Regional integration: from pipe dream to possibility


back to issue

AT the recent summit of the South Asian Association for Regional Cooperation (SAARC), the prime minister observed that the continuing global economic crisis posed a grim challenge to South Asia. Emphasizing the importance of tapping new sources of growth and investment, he noted that ‘complete normalization of trade relations will create huge opportunities for mutually beneficial trade within South Asia.’ He added that India had a ‘special responsibility’ in fostering regional economic integration owing to ‘the geography of our region and the size of our economy and market.’

As with most speeches at SAARC summits, this one was received with no more than a suppressed yawn. The Indian media and analysts seemed interested only in the meeting on the sidelines of the summit between the Indian and Pakistani prime ministers. Then too, air time and column width were almost entirely taken up by commentary on whether Manmohan Singh had taken a tough stand on terrorism and why he had referred to Yousuf Gilani as a man of peace.

Political leaders are usually seen as being obsessed with short-term developments and trivia, whilst analysts are credited with focusing on long-term and significant trends. On this occasion though, the roles seem to have been reversed. The prime minister was at once making a case for regional integration and pointing out why this might be the right moment for India to move in such a direction. Whatever our views about the conceptualization and conduct of Indian foreign policy over the last seven years, it is undeniable that New Delhi’s approach to South Asian economic integration has been marked by coherence and consistency. If India manages to get its act together in the months and years ahead, this may turn out to be the major international accomplishment of the second UPA government.

New Delhi’s seriousness about regional integration stems not merely from the ‘win-win’ economic logic of open trade and investment, although this remains a key driver and one that assumes greater importance in the context of a looming double dip in the global economy. India’s approach in recent years has been spurred by the realization that its ambitions for a greater role in world politics – commensurate with its economic growth – are contingent on a stable and developing periphery. The assumption that India could ignore its neighbours, often seen as pesky and bloody-minded, and focus on increasing its own capabilities and influence is no longer regarded as plausible. A troubled neighbourhood will place fetters on India’s ability as well as its credibility in operating on the global stage. As the prime minister stated in a speech in Dhaka earlier this year, ‘India will not be able to realize its own destiny without the partnership of its South Asian neighbours.’


But ensuring stability in South Asia is an undertaking fraught with difficulties. Not only does India have long-standing and intricate problems with many of its neighbours, but domestic politics in each of these countries has been volatile too. In this context, India sees closer economic ties as a way of indirectly addressing neuralgic relationships. By allowing its neighbours to partake of its economic growth, New Delhi apparently hopes to draw the sting from these relationships, secure a degree of stability, and pave the way for an eventual resolution of knotty problems. This seems a more cautious approach than the standard liberal assumption equating free trade and economic integration with peace. It is certainly more attuned to the peculiar problems of South Asia.


South Asia is amongst the least integrated regions of the world. Official intra-regional trade, to take but one indicator, hovers around 5% of total trade of the countries of the region. This is abysmally low not just in comparison to other regions of Asia (the corresponding figure for East Asia is over 50%), but also when contrasted with its own potential for growth through trade. South Asia has three attributes that make it extremely well-suited for integration by trade: the highest population density in the world, linguistic and ethnic overlap across borders, and the presence of a large number of cities close to the borders. However, this potential remains unrealized owing to a combination of historical and structural factors.

To start with, there is the lasting and complicated impact of the partition of India. It is not an exaggeration to say that the subcontinent is yet to come to terms with the implications of partition. Before 1947, this region had an almost unimpeded flow of goods, money, people and ideas. Furthermore, the region was also closely connected with other parts of Asia. In the West, the commercial ‘empire of the Raj’ extended to the Persian Gulf and East Africa. In the East, the ‘great crescent’ stretching from Calcutta to Singapore was the economic heartland of Asia.1 The open doors of South Asia turned on two hinges: Afghanistan in the West and Burma in the East, both of which were crucial to ensuring the integration of the subcontinent with the wider Asian landmass. The partition of India ran the knife both through the subcontinental economy and its links with other parts of Asia. A related consequence of partition was the endemic political disputes engendered by the speedy exit of the British and the hasty redrawing of the subcontinent’s maps. The resolution of these problems was rendered rather difficult by the fact that the newly created states defined their identities in sharp contradistinction to one another.


