Comment: Prospects of a free trade area in South Asia. (1996, 20 Marks)
A free trade area removes tariffs among members while each keeps its own external tariff, the first rung of Bela Balassa’s ladder of integration. South Asia began with the positive-list SAPTA (signed 1993, in force December 1995) and moved to SAFTA (signed 2004, in force 2006). Three decades on, tariffs have largely fallen, yet intra-regional trade is still under 6% of the region’s total. The prospects therefore depend on what lies beyond tariffs.
The case for optimism
- Gravity model: Jan Tinbergen’s model predicts heavy trade between large adjacent economies; the World Bank’s A Glass Half Full (2018) puts regional trade at US$23 billion against a potential of at least US$67 billion.
- Hidden demand: large informal flows (India–Bangladesh, India–Nepal, and India–Pakistan goods routed through Dubai) prove that traders want regional exchange.
- Real complementarities in services, health, education, tourism and, above all, energy: Bhutanese hydropower sells into India, and Nepali power first reached Bangladesh across India in November 2024.
- Indian generosity: the Gujral Doctrine of non-reciprocity and duty-free, quota-free access for least developed members since 2011 (a sensitive list of 25 lines).
- Bilateral successes: India’s free trade arrangements with Bhutan and Nepal, and the India–Sri Lanka FTA (in force 2000), under which trade grew several-fold.
The constraints
- Similar endowments: on Heckscher–Ohlin reasoning, labour-abundant economies exporting similar goods gain little from one another.
- Trade diversion: Jacob Viner showed that preferences among high-tariff economies may shift purchases to inefficient regional producers, as with the early copper and vanaspati surge under the India–Sri Lanka FTA.
- Hidden protection: long sensitive lists covering almost 35% of intra-regional trade by value (Nepal and Bangladesh near 1,000 lines each even after the first round of cuts), para-tariffs outside SAFTA, strict rules of origin, testing and certification.
- Missing pieces: no transit regime, no services schedules and restrictive visas; an Indian firm finds trading with Brazil about a fifth cheaper than trading with a neighbour.
- Politics: Pakistan never reciprocated India’s 1996 MFN grant; after Pahalgam it halted all trade (24 April 2025) and India barred all imports from Pakistan (2 May 2025). India’s 2025 curbs on Bangladeshi goods showed that access is revocable. Asymmetry makes every Indian surplus look like dependence.
Current position
- SAARC has held no summit since 2014, so the ministerial machinery to prune sensitive lists is dormant.
- Integration is moving sub-regionally and bilaterally instead: the BBIN motor vehicles agreement is being taken forward without Bhutan; the ADB’s SASEC programme has financed scores of projects; the India–Maldives FTA talks opened in mid-2026; India and Sri Lanka agreed in August 2026 to resume ETCA negotiations; and on 24 August 2026 Dhaka and New Delhi discussed reopening land ports and border haats and lifting yarn curbs.
- BIMSTEC’s free trade framework of 2004 remains unconcluded, despite the Bangkok Vision 2030 adopted in April 2025.
Rival readings
Amita Batra (Trapped in Conflict?, 2013) explains the gap against gravity predictions by conflict rather than endowments; the trade-cost school around Sanjay Kathuria sees technical frictions negotiable without a political settlement; Jayant Menon makes the open-regionalism case that unilateral, most-favoured-nation opening matters more than preferences. Each is right somewhere: conflict binds in the west, administration in the east.
Conclusion
The prospects of a full eight-member free trade area are poor while the India–Pakistan border stays closed and unanimity governs SAARC. The prospects of variable-geometry integration in the east, through bilateral agreements, BBIN, power trade and better land ports, are good and improving. Its value lies less in trade volume than in interdependence, which gives neighbours a stake in stability and leaves less room for outside powers.