India’s Neighbourhood Reboot, A Rare Opportunity to Replace Suspicion with Trade
Rarely a few months ago, it was all gloom and doom about India’s neighbourhood policy. Delhi was consumed by hand-wringing about why and how India “lost” the Subcontinent. The downturn in relations with Dhaka after the departure of Sheikh Hasina sharpened that acute sense of loss. The question now is different. Can India seize the opportunities for a reboot of regional policy triggered by new political developments across the neighbourhood? The answer is a cautious yes—but only if Delhi is willing to fundamentally reimagine how it engages its neighbours.
Across Bangladesh, Nepal, and Sri Lanka, new governments and new generations have come to power. In each case, the mandate has rejected old forms of dependency and clientelism. In each case, the electorate has signalled a desire for a relationship based on equality, mutual benefit, and respect for sovereignty. And in each case, the biggest opportunity for a fresh start lies in one domain: trade.
This article examines the political transitions across India’s neighbourhood, the historic barriers to regional trade integration, the global context that makes regional cooperation more urgent than ever, and the concrete steps India must take to turn this rare opportunity into lasting economic and strategic gain.
Part I: Bangladesh – From Toxicity to Interest-Based Engagement
In February 2026, Bangladesh held elections that produced a massive mandate for Tarique Rahman and the Bangladeshi Nationalist Party (BNP). The outcome marked a decisive break from the era of Sheikh Hasina, whose Awami League government had maintained a close but increasingly contentious relationship with Delhi. The last 20 months of Hasina’s tenure had been politically toxic, strained by issues ranging from water-sharing disputes to Delhi’s perceived interference in Bangladesh’s internal affairs.
Rahman’s emphasis on “Bangladesh First” is not, as some in Delhi fear, a signal of anti-Indian sentiment. It is, rather, a promise to his own people that Bangladesh’s foreign policy will be driven by Bangladeshi interests, not by the preferences of any external power. For India, this is not a threat; it is an opportunity for a mature, interest-based relationship—one where both sides engage not out of historical sentiment or political obligation, but out of clear, calculable mutual gain.
Over the last decade, Bangladesh has emerged as India’s most important neighbourhood partner. The deep economic interdependence built over this period—in trade, energy, connectivity, and people-to-people contacts—appears to have survived the political toxicity of the last 20 months. But survival is not enough. The relationship now needs fresh political impetus. That impetus must come from trade.
India is Bangladesh’s largest trading partner in the region, but the potential is vastly underutilized. Despite a 4,000-kilometre border, non-tariff barriers, poor infrastructure at land customs stations, and cumbersome administrative procedures have kept trade volumes far below what geography and economic logic would predict. The BNP government has signalled its willingness to address these issues. India must respond with concrete proposals: streamlined border procedures, investment in trade infrastructure, and a willingness to open its market to Bangladeshi goods.
Part II: Nepal – A Generational Political Shift
Nepal’s transition has been equally striking. The sweeping victory of the Rastriya Swatantra Party (RSP) and the rise of Balendra Shah—the charismatic mayor of Kathmandu who has emerged as a national political figure—mark a generational political shift. The old guard of the Nepali Congress and the Communist Party of Nepal (Maoist Centre), which have alternated in power for decades, have been swept aside. In their place is a new generation of leaders who are less burdened by the anti-India reflexes of the past.
For India, this is an opportunity to move beyond the old cycle of distrust. For decades, India-Nepal relations have been trapped in a pattern: Delhi would assert a “special relationship” based on history, culture, and geography; Kathmandu would resent what it perceived as Indian interference; and both sides would retreat into suspicion and periodic crisis.
The new leadership in Kathmandu is not interested in that cycle. They are not looking for a patron; they are looking for a partner. They want trade, investment, connectivity, and energy cooperation—not lectures on how to manage their foreign policy. India must shed the rhetoric of a “special relationship” in favour of one grounded in equality and genuine respect for Nepal’s sovereignty.
The economic logic is compelling. India remains Nepal’s largest trading partner—but barely. China has been making steady inroads, offering infrastructure investment and market access. To remain relevant, India must make its own market more accessible to Nepali goods, invest in cross-border infrastructure (particularly rail links and integrated check posts), and cooperate on hydropower—a sector where Nepal has vast untapped potential and India has massive energy demand.