A second and related factor is the structural asymmetry of South Asia. India is by far the largest, most populous and most powerful country in the region. It shares a boundary with every country in the neighbourhood, but most of them do not share a border with another South Asian country. Given its potential to be the eight hundred pound gorilla in the room, it is not surprising that most of India’s neighbours regard it with wariness and resentment, if not suspicion and fear. These sentiments have been accentuated by the arrogance and condescension with which India tends to treat its smaller neighbours.

The economic, political and psychological fallout of partition interacted in ways that undermined the possibility of regional integration. The persistence of political and security problems has prevented a cool assessment of the benefits of trade and economic integration. Reconciling these sets of considerations is not all that simple. Economic affairs tend to have a win-win logic. It is easy to see how cooperative exchange could work to the material benefit of all parties. But in politics moral considerations such as identity and honour can outweigh material interests. This is a problem that India faces with almost everyone one of its neighbours. Further, if political differences have a national security angle to them, it becomes all the more difficult for the logic of economic integration to assume primacy. Economic affairs are about absolute advantages accruing from interchange, but security affairs are about relative advantages gained by one side or another. Here too, India’s immense lead in size and power as well as outstanding political disputes has worked to reduce the attraction of closer economic ties in the subcontinent.


Take the case of trade between India and Pakistan. The partition of Bengal had left the jute growing areas inside Pakistani East Bengal and the factories in Indian West Bengal. In the immediate aftermath of partition, jute was Pakistan’s main export to India. During this period (1948-49), India’s share in Pakistan’s exports was nearly 56%. A decade later it had fallen to a mere 4.1%. Imports from India reduced as drastically over this period. The disputes over Kashmir and division of British India’s assets cast a dark cloud on economic relations. In September 1949, the Pound Sterling was devalued by 31%. Both India and Pakistan were part of the so-called Sterling Area and their currencies were pegged to the Sterling. India followed suit by devaluing its currency. But Pakistan refused to do so. The Pakistani leadership apparently wanted to sell jute to India a higher price. India refused to recognize the new exchange rate of its currency with the Pakistani Rupee and suspended trade. This resulted in a steep slump in Pakistan’s export earnings from India and forced it to find other trading partners. Trade with India resumed following an agreement in early 1951, but only at a much reduced scale.

In January 1957, India and Pakistan signed another trade agreement. Among other things, the agreement stated that ‘Each government shall accord to the commerce of the country of the other government treatment no less favourable than that accorded to the commerce of any third country.’ The two countries, in effect, granted Most Favoured Nation (MFN) status to each other. The agreement was, however, valid only for three years. Pakistan sought to link it to progress on a settlement on Kashmir. President Ayub Khan further extended it for a period of three years. Following the collapse of talks on Kashmir in 1963, the agreement was allowed to lapse. Two years later, India and Pakistan were at war – a war that not only put paid to the prospect of economic cooperation but also cut-off transit links between India and the two wings of Pakistan. Subsequent wars and crises continued to undermine the potential of bilateral trade.


Two other factors have militated against the normalization of economic ties. The experience of colonialism led the newly independent countries – with the notable exception of Sri Lanka – to regard the idea of free trade with suspicion and to pursue autarkic policies. Although countries of South Asia have come a long way since, the after-effects of their older economic systems and relationship continue to linger. This is evident in the persistence of high tariffs and quotas. Informal trade barriers have an even more pernicious effect. India and Pakistan, for instance, have only two functional transportation routes: the Attari-Wagah rail link and the Mumbai-Karachi sea route. The shipping and rail protocols across the region continue to be anachronistic. There are no efficient institutional arrangements for banking transactions and for facilitating investment. Equally problematic is the absence of reliable information exchange on trade data and policies. Another holdover from the past is the persistent strength of domestic cartels and lobbies in all countries.

Lastly, countries of the region – most conspicuously India – have treated their borders as fences to keep others out rather than using them as gateways for the movement of goods, capital and labour. In India’s case, it is clear that the under-development of its own border areas, which tend to be seen as buffer zones, has undercut its ability to foster regional trade. This is equally the case with most other countries in South Asia. In consequence, even limited trade and transit agreements have proved elusive.


