Can the current optimism about India’s economic prospects — its impending emergence as the third-largest economy with growing financial resources and a major technological hub — rub off on the rest of the Subcontinent? The recent visits to Delhi by Nepal’s Prime Minister Pushpa Kamal Dahal and Sri Lankan President Ranil Wickremesinghe highlight the shifting currents in South Asian regionalism. Japanese Foreign Minister Yoshimasa Hayashi’s recent travels to Delhi, Colombo, and Male and a surprising visit to Sri Lanka by French President Emmanuel Macron last week underline the new external impetus to the Subcontinent’s economic integration.
But the pessimistic discourse on South Asian regionalism is trapped in two old propositions. One, South Asia is the least integrated region and insufficiently connected to the world. The second is the belief that the road to regional integration in the Subcontinent must necessarily run through the SAARC — the South Asian Association for Regional Cooperation. The first proposition has been true for a long time, and the second has become irrelevant to the region’s future. Let us briefly review the two and how new forces are producing significant change on the ground.
The post-colonial and partitioned Subcontinent deliberately chose economic autarky and devalued regional integration. Endless conflict reinforced the lack of political appetite for cross-border commercial engagement. Worse still, the trans-regional connectivity inherited from the British Raj steadily withered as the newly-independent economies focused on import substitution.
The liberalisation and globalisation of the South Asian economies, which began in the 1990s, saw the injection of the language of regionalism in the Subcontinent and a new interest in trade and connectivity. Economic reform, however, was uneven across the region and tentative even in the capitals, with some support for change. And it was hard to mobilise support for cross-border connectivity projects amidst multiple political disputes among the South Asian sovereigns that exacerbated the region’s security challenges.
The 21st century has seen considerable improvement within the Subcontinent and in the connections between South Asia and the world. The share of intra-regional trade in the Subcontinent’s trade with the world has grown from about 2 per cent in 1990 to about 6 per cent today, but is nowhere near the potential or the achievements of other parts of Asia. But the direction is clearly positive.
The fact that SAARC is moribund — the last summit was held in 2014 — has not meant any progress in regional economic integration. In an ideal world, the SAARC would be the vehicle for reconnecting the region. But Pakistan is not interested in such an outcome; its priority for the last three decades has been to wrest concessions from India on Kashmir. It is in no mood to open its economy for mutually beneficial cooperation with India. That has not come in the way of the rest of the region moving forward — through bilateral, sub-regional, and trans-regional mechanisms outside of SAARC. A successful SAARC is not a precondition for thriving economic regionalism.
That brings us to three new factors that are accelerating regional economic integration. One is the renewed pressure to undertake economic reform. The recent economic crises in Sri Lanka and Pakistan are compelling the elites in Colombo and Rawalpindi to embark on serious and painful economic change. Whether they succeed or not, the two will not remain the same.
Nepal and Sri Lanka are today more open to trade, investment and connectivity with India. The visits of Dahal and Wickremesinghe in the last few weeks have seen strong commitments from both leaders for deeper economic integration with India. The entrenched political resistance to commercial engagement with India appears to be giving way to the pursuit of enlightened economic self-interest in both Kathmandu and Colombo.
Pakistan is turning to the Gulf to end its dependence on loans and bailouts. Last week, Pakistan announced a list of 28 major projects, worth billions of dollars, that will be open for investment from the United Arab Emirates, Saudi Arabia and Qatar. A fire sale of major national assets to foreigners would not have passed political muster in Delhi. But Pakistan is desperate, and its Chief of Army Staff, General Asim Munir, appears ready to take the political risk of confronting a potential popular backlash against sweeping economic change.
Second, the region is looming larger in India’s economic calculus. As India’s relative economic weight in the world has grown, its commercial ties with neighbours have increased. Delhi’s trade volumes with its neighbours are now impressive. Bangladesh, for example, is the fourth-largest destination for Indian exports — valued at about $16 billion in 2022. India’s exports to Sri Lanka at about $6 billion are comparable with India’s exports to Japan; Delhi’s exports to Kathmandu are more impressive at $8.5 billion.
The logic of economic geography is beginning to unfold in India’s relations with most of its neighbours, except Pakistan. India’s trade potential with Pakistan has been estimated to be as high as $37 billion. It is unlikely, though, to be realised any time soon. Delhi could, however, promote exports to Pakistan through third countries, say in the Gulf, instead of waiting to negotiate bilateral trade liberalisation with Islamabad.
Major initiatives for cross-border connectivity now complement India’s growing trade volumes with its neighbours. Trans-border projects to promote rail, road, energy, power, financial, and digital connectivity have all gained new impetus in India’s engagement with its neighbours. The regional connectivity that began with Bangladesh a few years ago is rapidly expanding to cover other neighbours.
Third, renewed great power rivalry between the US and China on the one hand and the deepening conflict between Delhi and Beijing on the other have altered the Subcontinent’s geo-economic template. In derisking their commercial ties with China, the US and its allies now actively promote economic and technological engagement with India.They are also promoting economic integration between India and its smaller neighbours. The US, for example, helped Nepal’s energy and road connectivity with India with the $500 million Millennium Challenge Grant.
Kathmandu approved it last year despite considerable opposition from China. Japan is now promoting sub-regional connectivity between India and Bangladesh that can potentially transform the economic map of the eastern subcontinent and the Bay of Bengal.
Hayashi’s visit to Colombo and Male is part of Tokyo’s strategy to raise its strategic profile in the Indian Ocean and offer viable alternatives to China’s Belt and Road Initiative, which has been widely embraced in South Asia. Tokyo and Paris also joined hands with Delhi to help Colombo navigate its economic crisis. Macron’s visit to Sri Lanka, the first by a French President, is an attempt to integrate Colombo into Paris’s Indo-Pacific outreach.
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Meanwhile, India, which was complacent about China’s growing economic presence in the region a few years ago, has offered a measure of competition in the Subcontinent with its own bouquet of regional infrastructure projects. Delhi is now working with its like-minded partners to offer credible economic alternatives to its neighbours that until now had seen Beijing as the only game in town. India has a long way to go before it can radically restructure South Asia’s economic architecture, but it now has economic heft and political purpose to pursue that ambition.
Together the three trends — the region’s new economic openness, Delhi’s vigorous neighbourhood policies, and Western support for an India-centred regionalism in South Asia — could transform the Subcontinent’s geo-economic landscape. India’s rising economic tide could help lift all boats in South Asia.
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The writer is a Senior Fellow at the Asia Society Policy Institute, Delhi and a contributing editor on international affairs for The Indian Express
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