Share of trade with India in total trade): -0.49 (-1.33) [included in column (3)]
  - Convergence: -3.21 (-2.27); -5.42 (-1.57); -4.01 (-1.08)
  - Age dependence ratio: -0.09 (-2.52); -0.01 (-0.14); 0.05 (0.56)
  - Secondary school enrollment: -0.05 (-1.46); 0.08 (1.72); 0.10 (2.17)
  - Investment/GDP: 0.04 (0.82); 0.09 (1.73); 0.08 (1.54)
  - Trade/GDP: 0.11 (5.49); 0.18 (7.51); 0.18 (6.98)
  - Government consumption/GDP: -0.15 (-2.65); -0.25 (-3.88); -0.25 (-3.76)
  - Inflation rate: -0.03 (-0.50); -0.17 (-1.73); -0.22 (-2.10)
  - Per capita real GDP growth in other trading partners: 0.56 (1.69); -0.01 (-0.02); -0.53 (-1.01)
  - Adjusted R-squared: 0.57; 0.77; 0.77
- Channels, robustness, and interpretation
  - Interaction term of India growth with India’s share of trade in each SAC’s total trade is negative and statistically insignificant, suggesting India’s growth spillovers do not depend on the trade channel in the regression results presented.
  - Excluding countries with weaker trade linkages with India (e.g., Afghanistan and Pakistan) does not change the results.
  - Official data may under-report actual trade flows, so the trade channel’s full impact may not be captured.
  - Scarcity of data on bilateral financial linkages and remittances prevents estimation of the importance of these channels.
  - Possible that India’s growth was positively correlated with growth in its major trading partners but negatively correlated with that of other regions for certain periods.
  - Spillovers likely transmitted through a combination of direct and indirect channels (technical knowhow, human capital development, business confidence); panel analysis may not be able to pinpoint a single dominant channel.
- Comparative magnitudes
  - India’s spillover estimate of 0.37 percentage points is smaller than estimates for other regional engines:
    - South Africa: a 1 percentage point increase correlated with a 0.5–0.7 percentage point rise for the rest of Africa (1980–99).
    - China: a 1 percentage point increase correlated with an average of 0.5 percentage point increase in growth of the rest of the world for the last two decades.

### Policy implications and recommendations
- A supportive policy framework to facilitate intraregional trade in South Asia could strengthen integration and amplify positive spillovers from India to neighboring economies.
- Specific areas for policy focus:
  - Reduction of trade restrictiveness and tariff barriers.
  - Improvement of infrastructure (roads, ports, electricity transmission) to lower transaction and transport costs.
  - Streamlining border procedures and addressing restrictive rules of origin and specified ports of entry in SAARC.
  - Implementation and full utilization of SAFTA and bilateral agreements shown to increase trade (example: India–Sri Lanka bilateral agreement).
  - Enhancing real and financial flows (increased FDI, improved banking and financial linkages, more transparent measurement of remittances and informal trade).
  - Addressing business environment challenges to improve “Ease of trading across borders” rankings.
- Expected outcomes
  - Increased intra-South Asia trade and financial linkages could provide stronger growth spillovers, consistent with results observed in Southern Africa and East Asia.
  - Policy reforms and infrastructure improvements could help capture indirect channels such as human capital transfer and technology diffusion, increasing the magnitude of regional spillovers.

*International Monetary Fund.*

### References .............................................................................................................

### _wp1256 - References .............................................................................................................

### I. INTRODUCTION
- Since the mid-1990s, the size of the Indian economy has increased nearly twenty-fold in U.S. dollar terms.
- Real GDP growth averaged 5 percent annually.
- India’s share in global exports has more than doubled.
- Key transmission channels for cross-country effects identified: trade, financial flows, human capital, and terms of trade.
- Study objective: analyze spillover effects of India’s growth to other South Asian countries (SAC: Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka) by estimating panel growth regressions with India’s growth as an explanatory variable and including trade and other standard growth-model variables.
- Principal result reported: India’s growth has good explanatory power for growth in SAC after 1995, controlling for human capital, size of government, inflation, and other trading partners’ growth.

