Enhancing Trade Relations: India and South Asia

South Asia is home to nearly a quarter of the world’s population, yet it remains one of the least economically integrated regions on the planet. Despite sharing borders, languages, and centuries of cultural exchange, the countries of this region trade remarkably little with one another. India sits at the centre of this puzzle. As the region’s largest economy, its trade relationships with neighbours like Bangladesh, Nepal, and Sri Lanka reveal both enormous untapped potential and the political and structural hurdles that keep it locked away.

The scale of the missed opportunity 🔗

The numbers tell a striking story. Intra-regional trade accounts for only about 5 percent of South Asia’s total trade. Compare this to East Asia and the Pacific, where roughly half of all trade happens within the region, or to Sub-Saharan Africa at 22 percent. South Asian countries instead direct the overwhelming bulk of their commerce towards Europe, North America, and East Asia, leaving the wealth of their own neighbourhood largely unexplored.

The World Bank captured this gap in its influential report, A Glass Half Full: The Promise of Regional Trade in South Asia. The study estimated India’s potential trade in goods with South Asia at $62 billion, against actual trade of just $19 billion, a shortfall of around $43 billion. Looking at the region as a whole, the analysis found that removing trade barriers could grow intra-regional trade roughly threefold, from about $23 billion to $67 billion. Other World Bank estimates have pointed to an even larger prize, suggesting regional trade in goods and services could rise from around $28 billion to $100 billion with the right policy approach.

India’s key trading partners in the region 🔗

India dominates South Asian trade, and a few neighbours account for most of its regional commerce. Understanding these individual relationships is essential to grasping the bigger picture.

Bangladesh: the largest partner 🔗

Bangladesh has emerged as India’s biggest trading partner in South Asia, ahead of Nepal and Sri Lanka. The relationship is heavily weighted in India’s favour. India’s exports to Bangladesh stood at US$11.46 billion in FY25, while Bangladesh’s exports to India remain a small fraction of that. Bangladesh has consistently recorded a large trade deficit with India, which by its own government’s figures has reached close to $7.86 billion in recent years.

The trade is dominated by textiles. Raw cotton is the single largest item India exports to Bangladesh, feeding Bangladesh’s enormous garment industry, alongside yarns and dyeing materials. This creates a form of intra-industry trade where India supplies inputs and Bangladesh exports finished garments to the world. Some analysts have argued that India’s large surplus gives it room to be more generous in granting market access to Bangladeshi goods.

Nepal: the landlocked neighbour 🔗

For Nepal, India is by far the most important economic partner. As a landlocked country, Nepal depends heavily on Indian ports and overland routes for its access to global markets, which makes the relationship structurally lopsided. India remains Nepal’s largest trading partner, and Nepal runs a substantial trade deficit driven by imports of fuel, vehicles, machinery, and consumer goods. India’s exports to Nepal cover categories like cotton, electricity, and high-speed diesel.

There is genuine complementarity here that could deepen ties. The World Bank has repeatedly noted that India could substitute some of its fossil-fuel use with cleaner hydropower from Nepal and Bhutan, turning the energy relationship into a two-way street rather than a one-way flow of goods.

Sri Lanka: the FTA pioneer 🔗

Sri Lanka holds a special place in India’s regional trade story because the two countries signed a bilateral Free Trade Agreement that came into force in 2000, well before broader regional frameworks took hold. This made Sri Lanka one of the early test cases for liberalised trade with India. India has maintained a steady trade surplus with Sri Lanka over the years, exporting petroleum products, vehicles, textiles, and machinery while importing a smaller volume of goods in return.

The relationship illustrates both the promise and the limits of regional trade deals. While the FTA boosted commerce, Sri Lanka has periodically grown cautious about deeper integration, reflecting a broader nervousness among smaller economies about being overwhelmed by their giant neighbour.

What is holding trade back? 🔗

If the potential is so large, why has it stayed unrealised for decades? The barriers fall into a few clear categories, and most of them are man-made rather than natural.

The SAFTA framework and its sensitive lists 🔗

Much of India’s regional trade operates under the South Asian Free Trade Area (SAFTA), signed at the 12th SAARC Summit in Islamabad in 2004 and brought into force on 1 January 2006. SAFTA replaced the earlier South Asian Preferential Trading Arrangement and aimed to phase out tariffs across the member states: India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka, Maldives, and Afghanistan.

In practice, SAFTA has underperformed. A major weakness is the so-called sensitive list, a long catalogue of products that each country exempts from tariff cuts to protect its domestic industries. These lists range from 6 to 45 percent of a country’s imports from the region, effectively pulling many of the most tradeable goods out of the free-trade arrangement. Long sensitive lists have kept the agreement’s actual impact far below its design.