Part III: Sri Lanka – Breaking Free from Historical Animosity
Sri Lanka had, in fact, begun the positive evolution of the region even before the transitions in Bangladesh and Nepal. Colombo, too, has a new generation in charge since the 2024 elections. The government has been moving toward pragmatic engagement with Delhi and breaking free from the historical political animosity that long coloured the ruling party’s relationship with India.
For decades, Sri Lankan politics was defined, in part, by suspicion of Indian intentions—a legacy of the 1987 Indo-Sri Lanka Accord, the Indian Peace Keeping Force (IPKF) intervention, and the perception that Delhi favoured Tamil interests over Sinhalese ones. That legacy has not disappeared, but it has faded. The new generation of Sri Lankan leaders is more focused on economic recovery—from the devastating 2022 economic crisis—than on historical grievances.
India has been a critical partner in Sri Lanka’s recovery, providing lines of credit, debt restructuring support, and essential supplies during the worst of the crisis. But trade remains the missing piece. Bilateral trade is far below its potential. According to World Bank data, the bilateral trade deficit is approximately $1.5 billion in India’s favour. Sri Lankan exporters face non-tariff barriers, regulatory hurdles, and competition from Indian domestic producers.
A comprehensive Economic and Technology Cooperation Agreement (ETCA), long discussed but never finalized, could transform the relationship. It would give Sri Lankan exporters preferential access to the Indian market, while giving Indian investors greater certainty in Sri Lanka. The new government in Colombo appears open to such an agreement. Delhi must show the same openness.
Part IV: The Historic Failure – India’s Self-Defeating Protectionism
Taken together, these transitions present India with a rare opportunity to reimagine its regional policy. But opportunity alone is not enough. For decades, India’s regional trade policy has been hobbled by self-defeating protectionism. It has taken a peculiarly perverse trade policy in Delhi to defeat India’s natural advantages of geography and economic history.
Consider the absurdities. India shares a 4,000-kilometre border with Bangladesh, yet Bangladesh’s exports to India are a fraction of what they could be. The narrow Palk Strait separates peninsular India from Sri Lanka, yet the West remains Sri Lanka’s main export destination, while China is the dominant source of its imports. India remains Nepal’s largest trading partner—but barely. Delhi has systematically neutralised the extraordinary advantage of an open border through poor infrastructure, countless non-tariff barriers, and a bureaucratic culture that treats each truck crossing the border as a potential smuggling operation.
Indian trade negotiators who rail against Western protectionism become its most ardent practitioners when it comes to their own neighbours. India objects to its massive trade deficit with China—over $80 billion—by refusing to accept that it must open its own market to its neighbours. The bilateral trade deficit with Nepal is small; with Sri Lanka, it is manageable. But Delhi finds it difficult to offer its neighbours the very market access it demands from Beijing.
This hypocrisy is not lost on India’s neighbours. They see a India that demands openness from others but practices closure at home. They see a India that lectures the West on free trade but erects barriers against the poorest economies in its own neighbourhood. And they have responded by diversifying their trade relationships—toward China, toward Southeast Asia, and beyond.
Part V: The Global Context – Fragmentation Creates a Regional Logic
The global trading system that emerged after the Cold War is fragmenting. The return of tariffs, sanctions, and geopolitical competition has made export-led growth more uncertain for smaller economies. The World Trade Organization’s dispute settlement mechanism is paralysed. Major powers are withdrawing from multilateral commitments. Supply chains are being reshored, nearshored, and friend-shored.
This global uncertainty creates a new regional logic. For Bangladesh, Nepal, and Sri Lanka, the Indian market offers scale and proximity that no distant partner can match. The consumer market of 1.4 billion people, growing rapidly, is right next door. The logistics costs are lower. The cultural and business familiarity is higher. And the political risks—of sudden sanctions, of geopolitical disruption—are lower.
Meanwhile, turbulence in the Gulf is beginning to have a deleterious impact across South Asia. The Gulf has long been the Subcontinent’s deep reservoir of energy, economic opportunity, and diasporic remittances. But the war in Iran, the instability in the Strait of Hormuz, and the shifting geopolitics of the Gulf are putting that reservoir under stress. India has already begun supporting its neighbours with the supply of essential hydrocarbon commodities—a sign of what deeper cooperation on economic and energy security could look like.