### II. INDIA’S GROWTH: STYLIZED FACTS
Findings on trade and external integration:
- Prior to 1991, India was largely a closed economy with high tariff and non-tariff barriers and a tightly controlled capital account.
- Reforms since 1991 included: a unified exchange rate system, lowering of tariffs across the board, and substantial reductions in regulation of, and restrictions on, trade.
- Exports growth doubled in the first ten years after the reform, from an annual growth of around 11.4 percent average during 1995–2000, to 25 percent by 2006 (Table 1).
- Exports of goods and services now account for around 22 percent of India’s GDP, up from around 8 percent at the eve of the reforms.
- Services exports, especially software and information technology (IT), grew rapidly; between 1995 and 2010 India’s share of services exports in world trade more than quadrupled, while goods exports doubled.
- India’s exports of IT have grown consistently above the global average since 2000.
- Despite progress, India’s share of world and regional trade remains small relative to China and ASEAN-4: India 1.7 percent, China 7.1 percent, ASEAN-4 8.7 percent (Table 2).
- Tariff and non-tariff restrictiveness remain higher in India compared to regional partners; Chart 3 indicates India has higher import duty revenue in percent of goods imported relative to comparators.

Findings on financial linkages and external assets/liabilities:
- Liberalization of parts of the capital account encouraged foreign investment and reduced reliance on short-term debt.
- FDI and equity portfolio flows increased significantly as a share of GDP between 1995 and 2010 (Table 3).
- Total External Reserves: 6.0, 8.4, 17.5, 19.5, 20.5, 22.4, 18.2 (percent of GDP) as shown in Table 3 (1995–2010 series).
- Total External Debt: 0.03, 0.02, 0.02, 0.02, 0.02, 0.02, 0.02 (percent of GDP) as shown in Table 3.
- Portfolio Flows: 1.1, 0.0, 1.2, -0.3, -2.9, 1.9, 0.6 (percent of GDP) shown in Table 3.
- Foreign Direct Investment: 0.6, 0.8, 0.7, 2.2, 3.0, 2.7, 1.6 (percent of GDP) shown in Table 3.

Memoranda and trade performance figures (from Table 1 and accompanying text):
- Export value annual percentage change series excerpt: 5.4, 8.9, 9.5, 11.4, 20.7, 25.1, 24.4, 18.5, -1.1, 26.3 (years spanning 1980–2010 as tabulated in Table 1).
- Memorandum: Export of Goods and Services: 5.9, 5.8, 8.5, 11.1, 14.9, 21.3, 20.9, 22.8, 22.3, 21.8 (in percent of GDP) (Table 1).
- Memorandum: Imports of Goods and Services: 8.7, 8.4, 10.1, 14.2, 17.0, 25.0, 24.4, 27.8, 28.5, 26.9 (in percent of GDP) (Table 1).

### III. INDIA’S ECONOMIC LINKAGES TO SOUTH ASIA
Regional scale and trade shares:
- India accounts for about 80 percent of the region’s GDP; Pakistan about 10 percent; Bangladesh 6 percent; Sri Lanka 2 percent; the rest less than 2 percent.
- South Asia per capita real GDP growth averaged 3.5 percent in 1990–1995 and 4.5 percent in 2005–2009.
- India granted duty-free access to goods from five SAARC countries in November 2011; framework agreement to reduce custom duties of all traded goods to zero by 2016.

