The Pahalgam attack and U.S. tariffs highlight the link between security and economy, underscoring the need for stronger South Asian economic integration for regional stability and growth.

Introduction

• South Asia, home to 25% of the world’s population, remains one of the least economically integrated regions globally. 
• Despite initiatives like the South Asian Free Trade Area (SAFTA), intraregional trade accounts for only 5-7% of total trade, far below other blocs like the EU (45%), ASEAN (22%), and NAFTA (25%). 
• Political conflicts, border disputes, and trust deficits have stifled economic cooperation, leaving an estimated $172 billion trade potential untapped.

About SAFTA

• Established by: SAARC (South Asian Association for Regional Cooperation)
  • SAARC Founded: 1985, with headquarters in Kathmandu, Nepal
• SAFTA Agreement Signed: 2004
• Came into Force: 1st January 2006
• Members: All 8 SAARC countries – Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
• Objective: To promote intra-regional trade and economic cooperation by gradually reducing tariffs and eliminating trade barriers among member states.

South Asia’s Underperformance

• Current intra-SAARC trade:  SAARC Nations have a trade of $23 billion (potential: $67 billion).
• UNESCAP estimate (2020): Potential trade could have reached $172 billion (86% remains unexploited).
• Trade-to-GDP ratio decline: From 47.3% (2022) to 42.94% (2024).
• Trade deficit expansion: From $204.1 billion (2015) to $339 billion (2022).
• India-Pakistan trade decline: Fell from $2.41 billion (2018) to $1.2 billion (2024).

Barriers To South Asia Integration

• Terrorism and Border Issues
  • Trust deficits, terror insurgencies, and border disputes, particularly between India and Pakistan have disrupted trade.
  • India-Pakistan bilateral trade declined from $2.41 billion in 2018 to $1.2 billion in 2024.
  • Pakistan’s exports to India plummeted to just $480,000 in 2024 from $547.5 million in 2019.
• High Trade Costs
  • Intra-SAARC trade costs are a steep 114% of the value of goods, making regional trade less competitive.
  • In contrast, trade costs with the U.S. are 109%, and intra-ASEAN costs are only 76%.
  • It is about 20% costlier for an Indian firm to trade with Pakistan than with Brazil, which is 22 times farther.
• Inefficient Trade Mechanism
  • Despite SAFTA, trade is not truly free due to red tape, non-tariff barriers such as custom delays,complex documentation, and poor infrastructure.
  • High logistics and customs costs limit regional value chain formation.
  • Example: Perishable goods rot at the borders due to procedural delays.
• Lack of Strategic Policies
  • Policymaking has been fragmented and lacks regional coordination.
  • SAFTA( 2006) has limited impact due to sensitive lists and weak dispute resolution.
  • There is vast untapped potential not just in goods, but also in services and investments.
  • Bangladesh (93%), Maldives (88%), and Pakistan (86%) have the highest unexploited trade potentials.
• Economic Instability and the Security Nexus
  • Trade deficits are rising: from $204.1 billion (2015) to $339 billion (2022).
  • South Asia’s trade-to-GDP ratio declined from 47.3% (2022) to 42.94% (2024).
  • Economic underperformance fuels discontent, which in turn exacerbates security threats, creating a vicious cycle.
    • Example: Sri Lanka’s crisis led to mass protest, Pahalgam terror attack affected tourism and business in Kashmir.

Way Forward

• Address Trust Deficits: Rebuild trust among SAARC nations through Track II Diplomacy and people-to-people ties.
  • Track II Diplomacy refers to informal, non-governmental dialogue aimed at resolving conflicts and building trust between nations or groups.
• Enhance Cooperation: Utilise complementary export sectors (India: Pharma, Bangladesh: Garments, Sri Lanka: Tourism, Nepal: Hydro)
  • Streamline SAFTA implementation by reducing non-tariff barriers and creating a robust dispute resolution mechanism. 
  • Build Regional value chains and ease customs via Single window clearance.
• Political Will and Institutional Reform: Promote infrastructure and regional integration, such as multimodal transport corridors and digital connectivity. Example: EU Integration post World Wars.
  • Encourage regional value chains in key sectors like textiles, agriculture, and IT services.
  • Shift the regional discourse from zero-sum politics to shared prosperity and security.

Conclusion

South Asia has a young population-a demographic dividend to harness through economic integration.

DOWNLOAD PDF