Executive Summary
South Asia, primarily encompassing seven countries, extends from the Himalayas to the Indian Ocean. This region is home to one-sixth of the world's population and includes almost 44 million diaspora individuals globally. The people of South Asia are interconnected through strong socio-cultural and historical bonds. Despite their diverse religious, ethnic, and linguistic backgrounds, these communities share common colonial histories and legacies. However, the post-colonial period in this region has been marked by traditions of conflict, political turmoil, and wars. India and Pakistan have engaged in multiple wars, while Sri Lanka and Nepal have experienced ethnic strife and communist insurgencies, respectively. Pakistan and Bangladesh have faced challenges related to dysfunctional democracies due to repeated military interventions. These political issues are considered significant factors contributing to the region's sluggish economic growth and ongoing economic crises. Although India and Bangladesh have demonstrated robust GDP growth in the past, they continue to face difficulties in catering to their large populations, providing youth employment, and addressing social and economic inequalities. These challenges are also pertinent to the other nations of the region. This article explores these challenges and examines the potential of SAARC (South Asian Association for Regional Cooperation) to foster regional unity and collectively tackle the issues of the 21st century.
Introduction and background
South Asia consists of seven countries bordered by the Himalayas to the north and the Indian Ocean to the south, with Iran to the west and Myanmar to the east. This region is home to one-sixth of the global population and holds significant geopolitical importance due to its economic potential and proximity to China and the Middle East. The countries share strong ethno-cultural and historical ties, many of which stem from a British colonial past. India, Bangladesh, and Pakistan were part of undivided British India, while Sri Lanka and the Maldives had multiple colonial regimes, including Portuguese and Dutch rule, before eventually coming under British control - Sri Lanka fully and the Maldives as a British protectorate. Nepal maintained a complex relationship with the British Empire, serving as a buffer state between British India and China, while Bhutan was never colonized but fostered a cordial relationship with British authorities.
India and Pakistan emerged as independent nations in 1947, followed by Sri Lanka in 1948 and the Maldives in 1965. Bangladesh, which was once part of Pakistan, gained independence in 1971 following a bloody war against the Pakistani military junta. In the 1980s, all seven countries established the South Asian Association for Regional Cooperation (SAARC) to promote regional collaboration. Afghanistan is the 8th member of SAARC. Afghanistan is regarded as both a South Asian and a Central Asian nation. Hence, this article focuses on the seven nations that are strictly identified as part of South Asia.
Political landscape
The intricate and often tumultuous relationship between the two preeminent South Asian nations—India and Pakistan—lies at the heart of a complex and contentious political landscape. Since their independence in 1947, the two countries have been embroiled in several intense conflicts, each war deepening their historical animosities. Over the past seventy years, the ebb and flow of their diplomatic relations have danced between fleeting moments of hope and persistent cycles of discord. Recurrent military coups in Pakistan, coupled with the rise of fervently extremist, religion-based politics in both nations, have significantly obstructed any real strides towards reconciliation and constructive regional collaboration. As both countries bolster their military might, with nuclear arsenals capable of catastrophic destruction, the tensions in this volatile region have escalated to alarming heights.
India, the largest and most influential country in South Asia, shares land borders with four neighboring nations while also connecting with the island nations of Sri Lanka and the Maldives across the sea. The complexities of India’s diplomatic engagements are further compounded by its intricate and often fraught relationship with China. Since the Sino-Indian War in the 1960s, the ties binding Pakistan and China have only strengthened, creating a strategic alliance that continues to challenge India’s regional aspirations. Meanwhile, Nepal, which witnessed a fierce Maoist insurgency and a Communist-led government in the late 20th century, has cultivated a steady rapport with China, capitalizing on its geographic proximity to the vast Himalayan border with occupied Tibet.
