India's Neighbourhood Policy Risks Lost Economic Opportunity

India's relationship with its South Asian neighbours sits at an impasse, and the deadlock carries real economic costs, according to Nitin Pai, co-founder of the Takshashila Institution. New governments in Nepal, Bangladesh, Sri Lanka and Maldives, along with a young king in Bhutan and a resurgent Pakistan, have changed the political dynamics. New Delhi's default approach over the past two decades has been to prioritise relations with the US, China and East Asia, putting the subcontinental neighbourhood on the back burner. That strategy helped India's economy triple in real terms, Pai said. It left a legacy of punitive restrictions and unmet potential.

The risk now is that India forfeits long-term influence in markets where it holds natural advantages. Nepal and Bhutan want to export hydroelectric power. Bangladesh needs river water and intermediate inputs for its garment industry. Sri Lanka and Maldives need fuel, food, finance and market access. India needs electricity from its Himalayan neighbours, transit through Bangladesh and maritime cooperation with Sri Lanka and the Maldives. On paper the deals are win-win. In practice they rarely happen, Pai wrote in a Mint column.

The exposure extends beyond bilateral trade. A generation ago, Nepali families sent children to India for higher education. Now they go to Singapore. Maldivians prefer Kuala Lumpur to Kochi. Bhutanese officials connect with Silicon Valley. This drift deepens India's relative isolation in its own backyard. International migration has linked South Asian societies to Europe, Australia and West Asia, bypassing New Delhi entirely.

Pai described a recurring pattern in India's approach to the region. First, a strong desire to keep external powers from gaining influence. Second, recognition that asymmetric concessions are needed but rarely delivered. Third, a preference for bilateralism over multilateral forums such as Saarc, where smaller neighbours could coalesce. Fourth, treating Pakistan as a separate category. Fifth, denominating cooperation in slow-moving infrastructure projects run by public-sector units. The cost of this pattern is measured in lost trade, stranded energy projects and the steady diversion of regional elites toward other economic hubs.