Obstacles to Economic Cooperation between India and Central Asia

Central Asia sits on enormous reserves of oil, natural gas, uranium, and rare earth metals, while India is one of the world’s fastest-growing major economies hungry for energy and new markets. On paper, the two are a natural match. Yet trade between them remains surprisingly thin. In 2023, total India-Central Asia trade in goods was only around $1.7 billion to nearly $2 billion – a tiny figure for economies of this size. Understanding why this potential stays untapped means looking closely at three stubborn obstacles: the absence of direct transport routes, the problem of hard currency and payments, and the underuse of credit lines. It also means examining the strategic moves India is making to break through them.

Why economic cooperation matters 🔗

Central Asia comprises five landlocked republics – Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, and Tajikistan. They form part of what India calls its “extended neighbourhood,” with civilisational and trade links going back to the days of the Silk Road. After the Soviet Union collapsed in 1991, these countries opened up, and India launched its Connect Central Asia Policy in 2012, built around four Cs: Commerce, Connectivity, Consular, and Community.

The economic logic is strong. Central Asia can supply mineral fuels, fertilizers, inorganic chemicals, and rare earth compounds, while there is room for joint ventures in petrochemicals, renewable energy, textiles, pharmaceuticals, and food processing, as a Eurasian Development Bank report notes. Despite this, the volume of trade does not match the potential. The reasons are largely structural.

Obstacle one: the lack of direct transport routes 🔗

The single biggest barrier is geography combined with politics. Central Asian states are landlocked, and India has no direct overland connection to them. The natural land route would run through Pakistan and Afghanistan, but this corridor has been closed to Indian trade for decades.

The Pakistan problem 🔗

After Partition in 1947, India lost direct overland access to Central Asia because the route passes through Pakistan. As the Connect Central Asia analysis explains, goods bound for the region cannot travel through Pakistan and Afghanistan and must instead take much longer routes – typically by sea to Iran and then overland – which makes trade far less viable. Pakistan has consistently denied India transit rights, effectively cutting off the shortest path.

High logistics costs 🔗

Because no efficient direct corridor exists, goods travel by long maritime detours or costly overland paths. The Eurasian Development Bank identifies the low productivity of the transport and logistics sector as one of the most important obstacles, since high costs reduce both the competitiveness of goods and the overall volume of trade. The current land route via China remains expensive and poses a serious logistical challenge for Indian traders.

Competition from China 🔗

While India struggles with access, China has poured investment into the region through its Belt and Road Initiative, funding and managing many transport and infrastructure projects across Central Asia. This has cemented Beijing’s economic and political influence and left India playing catch-up.

Obstacle two: the non-availability of hard currency 🔗

The second obstacle is financial. Even when goods can move, paying for them is not straightforward. The Indian rupee is not freely convertible on the capital account, and several Central Asian currencies are weak or volatile. This creates friction in settling trade.

What convertibility means 🔗

Currency convertibility is the freedom to exchange one currency for another at market rates without restrictions. India allows convertibility on the current account (for trade and services) but has deliberately avoided full capital account convertibility to protect itself from external financial shocks. The result is that the rupee is not officially used as an international means of payment.

Why this slows trade 🔗

When a currency is inconvertible or volatile, it becomes a barrier to trade because foreign partners have little use for it. India has tried to promote rupee-based settlement, but even with Russia, the rupee’s volatility has proved an obstacle to its expanded use, with traders often preferring other currencies. For smaller Central Asian economies, the absence of reliable hard currency and convertible payment mechanisms makes large transactions risky and cumbersome.

The search for solutions 🔗

India has begun proposing local currency trade as a workaround. It has suggested using local currencies for trade with Kazakhstan to strengthen financial independence, and bilateral central bank arrangements are being explored. But these remain works in progress rather than fully functioning systems.

Obstacle three: insufficient credit utilisation 🔗

The third obstacle is more subtle. India has actually offered substantial financing to Central Asia, but much of it goes unused. In October 2020, India extended a US$1 billion Line of Credit for infrastructure, energy, and agriculture projects across the region. Specific credit lines have also been approved for Uzbekistan, including a US$448 million line for road construction and IT-sector development.

Why credit goes underused 🔗

The problem is that offering credit is not the same as deploying it. Weak banking links, limited trade finance for small and medium enterprises, and the absence of reliable transport and payment channels all make it hard to convert these lines of credit into actual projects and trade flows. The Eurasian Development Bank highlights trade finance gaps for SMEs as a principal barrier, noting that resolving logistics and finance problems together could unlock an estimated additional $2 billion of trade.

The institutional gap 🔗

To address weak trade ties, India launched the India-Central Asia Business Council in 2020 to encourage cooperation among businesses on both sides. Yet the broader picture remains one where credit, infrastructure, and finance have not yet come together into a smooth pipeline that businesses can actually use.

India’s strategic responses 🔗

India is not standing still. It has pursued a set of connected initiatives designed to attack these obstacles at the root, especially the transport bottleneck.

The Chabahar port 🔗

The centrepiece is Chabahar, a port on Iran’s southern coast in Sistan-Balochistan province. In May 2024, India signed a 10-year contract between Indian Ports Global Ltd and Iran’s Port and Maritime Organisation to operate the Shahid Beheshti terminal. The strategic value is clear: Chabahar lets India reach Central Asia and Afghanistan by sea-and-land, completely bypassing Pakistan. The Indian Council of World Affairs describes the port, developed with around $370 million in investment, as a gateway to Central Asia and Eurasia that is especially valuable for landlocked countries. India sees Chabahar as a connectivity hub for Afghanistan and landlocked Central Asian states.

The International North-South Transport Corridor 🔗

Chabahar connects to the broader International North-South Transport Corridor (INSTC), a 7,200-kilometre multi-modal network of ship, rail, and road links established in 2000 among India, Russia, and Iran, now expanded to thirteen members. The corridor is designed to slash both cost and time, with reported savings of around 30% on cost and 40% on transit time compared to the traditional Suez Canal route. Together, Chabahar and the INSTC give India a resilient alternative for trade with Central Asia and beyond.

SCO and EAEU engagement 🔗

India also works through multilateral platforms. As a full member of the Shanghai Cooperation Organisation (SCO), India uses the forum to deepen engagement with Central Asian republics and push for reliable, diversified supply chains. At an SCO summit, Prime Minister Modi argued that Central Asian countries could unlock their economic potential by connecting with Chabahar and India’s large market.

On the trade-policy front, India has been negotiating a Free Trade Agreement with the Eurasian Economic Union (EAEU/EEU), which includes Kazakhstan and Kyrgyzstan. After a feasibility study, senior officials began formal FTA talks in March 2024. A successful agreement would lower tariffs and give Indian goods better access to the region, directly tackling the trade-volume problem.

The road ahead 🔗

The obstacles to India-Central Asia economic cooperation are real and interlinked. Transport gaps raise costs, currency problems complicate payments, and underused credit shows that money alone cannot fix the system. But the strategic responses – Chabahar, the INSTC, SCO engagement, and the EAEU FTA – show a coherent plan to convert geographic and financial disadvantage into a workable trade architecture. Whether these efforts succeed will depend on how quickly the physical corridors become fully operational and how effectively payment and finance mechanisms catch up. Geopolitical risks in Iran and Afghanistan remain a wild card that could disrupt the entire strategy.

What do you think? If you had to rank the three obstacles – transport, currency, and credit – which do you believe is the hardest for India to overcome, and why? And do you think bypassing Pakistan through Chabahar is a durable long-term solution, or does it simply trade one set of geopolitical risks for another?

References

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