THE CONTEXT: Two shocks in 2025—the reciprocal tariff hikes by the United States and the 22 April Pahalgam terror attack—illustrate how security spillovers and trade frictions feed upon each other in South Asia. Intra-regional trade is stuck at USD 23 billion (≈ 5 % of the region’s trade) against an estimated USD 67 billion potential, making the South Asian Association for Regional Cooperation (SAARC) the least-integrated major bloc.
THE BACKGROUND:
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- Institutional timeline: South Asian Association for Regional Cooperation (SAARC, 1985), South Asian Free Trade Area (SAFTA, 2006) and the South Asian Preferential Trading Arrangement (SAPTA, 1995) sought to translate geographical contiguity into prosperity but stalled amid political distrust.
- Missed opportunity: By comparison, the Association of Southeast Asian Nations (ASEAN) moved from the ASEAN Free Trade Area (1992) to the ASEAN Economic Community (2015), pushing its intra-trade share to ~25 %.
THEORETICAL FRAMEWORK
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- Security–Development Nexus: Enduring rivalries (India–Pakistan, India–China) raise transaction costs and deter cross-border production networks.
- Gravity Model Evidence: UN Economic and Social Commission for Asia and the Pacific (UNESCAP) shows actual South-Asian trade is <⅓ of the value predicted by economic size and distance.
WHAT, WHY, HOW:
| ASPECT | INSIGHT |
|---|---|
| What is broken? | SAFTA removed most tariffs but retained para-tariffs (regulatory duties, additional customs duty) and averaged 17 % of tariff lines in sensitive lists. Logistics remain the costliest globally. |
| Why so? | Trust deficit, terrorist violence, politicisation of trade concessions, and weak dispute-settlement under SAFTA. |
| How does it hurt? | Intra-SAARC trade costs equal 114 % ad-valorem—higher than trading with the United States (109 %) despite 22-times greater distance, and far above the Association of Southeast Asian Nations (ASEAN) average of 76 %. |
TECHNICAL DETAILS & CURRENT SCENARIO (FY 2024-25)
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- Trade cost within South Asia equals 114 % of shipment value—higher than the cost of trading with the United States (109 %) despite 22-times longer distance.
- India-Pakistan merchandise trade shrank from USD 2.41 billion (2018) to USD 1.2 billion (2024) after 2019’s Most-Favoured-Nation suspension and renewed curbs post-Pahalgam.
- Sub-regional bright spots: Bangladesh–India trade surpassed USD 16 billion in 2024; cross-border electricity trade (Indian grid to Nepal, Bangladesh) reached 9 GW.
- Services surge: India’s services exports hit USD 341 billion (2023-24), showing scope for a Regional Services Agreement covering IT, health tourism and digital payments.
THE SIGNIFICANCE:
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- Demographic dividend: South Asia hosts 25 % of global population but only 5 % of global trade output; integration could lift regional GDP by 1.7 percentage points annually (ADB simulation).
- Supply-chain resilience: Diversified regional value chains in textiles, auto components and pharmaceuticals buffer external shocks.
- Strategic stability: Economic interdependence lessens incentive for conflict escalation, enhancing human security.
THE GLOBAL PERSPECTIVE:
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- ASEAN Single Window: Digitally exchanged customs documents, reducing clearance time by 50 %.
- European Union Structural Funds: Pooling resources for laggard regions; model for a SAARC Development Infrastructure Fund.
- African Continental Free Trade Area (AfCFTA): Phased liberalisation + dispute-settlement body; indicates need for enforceable SAFTA adjudication panel.
THE ISSUES:
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- Tariff peaks & para-tariffs: Average MFN duty 13 % but effective protection >30 % once special regulatory fees are added.
- Non-tariff Measures (NTMs): Divergent product standards (e.g., sanitary-phytosanitary rules on agri-trade) raise compliance cost for SMEs.
- Security externalities: Border skirmishes, terrorism (Pahalgam 2025) disrupt logistical nodes and raise insurance premia.
- Logistics bottlenecks: Land ports lack 24×7 customs; average truck dwell-time at Petrapole–Benapole is 36 hours.
- Financial asymmetry: Limited use of Asian Clearing Union (ACU) and high transaction costs in hard currency settlements.
- Data-protection divergence: Digital-trade potential hobbled by inconsistent privacy laws.
THE CHALLENGES:
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- Trust deficit & politicisation of trade: SAARC summits stalled since 2014; security concerns veto economic agenda.
- Asymmetric gains: India’s 79 % share of intra-regional trade raises fears of domination among smaller neighbours.
- Institutional fatigue: Over-lapping forums (SAARC, BIMSTEC, BBIN, SASEC) dilute focus and resources.
- Climate vulnerability: Shared River basins and border infrastructure face rising extreme-weather risk.
THE WAY FORWARD:
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- Fast-track BBIN-MVA Roll-out: Deploy e-permits, satellite-based truck-tracking and one-stop border posts within 18 months; ADB can leverage a USD 400 million credit line for last-mile roads.
- Create SAARC Single Window 2.0: Integrate customs, quarantine and port-community systems under a cloud platform; pilot India–Bangladesh–Nepal corridor to halve clearance times.
- Mutual Recognition of Standards: Launch an Accredited Laboratory Network backed by South Asian Regional Standards Organisation (SARSO) to reduce recurrent testing fees by 30 %.
- Regional Digital Payments Grid: Inter-link UPI, LankaPay, and Nexco networks; settlement through ACU to cut remittance charges to 1 %.
- Cross-Border Power Pool: Operationalise the South Asia Regional Electricity Market (SAREM) with day-ahead power trading, stabilising peak-demand deficits.
- Trusted Trader Programme: Certify low-risk firms for priority clearance; extend to small and medium enterprises through simplified documentation.
- Women-Centric Trade Facilitation: Establish She-Trade hubs at land ports offering financing and training, tapping an extra USD 3 billion in regional exports by 2028.
- Regional Dispute-Settlement Panel: Adopt ASEAN-style consultation and panel procedures for SAFTA violations, limiting politicised retaliatory tariffs.
THE CONCLUSION:
South Asia’s integration story is less about lowering tariffs and more about erasing transaction costs of distrust. A calibrated mix of connectivity corridors, regulatory convergence and security CBMs—anchored in India’s Neighbourhood First doctrine—can transform the sub-continent to a prosperous South Asian Growth Arc.
UPSC PAST YEAR QUESTION:
Q. Do you think that BIMSTEC is a parallel organisation like the SAARC? What are the similarities and dissimilarities between the two? How are Indian foreign-policy objectives realised by forming this new organisation? 2022
MAINS PRACTICE QUESTION:
Q. South Asia’s low intra-regional trade reflects politics of mistrust more than economics of tariffs. Analyse.
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