The interaction of these four factors not only made regional integration a pipe dream, but also ensured the atrophy of the region’s links with other parts of Asia. This holds true of both the ‘hinge’ states of South Asia. When Prime Minister Indira Gandhi visited Kabul in 1969, the Afghanistan government mooted the idea of a tripartite trade and transit accord that would allow trade to flow from Turkey and Iran through Afghanistan to Pakistan and India. Indira Gandhi responded enthusiastically to this idea. In her first communication with General Yahya Khan later that year, she urged him to consider promoting commercial and economic relations. ‘Shipping companies and airlines which are neither Indian nor Pakistani are earning foreign exchange’, she observed. Pakistan, however, felt that such an arrangement would increase their dependence on India, and refused to respond to Mrs. Gandhi’s suggestion.2 Four decades on, the situation has not changed very much. In a transit agreement signed with Afghanistan earlier this year, Pakistan ensured that Indian goods could not move through Wagah into Pakistan and thence to Afghanistan.

Burma, on the other hand, was wracked by a swarm of insurgencies since independence in 1948. Initially, it was the communist party which took up arms against the government. Simultaneously, there was also an Islamist insurgency in the north of Arakan. Soon the Karens and Kachins of the highlands turned against the central government. Two years into these conflicts, Premier U Nu was periodically retreating into meditation to cope with the situation. His friend Jawaharlal Nehru observed that it seemed ‘as good a way of governing Burma as any.’3 The continuing civil war had two major consequences for Burma’s role as the critical link between the economies of South and South East Asia. The borderlands of the country slipped away from the central government’s grip and came under the control of insurgent groups. Further, as the Burmese government (and subsequently the junta) struggled to cope with the insurgencies, they grew increasingly suspicious of the role of external actors and pushed the country into self-imposed isolation until the 1990s.


Developments in the past few years, however, suggest that the grip of the structural and historical factors inhibiting integration might at last be loosening. The winds of change are originating from at least four sources. First, South Asia is at a unique moment in its recent history. Every country in the region has a democratic government, even if in some cases an authoritarian streak or military influence remains pronounced. It is perhaps no coincidence that India’s relations with most of its subcontinental neighbours are better today than at any point in the last two decades or more.

Take India’s relations with Nepal. By facilitating the comprehensive peace accord of 2006, India helped end the Maoist insurgency and threw its weight behind a broad based democratic restructuring of Nepal. During the subsequent stand-off between Maoists on the one side and the Nepal Army and other parties on the other, India’s policy wobbled for a while. But eventually New Delhi concluded that its long-term interests were better served by giving impetus to the democratic transition and that it was counter-productive to keep the Maoists out of the government. So far this appears to be working well. The thorny issues surrounding the integration of erstwhile Maoist combatants seem to have been overcome. The major task ahead is of drafting the constitution. Here too, India is well positioned to play a constructive role.


India’s ties with Sri Lanka have also improved since the end of the civil war in 2009. The Indian government has been quietly urging Sri Lanka to capitalize on the victory against the Tamil Tigers and forge a settlement. In so doing, it has sought to avoid being seen as ganging up with other (primarily western) powers against Sri Lanka and so accentuate the ultra-nationalist mood of the present government. Thus India has urged Sri Lanka to look into instances of human rights violations, but has not supported demands for an independent war crimes investigation.4 New Delhi has also called for a devolution package that builds on the 13th Amendment of the Sri Lankan Constitution to meet the political aspirations of the minority communities. In the last couple of years, a democratic political alternative has emerged for the Tamils. The Tamil National Alliance dropped its separatist agenda and fared well in local elections. The absence of credible, democratic Tamil parties had for long hamstrung India’s Sri Lanka policy. A window of opportunity is now open for working towards a durable settlement in Sri Lanka.


In the relationship with Bangladesh, the drive for improvement initially came from Dhaka. Since assuming office in January 2009, Prime Minister Sheikh Hasina has sought to bring Bangladeshi politics closer to the spirit of ’71 that led to the country’s independence. She has initiated war crimes trials against those who collaborated with the Pakistan Army in its atrocities during 1971. More importantly, she has repealed the controversial 5th amendment to the Bangladesh Constitution. This amendment had given legitimacy to the military dictatorships that followed Mujibur Rahman’s assassination, expunged secularism from the principles of state policy enumerated in the constitution, and deleted Article 12 which proscribed religious parties.

