State of South Asian Economic Integration

Syllabus: GS2/International Relations; GS3/Economy

Context

• South Asia, despite being home to over a fifth of the world’s population having cultural and historical linkages, remains one of the least economically integrated regions in the world.

State of the South Asian Economy

• South Asia, comprising countries like India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives, is home to over 1.8 billion people and represents a combined GDP of around $5 trillion.
  • EU: $18 trillion with only about 5.8% of the global population.
  • NAFTA: $24.8 trillion
• Growth Amidst Divergence: Indian economy has rebounded strongly, driven by robust domestic demand, infrastructure investment, and digital innovation (Economic Survey 2024–25).
  • Bangladesh has maintained steady growth, particularly in its garment exports and remittance inflows.
  • Other nations — such as Sri Lanka and Pakistan — have faced economic crises, high inflation, and debt distress, highlighting the region’s economic divergence.
• Low Regional Trade: Intra-regional trade under the South Asian Free Trade Area (SAFTA) accounts for just 5% to 7% of total trade — among the lowest globally.
  • It is far below the EU (45%), ASEAN (22%) and NAFTA (25%).
  • High tariffs, poor connectivity, and bureaucratic red tape discourage cross-border commerce.
• Trade Gaps: Even countries like Bangladesh (93% unutilized potential), Pakistan (86%), and Afghanistan (83%) have enormous room for economic collaboration.
  • Meanwhile, the region’s trade-to-GDP ratio fell from 47.3% in 2022 to 42.94% in 2024, indicating declining interdependence.
• High Cost of Being Neighbours: Paradoxically, it is more expensive to trade within South Asia than with distant partners:
  • Intra-SAARC trade cost: 114% of goods’ value
  • Trade cost with the U.S.: 109%
  • India-Pakistan trade cost is 20% higher than India-Brazil, despite Brazil being 22x farther
  • ASEAN’s intra-trade cost: 76% — about 40% cheaper than SAARC
• Missed Opportunities: South Asia’s current intra-regional trade among SAARC countries stands at around $23 billion, far below the potential $67 billion, and drastically lower than the estimated $172 billion potential identified by UNESCAP for 2020.

Other Key Challenges

• Geopolitical Tensions & Distrust: Long-standing rivalries — especially between India and Pakistan — have severely undermined regional cooperation initiatives like SAARC and SAFTA.
  • Political disagreements often spill over into economic decision-making.
• Protectionist Trade Policies: High tariffs, restrictive quotas, and non-tariff barriers discourage trade between neighboring countries.
  • Many South Asian economies have prioritized self-reliance over interdependence.
• Poor Connectivity & Infrastructure: Inadequate transport links, cumbersome customs procedures, and underdeveloped logistics networks limit the flow of goods, services, and people across borders.
• Asymmetry Among Member States: India’s economic dominance within the region has created power imbalances, leading to concerns among smaller countries about unequal benefits and influence.
• Weak Institutional Frameworks: Regional cooperation mechanisms often lack teeth, enforcement capability, or political will to deliver on integration promises.
  • SAARC, for instance, has been largely dormant.
• China’s Growing Influence: The growing involvement of external powers, particularly China, has led some South Asian countries to prioritize bilateral engagements over intra-regional collaboration.
• Climate vulnerability: The region is highly susceptible to climate shocks, from floods to heatwaves, which threaten agriculture and livelihoods.

Initiatives By India Supporting South Asian Economy

• Development Partnerships and Lines of Credit: For infrastructure, energy, and capacity-building projects, that include road and rail links with Nepal and Bangladesh, power-sharing agreements, and port development in Sri Lanka and the Maldives.
• Infrastructure and Connectivity Projects: Projects like the India-Bangladesh Maitree Power Plant, the India-Nepal cross-border petroleum pipeline, and the Kaladan Multi-Modal Transit Transport Project (linking India to Myanmar and beyond) are designed to boost regional trade and integration.
• SAARC Development Fund (SDF): It finances regional projects in areas like energy, transportation, and social development.
• BIMSTEC and BBIN Initiatives: These sub-regional groups aim to promote trade, connectivity, and energy cooperation.
• Startup India and Digital Outreach: India’s Startup India initiative has inspired cross-border collaboration, with Indian incubators and digital platforms offering mentorship and market access to entrepreneurs from neighboring countries.

Way Forward: Strategic Regionalism

• South Asia’s development hinges on genuine regional cooperation. To tap into its potential:
  • Reform SAFTA and focus on actionable enforcement;
  • Address border and trust issues through sustained diplomacy;
  • Create regional value chains to boost employment and innovation;
  • Develop trade infrastructure that supports integration over division;
  • Separate economic cooperation from political conflict, as seen in the EU model.

Source: TH