Notes for Students
Topic: Challenges and Prospects of Regional Economic Integration in South Asia
Source News: Editorial: The Hindu, Date: June 24, 2025, Author: Shashank Patel
Context of the Editorial: Despite frameworks like SAFTA, intra-regional trade in South Asia remains among the lowest globally, primarily due to political distrust, border disputes, terrorism, and inefficient trade systems.
Relevant UPSC Paper:
- GS Paper II – Governance, International Relations
- GS Paper III – Economy
Dimensions of the Article:
- Country-wise Trade Potential Lost
- Status of South Asian Economic Integration
- Political and Security Barriers to Trade
- Trade Costs and Inefficiencies
Current Context
South Asia, home to over 25% of the global population, remains one of the least economically integrated regions in the world — despite shared geography, culture, and economic potential. The editorial highlights how geopolitical tensions, trust deficits, and inefficient trade governance continue to cripple the economic unity envisioned under regional frameworks like SAFTA (South Asian Free Trade Area) and SAARC (South Asian Association for Regional Cooperation).
The situation is paradoxical. While global regional blocs like EU, ASEAN, and NAFTA show how economic cooperation can enhance collective prosperity, South Asia remains stuck in political rivalries, with intra-regional trade contributing only 5–7% of total trade — far below ASEAN’s 22%, EU’s 45%, or NAFTA’s 25%.
Terrorism, Security & Trade Decline
The editorial connects two seemingly unrelated events — the Trump administration’s tariff measures and a terror attack in Pahalgam — to show how economic and national security are intertwined. Trade and investment cannot flourish in an atmosphere of conflict, and security cannot be achieved in economic isolation. In South Asia, where countries like India and Pakistan share borders but also a long history of conflict, this relationship is stark.
Due to terrorism and border disputes, India-Pakistan trade has plummeted:
- From $2.41 billion in 2018 to $1.2 billion in 2024.
- Pakistan’s exports to India collapsed from $547.5 million in 2019 to just $480,000 in 2024.
This decline is not just a trade loss, but a reflection of how political hostility trumps economic logic in the region.
South Asia’s Untapped Trade Potential: Data & Meaning
SAFTA stands for the South Asian Free Trade Area.
Definition: SAFTA is a free trade agreement signed by the member countries of the South Asian Association for Regional Cooperation (SAARC) to promote trade and economic cooperation among South Asian nations by reducing or eliminating customs duties and trade barriers on goods and services.
Background:
- Replacing: It replaced the earlier SAPTA (South Asian Preferential Trade Arrangement), which had limited success.
- Established: The SAFTA Agreement was signed on January 6, 2004, in Islamabad.
- Came into force: January 1, 2006.
Despite SAFTA’s goal of free trade, current intra-SAARC trade stands at $23 billion, while:
- Estimated potential (UNESCAP): $67 billion (moderate) to $172 billion (ambitious).
- Meaning: 86% of trade capacity lies unutilized.
Even if we consider the conservative estimate, the region is still trading at only one-third of its potential.
Country-specific unexploited trade potential (as per UNESCAP’s Gravity Model):
- Bangladesh: 93% unused
- Maldives: 88%
- Pakistan: 86%
- Afghanistan: 83%
- Nepal: 76%
This data underscores a systemic failure across all South Asian economies to build regional value chains or establish mutually beneficial trade corridors.
Why High Trade Costs Are a Core Obstacle
The cost of trading within South Asia is 114% of the value of goods — meaning the cost of procedures, logistics, delays, and cross-border tensions often exceeds the actual product value.
Compare this to:
- India-US trade cost: 109% — lower, despite the vast distance.
- India-Brazil trade: 20% cheaper than India-Pakistan, despite being 22 times farther.
For context:
- Intra-ASEAN trade cost: only 76%, encouraging deep integration.
- South Asia lacks efficient customs, infrastructure, and harmonised regulatory mechanisms, which results in high transaction costs and unpredictability.
This economic irrationality discourages regional firms from participating in SAARC supply chains. Hence, even basic comparative advantage — like Bangladesh in textiles or India in pharma and IT — fails to transform into cross-border production networks.
Trade-to-GDP Decline: Regional Economic Weakness
South Asia’s trade-to-GDP ratio, a key indicator of global economic engagement, fell:
- From 47.30% (2022) to 42.94% (2024)
This decline, paired with World Bank’s revised growth forecast from 6% (2024) to 5.8% (2025), reflects regional economic sluggishness. Also:
- Trade deficit ballooned: $204.1 billion (2015) → $339 billion (2022)
- Yet, total trade volume grew: $1,335 billion by 2022 (exports + imports combined)
Implication: South Asia is consuming more global goods than producing, and failing to substitute imports with regional trade.
Failure of SAFTA & SAARC: Structural and Political Issues
SAFTA, established to promote free movement of goods, remains crippled because:
- Political tensions (e.g., India-Pakistan, India-Nepal, Pakistan-Afghanistan)
- Trust deficit: Member states doubt each other’s intentions and commitment.
- Minority issues, terrorism, border disputes, and electoral nationalism further derail cooperation.
Even basic trade facilitation (like uniform port charges, faster customs, digital tracking) remains non-operational across borders.
SAARC was envisioned to build mutual trust and promote collaborative growth — but remains inactive, as most members are in bilateral or trilateral conflicts.
Wider Consequences: Stunted Innovation, Investment, Human Capital
- Lower trade opportunity = lower demand for innovation
- Less investment in people, fewer regional jobs
- Loss of economies of scale, particularly for smaller countries like Bhutan, Maldives, Nepal
The lack of regional integration creates isolationist growth models, where each country tries to deal with external shocks alone, instead of leveraging collective strength.
Overall Editorial suggests:
The editorial highlights the failure of South Asia to become an economically integrated region despite having immense trade potential, shared borders, and historical ties. Agreements like SAFTA, meant to promote intra-regional trade, remain ineffective due to deep-rooted political distrust, border disputes, terrorism, and poor trade infrastructure.
Even though South Asia is home to a quarter of the world’s population, it contributes only 5–7% of its trade within the region, while other blocs like the EU or ASEAN thrive on internal trade. The cost of trading within South Asia is absurdly high, sometimes more expensive than trading with faraway countries like the U.S. or Brazil.
This dismal state of integration results in:
- Missed economic opportunities
- Widening trade deficits
- Under-utilised regional capacities
- And a failure to build shared prosperity
The editorial argues that economic prosperity and national security are interconnected, and unless South Asian nations set aside political hostilities and focus on mutual gains, the region will continue to lag behind other global blocs. The message is clear: economic cooperation is not just beneficial, it is essential for peace, growth, and regional stability.
