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South Asia is one of the least economically integrated regions in the world, despite its recent burgeoning growth regarding human capital and commercial engagements. An inter-regional and intraregional integration or cooperation is essential for achieving economic prosperity as well as social progress and political stability in the specific regions. It is also at the same time essential to acknowledge the dilemma of the direction of this progression, the familiar debate between the trade theorists and international relations theorists on the paradoxical conflict-trade linkage which is the contradictory evidence that proves that trade promotion need not mitigate conflict between nation-states.

It is still not entirely answered how, despite all the efforts of regional cooperation or other trading arrangements like the SAARC (South Asian Association for Regional Cooperation) and SAFTA(South-Asian Free Trade Agreement), South Asia still hasn’t witnessed an actual deceleration or slackening of political instability resulting from intraregional conflicts. This is evident from the infamous history of political vulnerability and inter-regional conflict that South Asia has faced especially after the partition of India into Pakistan and later into Bangladesh. However, the countries have come a long way from the post-colonial rudimentary state of being and have developed trade relations with its neighbours as well as other nations. The southern region of the Asian continent has still a long way to go concerning intraregional co-operation as well as trade with each other. The article intends to address the shortfalls in the intraregional trade in South Asia with a perspective underpinning India’s commercial relations with its neighbours (focusing on Nepal and Sri Lanka). The external factor that would hinder or inhibit this potential integration, which is China’s interference in trade relations, is also looked at.

Role of India in South Asian Trade

India has naturally assumed a dominant position in South Asia because of its fast evolving economy as well as its strategic geographic position, ‘contributing 77% of the total imports into South Asia and 80% of the total exports from South Asia’ (Ministry of Commerce and Industry, 2017). India has remained the biggest trading partner for Nepal, Bhutan and Sri Lanka, and also enjoys a trade surplus with all the countries in South Asia.  Nepal and Bangladesh have been the top export destinations of India and Bangladesh, and Sri Lanka has been the top import countries, followed by Pakistan and Nepal. The determinants of this trade are varied, and a sense of cooperation comes in to picture when taking into account the materialising of regional trade agreements and inter-regional organisations like SAARC to promote peace and stability. India has had staggering relationships with most of its neighbours and has been ‘wary of designs of smaller states to ‘gang up’ to neutralise its influence. This has added to mutual suspicions between smaller members and India’ (IISD, 2007).

Cooperation efforts:

However, despite the contentious relations between the South Asian states, efforts have been made to bring them closer on the grounds of mutually agreed areas of cooperation and avoiding political and controversial matters while pursuing an incremental approach to integration. The mutually agreed areas of cooperation were agriculture, rural development, telecommunications, meteorology, health and population control, transport, sports, arts and culture, postal services and scientific and technical cooperation, which were included in the Integrated Program of Action(IPA) that was launched in the first South Asian foreign ministers’ conference held in New Delhi, 1983. This was the dawning of the SAARC. The emergence of this organisation laid the foundation of inter-regional cooperation in South Asia under the orchestration of a confederation comprising of the South Asian nation-states.

There were also Regional Trade Agreements (RTAs) like SAFTA which not only promoted trade but also integration to a certain level among the states in South Asia. These RTAs were developed during SAARC negotiations and had a positive holistic agenda which was to ‘achieve socio-economic prosperity and political stability in the region’ (IIS, 2007). SAFTA had a well-defined approach to trade liberalisation, but still had the elementary flaw of not having a structural conflict-mitigation resolution or a well defined institutional or legal mechanism to deal with inter-state strife and its settlement. This is where it became evident that such RTAs or efforts of co-operation didn’t pay off. Despite the efforts to liberalise trade and improve commercial engagements among the states, the conflicts were not resolved effectively and even new disagreements started cropping up.

