Economic Integration in the Indian Subcontinent: A Study of Macroeconomic Interdependence

The South Asian Association of Regional Cooperation (SAARC) marked its Silver Jubilee in 2010. The SAARC’s charter, which was signed by Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka in 1985, has many similarities to the founding charters of similar regional associations signed elsewhere. While other regional associations have made substantial progress, SAARC has yet to produce notable results. In the context of growing global economic interdependence, it is of interest to assess how far economic growth in each of the SAARC economies has influenced growth in other member countries. Adopting a vector autoregression (VAR) methodology, this paper investigates macroeconomic interdependence in the South Asian region with a view to evaluating its readiness to forge ahead with its integration efforts. The findings of the study reveal that India has been influencing economic growth in the region, as its output variability has been affecting outputs in other member countries. If SAARC has to become successful as a regional bloc, India as the biggest gainer from trade and investment relationships should take some bold steps, which would represent some readiness to part with some of the gains derived by way of trade surpluses.