Bilateral trade dependence (Table 4 and Chart 4 excerpts; Trade with India, percent of total):
- Afghanistan: Imports from India 5.3 (share of total import), Exports to India 22.4 (share of total export); GDP US$ 10.6 billion; GDP per capita US$ 517.0 (Table 4).
- Bangladesh: Imports from India 13.9, Exports to India 2.2; GDP US$ 89.4 billion; GDP per capita US$ 638.0 (Table 4).
- Bhutan: Imports from India 41.4, Exports to India 93.5; GDP US$ 1.3 billion; GDP per capita US$ 1,978.0 (Table 4).
- Maldives: Imports from India 8.9, Exports to India 21.5; GDP US$ 2.2 billion; GDP per capita US$ 3,363.0 (Table 4).
- Nepal: Imports from India 56.7, Exports to India 5.6; GDP US$ 12.5 billion; GDP per capita US$ 652.0 (Table 4).
- Pakistan: Imports from India 5.7, Exports to India 1.3; GDP US$ 166.5 billion; GDP per capita US$ 1,050.0 (Table 4).
- Sri Lanka: Imports from India 23.6, Exports to India 5.3; GDP US$ 42.0 billion; GDP per capita US$ 2,435.0 (Table 4).
- India (memo): Imports from SAC 0.6, Exports to SAC 4.7; GDP US$ 3,130.2 billion; GDP per capita US$ 2,265.0 (Table 4).

Financial and official flows within the region:
- Bhutan: more than 70 percent of Bhutan’s budgetary grants are from the Government of India; 98 percent of Bhutan’s external debt is owed to India and serviced automatically from joint venture hydroelectric power receipts.
- Maldives: loans from India account for about 20 percent of external debt outstanding; State Bank of India is the second largest bank operating in Maldives.
- Afghanistan: India committed to US$ 650–750 million (about 4 percent of GDP) in aid through direct and indirect budget support.
- EXIM Bank of India extended a line of credit of $1 billion to the Government of Bangladesh in 2010 for financing eligible goods and services.
- Private outward FDI from Indian enterprises to South Asia averaged about $20 million a year in 2002–2006 (firm-level sample); applying that percentage to aggregate FDI outflows suggests India’s FDI to SAC would account for less than 4 percent of the total FDI inflows received by SAC (Table 5).
- FDI Flows 2005-2010 (Table 5, selected India entries): India FDI inflows/outflows series excerpt: 29,85; 14285; 17234; 19397; 15929; 14626 (FDI flows $, millions as tabulated).

Real-sector links and infrastructure:
- Hydroelectric power projects in Bhutan jointly developed with grants and loans from India provide a surge in export earnings for Bhutan and supply power to India.
- Joint development of thermal power generation and planned electricity transmission interconnection with India expected to supply at least 250 MW of power to Bangladesh.
- Bangladesh to allow use of its seaports for movement of goods to/from India by road and rail.
- India constructing major road in Afghanistan; additional development cooperation includes rebuilding air links and power plants.

Human capital and migration:
- From 1992 to 2007, the number of SAC students studying in India’s universities more than doubled to almost 5,000 (Dongaonkar and Negi 2009).
- Remittances channel: Nepal and Bangladesh have sizable numbers of emigrants in India (not fully recorded in official data). Indian migrant workers are a large proportion of expatriate labor force in Bhutan and Maldives, especially in construction.

Key empirical conclusion reiterated:
- India’s growth has good explanatory power for growth in SAC after 1995, implying meaningful spillovers transmitted through trade, financial flows, human capital, and infrastructure/investment linkages.

*Source: _wp1256 - References (IMF PDF).*

### Box 1. South Asia, Southern Africa and East Asia: A Comparison

### Box 1. South Asia, Southern Africa and East Asia: A Comparison

### Comparison overview
- Growth and integration patterns between South Africa and the Southern Africa region (SAR) and between China and East Asia produced similar outcomes to those of India in South Asia, though the magnitude of the impact differs.
- Economic growth in the Southern African region accelerated since the mid 1990s, coinciding with the post-apartheid opening up of the South African economy.

