International economic relations are instrumental in the development of a nation’s economy. Accordingly, India has maintained foreign economic ties with its four immediate neighboring countries —Bangladesh, Bhutan, Nepal and Sri Lanka. In addition, the five countries located in the South Asian region share multitudes of historical and cultural similarities.
The ‘Neighborhood First’ policy of the current Indian government emphasizes advancing trade relations with its adjoining nations. These five countries are part of the South Asian Association of Regional Cooperation (SAARC) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). The aims and objectives of both the multilateral organizations are to promote rapid social and economic development in the South Asian region.
Economy of Bangladesh
The economy of Bangladesh is predominantly agrarian, with about 45% of the total populace involved in agriculture and allied activities. Rice is the main agricultural product produced in the nation, followed by jute, tea, vegetables, which are also crucial from a foreign exchange perspective. As of 2019, industry and service sectors contribute the maximum share in the Gross Domestic Product (GDP) of Bangladesh, 31% and 56% respectively. Bangladesh’s economy has displayed remarkable growth in recent years. Earlier, Bangladesh was on the list of United Nations Least Developed Countries (LDC); however, in 2018, it was upgraded to a higher level and is now considered a developing country. As per official records, Bangladesh’s annual GDP growth was 8.2% in 2019.  The country has also observed a rise in per capita income in the last few years. Its per capita income was at USD2,227 in the financial year 2020-21— over 9 per cent jump from USD2,064 in 2019-20, which is higher than that of India, whose per capita income reached USD1,947.417 during the same period. The significant reasons attributed for this robust growth are Bangladesh’s strong trade in terms of exports which advanced at a rate of 8.6% every year during 2011-19, along with a significant emphasis on setting up industries like pharmaceuticals, textiles, food processing and others and also concurrent growth in the service sectors.
India-Bangladesh Economic Relations
Ever since Bangladesh gained independence from Pakistan in 1971, it has developed policies and strategies to enhance its economic growth. One such approach involves maintaining strong bilateral relations with its neighboring nation- India. India and Bangladesh are trade partners since 1972. Multiple agreements and pacts are signed between the two countries to strengthen the economic relations between the two countries. The first trade agreement between India and Bangladesh was signed in 1972. By the year 1973, India held more than 6 % share of Bangladesh’s total export.
Over last decade, India’s trade with Bangladesh has expanded steadily. In the previous five years, the total trade between the two nations has increased by 17%. Under the South Asian Free Trade Area (SAFTA), since 2011, India has granted Duty-Free Quota Free (DFQF) access to Bangladeshi exports except for tobacco and alcohol in the Indian markets. This has resulted in an increment in the exports from Bangladesh to India. India imports readymade Garments, jute and jute goods, rags, animal or vegetable fats, oils and other items from Bangladesh. The prime exports of India from Bangladesh are raw cotton, mineral fuels, lubricants, distillation products, vehicles other than railway, machinery, nuclear reactors, boilers, cereals, coffee, tea, and others. In 2018, Bangladesh emerged as the largest importer of cotton from India. The export of Bangladesh’s garment to India increased from just USD 55 million in July 2011-June 2012 to USD 278.68 million in July 2017-June 2018. Readymade Garments export to India in July 2017-June 2018 increased by 114.68%.
India’s total merchandise trade with Bangladesh registered a growth of 39%, increasing from USD 6.65 billion in 2013-14 to USD 9.29 billion in 2017-18. As a result, India’s total merchandise trade with Bangladesh remained at USD 9.033 billion in 2018-19.
India observed a growth of 24% in its engineering trade as well. It increased from USD 2.23 billion in 2017-18 to USD 2.8 billion in 2018-19. India’s exports to Bangladesh grew by 24.1% from USD 2.13 billion to USD 2.65 billion between 2016-17 and 2017-18. India’s exports to Bangladesh increased to USD 2.69 billion in 2018-19. Foreign Direct Investment (FDI) has increased up to USD 539.91 in 2018 from USD 243.91 million in 2014. Emani, Dabur, Marico, Asian Paints, Pidilite, Godrej, Sun Pharma, Tata Motors, Hero MotoCorp, and several other Indian companies have invested in Bangladesh across various sectors.
