New economic diplomacy in South Asia: India should focus on neighbours

Through economic diplomacy the eight member states of SAARC could aim to act as the building blocks to contribute towards socio economic upliftment of the region

By Srimal Fernando 

and Mizly Nizar 

The combined economic vision plan for South Asia’s eight nations will always be a new impetus with distinguished features. The politics of the region including policies for economic and social transformation has been shaped by the varied political conditions prevailing in these nations. 

The New India 2022 economic policy which aims to double its economy from $ 2.5 trillion to $ 5 trillion in the next eight years will impact the future roles of the both India and its neighbouring countries. Sri Lanka’s Vision 2025 aims to reach the target of $ 5000 per capita income thereby attaining the status of an upper middle income nation. 

Bangladesh is seen as one of the fastest growing economies with a rate of 7.1%, despite nearly one fourth of its population living below the poverty line. Bhutan has seen much economic development in recent years with a GDP (Gross Domestic Product) growth rate of around 6.8 %. 

Nepal which overturned the monarchy to become a multi-party democracy envisions generating hydroelectricity through its 6000 rivers which is vital for its economy. Pakistan which remains a pivotal state for regional integration in South Asia is likely to see substantial changes in its socio, economic and political direction of its 2025 vision plan with the emergence of the new Prime Minister Imran Khan in 2018. 

Though Maldives boasts of high GDP per capita of $ 8,980 in 2017, its democratic stability remains an area of concern among the South Asian and Western political and security circles. The most serious foreign and security policy challenge for South Asia is Afghanistan’s instability. It lags well behind other regional nations in terms of socio- economic indicators with unemployment at a high of 40%. 

When compared with countries in other geopolitical regional groups, most of the South Asian countries lag well behind in socio economic development. The disparities in living standards among most of these countries can be seen from socio economic indicators such as GDP per capita, poverty, health and education indices and the Human Development Index (HDI). 

The most notable economic progress in the region has been made in the sphere of Small and medium enterprises (SMEs). However, lack of significant Foreign Direct Investments (FDIs) in some of the South Asian countries is slowing down economic growth. In the recent years the need for attaining self-sufficiency in food has been a significant target to be achieved by the countries in this region.

Some of the South Asian countries have survived on short term borrowing such as from the International Monetary Fund (IMF) to accelerate GDP growth to the 4%-5% range. As of 2017 IMF has provided conditional loans of $ 1.5 billion to Sri Lanka and $ 6.6 billion to Pakistan. As directed by the IMF both countries had to bring down their budget deficits and hence had to make structural adjustments by cutting down on some of the welfare projects and leasing out economically important nerve centres on long-term arrangements to foreign nations. 

Even though India and Sri Lanka faced many odds at the onset they have emerged as the most stable states in South Asia in the past seventy years. India is considered as an emerging power in the world which could influence the future of the region. In spite of global economic slowdown, the Indian economy continued with high growth and stability. Hence the idea of regional economic collaboration needs new impetus from the remaining SAARC countries. 

In countries such as India, Pakistan, Bangladesh and Sri Lanka, political will of their respective governments play a key role to jointly commit to a common economic interest. The vital factor affecting the formulation of a common regional economic policy is the strained relationship between India and Pakistan.

For countries such as Sri Lanka, Nepal, Bhutan, and the Maldives entering into the South Asian Free Trade Area (SAFTA) agreement in 2004 may have helped overcome the economic disadvantages of being a small nation. It can be argued that for smaller nations having well-crafted bilateral or regional agreements with their bigger counterparts can contribute towards these nations achieving higher GDP growth rates and assistance to uplift social welfare. 

The main aim of The SAFTA was to promote interregional trade to stimulate economic cooperation among member states and make these states more conducive to receive FDIs. However, South Asian countries have not benefited from this agreement due to non-tariff barriers imposed across borders hindering inter-regional trade. 

Many policy proposals have been afloat to promote economic cooperation through far reaching changes to the regional economic structure. It is imperative that the neighbouring countries work towards eliminating barriers for inter-regional trade and also to improve political relationships which could lead to a significant increase in intra-SAARC trade. In addition to inter-regional trade expanding inter-regional travel is another sphere that could contribute towards building socio, economic and political linkages. 

Furthermore, another source for development is the Ultra High Net worth Individuals (UHNWI) in the region with India being the fastest growing country of UHNWI. The figures for Bangladesh, India and Pakistan are respectively 17.3%, 10.7% and 8.4% indicating that there is much scope to tap into these sources for regional economic development. 

In achieving their future vision plans the eight South Asian nations would face many obstacles and have a long way to go before they reach the status of middle income countries. The future viability of individual strategies will depend on the will and capacity of the regional nations to reach a compromise for a shared future vision. 

Through economic diplomacy the eight member states of the South Asian Association of Regional Cooperation (SAARC) could aim to act as the building blocks to contribute towards socio economic upliftment of the region. 

(Srimal Fernando is a research scholar at Jindal School of International Affairs, India and an editor of Diplomatic Society for South Africa. Mizly Nizar is a foreign policy analyst and a former visiting lecture at The Bandaranaike Centre for International Studies and the Open University of Sri Lanka.)