New Delhi: Pakistan’s move last week towards granting archrival India the status of “most favoured nation" (MFN) is seen as a major confidence-building measure towards normalizing fraught ties, but is also being viewed as the latest building block in the rapid transformation of South Asia’s political economy.

Indian lines of credit to support Nepal’s new Maoist government led by Baburam Bhattarai, Myanmar’s first nominally democratic administration of President Thein Sein, and India allowing duty-free access to 46 types of garments from Bangladesh are some other steps promising to change the economic dynamics of a region considered one of the world’s poorest and housing around one-fifth of humanity.

A paramilitary soldier stands guard as a truck crosses into Pakistan from India, at the Wagah border, 4 Nov 2011 (Reuters )

Plans exist for harnessing Bhutan’s vast hydel power potential by developing an electricity grid linking India’s North-East and beyond—Afghanistan, the Maldives, Nepal and Pakistan.

Former foreign secretary Kanwal Sibal acknowledged the sweeping changes in the region, noting several reasons for the new dynamism in India’s engagement.

“One is the thinking that we have been neglecting our neighbourhood as we sign trade pacts with Japan, South Korea, Thailand, etc.—countries that are further afield," he said. “There is this realization that we are undermining our long-term interest by not opening up our market. The idea is that if we foster closer economic linkages, it will help in better political relations as well."

“In India’s case, the neighbourhood becomes even more critical, for it is by far the largest country and it has, therefore, the added responsibility to ensure that the neighbours do not remain underdeveloped," Dhar said. “The lack of development in countries like Nepal and Bangladesh has meant that their population has less employment opportunities and it is India that has to bear the burden of the migrating population."

Indian officials say the changes are the result of a well-thought-out policy of the government to reach out to the countries in its neighbourhood. “India has shifted away from its earlier position demanding reciprocity when interacting with neighbours," said an official, who did not want to be named. “India is now willing to accept asymmetry in its relations with its neighbours."

With India sharing thousands of kilometres of land and maritime borders with its neighbours, security has been one of the imperatives driving policy.

In a speech at the University of Dhaka during his visit in September, Prime Minister Manmohan Singh said he believed India “will not be able to realize its own destiny without the partnership of its South-Asian neighbours".

Referring specifically to the importance of Bangladesh in India’s security matrix, Singh said, “Our partnership with Bangladesh is important for the stability and prosperity of our own north-east region"—an allusion to the states of Assam, Mizoram, Meghalaya, Tripura, Nagaland, Manipur and Arunachal Pradesh, riven by insurgencies with some of the militant groups using Bangladesh and Myanmar to take shelter and launch attacks against targets in India.

Another factor has been the looming presence of India’s strategic and economic rival China. With Beijing stepping up its economic presence in Sri Lanka, Myanmar, Nepal and the Maldives with big-ticket infrastructure projects, “China is indeed a factor" in India’s neighbourhood calculations, Sibal said.

C.U. Bhaskar, former head of the National Maritime Foundation think tank, is of the view that the “lack of a breakthrough in ties with Pakistan has also played a part" in India shifting its focus towards other countries in the region.

The reference is to the many attempts India has been making at engaging Pakistan in a dialogue to sort out the long-pending Kashmir dispute. The scenic Himalayan region has been the source of continuous friction and three wars over Kashmir since independence from British rule in 1947.

Some external factors, too, seem to have lent a helping hand in shaping the new economic landscape.

In the case of Nepal, the election of the India-educated Bhattarai as the new prime minister has provided New Delhi an opportunity to rescript ties. India extended a $250 million (Rs 1,235 crore) line of credit to the country with a promise to scale it up to alleviate the financial problems the Himalayan country has been facing largely due to the decade-old civil war that ended in 2006. India had been wary of former Maoist prime minister Pushpa Kamal Dahal, who took office after the 2008 elections, but seems more at ease with Bhattarai.

In neighbouring Myanmar, President Thein Sein initiating several political reforms and holding talks with pro-democracy icon Aung San Suu Kyi has created a more conducive environment for India to engage the country. Also significant was Sein ordering work on a controversial $3.6 billion dam to stop after rare public opposition to the Chinese-backed hydropower project.

With Bangladesh, the presence of an India-friendly government in Dhaka, sensitive to New Delhi’s security concerns, has made it easy to make concessions. In December 2009, Sheikh Hasina’s government arrested and handed over to India insurgents belonging to the United Liberation Front of Asom.

Sushanta Sen, principal advisor at the Confederation of India Industry dealing with South Asia, said a part of the change in atmospherics in South Asia has come from the realization “that engaging India economically is beneficial to them".

Support for this theory came from a Nepalese business delegation that accompanied Bhattarai on his visit to India in October.

“If countries like Vietnam and Myanmar can take advantage of India’s growth, why should South Asian nations be deprived of this prosperity?" said Binod K. Chaudhary, a member of the Nepal Parliament and business community, at a meeting in New Delhi—a marked contrast to the days when India was perceived as a threat by smaller countries in the region because of its size and market potential.

According to Dhar, “there is considerable economic sense for India to look towards its neighbours", against the backdrop of the current global economic crisis.

“In recent years, the South Asian region as a whole has started looking up. The region was among the better performers in the post-recession phase; in fact, it was the first to recover from the downturn," Dhar said. “With such economic performance, opportunities are opening up for investors and, therefore, the interest shown by the Indian investors is only logical."