### Trade and integration patterns — Southern Africa (SAR)
- Average GDP growth rate of the region rose from 2.7 percent in 1990-1994 to 3.4 percent in 2006-2010, with most of the acceleration accounted for by the post-apartheid growth spurt in South Africa.
- South Africa accounts for more than 80 percent of SAR imports.
- Southern Africa Customs Union (SACU) aided integration; trade within SAR is free from tariffs and virtually all other trade barriers.
- Smaller SAR countries’ imports, especially intermediate goods, are largely from South Africa, but several smaller countries (e.g., Lesotho and Namibia) have bulk exports destined for markets outside the region.
- Non-trade channels in SAR:
  - Financial integration enhanced by membership in the Common Monetary Arrangement (CMA, a quasi currency board).
  - South African banks intermediate most cross-border financial flows.
  - Pegging of smaller countries’ currencies to the South African rand reduces transaction costs and helps maintain price stability via policy credibility of the South African Reserve Bank.
  - Labor market integration and remittance flows from nationals resident in South Africa are key sources of income and balance of payments flows for smaller countries, especially Lesotho and Swaziland.

### Trade and integration patterns — East Asia (China–ASEAN)
- The share of ASEAN trade in China’s total trade doubled to nearly 10 percent from the early 1990s to 2010.
- China’s share in ASEAN’s exports nearly tripled, and its share in ASEAN imports more than quadrupled from 1993 to 2008.
- ASEAN–China Free Trade Area came into effect on January 1, 2010; strong trade linkages preceded its establishment.
- Export composition shifts:
  - More developed ASEAN countries moved from exporting primary goods and natural resource commodities to exporting mainly information and communication technology goods and intermediate capital goods to China.
  - Poorer ASEAN countries (Cambodia, Vietnam, Laos and Myanmar) retain comparative advantage in low labor costs as relative incomes rise in China.
- FDI channel:
  - ASEAN’s FDI to China accounted for about 6 percent of total FDI received by China in 2008.
  - Considerable FDI flows from ASEAN to China involve intra-firm trade and cross-border production sharing.
  - Tariff reductions from the free trade agreement are expected to bring more associated FDI.

### Reasons for stronger linkages in SAR and East Asia versus South Asia
- Southern Africa comprises relatively more homogeneous countries and the size of South Africa’s economy relative to the rest of Southern Africa is much larger than India’s in South Asia.
- Some ASEAN economies had attained relatively high levels of development before China’s opening, enabling them to exploit trade complementarities with China; by contrast, poorer South Asian countries were less able to do so with India.
- China–ASEAN merchandise trade is largely complementary and characterized by cross-border production networks and intra-industry trade (materials, parts and components).
- India’s exports have been driven by service exports, with limited scope for integrating South Asian neighbors into value chains.

### Potential for increased integration from India to South Asia
- Trade between China and ASEAN began to grow steadily in the early 1990s, nearly a decade after China began reforms; India’s economic reforms started about 10 years later than China’s, suggesting India may be in an earlier stage of integration with its region.
- India’s trade with the rest of the world on average grew twice as fast in the last ten years as in 1991-2000; this pattern may extend to South Asia.
- A supportive policy framework would help intraregional trade in South Asia:
  - Trade within Southern Africa is virtually free of restrictions; ASEAN–China Free Trade Area reduces tariffs on almost 90 percent of imported goods to zero.
  - Trade restrictiveness in South Asia has remained high, as indicated by the World Bank’s Overall Trade Restrictiveness Index.
  - India’s tariffs for agricultural goods and processed goods are higher than for semi-manufactures, consistent with its strategy of protecting agriculture and promoting development of manufacturing that requires imported intermediate goods.
  - Bilateral trade agreement example: trade between India and Sri Lanka saw a substantial increase following their bilateral agreement, suggesting SAFTA, once fully implemented, can have significant positive impact on intra-South Asia trade linkages.