Non-tariff barriers 🔗

Even where tariffs have fallen, other obstacles remain. Non-tariff barriers are now often a greater hurdle than tariffs themselves. These include restrictive customs procedures, complex technical and quality standards, sanitary and phytosanitary requirements, port restrictions, and lengthy bureaucratic delays. Research on the region argues that mutual recognition of standards and certificates between countries would leave all member economies better off and raise both intra-regional trade and welfare. Until that happens, exporters face duplicated testing and paperwork that quietly raise the cost of doing business across borders.

Poor connectivity and high logistics costs 🔗

South Asia’s transport infrastructure was largely built to serve internal needs rather than regional trade corridors. Roads, railways, and ports are often fragmented and inefficient, which inflates the cost of moving goods between neighbours. The World Bank has backed efforts to fix this, approving more than $1 billion in financing through the Accelerating Transport and Trade Connectivity in Eastern South Asia programme. The project aims to digitise paper-based trade processes and modernise major land ports in Bangladesh and Nepal to cut border-crossing times.

Political tensions and the trust deficit 🔗

The single biggest drag on regional trade is political. The strained relationship between India and Pakistan, the region’s two largest economies, has badly damaged the prospects of South Asia-wide integration. The World Bank found that formal India-Pakistan trade could be worth around $37 billion, against actual trade of just over $2 billion. Because these two countries together represent the bulk of the region’s economy, their frozen relationship pulls down the entire region’s numbers. Beyond Pakistan, a broader trust deficit persists, with smaller neighbours often perceiving India’s economic size as a threat rather than an opportunity.

The path to deeper integration 🔗

The good news is that the obstacles are mostly policy choices, which means they can be reversed. Several practical steps could unlock the region’s trade potential.

First, countries can shorten their sensitive lists, gradually bringing more products under tariff liberalisation. Second, governments can tackle non-tariff barriers by mutually recognising each other’s standards and simplifying customs procedures. Third, continued investment in cross-border connectivity, from upgraded highways to digitised land ports, would lower the physical cost of trade. India has already taken some unilateral steps, offering duty-free access to the region’s least developed countries.

There is also a strong case for India to lead by example. Given its consistent trade surpluses with most neighbours, India can afford to be more open and generous in granting market access without serious risk to its own industries. Doing so would build goodwill and counter the perception of economic dominance that often stalls cooperation. Catalysing private and intra-regional investment, so that companies build shared supply chains across borders, could turn trade and investment into mutually reinforcing engines of growth.

Why this matters 🔗

Deeper regional trade is not just an economic abstraction. It promises cheaper and more varied goods for consumers, better access to inputs and markets for producers, and reduced isolation for landlocked and border regions like Northeast India. For a region with some of the poorest populations in the world, unlocking the difference between $28 billion and $100 billion of trade could translate into real jobs, lower prices, and stronger growth. The fundamentals, including geographic proximity, complementary economies, and shared history, are all in place. What remains is the political will to dismantle the barriers that South Asian governments themselves have built.

What do you think? Should India use its economic strength and trade surpluses to be more generous towards its smaller neighbours, even if the short-term benefits flow mostly the other way? And can meaningful regional trade integration ever succeed in South Asia while the India-Pakistan relationship remains frozen?

References

1. https://www.worldbank.org/en/news/press-release/2018/09/24/south-asia-remove-trade-barriers-mutual-economic-gains-report
2. https://www.worldbank.org/en/news/press-release/2018/10/08/sri-lanka-has-the-potential-to-more-than-double-its-exports-to-south-asia-region-says-a-world-bank-report
3. https://blogs.worldbank.org/endpovertyinsouthasia/5-things-boost-south-asian-regional-trade-100-billion-5-years
4. https://www.ibef.org/indian-exports/india-bangladesh-trade
5. https://www.tbsnews.net/economy/bangladesh-trade-deficit-india-hits-786-billion-minister-1416926
6. https://myrepublica.nagariknetwork.com/news/nepal-runs-trade-deficit-with-115-countries-as-import-export-gap-widens-93-20.html
7. https://uppcsmagazine.com/regional-economic-cooperation-in-asia-safta-sapta-and-asean/
8. https://www.pressreader.com/sri-lanka/daily-mirror-sri-lanka/20190222/282467120172553
9. https://www.sciencedirect.com/science/article/abs/pii/S0954349X24000389
10. https://www.worldbank.org/en/news/press-release/2022/06/28/regional-trade-and-connectivity-in-south-asia-gets-more-than-1-billion-boost-from-world-bank