The Reality of South Asian Trade Cooperation

Despite the impressive growth in exports with most of the countries, India still faces a conflict of interest that constitutes a strategic and defence persona which even inhibits the trade relations with its neighbours, especially Pakistan. Due to the trade barriers set up by Pakistan and India, the potential trade prospects (which invariably leads to economic prosperity) has been halted, and the comparative advantages for each state in trading certain commodities have been obliviated owing to national security concerns or other superficial rationales like historical enmity or political differences. The same case applies to other states in the South Asian region as well.  “Mistrust effectively erodes confidence-building measures, security concerns are always allowed to trump the mutual desire for greater commerce, and a bellicose media is permitted to fuel xenophobic and parochial emotions”( Kumar, 2013). 

In the context of SAARC, the neighbouring countries have not been able to deliberate upon bilateral political differences within the purview of SAARC as it is not permitted, and hence the trade between them also suffered from worsening of their relation. There was no provision to address these bilateral issues, which would potentially stall other vital issues and deliberations like trade agreements or other treaties.  This was one of the significant shortfalls of the SAARC, which is evident in the overall performance of the organisation regarding poor trade growth or the inability to tackle the stark inequality among different states. While this grave irregularity in bilateral trade exists between south Asian countries due to political and strategic reasons, the external influence or attempts at diffusing the existing commercial relations by scattering it, is also worth looking into, mainly because of India’s diminishing role as a trade partner to countries like Nepal and Sri Lanka, due to Chinese influences. 

China, a Dormant Threat:

‘In addition to being the highest contributor to the exports and imports to/from South Asia, India is also the largest economy in the region, having the highest population and the highest GDP growth rate’. South Asia is also ‘economically important from India’s trade perspective’ considering other ‘high growth economies like Sri Lanka and Bangladesh’ (Ministry of Commerce and Industry, 2017). The role of China, as an alternative or as an inhibitor of India’s capacity as a supplier of essential commodities and other goods, has always been a threat to India’s commercial dominance in the South Asian region. However, in retrospect, it is not valid to say that China has been deliberately trying to hamper commercial relations between India and its neighbours. Certainly, actions by the Indian government have also steered this gradual deterioration of relations with countries like Nepal, Pakistan, Bangladesh and Sri Lanka. However, to analyse the challenges in South Asian trade due to China’s influence, it is important to revisit the recent political or economic hassles that India’s neighbours have faced, especially Nepal and Sri Lanka, as it will define the future trajectory of diplomatic-trade relations of these countries with India. 

Nepal, for example, has been the second largest export destination of India among the South  (Ministry of Commerce and Industry, 2017). Asian countries and has been prominently dependent on India for trade since time immemorial. Quite recently, Nepal had to face the burden of a double-disaster because of the major earthquake in 2015 and the blockade at the Indian border, which had left Nepal helpless and disoriented. In March 2016, Nepal government under the leadership of K.P. Sharma Oli signed the historic Transit and Transport Agreement with China, in the wake of the Indian blockade and this was the culmination of India’s monopoly over Katmandu regarding trade. The recent spike in the Nepalese liaison with China was a reaction of Katmandu in response to the difficulties it had faced during 2015-16 and the Nepal government trying to diversify its trade by opening up itself to more options like trade with China. Some important steps were taken during Prime Minister K P Oli’s visit to China in June 2018. The joint statement issued had explicitly mentioned the decision of Nepal and China to “to intensify implementation of the Memorandum of Understanding on Cooperation under the Belt and Road Initiative to enhance connectivity, encompassing such vital components as ports, roads, railways, aviation and communications within the overarching framework of trans-Himalayan Multi-Dimensional Connectivity Network” (China, Ministry of Foreign Affairs 2018).

