India's efforts to expand exports across South Asia are facing a growing challenge as economic ties with neighboring countries come under pressure from political tensions, diplomatic mistrust, and competing regional interests.

New Delhi has asked exporters to identify trade barriers in Bangladesh, Nepal, Bhutan, Sri Lanka, the Maldives, Afghanistan, and Pakistan as it seeks to diversify overseas markets and achieve its $1 trillion export target in the current fiscal year.

However, India's merchandise exports to these seven neighboring countries fell 1.3% to $25.7 billion in FY2026. This followed a modest 2% increase in FY2025 and an 8.57% decline in FY2024.

According to The Business Standard, citing The Economic Times, Indian exporters have been asked to report obstacles such as high import duties, licensing requirements, banking restrictions, product standards, and delays in regulatory approvals.

But the declining figures suggest that India's trade difficulties go beyond tariffs and regulatory procedures. Growing political distrust and strained relations with neighbouring countries are also limiting New Delhi's ability to strengthen its economic influence in the region.

Bangladesh is a clear example of this changing regional dynamic. Once a major trading partner under Sheikh Hasina's government, bilateral relations have deteriorated since her removal from power in August 2024. Political differences, public distrust and unresolved diplomatic issues have created uncertainty over future economic cooperation.

A proposed Comprehensive Economic Partnership Agreement (CEPA), discussed during a commerce secretary-level meeting in New Delhi on March 4, 2022, has also made little progress. The lack of movement reflects the wider difficulties in restoring confidence between the two countries.

Despite these tensions, Bangladesh remains an important market for Indian exporters. Indian yarn manufacturers, for example, are seeking faster certification of rules of origin, as Bangladesh accounts for around 45% of India's total cotton yarn exports.

Similar trade difficulties have emerged in Sri Lanka, where Indian chilli and turmeric exporters have faced restrictions over pesticide residue standards. New Delhi is also seeking greater access to regional markets for its chemicals, pharmaceuticals and other products.

Such disputes reflect a broader concern among South Asian countries: protecting domestic industries, maintaining regulatory independence and ensuring that trade agreements serve their own economic interests.

India's relations with other neighbours have also faced periodic challenges. Political disagreements and sovereignty concerns have complicated its engagement with Nepal, the Maldives and Sri Lanka. Meanwhile, China's growing economic presence has increased competition for regional influence, further weakening India's traditional position.

Regional trade arrangements have done little to overcome these divisions. Despite the South Asian Free Trade Area (SAFTA), trade among South Asian countries remains limited. India, Bangladesh and Sri Lanka are also members of the Asia-Pacific Trade Agreement alongside China, while India and the Maldives have started negotiations on a bilateral trade agreement.

Ajay Sahai, director general of the Federation of Indian Export Organisations, has described the latest initiative as important for expanding regional trade and diversifying India's export markets. However, an Indian industry representative acknowledged that political issues must also be addressed to improve commercial relations across South Asia.

This highlights the central challenge facing New Delhi. India wants greater access to neighbouring markets, but trade expansion requires mutual confidence, stable diplomatic relations and respect for the economic priorities of its partners.

For years, India has sought to translate its economic size and geographical advantage into regional leadership. Yet its neighbours are increasingly pursuing independent economic and diplomatic interests, rather than aligning automatically with New Delhi's priorities.

India's $1 trillion export ambition may therefore face a significant obstacle closer to home. Its neighbours remain important trading partners, but economic dependence does not necessarily translate into political trust or acceptance of Indian regional leadership.

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