As the specter of heightened US tariffs looms over Indian exports, a significant yet underutilized economic opportunity lies much closer to home. India's trade with its immediate neighbors remains remarkably low, representing a massive untapped potential that could help cushion the blow from global trade volatility. Experts argue that revitalizing regional commerce within South Asia is not just an option but a strategic necessity in the current climate.
The Staggering Gap in Regional Trade
Official data reveals a stark picture of missed connections. In the fiscal year 2025, India's total trade with its neighbors—Pakistan, Bangladesh, Nepal, Afghanistan, Bhutan, and Sri Lanka—stood at a mere $30 billion. This figure accounts for just 2.7% of India's overall trade volume. More concerning is the trend: trade with all these nations, except Bhutan, has declined since 2021, even as global trade flows have remained stable.
This stands in sharp contrast to other regions. Intraregional trade constitutes only 5% of South Asia's total trade, compared to 48% in East and Southeast Asia and a substantial 66% in Europe. Sanjay Kathuria, Senior Fellow at the Centre for Social and Economic Progress (CSEP) and former World Bank lead author, emphasizes that "the case for regional integration has become stronger because the global trading environment is so much more volatile."
The $60 Billion Potential and Invisible Barriers
The potential upside is enormous. A 2018 World Bank study, using 2015 statistics, estimated that removing tariffs and infrastructural barriers within South Asia could triple the regional trade volume from $20 billion to $60 billion. While the model hasn't been updated for the last decade, a simple extrapolation to 2025 GDP and trade figures suggests South Asia could still gain $50-60 billion in additional trade through liberalization. This sum is approximately half of India's total trade with the United States.
Robert Lawrence, a professor of international trade at Harvard University, labels this a "lost opportunity," noting the "tremendous potential" of regional trade. However, realizing this potential is fraught with challenges. The South Asian Association for Regional Cooperation (SAARC) has not held a summit since 2014. The South Asian Free Trade Area (SAFTA), established in 2006, remains hampered in practice; it is often cheaper for India to export to Brazil than to Pakistan due to persistent barriers.
Beyond formal tariffs, non-tariff barriers are a major hindrance. For instance, India and Pakistan share a 3,000-km land border but have only one functional open crossing for cargo at Attari-Wagah. Following terror attacks in Jammu and Kashmir, cargo movement through this route has plummeted by 86% since 2019. Furthermore, a World Bank report from 2019 indicated that over a third of potential trade volume is restricted through 'sensitive lists' maintained by countries.
Informal Trade and the Path Forward
The official statistics likely hide a much larger reality of informal trade. An analysis by the Global Trade Research Initiative found that last year, nearly $10 billion worth of Indian goods were rerouted through Gulf countries, relabeled, and then exported to Pakistan. This figure is over 20 times the official export number, signaling a vast latent demand and inefficient trade channels.
Professor Lawrence suggests a pragmatic approach: "It's hard to get trade without peace, but you don't need to start with free trade agreements. Dismantling non-tariff barriers will also go a long way." This view is gaining traction. In September, panelists from Bangladesh, Nepal, and India at a CSEP seminar stressed reforming tariff regimes and building robust regional supply chains beyond basic goods like textiles.
While India is pursuing treaties with the EU, UK, and Australia, these markets are constrained by distance and complex demands. South Asia, with shared cultures and proximity, represents "low-hanging fruit," as Kathuria describes it. The political window for action may be opening; at the recent UN General Assembly, Bangladesh's interim leader Muhammad Yunus called for a SAARC revival for "shared development." Navigating the region's geopolitical tensions, domestic instability, and infrastructure gaps will be the ultimate test for India's regional leadership and its strategy to diversify away from over-dependence on any single market.