Special Economic Zones (SEZ) are constructed to enhance bilateral trade between two nations further. In 2020, Bangladesh Economic Zones Authority (BEZA) signed an agreement with the Adani Ports and Special Economic Zone Limited (APSEZ) to begin constructing the Indian SEZ in Bangladesh. The Indian authority approved USD115 million in funds for the project on June 11 under its third Line of Credit (LoC) worth USD4.5 billion to Bangladesh, which was agreed upon in 2017. The source said, once operational, the proposed country-specific zone is expected to create employment for nearly 0.1 million people and attract more than USD2 billion investment. India extended USD 2 billion LoC to Bangladesh earlier in 2015-16 for development in a wide range of sectors, including social sectors.
In 2015, Bangladesh, Bhutan, India, and Nepal (BBIN) signed a Motor Vehicles Agreement for the Regulation of Passenger, Personal and Cargo Vehicular Traffic. The agreement facilitated safe and reasonable transportation of goods and passengers across the borders and enhanced regional economic integration among the BBIN countries.
Challenges to Economic Relations
Although the two nations are on good terms in matters of economy and trade, specific issues require utmost attention for strengthening the economic ties between the two. The following hurdles to the Indo-Bangladesh relations are:
The bilateral trade of about 50% between India-Bangladesh takes place through land and ports, and the borders act as the checkpoints where goods are inspected. Therefore, there are always delays and cost-increments due to the loading and unloading of goods at the ‘no man’s land’. In addition to this, the cost of exporting goods from Dhaka to Delhi are considerably higher than transporting to those of US and European ports.
Indian government and policymakers should focus on making policies that remove any such obstacles that occur between the trade flows between the two.
In 2015, a Land Boundary Agreement was again signed between two nations to settle land issues to improve economic development. However, the Tin (or Teen) Bigha Border still remains unsolved and is under the possession of India. Moreover, illegal migration of citizens, human trafficking, transfer of illegitimate weapons and other illicit imports across both sides of the border are another set of issues.
India and Bangladesh also have disputes over water resources that can anytime take political turns and, therefore, can affect the thriving economic ties between the two.
The issues mentioned above can have adverse effects on the economic relations between India and Bangladesh if not resolved in time. The Indian government must liberalize trade barriers and settle down its other issues with Bangladesh so that trade between the two can flourish to its full potential.
Economy of Bhutan
Bhutan is a small country snuggled with Himalayan mountains. This eco-friendly country measures its development in terms of Gross National Happiness (GNH). The economy is mainly dominated by agriculture and forestry, which is the primary source of livelihood for more than half of the Bhutanese population. In addition to this, abundant water resources have created ideal conditions for hydropower development, thereby stimulating economic growth. Revenues generated from hydropower plants help significant investments in human capital, thereby significantly improving service delivery and education and health outcomes. The economic relation with India dominates Bhutan’s economy. Bhutan has become a low- and middle-income country, and the poverty rate has decreased by two-thirds in the past decade. Since the early 1980s, the average annual growth rate of GDP has been 7.5%, making Bhutan one of the fastest-growing economies in the world. According to official statistics, per capita, Gross National Income (GNI) was USD3,080 in 2018, which is now three times the threshold for low- and middle-income countries and only 10% lower than the threshold for upper-middle-income countries. The pandemic has affected the pace of economic growth; however, it is expected to accelerate soon.