These developments are closely linked to Sheikh Hasina’s desire for a rejuvenated relationship with India. After all, the religious parties not only opposed independence for Bangladesh but close ties with India as well. A secular, pluralist Bangladesh is certainly a more attractive regional partner for India. New Delhi, for its part, has reciprocated Dhaka’s interest in a closer and firmer relationship. To be sure, India’s inability to conclude an accord on the Teesta River waters came as a dampener. But the fact that New Delhi pushed through a settlement on the borders and enclaves – in the teeth of domestic opposition – has signalled its willingness to tackle issues that were previously seen as intractable.

The state of play with Pakistan is, of course, an exception to this trend. In the wake of the terrorist attacks in Mumbai in November 2008, India-Pakistan relations dipped into a trough. New Delhi has sought to pick up the pieces by adopting a graduated, step-by-step approach. By so doing, it has aimed to defuse the symbolic, public importance of diplomatic contacts and to build confidence by addressing easier issues before grappling with the more tricky ones. In consequence, while there has been little tangible progress on issues such as terrorism,5 there is considerable scope for improvement in economic relations. Pakistan’s recent decision to confer MFN status on India is a welcome and overdue step in this direction.


A second source of change is India’s own economic growth over the past decade and a half. For the first time India is credibly poised to play the role of a regional dynamo. India’s neighbours are gradually realizing the unprecedented opportunity that India presents for their growth prospects. India’s free trade agreements with Sri Lanka and Bhutan, and the trade and transit agreement with Nepal, have showcased the potential benefits of regional economic integration. In this context, it is not surprising that Bangladesh wants to greatly enhance trade and connectivity with India, or that Pakistan has given MFN status to India. Bilateral initiatives have had a demonstration effect even in the more sensitive areas of potential cooperation. Until a few years ago, Nepal was chary of developing with Indian support its hydel power potential. This would not only have met Nepal’s own energy requirements, but also become a major export to India. The issue, however, was seen in Nepal as one of water sharing with India and hence as politically problematic. Such inhibitions were overcome only after Kathmandu saw the benefits accruing to Bhutan from embarking on such ventures and exporting power to India.


The third, and related, driver of change is the assurance imparted by India’s economic growth to its foreign policy. Once the largest recipient of foreign aid, India now has a growing profile as a donor. Bhutan, Nepal, Bangladesh, Sri Lanka, Maldives and Afghanistan have been beneficiaries of this turn in Indian foreign policy. India’s successful contributions to the reconstruction of Afghanistan – especially its power generation and road construction projects – amply underscores the manner in which its economic capability can be used to pursue political influence and stability.

The fourth factor contributing to change is the increasing presence of China on India’s periphery. The strengthening – in some cases, the cementing – of ties between India’s neighbours and China is hardly surprising. Given their structural asymmetry vis-à-vis India, most of these countries have looked for countervailing influences. At different points in the last six decades, Pakistan, Sri Lanka, Nepal and Bangladesh have sought and obtained varying degrees of assistance from external powers. The current Chinese footprint in South Asia is largely economic, though there are potential – in some cases, immediate – security implications as well. In the past, India has invested inordinate levels of diplomatic effort to staunch the flow of any external assistance that could impinge upon its security. New Delhi now realizes that it is operating in a competitive marketplace: instead of shouting itself hoarse about the Chinese presence, it should focus on rejuvenating its ties with neighbours and increasing its influence in South Asia.

The confluence of these factors has set the stage for a major push towards subcontinental economic integration. Interestingly, this has coincided with changes in the ‘hinge’ states of Myanmar and Afghanistan. The elections in Myanmar last year have thrown up a government that has surprised all observers with its reformist drive. These moves are apparently shaped by Myanmar’s desire to break out of both its international isolation and its exclusive embrace with China. In pursuit of these objectives, Myanmar is keen on upgrading its economic and political relationship with India. In many ways, the recent developments in Myanmar have vindicated India’s opposition to economic sanctions and other measures to isolate Myanmar.6 


The situation in Afghanistan is much less sanguine. The US and its allies are ready to pull-out by 2014, but the insurgency is yet to be blunted and political reconciliation is proving elusive. Pakistan remains unwilling to bring to bear any pressure on its clients amongst the Taliban. The US, in turn, is struggling to find ways of changing the behaviour of its ‘major non-NATO ally’.7 India’s position in Afghanistan has been improving though. The recently concluded strategic partnership agreement reaffirms India’s commitment to the reconstruction and development of Afghanistan. But it goes beyond the existing relationship and caters for closer economic and security ties. Although the latter – especially the provisions for training and equipping Afghan forces – have attracted attention, it is the economic dimension that is of immediate interest to New Delhi. Here the agreement aims both to enlarge India’s economic presence in the country and facilitate the economic integration of Afghanistan with other South Asian countries.

