Improved intra-regional trade is needed to improve connectivity in the South Asian region. Such an initiative, facilitated by the movement of goods, services, people and knowledge, would provide access to new markets and attract foreign direct investment (FDI) in various sectors. The resulting economic growth would also play a key role in bridging the trust gap in the region and increasing the opportunity costs of conflict.  The lack of regional connectivity in South Asia, despite the benefits of proximity, has a long history of mistrust, conflict and political upheaval. Moreover, India`s presence as a “big brother” in the region has made its smaller neighbors cautious about taking the initiative. Going forward, policymakers should focus on removing barriers and enabling better connectivity in all areas to build trust and balance China`s growing ties with India`s neighbors. The potential and benefits of trade must be harnessed by the countries of the region to ensure mutual economic gains. The following recommendations are based on the extensive literature on trade and regional integration in South Asia. So why is intra-regional trade growing in South Asia despite more than a decade of SAFTA, several bilateral free trade agreements, and a unilateral duty-free tariff regime from India to all least developed countries in the region (Afghanistan, Bangladesh, Nepal, Maldives and Bhutan)? The World Bank`s latest report, “A Glass Half Full: The Promise of Regional Trade in South Asia,” gets to the bottom of it. And here are the reasons for the ineffectiveness of its SAFTA. First, SAFTA is undermined by the so-called “sensitive list” – a long list of products exempted from the tariff liberalization program. Each country has many products in this sensitive list, ranging from 6 to 45 percent of its imports from other South Asian countries. Bangladesh, Sri Lanka and Nepal have the highest proportion of sensitive imports from South Asia.
Similarly, 5 to 48 per cent of exports to South Asia do not benefit from tariff preferences from beneficiary countries, with Maldives, India and Pakistan having the highest share of exports subject to this treatment. This guidance note analyses the share of Indian trade with its neighbours. The data used comes from the World Bank`s World Integrated Trade Solution (WITS) database and the International Monetary Fund`s (IMF) Directorate of Trade Statistics (DOTS) database. All commercial values are expressed in U.S. dollars (US$). For India`s trade with South Asia, import and export volumes and shares from 1988 to 2018 are analyzed; However, China`s trade figures with South Asia (excluding India) are from 1992 to 2018. India`s largest export market in the region is Bangladesh, followed by Sri Lanka and Nepal, while the largest imports by value come from Myanmar, Sri Lanka and Bangladesh. All neighboring countries have a trade deficit with India, the highest being Bangladesh with a deficit of $7.6 billion, followed by Nepal with $6.8 billion (2018). The trade deficit widened (Figure 1). Until 2005, India and China were close to each other in their total trade volume with South Asia. However, after 2005, China steadily increased its trade with South Asia, with the exception of a slight decline in 2009 due to the global financial crisis. In 2014, China`s trade peaked at $60.41 billion, while India traded about a third of the amount at $24.70 billion.
After peaking in 2014, both countries experienced a decline in trade with South Asia in 2015 and 2016. China`s trade with its N8 neighbors is primarily export-oriented (Figure 4), making it one of the most important sources of goods to South Asia.  Despite the existence of regional and bilateral free trade agreements, India`s trade volume with its neighbours has remained well below that of China, which has only one free trade agreement in the region (Figure 2). India`s trade with its neighborhood ranged from 1.7% to 3.8% of its world trade. ASEAN national authorities have also always been reluctant to distribute or cede the sovereignty of other ASEAN members to the authorities (although ASEAN trade ministries regularly conduct cross-border visits to carry out on-site inspections as part of anti-dumping investigations). Unlike the EU or NAFTA, joint teams have not been deployed on a large scale to ensure compliance and investigate violations. Instead, ASEAN national authorities must rely on the review and analysis of other ASEAN national authorities to determine whether EAFTA measures such as the rule of origin are being complied with. There may be differences of opinion between national authorities. Again, the ASEAN Secretariat can help resolve a dispute, but has no legal authority to resolve it. The South Asian Free Trade Area (SAFTA) is an agreement that was signed on 6 January 2004 and 12 January 2004.
SAARC Summit in Islamabad, Pakistan. A free trade area of 1.6 billion people in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka has been established to reduce tariffs on all traded goods to zero by 2016. The SAFTA Agreement entered into force on 1 January 2006 and is in force following the ratification of the Agreement by the seven governments. SAFTA required developing countries in South Asia (India, Pakistan and Sri Lanka) to reduce their tariffs to 20% in the first phase of the two-year period ending in 2007. During the last five-year phase, which ended in 2012, the tariff was reduced from 20% to zero in a series of annual reductions. .