This paper is an attempt to understand the incentives for and progress towards greater economic integration in South Asia. This sub-region comprises seven economies, namely, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka, which are members of South Asian Association for Regional Cooperation (SAARC). The first concrete proposal for establishing a framework for regional cooperation in South Asia was made by the former president of Bangladesh, Ziaur Rahman, in May, 1980. It was promptly endorsed by Nepal, Sri Lanka, the Maldives and Bhutan but India and Pakistan were initially skeptical. Their acceptance of the SAARC concept was slow, hesitant and delayed. Its charter was accepted by all the seven members in mid-1985. Success of similar regional trade and economic integration groups in other parts of the globe had impressed the members. Therefore, they created it primarily for holding consultations on regional issues of mutual interest as well as collaborating in international fora for mutual benefit. Regional cooperation that SAARC initially emphasized was on the political level, for which the foreign ministers of the seven countries met. Members also intended to explore the possibilities of cooperation on economic and social issues, but that was secondary.

Due to the legacy of conflicts, the member countries of the SAARC were initially tentative in coming together. Lack of enthusiasm, poor understanding of benefits of regional integration and overly cautious conduct made the process of formulating regional integration-related agreements and implementing them in an effective and efficacious manner a time-consuming and difficult one. SAARC often gave an impression of being a forum where the member countries met to carry on discussions and organize seminars and conferences, rather than thoughtfully devise pragmatic sub-regional economic integration policies for the common good of them all and implement them in a methodical manner so that their GDP growth and intra-regional trade and investment can be accelerated and poverty ameliorated (Katzenstein, 2000).