Sri Lanka has experienced ethnic conflicts and a civil war that severely impacted the nation's potential for economic growth. In the wake of the recent political upheaval in Sri Lanka, a left-leaning political party has recently taken the reins of power. This shift raises the stakes, as it may usher in an era of increased Chinese influence over the island nation. Similarly, since 1975, various regimes in Bangladesh have gravitated towards China, drawn by the promise of military and economic partnerships. The political landscape shifted dramatically in 2024 when a pro-India government was ousted in a surprising turn of events, leading to the establishment of a new interim government, which, bolstered by Islamist factions, appears poised to strengthen ties with both Pakistan and China. This evolving dynamic speaks to the intricate web of alliances and rivalries that define South Asia today.
Economic Conditions
The World Bank has heightened its growth forecast for South Asia to an impressive 6.4% in 2024, a notable rise from the previous estimate of 6.0%. This optimistic outlook is underscored by robust domestic demand in India and a swift economic resurgence in nations like Sri Lanka and Pakistan, which have been grappling with recent crises. The expected growth rate for India has been elevated to a remarkable 7% year-on-year for the current fiscal year, ending in March 2025. This surge is driven by a revitalization in agricultural output and a notable increase in private consumption, painting a vivid picture of economic resilience and vibrancy. This revision solidifies South Asia's reputation as the fastest-growing emerging economy region as recognized by the World Bank. The Washington-based lender envisions sustained growth for South Asia at a solid 6.2% annually over the next two years.
India boasts a burgeoning consumer class that invigorates the economy, generating a dynamic and bustling market. Meanwhile, Sri Lanka and Pakistan are steadily navigating their way out of the shadows of the political turmoil and economic distress they faced in 2022 and 2023. Nepal and Bhutan, with their stunning landscapes and rich cultural heritage, are showcasing promising growth prospects, largely sustained by their tourism sectors. In stark contrast, Bangladesh’s economic forecast has dimmed, revised downward to 4.0% from a more hopeful 5.7% for the fiscal year 2024/25, spanning from July to June. This decline is primarily due to a fall in garment exports amid political unrest and uncertainties, leaving the country at a pivotal crossroads. The political upheaval in 2024 has seriously hampered Bangladesh’s critical export-driven ready-made garment sector, the cornerstone of its foreign exchange. The newly established interim government appears to be struggling to make headway toward economic recovery, rendering the nation’s path to rejuvenating its growth rate highly uncertain.
As of December 2023, India's inflation rate, gauged by the Consumer Price Index (CPI), is a noteworthy 5.22%. This represents a notable improvement from last year's average inflation of 6.7% in 2022. The easing of consumer prices can be traced back to a cooling in food inflation, which has receded to 8.39%, down from 9.04% just a month earlier in November. During the same period, Pakistan and Sri Lanka celebrated a significant decline in inflation, marking their lowest rates since the onset of the global energy crisis that rocked the world in late 2021.
In stark contrast, Bangladesh has faced a dramatic surge in inflation, reaching its second-highest level in 13 years, primarily due to devastating floods that severely disrupted agricultural supply. It is argued that the change in government leadership, inexperience, and a lack of preparation of the interim government contributed to the poor management of the flood situations and subsequent recovery measures. Looking ahead, regional inflation is projected to dip below its 10-year average of 5.7% by 2025, spurred on by a decrease in food prices that promises to bring relief to consumers across the region.
The region is rich in diverse economic talents and abundant natural resources. India, Pakistan, and Bangladesh collectively harbor reserves of natural gas. At the same time, India is endowed with the fourth-largest coal reserves in the world, along with significant stores of iron ore and manganese ore, the latter ranking seventh globally as of 2013. Additionally, India boasts the sixth-largest lithium reserves in the world, showcasing its potential in new energy sectors. Despite these assets, remittances from Indian citizens working abroad—primarily in the United Arab Emirates, the United States, and Saudi Arabia—remain India’s foremost source of foreign exchange. Recent data reveals that the service sector is the backbone of India’s economy, contributing nearly 70% to its GDP. IT services, business process outsourcing (BPO), and tourism lead the charge and illuminate India’s position as a global economic player.