India has also endorsed the architecture for stabilizing Afghanistan proposed at the international conference recently held in Istanbul. This rests on the idea of economic cooperation in the region stretching from Turkey to South and Central Asia, with Afghanistan at the centre of this arrangement. These are ambitious ideas. For the present, India should be pleased if it can take smaller but tangible steps such as a tripartite transit and trade agreement with Afghanistan and Pakistan.


The time, then, may be propitious not only to press ahead towards economic integration within South Asia, but also to try and weld the subcontinent with South East Asia, and possibly West Asia. The question, as always, is not simply of intent but capability too. On this score, it is clear that India needs to get its act together. For one thing, it needs to improve its record of delivery on economic assistance and projects. The problem arises, in the first instance, from the absence of effective coordination mechanisms between different ministries and agencies. To be sure, there have been occasions when the Indian government has knocked heads together to ensure speedy implementation of promises.8 But this should be institutionalized and not remain episodic.

For another, the government needs to find effective ways of working with the private sector in advancing India’s economic influence in the region and beyond. The private sector will, of course, have its own agenda; but it is important to leverage its domain knowledge and presence on the ground.9 Such coordination will also be necessary to modulate the resistance from certain sectors or lobbies. While the opening up of trade and integration of South Asia economies will be a win-win proposition for all countries, it will create some losers within each country. Think of the dilution of the Free Trade Agreement with Sri Lanka owing to opposition from Indian tea and textile lobbies. At a time of economic slowdown, there is bound to be increased resistance from specific sectors to opening up trade with neighbours.


Finally, New Delhi needs to accord a greater role to Indian states, especially those abutting the neighbours, in the formulation as well as execution of regional policy. Part of the challenge – as evident from Teesta waters episode with West Bengal – will be to persuade the states to set aside their provincialism and adopt a wider view of the national interest. All of this is easier said than done. But addressing these issues will be crucial in determining whether regional integration remains a pipe-dream or becomes a possibility.



1. Robert J. Blyth, The Empire of the Raj: India, Eastern Africa and the Middle East, 1858-1947, Palgrave Macmillan, London, 2003; Chris Bayly and Tim Harper, Forgotten Armies: Britain’s Asian Empire and the War With Japan, Allen Lane, London, 2005.

2. Indira Gandhi to Alexei Kosygin, c. 10 April 1969, Subject File 203, P.N. Haksar Papers (III Installment), Nehru Memorial Museum and Library, New Delhi.

3. Cited in Chris Bayly and Tim Harper, Forgotten Wars: The End of Britain’s Asian Empire, Allen Lane, London, 2008, 535-36.

4. For a judicious account of these allegations, see, Gordon Weiss, The Cage: The Fight for Sri Lanka and the Last Days of the Tamil Tigers, Bodley Head, London, 2011.

5. For a recent, comprehensive assessment of Pakistan’s relationship with jihadi outfits, see, Stephen Tankel, Storming the World Stage: The Story of Lashkar-e-Taiba, Hachette, New Delhi, 2011.

6. For a background to these changes in Myanmar, see, Thant Myint-U, Where China Meets India: Burma and the New Crossroads of Asia, Faber, London, 2011.

7. Riaz Mohammad Khan, Afghanistan and Pakistan: Conflict, Extremism and Resistance to Modernity, Oxford University Press, New Delhi, 2011; Bruce Reidel, Deadly Embrace: Pakistan, America and the Future of the Global Jihad, Harper Collins, New Delhi, 2011.

8. This was done, for example, with lines of credit for African countries when India was campaigning for a seat in the United Nations Security Council in 2005. Navdeep Suri, ‘The TEAM-9 Lines of Credit: Winning Friends and Opening New Markets’, in Kishan Rana and Bipul Chatterjee (eds.), Economic Diplomacy: India’s Experience, CUTS International, Jaipur, 2011.

9. For an interesting study of government and business interaction in shaping foreign policy, see, Raymond E. Vickery Jr., The Eagle and the Elephant: Strategic Aspects of US-India Economic Engagement, Oxford University Press, New Delhi, 2011. Vickery’s account of the institutionalization of interaction between the government and private sector in America are particularly insightful.