This is a moment to consider deeper cooperation on economic and energy security with Bangladesh, Bhutan, and Nepal in the east, and Sri Lanka and the Maldives in the south. Such engagement would serve as a solid anchor against politically driven instability in bilateral relations. Getting there requires neither the much-vaunted revival of the South Asian Association for Regional Cooperation (SAARC)—a forum that has been effectively moribund for years—nor elaborate new regional forums. It requires only political will, policy innovation, and institutional agility.
Part VI: The Mindset Shift – From Favour to Partnership
But none of this can be achieved without a change in mindset. For too long, India’s neighbourhood policy has rested on an implicit assumption: that what India offers is a favour, and that smaller neighbours should respond with gratitude and political deference. This assumption has produced precisely the political resentment in the neighbourhood that India seeks to avoid.
When India provides a line of credit to Nepal or a grant to Sri Lanka, it expects something in return: support on international issues, restraint in courting China, or deference on bilateral disputes. When that expectation is not met, Delhi feels betrayed. But from the perspective of Kathmandu or Colombo, India’s “favours” have often come with strings attached, while China’s investments come with fewer political conditions. Whether that perception is accurate is less important than the fact that it exists.
The new governments in Dhaka, Kathmandu, and Colombo represent electorates that have rejected old forms of dependency and clientelism. They are not looking for patrons; they are looking for partners. This requires a fundamental shift in Delhi’s approach. Agreements must produce visible, measurable benefits on both sides. Connectivity must improve, markets must open, and economic cooperation must translate into jobs, exports, and growth—for India’s neighbours and for India itself.
This is not altruism. It is enlightened self-interest. A prosperous, stable neighbourhood is good for India. A neighbourhood that trades with India is a neighbourhood that has a stake in India’s success. A neighbourhood that sees India as a partner, not a hegemon, is a neighbourhood that will resist the siren songs of other powers.
Part VII: What India Must Do – Concrete Steps
The rhetorical shift is necessary but not sufficient. India must also take concrete steps:
First, negotiate comprehensive trade agreements with Bangladesh, Nepal, and Sri Lanka. These agreements must go beyond tariff reductions to address non-tariff barriers, rules of origin, sanitary and phytosanitary standards, and trade facilitation. They must be ambitious enough to matter, but flexible enough to accommodate the different levels of development and capacity.
Second, invest in cross-border infrastructure. Integrated check posts (ICPs) at key border crossings, rail links, inland waterways, and transit corridors should be prioritised. The India-Bangladesh Protocol on Inland Water Transit and Trade has been a success; it should be expanded. The India-Nepal rail links have improved; more are needed.
Third, simplify trade procedures. The transaction costs of trading across South Asian borders are among the highest in the world. Digitisation, single-window clearance, and mutual recognition of standards can dramatically reduce these costs. India has made progress on its own trade facilitation; it must extend that progress to its borders.
Fourth, open the Indian market. This is the hardest step, politically. Domestic producers will resist. But the evidence is clear: Indian industry has nothing to fear from Bangladeshi garments, Nepali hydropower, or Sri Lankan tea. In fact, greater regional trade integration would make Indian industry more competitive by giving it access to regional supply chains.
Fifth, link trade to energy and economic security. The Gulf turbulence is not going away. India should work with its neighbours to create a regional energy security framework: joint reserves, emergency sharing protocols, and coordinated responses to supply disruptions. This would not only increase resilience but also build trust.
Conclusion: A Rare Window
Across India’s neighbourhood, new governments and new generations are in power. In Bangladesh, the BNP’s “Bangladesh First” approach opens the door for an interest-based relationship. In Nepal, the RSP’s generational shift offers an escape from the old cycle of distrust. In Sri Lanka, the post-2024 government is breaking free from historical animosity. Taken together, these transitions present India with a rare opportunity to reimagine its regional policy.
The biggest possibilities are in trade. For decades, India’s self-defeating protectionism has defeated its natural advantages of geography and economic history. The global fragmentation of the trading system, the turbulence in the Gulf, and the new leadership in the neighbourhood all point in the same direction: deeper regional economic integration is not just desirable; it is necessary.
