South Asia as a Free Trade Area
SAARC as an Economically Integrated Area — the numbers
South Asia covers about 3.5% of the world’s land surface but holds a fourth of its population. Despite proximity and common socio-cultural bonds, it is among the world’s least integrated regions.
| Indicator | Position |
|---|---|
| Intra-regional trade | A meagre 5% of total trade — against 25% for ASEAN. |
| Intra-regional investment | Less than 1%. |
| Cost of intra-regional trade | 114% of the value of goods exported — trade with neighbours costs more than trade with distant partners, which discourages regional value chains despite contiguity. |
| Comparative cost | It is 20% cheaper for India to trade with Brazil than with its neighbours. |
| Hub-and-spoke pattern | For Bangladesh, trade with India is 90% of its regional trade; trade with Afghanistan, Bhutan, Nepal, Maldives and Sri Lanka together is just 2%. |
Why it stays low
- SAFTA’s poor implementation → SAARC’s main instrument for improving intra-regional trade has failed largely because of Non-Tariff Barriers, while the focus remained on tariff reduction alone.
- Poor connectivity and infrastructure deficit → women, the poor and marginalised groups are worst affected by the infrastructure gap.
- High informal border trade → recorded figures understate reality. UNESCAP analysis shows formal intraregional trade vastly underestimates actual trade, since official data misses informal exchanges by entrepreneurial communities at the frontiers, helped by porous borders and shared history, language and culture.
- Poor supply capabilities in LDCs → trade imbalances with India persist because of limited capacity to supply products of interest to India; productive capacities of South Asian LDCs have actually declined in technical complexity and product variety compared with other countries.
- Poor trade facilitation → excessive delays, high costs and uncertainty at borders.
The upside estimate
Philippe Le Houérou points to prospects in regional commerce, connectivity and energy cooperation; a World Bank study finds goods trade within South Asia could be three times current levels, with even higher potential in services.
India as a Driving Force of Economic Integration
India is central to SAARC by geography, economy, international stature and commitment. The region has an acute asymmetrical balance, so India carries a special responsibility — taking the region along in its own march is both an economic and a demographic imperative.
| Instrument | What India has done |
|---|---|
| Trade share | India’s trade with South Asia is around 5.5% of its global trade; India has pressed for expedited negotiation and implementation of agreements on three themes — trade, connectivity and people-to-people contact. |
| SAFTA concessions | Unilateral duty-free access on all items to SAARC LDCs; Phase II commitments met for non-LDCs; zero tariff for goods from LDCs. |
| Currency swap | A base fund of US$ 2 billion from India for short-term foreign exchange liquidity. |
| SAARC Development Fund | The only country to have paid its assessed contribution for the entire five-year period — US$ 89.9 million — plus a voluntary US$ 100 million. |
| Bilateral trade openings | Historic FTAs with Bhutan and Nepal, expanded to an FTA with Sri Lanka and significant liberalisation for Bangladesh’s principal exports, notably textiles. |
| Afghanistan | US$ 2 billion allocated to infrastructure projects in energy and highways. |
Limited success — reasons
- The “Big Brother Syndrome” among smaller members; India’s size makes it the most striking culprit in their eyes.
- India’s economic strength and scientific and technological development create suspicion of domination.
- The Pakistan factor — the boycott and eventual scrapping of the 19th Summit in Islamabad after Uri.
- China’s intervention across South Asian countries, containing India’s influence — contracts for Hambantota and the expansion of Colombo port.
- Smaller members such as Bangladesh, Nepal and Sri Lanka consider India the main source of threat to their security and have welcomed, directly or indirectly, the role of extra-regional powers.
The debt-trap thesis and its rebuttal
The ‘String of Pearls’ and debt-trap readings treat Hambantota as a Chinese strategic foothold. Lee Jones and Shahar Hameiri (Chatham House) reject this on the evidence — Hambantota was a Rajapaksa white elephant, Sri Lanka’s debt crisis came mainly from Western-market borrowing, and the 2017 deal was a commercial lease, not a seizure. The port now hosts Sri Lanka’s own southern naval command.
Prospects for Sub-Regional Integration
- Regional integration in South Asia is being reimagined through sub-regional platforms as SAARC remains stalled by interstate friction and weak enforcement.
- Prakriti Bhattarai records that even signature schemes left “intra-SAARC trade… below 5%”, and that unanimity rules slow decisions — conditions that push states towards nimbler forums.
- Misu Kim → new regionalism in India’s neighbourhood draws on political-economy drivers — connectivity, market access and flexible coalitions — more than on classic neo-functional ‘spillovers’. She shows SAARC’s stagnation and the rise of sub-regional ventures such as SASEC and BBIN as pragmatic responses to power politics and to limited regional identity.
Two enablers
- Bay of Bengal economic geography → BIMSTEC links South and Southeast Asia and widens India’s cooperation circle beyond SAARC’s constraints; sub-regionalism lets states sidestep political tension while deepening trade and infrastructure ties.
- Concrete connectivity → projects under Act East — the India–Myanmar–Thailand Highway and the Kaladan Multimodal Corridor — are meant to cut cost and time, though delays in Myanmar and staggered execution persist. The BIMSTEC FTA is not yet functional, with negotiations continuing, which leaves the economic rules unfinished.
BBIN — promise and constraint together
- A significant leap forward in transport and energy cooperation, but vulnerable to geopolitical rivalry and resource constraints.
- Bhutan’s parliament rejected the BBIN Motor Vehicles Agreement in November 2016; the agreement moved forward in March 2022 when members met in New Delhi to finalise the MoU.
- Domestic conditions affect feasibility. India’s Northeast, critical for BIMSTEC and BBIN corridors, faces security and social hurdles; armed conflict, mobility restrictions and policy silos still obstruct a real ‘gateway’ role.
Assessment
Near-term realignment is feasible only in sectoral, project-based modes — transport, energy, customs facilitation, selective value chains. BIMSTEC and BBIN can deliver incremental integration where politics allows and infrastructure exists. Without operational trade rules and steadier Northeast connectivity, sweeping region-wide integration in the immediate future is unlikely.