### Identified barriers and stylized statistics from the literature
- Infrastructural and institutional constraints:
  - Wilson and Ostuki (2005): improving South Asia’s infrastructure to around 50 percent of East Asia’s could improve intra-regional trade by about 60 percent.
- High levels of overall protection:
  - The average weighted tariff is relatively high compared to the world average; India is less open in weighted average applied tariff rate than Sri Lanka, Pakistan or Nepal.
- Challenging business environment:
  - South Asia ranks second last among regions in ease of trading across borders.
  - In 2011, India is ranked 100th in “Ease of trading across borders” compared to China’s rank of 50th in the world.
- Restrictive rules of origin and destination increase transactions costs; specified ports of entry in SAARC may have curbed trade.
- Limited revealed comparative advantage:
  - South Asian economies have similar patterns of revealed comparative advantage in a relatively low range of products; bilateral trade structures exhibit low trade complementarities.
- Substantial informal or illegal trade:
  - Bilateral unofficial trade of India with Bhutan, Nepal, Pakistan, and Sri Lanka was estimated to be more than their respective official trade in the 1990s.
  - Taking into account informal trade, total intra-regional trade was found to be higher by 5 percent.
  - Taneja (2004): extra-legal trade is nearly one third of the value of legal trade between India and Sri Lanka.
  - India’s formal trade with Pakistan is less than 10 percent of their estimated informal trade of USD 2 billion.

### Literature insights on spillovers and channels
- Conventional transmission channels: trade, financial flows, changes in terms of trade (exchange rate channel).
- Dynamic factor models (e.g., Stock and Watson (2005)) find increased synchronization driven by common international factors; identification issues addressed in Bayoumi and Swinston (2007) using SVARs.
- Studies finding regional spillovers:
  - Obiora (2009): significant spillover effects from EU countries and Russia to the Baltic countries via trading partners, financial conditions and trade linkages.
  - Ilahi and Shendy (2008): real GDP growth, private consumption and private investment in MENA countries (including Pakistan) strongly associated with remittances from and accumulation of financial surpluses in GCC countries.
- Intangibles and indirect channels:
  - Spillovers may occur via human capital (education and health services), factor productivity, and business confidence; these effects may not be well captured by models that focus solely on trade and investment channels.
  - Arora and Vamvakidis (2005) find South Africa is an engine of growth for the rest of Africa, with strong growth correlation not fully explained by explicit trade channels.

### Empirical model and estimation results
- Model specification:
  - Panel regression following Arora and Vamvakidis (2004, 2005 and 2010) using 3-year averages for 1961–2009 (initial GDP per capita uses value in the first year of each three-year period).
  - Dependent and independent variables include:
    - Convergence (logarithm of real GDP per capita in the initial year)
    - Demographics (age dependence ratio)
    - Physical capital (gross domestic investment as a percent of GDP)
    - Human capital (secondary school enrollment ratio)
    - Trade openness (trade as a percent of GDP)
    - Size of government (government expenditure as a percent of GDP)
    - Macroeconomic stability (inflation)
    - Growth of real GDP per capita in India
    - Growth of real GDP per capita in other trading partners (weighted by share of trade)
  - Data sources: World Development Indicators, IMF’s Direction of Trade data and staff estimates.
- Estimation approach:
  - Panel regression with fixed country effects for the whole sample period (1961–2009).
- Findings:
  - For the whole sample period, India’s growth impact is not statistically significant in explaining growth in SAC.
  - Other coefficients largely consistent with growth literature:
    - Growth negatively correlated with convergence, the age dependence ratio, government consumption and inflation.
    - Growth positively correlated with investment, trade openness and growth in other parts of the world.
    - Secondary school enrollment coefficient is close to zero and statistically insignificant (sign opposite of expectation).
  - In the post-reform period specification, India’s growth is a statistically significant determinant of growth in the rest of South Asia after controlling for other determinants.
  - The estimation suggests that an increase in growth in India by 1 percentage point is correlated with a rise in growth in SAC economies.

### Key policy implication
- A supportive policy framework to facilitate intraregional trade in South Asia (e.g., reduction of trade restrictiveness, improved infrastructure, streamlined border procedures, and implementation of SAFTA) could strengthen integration and amplify positive spillovers from India to neighboring economies.

