India’s trade relations with its immediate neighbours are a special focus area for the government of India.
India's trade with the South Asian countries has remained roughly between 1.7% and 3.8% of its global trade. China has consistently increased its exports to the region from US$8 billion in 2005 to US$52 billion in 2018, a growth of 546%.
Despite geographical proximity and the existence of bilateral and multilateral free trade agreements (FTAs), South Asia is one of the least economically integrated regions in the world. Owing to protectionist policies, high logistics cost, lack of political will and a broader trust deficit, intra-regional trade in South Asia remains well below its potential at 5% of the region’s global trade.
This makes South Asia one of the most disconnected regions in the world. Intra-regional trade in the South Asian region (including Myanmar) amounts to only 5.6%.
Bangladesh is India's largest trading partner in the SAARC followed by Sri Lanka, Nepal, and Pakistan. India has indicated its willingness to take on asymmetrical trade responsibilities in the region in order to promote greater regional and economic integration. It already provides zero duty market access to all Least Developed Countries (LDCs) of SAARC, for all tariff lines, except 25 lines of liquor and tobacco. This measure is already helping them to reduce their trade deficits with India.
India strengthened its bilateral links with its neighbours by signing free trade agreements with Nepal, Bhutan and Sri Lanka and a preferential trade agreement with Afghanistan. In 2006, India, along with Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka, signed the South Asian Free Trade Agreement (SAFTA)under the aegis of the South Asian Association for Regional Co-operation or SAARC (Afghanistan was included as a member in 2007). The main element of the agreement was a reduction in tariffs by all members under a tariff liberalisation programme (TLP), except on items that are included in the Members’ sensitive lists. Members also agreed to the elimination of para-tariffs and non-tariff barriers and the adoption of trade facilitation measures to remove barriers to cross-border movement of goods.
India has kept 88 percent of tariff lines outside the SAFTA Sensitive List for non-LDC members. India also provides significant trade access to Sri Lanka under a separate bilateral India-Sri Lanka Free Trade Agreement. These measures have led to a fair degree of integration of the economies in the region with the Indian economy. India’s approach in this region has been to enlarge the canvas for economic engagement by including services, investments, and several other non-tariff areas. South Asia should be visualised as one large economic entity which can take part as a seamless whole in regional and global production networks. South Asia contributes substantially to global demand and, therefore, it is only fitting that it plays a greater role in regional economic decision making.