But seizing this opportunity requires a change in mindset. India must stop treating its neighbourhood as a sphere of influence to be managed and start treating it as a partnership to be built. It must stop offering favours and start offering market access. It must stop demanding deference and start producing mutual gain.
The window is open. It will not remain so forever. India must act.
5 Questions & Answers Based on the Article
Q1. What political transitions have occurred in Bangladesh, Nepal, and Sri Lanka, and why does the author describe them as a “rare opportunity” for India?
A1. In Bangladesh, the February 2026 elections gave a massive mandate to Tarique Rahman and the Bangladeshi Nationalist Party (BNP), ending the Hasina era. In Nepal, the Rastriya Swatantra Party (RSP) won a sweeping victory, and Balendra Shah has risen as a national figure—marking a generational political shift. In Sri Lanka, a new generation has been in charge since the 2024 elections, moving toward pragmatic engagement with Delhi and breaking free from historical animosity. The author describes this as a rare opportunity because all three new governments have rejected old forms of dependency and clientelism, seeking partnership rather than patronage. This creates a window for India to reimagine its regional policy based on equality, mutual benefit, and genuine respect for sovereignty.
Q2. What does the author identify as the historic failure of India’s regional trade policy?
A2. The author identifies self-defeating protectionism as the historic failure. Despite natural advantages of geography and economic history—including a 4,000-kilometre border with Bangladesh and the narrow Palk Strait separating India from Sri Lanka—India has systematically neutralised these advantages through poor infrastructure, countless non-tariff barriers, and a bureaucratic culture that treats cross-border trade with suspicion. The author points to the hypocrisy where Indian trade negotiators rail against Western protectionism while becoming its most ardent practitioners when it comes to neighbours. India objects to its massive trade deficit with China (over $80 billion) but refuses to open its own market to its smaller neighbours.
Q3. How does the global context—fragmentation of the trading system and turbulence in the Gulf—create a new regional logic for South Asia?
A3. The global trading system is fragmenting, with the return of tariffs, sanctions, and geopolitical competition making export-led growth more uncertain for smaller economies. The WTO dispute settlement mechanism is paralysed. Simultaneously, turbulence in the Gulf (including the war in Iran and instability in the Strait of Hormuz) is disrupting the Subcontinent’s deep energy, economic, and diasporic ties with the Gulf. This creates a new regional logic: for Bangladesh, Nepal, and Sri Lanka, the Indian market offers scale, proximity, lower logistics costs, and lower political risks that no distant partner can match. India has already begun supporting its neighbours with essential hydrocarbon supplies, pointing toward deeper cooperation on economic and energy security.
Q4. What is the author’s critique of India’s traditional assumption in neighbourhood policy, and what mindset shift is required?
A4. The author critiques the assumption that what India offers is a favour, and that smaller neighbours should respond with gratitude and political deference. This assumption, the author argues, has produced precisely the political resentment that India seeks to avoid. When India provides a line of credit or a grant, it expects support on international issues, restraint in courting China, or deference on bilateral disputes. Neighbours, however, perceive India’s “favours” as coming with strings attached, while China’s investments come with fewer political conditions. The required mindset shift is from favour to partnership—treating neighbours as equal partners, producing visible, measurable benefits on both sides, and recognising that deeper regional trade integration serves India’s own enlightened self-interest.
Q5. What five concrete steps does the article propose for India to seize the opportunity in its neighbourhood?
A5. The five concrete steps are: (1) Negotiate comprehensive trade agreements with Bangladesh, Nepal, and Sri Lanka, addressing non-tariff barriers, rules of origin, and trade facilitation. (2) Invest in cross-border infrastructure including integrated check posts, rail links, inland waterways, and transit corridors. (3) Simplify trade procedures through digitisation, single-window clearance, and mutual recognition of standards to reduce transaction costs. (4) Open the Indian market—the hardest step politically—by recognising that Indian industry has nothing to fear from regional competition and would become more competitive through regional supply chains. (5) Link trade to energy and economic security by creating a regional energy security framework with joint reserves, emergency sharing protocols, and coordinated responses to Gulf supply disruptions.
