• The share of intra-regional trade in the Subcontinent’s trade with the world has grown from about 2% in 1990 to about 6% in 2023, but it is nowhere near the potential or the achievements of other parts of Asia.
• India’s trade volumes with its neighbours are impressive.
• Bangladesh, for example, is the fourth-largest destination for Indian exports.
• India’s exports to Sri Lanka at about $6 billion are comparable with India’s exports to Japan.
• India’s exports to Nepal are more impressive at $8.5 billion.
• Regional groupings like South Asian Association for Regional Cooperation (SAARC) are becoming defunct due to rivalry of India and Pakistan.

South Asia is least integrated region and least connected to the world:

• The post-colonial and partitioned Subcontinent deliberately chose economic autarky and devalued regional integration.
• Endless conflict in the region reinforced the lack of political appetite for cross-border commercial engagement.
• The trans-regional connectivity inherited from the British Raj steadily withered as the newly-independent economies focused on import substitution.
• The liberalization and globalization of the South Asian economies, which began in the 1990s, saw the injection of the language of regionalism in the Subcontinent and a new interest in trade and connectivity.
• Economic reform was uneven across the region and tentative even in the capitals, with some support for change.
• It was hard to mobilize support for cross-border connectivity projects amidst multiple political disputes among the South Asian sovereigns that exacerbated the region’s security challenges.
• The 21st century has seen considerable improvement within the Subcontinent and in the connections between South Asia and the world.

Road to regional integration in the Subcontinent must necessarily run through the SAARC:

• The fact that SAARC is moribund, its last summit was held in 2014.
• It has not made any progress in regional economic integration.
• SAARC would have been the vehicle for reconnecting the region but Pakistan is not interested in such an outcome.
• Pakistan’s priority has been to wrest concessions from India on Kashmir.
• It is in no mood to open its economy for mutually beneficial cooperation with India.
• That has not come in the way of the rest of the region moving forward through bilateral, sub-regional, and trans-regional mechanisms outside of SAARC.
• A successful SAARC is not a precondition for thriving economic regionalism.

Factors that are accelerating regional economic integration

Renewed pressure to undertake economic reform:

• The recent economic crises in Sri Lanka and Pakistan are compelling them to embark on serious and painful economic change.
• Nepal and Sri Lanka are more open to trade, investment and connectivity with India.
• Both the countries are aiming for deeper economic integration with India.
• The entrenched political resistance to commercial engagement with India appears to be giving way to the pursuit of enlightened economic self-interest in both countries.
• Pakistan is turning to the Gulf to end its dependence on loans and bailouts.
• Pakistan announced a list of 28 major projects, worth billions of dollars, that will be open for investment from the United Arab Emirates, Saudi Arabia and Qatar.
• Pakistan is willing to take the political risk of confronting a potential popular backlash against sweeping economic change.

The region is looming larger in India’s economic calculus:

• As India’s relative economic weight in the world has grown, its commercial ties with neighbours have increased.
• The logic of economic geography is beginning to unfold in India’s relations with most of its neighbours, except Pakistan.
• India’s trade potential with Pakistan has been estimated to be as high as $37 billion which is unlikely, though, to be realised any time soon.
• India can promote exports to Pakistan through third countries, example through the Gulf, instead of waiting to negotiate bilateral trade liberalization with Pakistan.
• Major initiatives for cross-border connectivity now complement India’s growing trade volumes with its neighbors.
• Trans-border projects to promote rail, road, energy, power, financial, and digital connectivity have all gained new impetus in India’s engagement with its neighbors.
• The regional connectivity that began with Bangladesh a few years ago is rapidly expanding to cover other neighbors.

Renewed great power rivalry:

• Renewed great power rivalry between the US and China on the one hand and the deepening conflict between India and China on the other have altered the Subcontinent’s geo-economic template.
• In de-risking their commercial ties with China, the US and its allies now actively promotes economic and technological engagement with India.
• They are also promoting economic integration between India and its smaller neighbors.
• The US, for example, helped Nepal’s energy and road connectivity with India with the $500 million Millennium Challenge Grant.
• Nepal approved it despite considerable opposition from China.
• Japan is promoting sub-regional connectivity between India and Bangladesh that can potentially transform the economic map of the eastern subcontinent and the Bay of Bengal.
• Japan’s visit to Sri Lanka and Maldives is part of Tokyo’s strategy to raise its strategic profile in the Indian Ocean and offer viable alternatives to China’s Belt and Road Initiative, which has been widely embraced in South Asia.
• Japan and France have also joined hands with India to help Sri Lanka navigate out of its economic crisis.

India, which was complacent about China’s growing economic presence in the region a few years ago, has offered a measure of competition in the Subcontinent with its own bouquet of regional infrastructure projects. India is now working with its like-minded partners to offer credible economic alternatives to its neighbours that until now had seen China as the only game in town. India has a long way to go before it can radically restructure South Asia’s economic architecture, but it now has economic heft and political purpose to pursue that ambition. Together the three trends: the region’s new economic openness, India’s vigorous neighbourhood policies, and Western support for an India-centred regionalism in South Asia could transform the Subcontinent’s geo-economic landscape. India’s rising economic tide could help lift all boats in South Asia.