Similar to India, both Bangladesh and Pakistan derive substantial portions of their foreign exchange from their overseas workforce. In 2023, Bangladesh experienced a noteworthy surge in remittances, which saw an increase of 3.1%, totalling approximately $22 billion. The fiscal year 2023-24 marked a significant milestone, as remittances to Bangladesh soared to nearly $24 billion, representing the highest influx in three years. Meanwhile, in 2021, Pakistan recorded a remarkable $31.1 billion in remittances, reflecting an impressive 19.8% rise compared to the previous year.
The geographic closeness of the South Asian nations to the Middle East, combined with deep-rooted religious and cultural connections, has positioned them as an essential contributor to the thriving economies of the Gulf states. The South Asian diaspora is a vast and dynamic force, with an estimated 44 million individuals of South Asian descent scattered across the globe, making it one of the largest diaspora groups worldwide. Their contributions play a crucial role in invigorating their home countries' economies, fostering growth and development through the remittances they send back.
Major economic challenges
The South Asian economies are at a critical crossroads, where the surge of a burgeoning population presents both an unprecedented challenge and a unique opportunity. This vibrant region is wrestling with the stark realities of increasing income inequality, a staggering youth unemployment crisis, and the urgent necessity for strategic infrastructure development, all amidst a backdrop of striving for sustained and inclusive economic growth.
As the dust settles from the economic upheaval precipitated by the pandemic, the region finds itself trapped in sluggish growth coupled with soaring inflation, casting a long shadow of doubt and instability. The youth demographic, teeming with potential, is yearning for capacity building to empower them to become vital economic contributors. Yet, despite India's strides in harnessing the capabilities of its IT sector, a large segment of its population remains ensnared in the digital divide. Other countries have yet to fully harness the potential of transformative technologies, both as a distinct sector and as a powerful enabler to drive their developmental goals forward. This untapped potential leaves a gap in innovation and progress, preventing these nations from realizing the full benefits that cutting-edge advancements can bring to their societal and economic growth.
Compounding these challenges is the region's vulnerability to climate change, as it repeatedly faces the devastating consequences of natural disasters that threaten livelihoods and infrastructure alike. The persistent problems of political instability loom large, further complicating the economic landscape. Mutual mistrust between nations and extremist political agendas severely affect bilateral trade. The anti-India rhetoric from the new interim government in Bangladesh created unease between Bangladesh and India, resulting in a decrease in trade.
SAARC
The South Asian economy stands as a resilient yet troubled entity, balancing the weight of its challenges with its growth potential. The South Asian Association for Regional Cooperation (SAARC) can play a crucial role in advancing the region's development aspirations by promoting regional cooperation through trade, cultural exchange, and collaborative efforts to combat climate change. Since its establishment, SAARC has demonstrated promise but has struggled to accomplish significant objectives, such as forming an economic union. The South Asian Free Trade Area (SAFTA), signed in 2004, aimed to enhance trade among member nations. However, a recent report from the Asian Development Bank highlights a stark reality: despite the potential for intra-regional trade in SAARC to reach an average of $22 billion per year, actual South Asian trade has only amounted to approximately $8 billion. This indicates an annual untapped potential for intra-regional trade of about $14 billion.
Future of the region
The region faces significant challenges due to climate change, with all seven countries experiencing some form of extreme weather that profoundly impacts their economic capabilities. Additionally, political instability in the region undermines their potential for growth. This instability weakens not only internal capacities but also affects bilateral relationships, as regional politics is often driven by religious extremism and hostility toward neighbouring nations. To achieve meaningful and concerted progress, these countries must prioritize regional cooperation. By fostering stable and progressive bilateral relationships, they can create synergies to better exploit national resources and capabilities. Enhanced cultural exchange can further complement trade and commerce, strengthening relationships among populations and building a foundation of mutual trust and respect. Consequently, revitalizing SAARC and working towards a functional SAFTA could represent a significant milestone in this effort.