India-Bhutan Economic Relations
India and Bhutan share a genial relationship and hold strong bilateral ties with each other. The economy of Bhutan is mainly dependent on India. Bhutan is receiving economic aid from India since 1961. India financially assisted the First Five Year Plan (FYP) for economic development laid out by Bhutan. For Bhutan’s 12th FYP in 2018, India has allotted Rs. 4500 crores. India also provides financial assistance to Bhutan in developing hydropower projects which is mutually beneficial for both nations. The electricity generated from these hydropower plants is exported to India, creating revenue for Bhutan from its exports. The cooperation has resulted in the construction of several hydroelectric projects — the 336 MW Chukha Hydroelectric Project, the 60 MW Kurichhu Hydroelectric Project, the 1,020 MW Tala Hydroelectric Project and the 720 MW Mangdechhu Hydroelectric Project, totalling 2136 MW are already operational in Bhutan and are supplying electricity to India.
The India-Bhutan Trade and Transit Agreement signed in 1972 allows free trade-regime and duty-free transit of Bhutanese exports to third countries. Over the years, the trade between the two nations has grown steadily, and India is Bhutan’s largest trading partner. India accounts for about 92% share in Bhutan’s export to the world during 2014-18. Similarly, India’s share in Bhutan’s total import from the world from 2014-18, on average, was 88%. In the period from January-June 2018, trade between the two nations stood at Rs. 4318.59 crores. The chief exports from India to Bhutan are mineral products, machinery and mechanical appliances, electrical equipment etc. The principal imports from Bhutan include electricity, ferrosilicon, Portland cement etc.
Challenges to Economic Relations
Bhutan and India share relatively amicable relations and both nations are equally keen on strengthening their economic ties with one another. However, there are particular challenges to the same e.g.
Several high visit exchanges between the heads of the two nations and the Indian government’s Act East Policy and Bharat to Bhutan’s vision has undoubtedly left positive impacts on the relations between the two nations. India must focus on policies that mutually benefit both countries and make Bhutan self-reliant rather than dependent on India.
Economy of Nepal
Nepal is a landlocked nation whose economy is primarily based on agriculture, with about 60% populace involved in agricultural practices, and it contributes approximately 30% to the GDP of Nepal. Economic liberalization in Nepal has paved the way for the development of Nepal’s economy at a comparatively faster rate than in earlier times. However, instability and frequent changes in Nepal’s political scenario have always remained a hurdle in the development of Nepal’s economy.
Nepal is dependent on the remittances of foreign workers. Since 2000, the growth of the carpet and garment industries has stimulated the economy of Nepal. Apart from this, the tourism industry is also becoming a significant factor in the surging of the economy. Nepal is also the center of attraction for many foreign investors in the fields of hydroelectricity and other various sectors.
India- Nepal Economic Relations
The two nations have maintained excellent bilateral relations since 1950. The role of India during the transition of Nepal’s primitive economy to a modern one is highly notable. The Indian government also provided financial assistance to Nepal in the launch of its first and second FYP.
India renders cooperation to Nepal over various development projects that cover infrastructures such as airports, roads, bridges, power projects, irrigation, agriculture, bridges, power projects, industrial estates, communication, building construction and others. India aided the construction of the first highway in Nepal — Tribhuvan Rajpath that links Kathmandu to Birgunj in 1956. Along with that, nearly 75% of the East-West Highway that connects the two ends of the country through the Terai region were also finalized by India. The Koshi Barrage, which is near the international border with India and connects the entire eastern part of Nepal with the rest of the nation, was again completed under the supervision of the Indian government back in 1958. Other vital Indian projects include the Gandaki Irrigation project, Devighat Hydropower project.
In terms of trade and commerce, India is the largest trading partner of Nepal. In 2018-19, the total bilateral trade between the two reached USD 8.27 billion., while Nepal’s exports to India in 2018-19 stood at USD 508 million, India’s exports to Nepal was USD 7.76 billion. Nepal mainly imports petroleum products, motor vehicles and spare parts, rice & paddy, other machinery & parts, medicine; hot-rolled sheet in coil, electrical equipment, cement, agricultural equipment, wires, rods, vegetables, cold-rolled sheet in coil, thread, etc. from India.
