Trade

1. Strategic significance and institutional architecture

Neighbourhood trade diplomacy concerns the rules, infrastructure and political relationships governing exchanges of goods, services and electricity across borders. For India, its immediate South Asian neighbours are the principal focus, while Myanmar connects the neighbourhood with ASEAN and the Act East policy. China is also a major neighbouring trading partner, but its scale, strategic competition and different institutional relationship require distinct treatment.

Trade creates markets for Indian firms, supports border livelihoods and provides neighbours with access to a large nearby economy. It can reduce the cost of essential supplies, enable regional value chains and improve connectivity for landlocked Nepal and Bhutan. For India’s Northeast, neighbouring ports and transit corridors can overcome geographical isolation and stimulate local production.

The South Asian Free Trade Area, or SAFTA, provides a regional framework for tariff preferences in goods. Its effectiveness is limited by sensitive lists, rules-of-origin requirements, non-tariff barriers and political restrictions. Bilateral arrangements often deliver more: India has free trade agreements with Sri Lanka and Bhutan, preferential arrangements with Nepal, and trade and transit instruments with Bangladesh. Preferences do not eliminate every tariff or regulatory requirement.

• Neighbourhood First supplies the political framework; Act East and BIMSTEC connect eastern neighbours with wider regional markets.
• SAFTA covers goods; the SAARC Agreement on Trade in Services was signed separately in 2010.
• WTO obligations provide the multilateral baseline, while permitted regional preferences offer additional market access.

2. Country-specific patterns and diplomatic priorities

Bangladesh is central to India’s eastern connectivity. Trade includes textiles, agricultural products, machinery and intermediate inputs. Bangladesh benefits from Indian inputs and a large consumer market, while India gains access to a growing economy and connectivity opportunities for the Northeast. Under bilateral arrangements, designated Indian cargo can use Chattogram and Mongla ports. Changes in Bangladesh’s domestic politics make commercial predictability and sustained institutional engagement especially important.

Nepal’s open border and close economic links coexist with dependence on Indian transit routes and sensitivity about sovereignty. The bilateral Treaty of Trade and Treaty of Transit address different needs: market access and movement through Indian territory. Bhutan’s relationship with India combines free trade, transit and hydropower cooperation. Electricity exports generate revenue, but diversification remains important for resilience and employment.

The India–Sri Lanka Free Trade Agreement has operated since March 2000. Its experience highlights both the benefits of preferential access and disputes concerning quotas, standards and rules of origin. Maldives depends substantially on imported essentials, making dependable supplies and shipping links diplomatically important. Myanmar offers access to Southeast Asia, but conflict and border insecurity disrupt formal commerce.

Trade with Pakistan has been severely restricted since 2019: India withdrew most-favoured-nation treatment after the Pulwama attack, while Pakistan subsequently suspended bilateral trade, subject to limited exceptions. Afghanistan illustrates the difficulties of commerce without dependable direct overland access. Chabahar offers an alternative route through Iran, but commercial viability, security and sanctions-related uncertainty remain constraints. India’s large merchandise deficit with China raises separate concerns over concentrated dependence on critical inputs.

3. Connectivity, energy and trade facilitation

Market access is meaningful only when goods can cross borders efficiently. Integrated Check Posts, developed through the Land Ports Authority of India, bring customs, immigration and associated services together. Petrapole–Benapole on the Bangladesh border and Raxaul–Birgunj on the Nepal border are important gateways. Their performance depends on approach roads, parking, warehousing, testing facilities and coordinated operating hours on both sides.

The Bangladesh–Bhutan–India–Nepal Motor Vehicles Agreement, signed in June 2015, seeks to facilitate cross-border movement of passenger, personal and cargo vehicles. Bhutan has not ratified it, and full implementation across all four countries remains incomplete. Operational protocols, insurance, customs guarantees and environmental safeguards matter as much as signing the agreement.

Rail links, coastal shipping and the India–Bangladesh Protocol on Inland Water Transit and Trade diversify transport options. Digital customs, advance processing, electronic certificates of origin and risk-based inspection can reduce delays without weakening enforcement. Mutual recognition of testing results requires credible accreditation and regulatory confidence, not simply political declarations.

Electricity trade adds a growing regional dimension. India imports hydropower from Bhutan and Nepal and supplies electricity to Bangladesh. In November 2024, the first trilateral power transaction from Nepal to Bangladesh through India’s grid was inaugurated, covering 40 MW. Such arrangements turn India’s geographical position into a platform for shared energy security.

4. Why regional trade remains below potential

Political mistrust is the foremost obstacle. India–Pakistan tensions have weakened SAARC cooperation, while smaller neighbours may interpret dependence on India as a source of vulnerability. Border disruptions or uncertainty over essential supplies can therefore produce diplomatic costs beyond their immediate commercial impact. Economic interdependence can encourage cooperation, but it does not automatically resolve territorial or security disputes.

Trade costs remain high because of limited transport integration, repeated transshipment, inconsistent documentation and insufficient border infrastructure. Sanitary and phytosanitary measures and technical standards are legitimate protections when evidence-based and transparent; opaque testing procedures or discriminatory application can turn them into barriers. Informal trade also grows where formal channels are costly or inaccessible.

Structural asymmetry compounds these difficulties. India’s neighbours often have narrow export baskets, small industrial bases and difficulties meeting standards at scale. Persistent bilateral deficits can generate resentment, although a deficit alone does not establish unfair trade. Import restrictions may protect particular producers but raise costs for consumers and downstream industries.

Domestic instability, foreign-exchange shortages and climate hazards can interrupt regional supply chains. The pandemic demonstrated the importance of keeping essential trade functioning. Agricultural export restrictions and sudden regulatory changes may help address domestic shortages, but they can undermine confidence among dependent neighbours unless accompanied by consultation and predictable arrangements.

5. A practical agenda for trade diplomacy

India should frame regional integration as shared prosperity rather than simply a search for export markets. Supporting neighbours’ productive capacity through standards laboratories, supplier development, logistics and investment would expand their exports and strengthen political support for openness. Regional value chains in garments, food processing, pharmaceuticals and clean energy offer practical entry points.

Implementation should take priority over repeated announcements. Time-bound border upgrades, interoperable customs systems, coordinated inspections and transparent grievance mechanisms can deliver visible benefits. State governments, border communities, small firms and women traders should participate in policy design because they experience the costs of inefficient crossings directly.

Predictable essential-supply arrangements, subject to domestic availability and clearly stated rules, would improve India’s credibility. Wider electricity trading, diversified transit routes and climate-resilient infrastructure can spread gains across countries. Subregional cooperation should complement, rather than formally replace, wider South Asian institutions.

Success should be measured through border-clearance times, logistics costs, export diversification, reliability of energy supply and benefits to local communities, not merely aggregate trade value. The guiding principle is asymmetric responsibility with reciprocal gains: India can shoulder greater facilitation costs while seeking transparent rules, commercial sustainability and legitimate security safeguards.

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