*Source: Box 1. South Asia, Southern Africa and East Asia: A Comparison (excerpt).*

### 0.37 percentage points. The estimates and levels of significance of the other independent

### _wp1256 - 0.37 percentage points. The estimates and levels of significance of the other independent

### Key empirical findings
- A 1 percentage point increase in India’s growth translates into 0.37 percentage point increase for SAC (South Asia Countries) in the post-1995 period.
- The estimates and levels of significance of the other independent variables are largely consistent with the literature.
- The estimate on the average growth (weighted by share of trade) in other trading partners is close to zero, but this does not necessarily imply the growth in SAC is uncorrelated with growth in the rest of the world.
- A Hausman test strongly rejects the random effect assumption in favor of the fixed effect specification presented.

### Regression results (Table 6: Panel Regression with Fixed Country Effects)
- Dependent variable: real GDP per capita growth. T-statistics in parentheses.
- Columns and sample periods:
  - (1) 1963-2007
  - (2) 1995-2007
  - (3) 1995-2007
- Coefficients and t-statistics:
  - Per capita real GDP growth in India: -0.02 (-0.12); 0.37 (2.44); 0.77 (2.73)
  - (Per capita real GDP growth in India) x (Share of trade with India in total trade): -0.49 (-1.33) [included in column (3)]
  - Convergence: -3.21 (-2.27); -5.42 (-1.57); -4.01 (-1.08)
  - Age dependence ratio: -0.09 (-2.52); -0.01 (-0.14); 0.05 (0.56)
  - Secondary school enrollment: -0.05 (-1.46); 0.08 (1.72); 0.10 (2.17)
  - Investment/GDP: 0.04 (0.82); 0.09 (1.73); 0.08 (1.54)
  - Trade/GDP: 0.11 (5.49); 0.18 (7.51); 0.18 (6.98)
  - Government consumption/GDP: -0.15 (-2.65); -0.25 (-3.88); -0.25 (-3.76)
  - Inflation rate: -0.03 (-0.50); -0.17 (-1.73); -0.22 (-2.10)
  - Per capita real GDP growth in other trading partners: 0.56 (1.69); -0.01 (-0.02); -0.53 (-1.01)
- Adjusted R-squared: 0.57; 0.77; 0.77

### Channels, robustness, and interpretation
- An interaction term of India growth with India’s share of trade in each SAC’s total trade is negative and statistically insignificant, suggesting India’s growth spillovers do not depend on the trade channel in the regression results presented.
- Excluding countries with weaker trade linkages with India, such as Afghanistan and Pakistan, does not change these results.
- Official data may under-report actual trade flows, so the trade channel’s full impact may not be captured.
- Scarcity of data on bilateral financial linkages and remittances prevents estimation of the importance of these channels.
- It is possible India’s growth was positively correlated with growth in its major trading partners but negatively correlated with that of other regions for certain periods.
- India’s growth spillovers are likely transmitted through a combination of direct and indirect channels; the panel analysis may not be able to pinpoint a single dominant channel.
- Potential indirect channels include increased availability of technical knowhow from India, increases in human capital development, and increased business confidence leading to policy implementation that positively affected SAC growth.

### Comparative context
- The level of India’s spillover impact is less than those found for other large economies:
  - Arora and Vamvakidis (2005): a 1 percentage point increase in GDP per capita growth in South Africa is correlated with a 0.5–0.7 percentage point rise in growth in the rest of Africa for 1980–99.
  - Arora and Vamvakidis (2010): a 1 percentage point increase in China’s growth is correlated with an average of 0.5 percentage point increase in the growth of the rest of the world for the last two decades, with potentially larger effects for Asian countries.

### Policy implications and recommendations
- The modest post-reform spillover indicates India can influence growth in the region, but the magnitude is limited compared with other regional powerhouses.
- Enhancing real and financial flows could provide a stronger basis for integration and improve the benefits of growth through trade and financial channels.
- Addressing challenges in infrastructure, business environment, and trade restrictions could increase the gains from India’s growth for SAC.
- Increased intra-South Asia trade and financial linkages could provide stronger outcomes, consistent with results obtained in other regions.

*International Monetary Fund.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1256.pdf_