South Asia opens up: How trade reforms impact households and sectors

Over the next decade, about 280 million people will come of working age in South Asia. The region needs a robust growth engine to create jobs for these labor market entrants. International trade emerges as a promising source to boost economic growth.

South Asia has long been the least open emerging market and developing economy (EMDE) region to global trade. In 2024, exports of goods represented only around 12 percent of GDP in South Asia—about half the share in other EMDEs. In part, this reflects the region’s exceptionally high import tariffs, with domestic manufacturing firms facing average tariffs on intermediate inputs that are more than double those in other EMDEs (figure 1A, B).

Major reforms are now underway to open South Asian economies to global trade.

India’s new free trade agreements (FTAs) with the European Union and the United Kingdom are doubling the scope of preferential international market access for domestic firms from currently one-sixth to one-third of global GDP (figure 1C). Sri Lanka, too, is planning to gradually eliminate a significant portion of its para-tariffs—the country’s sizable border charges and taxes on imported goods that are levied in addition to statutory tariffs (figure 1D). 

Note: Panels are based on figures B1.1.1B, B1.1.1C, B1.1.2A, and B1.1.4A of the April 2026.

India’s tariff-cut commitments toward the European Union and the United Kingdom as well as Sri Lanka’s proposed para-tariff phase-out would each represent a 9-percentage-point reduction in the simple average ad valorem import duties applied. The most recent South Asia Economic Update examines the distributional impacts of these reforms on households and export sectors.
 

Impact across households

Both trade reforms are expected to result in broad-based consumption and real income gains for households across the entire income distribution (figure 2). Consumers in rural areas would particularly benefit from tariff cuts on manufactured goods, which represent a larger share in rural households’ expenditures than in urban households. The expected magnitude is exceptionally strong in Sri Lanka, where the removal of para-tariffs could raise real income by 2 percent on average, with larger increases for the poorest households.

Note: Panels are based on figures B1.1.2F and B1.1.4F of the April 2026 South Asia Economic Update.

Impact across export sectors

Both trade reforms reduce import barriers especially for emerging export industries with moderate revealed comparative advantage and currently high tariffs, such as textiles and leather in India and food and beverage manufacturing as well as rubber and plastics in Sri Lanka (figure 3). In contrast, both countries’ export industries with the strongest comparative advantage are already operating in sectors with low tariffs before the reforms, while sectors without revealed comparative advantage remain protected.

Note: Panels are based on figures B1.1.3A and B1.1.5A of the April 2026 South Asia Economic Update.

Policies

In sum, the trade reforms underway in South Asia are expected to generate broad-based real income gains for households and be especially pro-poor in Sri Lanka. At the same time, they are expected to increase competitive pressure—but also lower intermediate input costs—for emerging export sectors. Policy makers can maximize the gains from these reforms by removing obstacles to firms’ growth and to the reallocation of workers toward export-linked jobs.

Source : World Bank