Indian firms are among the largest investors in Nepal, accounting for more than 30% of the total approved foreign direct investments. About 150 Indian ventures are operating in Nepal engaged in manufacturing, services (banking, insurance, dry port, education, and telecom), power sector and tourism industries. Some prominent Indian investors include ITC, Dabur India, Hindustan Unilever, VSNL, TCIL, MTNL, State Bank of India, Punjab National Bank, Life Insurance Corporation of India, Asian Paints, CONCOR, GMR India, IL&FS, Manipal Group, MIT Group Holdings, Nupur International, Transworld Group, Patel Engineering, Bhilwara Energy, Bhushan Group, Feedback Ventures, RJ Corp, KSK Energy, Berger Paints, Essel Infra Project Ltd. and Tata Power, India etc.
Challenges to Economic Relations
In 2015, Nepal accused India of imposing a blockade that resulted in a severe economic crisis in Nepal. Such grave incidents have caused a sense of mistrust in the minds of Nepalese citizens towards India, which is not a good sign for India.
These are some of the critical issues India needs to address. Under India’s ‘Neighborhood First Policy’, India focuses on improving its ties with the neighboring and culturally linked nation. The visits have yielded positive results as well as Nepal also believes in restoring relations with India. However, with the growing global markets and China extending its arms in Nepal, it is high time India must act swiftly and come up with policies and plans that fortify the economic relations of India and Nepal.
Economy of Sri Lanka
The economy of Sri Lanka is characterized by a mixed economy with both state and private sectors coexisting together and contributing to the nation’s GDP. Post-independence in 1948, Sri Lanka has achieved rapid economic advancement through its various fiscal and trade policies and economic liberalization in 1977. The country has also met the target of the Millennium Development Goal (MDG) in halving extreme poverty faced by the citizens of its nation. Over the years, the country has focused on its export of agriculture, building new industries, software, and information technology. Additionally, new services like airport, seaports are becoming hubs for transshipments. Port of Colombo ranks among the top 25 ports and is one of the busiest ports that carry out foreign trade. In 2019, the share of agriculture in Sri Lanka’s gross domestic product was 7.42 %, the industry contributed approximately 27.4%, and the services sector contributed about 58.24 %. Tourism is another expanding sector that spurs the economic growth of Sri Lanka.
Its per capita gross national produced (GNP) dropped over 200 dollars from 3,968 dollars in 2018 to 3,741 dollars in 2019, while per capita gross domestic (GDP) product dropped from 4,079 dollars to 3,852 dollars following a currency crisis triggered which brought stagflation. The country is relegated to a lower-middle-income country by the World Bank against its previous position as an upper-middle-income nation.
India – Sri Lanka Economic Relations
The relationship between India-Sri Lanka is centuries old, and both countries share healthy bilateral relations. Moreover, the two nations have established solid economic ties over time and are now collaborating over new economic development arenas.
Sri Lanka is one of the largest trading partners of India in the SAARC region. India also contributes the largest share of Foreign Direct Investment in Sri Lanka. The India-Sri Lanka Free Trade Agreement (ISFTA) was signed on December 28 1998, between India and Sri Lanka. The agreement has enabled trade relations to flourish rapidly between the two.
The trade between two nations increased to USD 5 billion in 2017 from USD 0.7 billion in 2001. Additionally, India’s exports to Sri Lanka between 2001-17 grew from USD 0.6 billion to USD 4.5 billion, whereas India’s imports from Sri Lanka grew from 0.06 billion to 0.7 billion during the same period. The bilateral trade between two nations stood at USD 4.59 billion in 2019.
India exports several items to Sri Lanka, mainly vehicles other than railway, lubricating oil, aircraft, space crafts, mineral fuels, ships, boats, pharmaceuticals, edible vegetables, coffee, tea, cotton, etc.
