The Sorry State of South Asian Economic Integration
Relevance
- GS Paper II: India and its neighborhood; regional organizations (SAARC, BIMSTEC)
Context
- In 2024, two major developments highlighted the economic and security vulnerabilities of India:
- Reciprocal tariffs by the Trump administration, affecting trade.
- Terror attack in Pahalgam, affecting national security.
- Though seemingly unrelated, both incidents highlight how economic and national security are interconnected.
- South Asia suffers from mutual mistrust, weak institutional mechanisms, and poor regional coordination, making it one of the least integrated regions in the world.
Current State of Economic Integration in South Asia
- Intra-regional trade: Just 5–7% of total trade — lowest among major regional blocs.
- EU: 45%
- ASEAN: 22%
- NAFTA: 25%
- SAARC Trade Volume (2024): ~$23 billion, versus potential $67–172 billion (UNESCAP).
- GDP Comparison:
| Region | % of World Population | GDP (in $ Trillion) |
| South Asia | ~25% | ~$5 trillion |
| EU | 5.8% | ~$18 trillion |
| NAFTA | ~6.5% | ~$24.8 trillion |
Trade Imbalances & Missed Potential
- South Asia’s trade-to-GDP ratio fell: 47.3% (2022) → 42.94% (2024).
- Growth forecast (World Bank): 5.8% (2025), down from 6% (2024).
- Trade deficit widened: $204.1 billion (2015) → $339 billion (2022).
- Unutilized trade potential (UNESCAP Gravity Model):
- Bangladesh: 93%
- Maldives: 88%
- Pakistan: 86%
- Afghanistan: 83%
- Nepal: 76%
India-Pakistan Trade Breakdown
- Bilateral trade:
- 2018: $2.41 billion
- 2024: $1.2 billion
- Pakistan’s exports to India:
- 2019: $547.5 million
- 2024: just $480,000
Key Challenges to Integration
- High Trade Costs
- Intra-SAARC trade cost: 114% of goods’ value
- Trade cost with US: 109%
- Trading with Pakistan costs India 20% more than trading with Brazil (22× farther).
- Political Tensions
- Border disputes, terrorism, and unresolved conflicts, especially India–Pakistan.
- Weak Trade Governance
- SAFTA implementation remains half-hearted.
- Red tape, tariffs, and non-tariff barriers deter trade.
- Lack of Regional Value Chains
- High trade costs and mistrust deter collaboration, unlike ASEAN where trade costs are 76%, encouraging interdependence.
- Underutilized Sectors
- Trade in services and regional investments largely untapped.
- Over two-thirds of trade potential remains unexploited.
Why Integration Matters
- Economic Prosperity = National Security
- Economic stagnation breeds instability and extremism.
- Prosperous neighbors lead to a peaceful and stable region.
- Boosts Growth & Innovation
- Trade allows for economies of scale, job creation, and tech transfer.
- Reduces Dependence
- Less reliance on extra-regional powers like China or the US.
Way Forward
| Area | Suggestions |
| Political | Depoliticize trade; pursue economic diplomacy |
| Trade Policy | Revive SAFTA; harmonize standards; reduce NTBs |
| Infrastructure | Improve logistics, customs clearance, transport corridors |
| Services Trade | Promote tourism, fintech, education, and medical services |
| People-to-People | Encourage academic exchanges, cultural diplomacy |
| Trust Building | Conflict resolution mechanisms within SAARC |
Conclusion
South Asia stands at a crossroads. Its geographic contiguity, shared history, and demographic dividend offer unprecedented potential for economic cooperation. However, mistrust, political disputes, and inefficient mechanisms keep the region from realizing its potential. A functional, depoliticized, and cooperative trade architecture is crucial for building peace and prosperity in South Asia.
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