Deepening South Asian Integration

South Asia as a region is one of the least integrated regions in the world. It is because despite being one of the fastest growing regions in the world economy it has shown limited efforts at integration. These are due to a host of historical and current factors like political turmoil lack of mutual trust, and cross-border conflicts, etc.

The efforts at increasing engagement in the past have included the formation of the SAARC (South Asian Association for Regional Cooperation) in 1985 and the coming into force of the SAFTA (South Asian Free Trade Area) in 2006. Many other smaller initiatives have also taken place in between these two major steps. All of these have had very limited benefits to individual countries as well as to the region as a whole. The South Asian region comprises of eight countries namely Afghanistan, Bangladesh, Bhutan, Nepal, India, Maldives, Pakistan and Sri Lanka. India is by far the largest country both in terms of the number of people as well as in GDP terms. Pakistan is the second largest country both in terms of the number of people as well as in GDP terms. Both India and Pakistan are at loggerheads since the time of independence. The other major country in the region is Bangladesh that has GDP and population a little lesser than Pakistan.

A host of challenges underlie the current state of affairs. These include challenges like poverty, infrastructure, trade liberalization- barriers like customs and regulatory bottlenecks, and the creation of jobs, etc.

Poverty is a major problem in the region. Roughly 44 percent of the world's poor live in the region. It has direct implications for healthcare, as well as limiting the economic and social choices for most people especially women, etc. Women in the region often end up in the informal sectors and end up doing unpaid work. The formal labour force participation rates for women are low. With respect to infrastructure, road and railroad connectivity even among countries that can have them is dismal. The energy infrastructure potential especially for renewable and hydroelectric sources are largely not adequately harnessed and therefore not in a position to be traded with countries that have the demand and ability to pay. Similarly, in some places ports are not adequately developed to cater for the movement of goods to and fro from the economies. Inland waterways too present an untapped potential if the water resources are managed and harnessed properly. The intraregional trade as a percentage of GDP is one of the least in the world. It is close to 5 percent as compared to 25 percent in ASEAN. FDI from countries within the region in other countries is low but increasing. Customs procedures and regulatory bottlenecks are ample including trade barriers like tariffs, etc. Similarly, being young with a growing workforce the region requires job creation at an unprecedented pace. More than 1 million people enter the workforce every month just in India alone.

But despite or due to these challenges the region presents huge potential and opportunities, some of which are being leveraged now. These include projects for ports' modernization, road connectivity between countries, harnessing energy potential through the building of dams, cross-border energy infrastructure development, improvement in customs' procedures, etc. A recent 2012 study mentions that the consumer welfare that would accrue due to a more open trade regime in the region is estimated to be close to $2 billion a year. Also, a more open trade regime could increase the intra-regional trade to 100 billion USD from the current levels of 28 billion USD a year in the coming five years. Some industries will be adversely impacted if a trade regime is progressively liberalized but overall the benefits would be larger than the costs. The key to industries and individual firms will be their competitiveness with respect to other industries and firms within the region.

Over the next few years, India would do well to play a proactive leadership role in making the region more open as well as overall well integrated. It would require simplification of trade procedures, investments in infrastructure development, and building institutions that enable opening and functioning of businesses that integrate well into the regional supply chains. All these points if pursued will help not only in economic development within the region but will also boost mutual trust, peace and shared prosperity.

(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness & Editor of Thinkers. The views expressed are personal. Amit can be reached at amit.kapoor@competitiveness.in and tweets @kautiliya)