On the other hand, India imports items like residues and waste from the food industries, Base Oil, Poultry feeds, Areca nuts (waste and scrap), paper or paperboard, Pepper, Ignition Wiring Sets, Copper wire, Marble, travertine, alabaster, and other various goods.
In 2015, India and Sri Lanka signed nuclear energy agreement whereby India will aid Sri Lanka in building its nuclear energy infrastructure and providing training to personnel.
Tourism is one department that enhances economic relations between these two historically connected nations. The total number of tourist arrivals from India to Sri Lanka during January-December 2019 was 355,002, i.e. approximately 18.2% of the total tourist arrival. Sri Lankan tourists, too are among the top ten sources for the Indian tourism market. In 2019, the High Commission of India issued more than 107,360 tourist visas in Colombo to facilitate travel between India and Sri Lanka, along with 14,597 Business Visas.
Challenges to Economic Relations
The government of the two nations are still looking for solutions to resolve this issue as it affects their relations and, in turn, hampers the economic ties.
India and its contiguous neighbours — Bangladesh, Bhutan, Nepal, and Sri Lanka are connected by borders and share profound historical and cultural relations. India maintains diplomatic relations with all these nations that have gone through multiple ebbs and flow over the years. All these nations are of great significance to India in terms of culture, economy, and security. India has put forward several policies and agreements to enhance its economic relations with its immediate neighbouring nations, which has resulted in remarkable growth in the overall economy of these five nations. However, on the flip side of the coin, there is no gainsaying that despite sharing such geographical proximity and various bilateral and multilateral trade agreements, these nations cannot develop their economy to its highest potential. The obstacles like high tariffs and non-tariff barriers, heavy import and countervailing duties, lack of infrastructure, improper transportation facilities across borders, informal trade, and China’s coercive intervention in these nations impede the economic expansion of India with its close neighbours. Therefore, India must act promptly on revamping its economic ties with these countries.
GDP growth (annual %) – Bangladesh, available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=BD (last visited on June 08, 2021).
Express News Service, “Bangladesh beats India in per capita income” The Indian Express May 21, 2021.
INDIA – BANGLADESH ECONOMIC RELATIONS, available at: https://ficci.in/spdocument/20184/StatusPaperonIndiaBangladesh.pdf (last visited on June 08, 2021).
South Asian Free Trade Area- The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC). The agreement came into force in 2006. available at: https://www.un.org/ldcportal/south-asian-free-trade-area/ (last visited on June 08, 2021).
Nanda Kasabe, “Bangladesh emerges largest importer of Indian cotton” FinancialExpress April 24, 2018.
DOING BUSINESS WITH BANGLADESH, available at: https://www.hcidhaka.gov.in/pdf/Doing_Business_FAQ_2019_July03.pdf (last visited on June 08, 2021).
India and Bangladesh: Bilateral Trade & Economic Ties: available at: https://www.eepcindia.org/event/2020/asia-pharma-bangladesh/economic.html (last visited on June 08, 2021).
Indian SEZ in Bangladesh, available at: https://www.maritimegateway.com/indian-sez-bangladesh/ (last visited on June 08, 2021).
Indian special economic zone in Bangladesh set to get $115 mn more, available at: https://www.outlookindia.com/newsscroll/indian-special-economic-zone-in-bangladesh-set-to-get-115-mn-more/1891173 (last visited on June 08, 2021).
Press Trust India, “India extends biggest ever line of credit worth $2 billion to Bangladesh” March 10, 2016.
Making the most of Bangladesh–India trade, available at: https://www.eastasiaforum.org/2019/09/17/making-the-most-of-bangladesh-india-trade/ (last visited on June 08, 2021).
India-Bangladesh enclaves- An enclave is the fragmented territory of one sovereign power located inside another sovereign territory. Post-independence Both India and East Pakistan (later independent Bangladesh) retained enclaves totaling about 119 square kilometers within the other’s newly demarcated boundaries.
India- Bangladesh Land Boundary Agreement- Under the Land Boundary Agreement between, the Bangladeshi enclaves in India and Indian enclaves in Bangladesh were transferred on July 31, 2015.
