India’s biggest trade opportunity is right next door

This article is authored by S Venkat Narayan, senior journalist and global affairs specialist, New Delhi.

India is scouring the world for new trade agreements when its biggest untapped market lies immediately across its borders.

Indian economy. (Illustration: Abhimanyu Sinha)

That, in essence, was the striking argument made by veteran diplomat and former foreign secretary Shyam Saran in a recent conversation: Instead of expending enormous diplomatic energy negotiating elaborate free-trade agreements with small, distant economies, India should first unlock the vastly greater economic potential of its own neighbourhood.

The proposition is difficult to dismiss.

South Asia is home to nearly two billion people, yet its economies remain among the least integrated in the world. The World Bank estimates that countries in the region trade only about $23 billion a year with one another, against a potential of at least $67 billion. Intra-regional trade accounts for barely 5% of South Asia's total trade, compared with roughly 25% in ASEAN.

Even more revealing is the cost of doing business across South Asian borders. The World Bank has estimated that it can be about 20% more expensive for an Indian company to trade with a neighbouring South Asian country than with Brazil.

This is an absurdity created not by geography or economics but by politics, protectionism, poor connectivity, cumbersome customs procedures and mutual distrust.

India is uniquely positioned to change it.

With an economy approaching $4 trillion, India dwarfs every other South Asian economy. That asymmetry, rather than being regarded merely as a source of regional anxiety, could become New Delhi's greatest instrument of economic diplomacy.

India does not need to demand reciprocity from its smaller neighbours at every step. It could afford to open its enormous domestic market more generously to products from Nepal, Bhutan, Bangladesh, Sri Lanka and, eventually, Pakistan—allowing them to sell in India whatever they can competitively produce.

In return, India would sell them what they need: Pharmaceuticals, machinery, automobiles, engineering goods, food, petroleum products, information technology, financial and professional services, electricity and consumer goods.

The result would be more than a larger trade balance. It could create a web of economic interdependence in which India's neighbours acquire a direct commercial stake in stable relations with New Delhi.

The case for such a policy is particularly powerful when viewed against the extraordinary potential of India-Pakistan trade.

Actual bilateral trade remains negligible compared with the size and proximity of the two economies. Yet studies have estimated that normalised India-Pakistan trade could eventually reach $37 billion to $50 billion annually, many times its present level.

The point is not that a free-trade agreement would suddenly produce $50 billion of commerce. Political hostility, security concerns and logistical barriers cannot be wished away by economists. The figure nevertheless demonstrates the scale of the opportunity that decades of confrontation have suppressed.

Bangladesh provides another example. India-Bangladesh trade was about $13.7 billion in 2024-25, but the relationship remains heavily tilted towards Indian exports. Greater access for Bangladeshi goods to India's huge consumer market could help narrow that imbalance while giving Bangladesh a larger economic stake in the relationship.

The same principle can be applied, in different ways, across the neighbourhood.

Nepal has hydropower and agricultural potential. Bhutan has electricity and niche products. Sri Lanka has strengths in tea, spices, rubber products, apparel, tourism and services. Bangladesh has become a major manufacturing centre. Pakistan possesses a huge consumer market and complementary agricultural and industrial capabilities.

India, meanwhile, has what all of them need: Scale.

That raises a fundamental question about the direction of Indian trade policy.

New Delhi should certainly continue negotiating with major global economies. Access to the European Union, the US, Britain, Japan, Australia and other large markets can deliver substantial gains in exports, investment, technology and supply-chain integration.

But the pursuit of distant markets should not obscure the extraordinary opportunity in the neighbourhood.

The recently concluded India-New Zealand FTA is instructive. New Zealand is a developed, technologically advanced economy and the agreement offers India genuine opportunities. But bilateral goods and services trade was only around $2.4 billion in 2024.

Compare that with the potential of a properly integrated South Asian market.

The issue, therefore, is not whether India should trade with New Zealand. It is whether New Zealand should receive more strategic attention than India's own neighbours, whose economic integration could generate much larger political and strategic dividends.

India could address this without waiting for another grand SAARC treaty.

It could pursue a Neighbourhood Trade First strategy: Progressively lower tariffs on imports from South Asia; eliminate unnecessary non-tariff barriers; simplify customs; improve road, rail, port and inland-waterway connectivity; expand banking and digital-payment links; and encourage Indian companies to build regional supply chains.

Most importantly, India could adopt an asymmetrical approach—open its huge market faster than its smaller neighbours are required to open theirs.

There would be costs. Some Indian producers would face greater competition. But the benefits could extend well beyond trade: Cheaper inputs, larger export markets, integrated supply chains and, above all, a more stable strategic neighbourhood.

There is a powerful historical irony here.

The oft-repeated claim that India once accounted for 25% of world trade is inaccurate. The celebrated economic historian Angus Maddison estimated that India accounted for 24.4% of global GDP in 1700. His India referred to the economic space of the subcontinent, much of which today comprises India, Pakistan and Bangladesh.

The subcontinent was then an interconnected economic ecosystem. Colonialism, followed by Partition and decades of political rivalry, fragmented that space.

India now has the economic weight to begin reconnecting it.

The objective need not be an EU-style South Asian union, nor even an ambitious new regional institution. It can begin with something much simpler: let India's neighbours sell more to India, and let India sell more to them.

For India's smaller neighbours, access to a market of more than 1.4 billion consumers could be transformative. For India, it could turn economic size into diplomatic influence.

Trade cannot solve South Asia's political disputes. But prosperity creates constituencies for stability, and economic interdependence gives governments something tangible to lose when relations deteriorate.

India should, therefore, look beyond the fashionable geography of global trade.

The world's largest opportunities may not always be thousands of kilometres away.

For India, one of the biggest is waiting just across the border.

India currently does about $31 billion of trade annually with its South Asian neighbours. With the World Bank estimating that intra-regional trade could rise from $23 billion to at least $67 billion, and with normalised India-Pakistan commerce alone potentially adding tens of billions of dollars, a long-term Indian policy aimed at deep neighbourhood integration could realistically aspire to push India's annual trade with South Asia towards the $100-billion mark.

Thus, India can convert economic size into diplomatic influence by making itself the principal market, supplier and economic engine of South Asia.

(The views expressed are personal)

This article is authored by S Venkat Narayan, senior journalist and global affairs specialist, New Delhi.