Dismal State of South Asian Economic Integration

Context: Despite being home to 25% of the global population, South Asia remains one of the least economically integrated regions in the world.

Economic and national security are often discussed separately, but they are deeply intertwined. 

Economic instability fuels unrest, while security threats disrupt trade and investment. 

No country can achieve lasting security without economic prosperity, and vice versa. E.g., Border disputes among South Asian nations significantly hamper trade and economic cooperation, preventing the region from achieving its full potential.

The South Asian region is one of the least economically integrated regions in the world. 

• South Asia, the most populous region of the world (25% of the world’s population), represents a combined market of only $5 trillion in GDP. On the other side, the EU, with 5.8% of the world’s population, accounts for $18 trillion in GDP, and NAFTA has a GDP of $24.8 trillion. This clearly shows the underexploited capacity of the South Asian region.
• South Asian Free Trade Area (SAFTA) was created under SAARC to foster trade Cooperation. Despite this, inter regional trade stands at just 5-7% of the total international trade - the lowest among all major regional blocs. The EU accounts for approximately 45% of total international trade, ASEAN accounts for 22% and NAFTA around 25%.
• Current trade among SAARC (South Asian Association for Regional Cooperation) countries is just around $23 billion, far below the estimated $67 billion. United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), estimates South Asia's trade potential at $172 billion, with over 86% unexploited by 2020. Bangladesh has the highest unexploited proportion, at 93%, followed by the Maldives (88%), Pakistan (86%), Afghanistan (83%), and Nepal (76%).

Barriers to Regional Trade and Integration

High Intra-Regional Trade Costs

• Intra-South Asia trade costs 114% of the value of goods, making regional trade more expensive than global trade. E.g., It is about 20% more costly for a company in India to trade with Pakistan than with Brazil, which is 22 times farther away. Intraregional trade costs for ASEAN are some 40% lower than intra-SAARC trade costs, at 76%, creating high incentives for interdependence in that bloc.
• Underperforming SAARC and  SAFTA: SAARC had the aim of ending distrust and tension, but trust deficits and regional conflicts hinder the full implementation of agreements such as SAFTA. Despite SAFTA, trading with neighbours is not ‘free’. As estimated by the UNESCAP, in spite of trade liberalisation under SAFTA, intraregional trade in South Asia is less than a third of its potential.
• Security and Trust Deficit: Political diversity, regional disputes, minority issues and terrorism are major obstacles to regional cooperation. Most SAARC countries are in conflict with each other, preventing effective regional integration. E.g., due to terror insurgencies and border disputes, bilateral trade between India and Pakistan fell from $2.41 billion in 2018 to $1.2 billion in 2024 and Pakistani exports to India fell from $547.5 million in 2019 to just $480,000 in 2024.
• Absence of Strategic Vision: Regional forums lack leadership, enforcement, and long-term planning. E.g., SAARC summits are irregular, and often unproductive.

Impacts of Poor Regional Integration: 

• Lesser trade opportunity means lesser capacity for innovation, production and investment in the people of the country.
• South Asia’s trade-to-GDP ratio decreased from 47.30% in 2022 to 42.94% in 2024.
• The World Bank reported a softened growth forecast of 5.8% for 2025, down from 6% in 2024. 
• The trade deficit of the subregion has widened from $204.1 billion in 2015 to $339 billion in 2022.

Therefore, to exploit the full potential of the South Asian region, members must work actively to enhance intra-regional trade, keeping aside their bilateral conflicts.