PTI “India announces Rs 4,500 crore assistance to Bhutan” Economictimes.indiatimes December 28, 2018.
India, Bhutan sign pact for first joint venture hydropower project, available at: https://www.livemint.com/politics/policy/india-bhutan-sign-pact-for-first-joint-venture-hydropower-project-11593442538057.html (last visited on June 10, 2021).
India-Bhutan Economic Relations, available at: https://icrier.org/pdf/Working_Paper_384.pdf (last visited on June 10, 2021).
India-Bhutan Relations: Evolution, Challenges & Recent Developments, available at: https://www.iasexpress.net/india-bhutan-relations/#section-3 (last visited on June 10, 2021).
Dipanjan Roy Chaudhury “Long standing Indo-Nepal partnership threatened by vested interests in Kathmandu” Economictimes.indiatimes, June 16, 2020.
India’s limited trade connectivity with South Asia, available at: https://www.brookings.edu/research/indias-limited-trade-connectivity-with-south-asia/ (last visited on June 10, 2021).
‘India’s trade barriers limit Nepal’s export potential’, available at: https://kathmandupost.com/money/2016/03/31/indias-trade-barriers-limit-nepals-export-potential (last visited on June 10, 2021).
The challenges facing India-Nepal ties, available at: https://www.orfonline.org/expert-speak/the-challenges-facing-india-nepal-ties-69458/ (last visited on June 11, 2021).
Impact of demonetization, available at: https://kathmandupost.com/opinion/2018/04/22/impact-of-demonetisation (last visited on June 11, 2021).
Sri Lanka: Share of economic sectors in the gross domestic product (GDP) from 2009 to 2019, available at: https://www.statista.com/statistics/728539/share-of-economic-sectors-in-the-gdp-in-sri-lanka/ (last visited on June 11, 2021).
Sri Lanka downgraded to World Bank lower middle income country as per capita income falls, available at: https://economynext.com/sri-lanka-downgraded-to-world-bank-lower-middle-income-country-as-per-capita-income-falls-71644/ (last visited on June 11, 2021).
India–Sri Lanka Bilateral Relations: Reinforcing Trade and Investment Prospects, available at: https://www.phdcci.in/wp-content/uploads/2018/11/India_Sri-Lanka-Bilateral-Relations_Reinforcing-Trade-and-Investment-Prospects.pdf (last visited on June 12, 2021).
India–Sri Lanka Virtual B2B Meet, available at: https://phdccivirtualmeet.com/india-sri-lanka-15-16-july-2020/ (last visited on June 12, 2021).
India seals nuclear energy pact with Sri Lanka, hopes to push back Chinese influence, available at: https://www.reuters.com/article/us-india-sri-lanka-idUSKBN0LK0Y520150216 (last visited on June 12, 2021).
India Vs. Srilanka CAA.docx – India is Sri Lanka’s largest trade…., available at: https://www.coursehero.com/file/68642507/India-Vs-Srilanka-CAAdocx/ (last visited on June 11, 2021).
INDIA-SRI LANKA ECONOMIC AND TRADE ENGAGEMENT, available at: https://www.hcicolombo.gov.in/Economic_Trade_Engagement (last visited on June 12, 2021).
China launches Sri Lanka’s first satellite as India watches ties grow, available at: https://www.reuters.com/article/us-srilanka-satellite-china-idUSBRE8AQ0HO20121127 (last visited on June13, 2021).
S. Vijay Kumar, “TN police on ‘high alert’ after Sri Lanka passes law on China-backed Colombo Port City” The Hindu May 31, 2021.
Indo-Lanka Maritime Boundary Agreement-The maritime boundary between India and Sri Lanka was established though a pair of bilateral Agreements that were reached in 1974 and 1976. available at: https://sovereignlimits.com/boundaries/india-sri-lanka-maritime (last visited on June 13, 2021).