  Source: DGCI&S Database                                     Growth Rate( in percentage)/India’s trade with Nepal




















Sri Lanka has also had a staggering relation in terms of trade with India which was influenced clearly by the political friction and regional conflicts in both the countries.  The recent political turnaround in Sri Lanka implies a deterioration of trade relations with Sri Lanka, primarily because of their potential shift towards China regarding their commercial engagements. The Sri Lankan President Maithripala Sirisena decided to oust the Prime Minister Ranil Wickremesinghe and appoint Mahinda Rajapaksa as the new PM citing the reason as their differences over a host of issues. The strategic alliance between Rajapaksha and China is well known as he was the one who facilitated Sri Lanka’s main port to Chinese naval submarines which caused much ado in New Delhi.

Despite the high stakes in Sri Lanka, the challenges that India is facing are mostly because of the external influences like the high financial investment of China in the island nation, mostly in infrastructure projects. “Moreover, China has been considered as a strong supporter of Rajapaksa. Beijing has already congratulated him on his coming back as prime minister.  On the other side, those who backed Wickremesinghe (who seek to have strategic ties with India) saw a Chinese role in his attempted replacement – albeit dismissed by Beijing” (Seethi, 2018). The plummeting of exports and imports during the year 2015-16 to the lowest record is just a superficial reflection of how Nepal suffered during the blockade.  Meanwhile, realising that it can’t sustain its economy by depending on India alone, the Nepalese exports to China rose dramatically by almost 72 per cent during mid-2017, a Chinese central bank report revealed. This relieved Nepal of a ballooning trade deficit and ‘Nepal exported goods worth 17 million U.S. dollar to China during first seven months of the current fiscal 2017-18, a rise by 72.3 per cent over the same period last fiscal year. It is thus evident how China has assumed a crucial role in Nepal’s trade sphere with the regional cooperation between India and Nepal deteriorating owing to political factors.

On a conclusive analysis of the challenges India faces in the South Asian region, it is fairly obvious how external influences, especially that of China has kept India in the constant fear of losing its autonomy over the trade with its neighbours and thereby limiting the commercial upper hand of the subcontinent. The shortfalls indeed can be ascribed to the inability of the South Asian states to mitigate conflict and engage in peace talks without allowing the strategic frictions to spill over into the economic tie-ups or engagements. This calls for a prudent set of plans for the future especially with new political and strategic contrasts of neighbours with India.  Nevertheless, India should strive to see beyond the mere strategic and political agendas, and help those countries who have had a material dependence on India historically.


Kathmandu Post (2018): “China allows Nepal access to its ports,” 8 September,  http://kathmandupost.ekantipur.com/printedition/news/2018-09-08/china-allows-nepal-access-to-its-ports.html

Seethi, KM (2018): “Distress Signals from Colombo”, 30th October, https://countercurrents.org/2018/10/30/distress-signals-from-colombo/

China, Ministry of Foreign Affairs (2018): “Joint Statement between the People’s Republic of China and Nepal, 22 June, https://www.fmprc.gov.cn/mfa_eng/wjb_663304/zzjg_663340/yzs_663350/gjlb_663354/2752_663508/27

International Institute for Sustainable Development (2007): “Regional Integration, Trade and Conflict in South Asia”, January, https://www.iisd.org/pdf/2007/tas_rta_south_asia.pdf

India, Ministry of Commerce and Industry (2017): “India’s Trade with South Asia in 2016-17”, September, http://commerce.gov.in/writereaddata/uploadedfile/MOC_636477306238949138_Trade_with_South_Asia_2016-17.pdf

DGCI&S Database (2018): “FOREIGN TRADE STATISTICS OF INDIA (PRINCIPAL COMMODITIES AND COUNTRY)”, 8th February, http://www.dgciskol.gov.in/pub_brochure.aspx

Kumar, Rajiv(2013): “By working together, South Asian countries can guarantee all their futures”, DailyMail, 14th November, https://www.dailymail.co.uk/indiahome/indianews/article-2507518/By-working-South-Asian-countries-guarantee-futures.htm

source: The Quint

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Written By Nikhil Seethi

Economics Graduate. Pursuing Masters in Development Studies.

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