Can India continue to grow in a turbulent neighbourhood? In its latest outlook, the IMF has projected a growth rate of 6.2% for India in 2025, and 6.3% in 2026 – the highest amongst major global economies[1]. India is also a standout performer in the South Asian region, with its neighbours projected to grow at 2-5%, the result of deeper issues within those nations.
Building a robust engagement with India on the energy front can help offset some of the economic and political crises that most of India’s neighbours are facing. The coup in Myanmar and the subsequent civil war is now three years and counting, and the government has lost control over large swathes of the country. Myanmar is now a hub for the production of narcotics, including heroin and amphetamines. Pakistan continues to be racked by economic troubles and multiple insurgencies. Bangladesh witnessed a violent regime change in 2024, made susceptible by economic problems- which are worsening. Sri Lanka, which defaulted on its external debt in 2022, is stabilising and is a bright spot in this otherwise dismal picture. Each of the three – Pakistan, Bangladesh, and Sri Lanka – is currently under an IMF program to restore macroeconomic stability, and to rebuild forex reserves along with other objectives.
Closer economic integration within the region can help smaller regional economies benefit from India’s growth. While Pakistan and Myanmar are currently incapacitated, given their instability, India should build closer links with other more solvent neighbours: Bangladesh, Sri Lanka, Nepal and Bhutan through energy connectivity. Ties with Bangladesh are strained at the moment, but this shouldn’t damage long term cooperation.
There are some common problems that India’s smaller neighbours face. Lack of scale is one. For instance, the power plants and petroleum refineries in Bangladesh and Sri Lanka are much smaller than their Indian counterparts and are expensive to operate. Access to capital is another problem. Nepal has large hydropower potential, but not the funds to build dams to tap it. Moreover, Nepal doesn’t have the electricity demand to absorb this entire potential. Without market access, this potential will remain unutilised.
Bangladesh gets most of its electricity from natural gas from domestic reserves, and since 2018 has increasingly been relying on expensive imports. The country has an on-going electricity shortage[2], which is forcing industry to scale down operations, especially the textile industry, its major exporter. As an emergency measure, the government is considering using imported oil for power generation[3] (more expensive compared to coal). Unfortunately, Bangladesh is also facing a foreign exchange shortage, so importing oil for electricity will be unaffordable in the medium term. Sri Lanka gets 34% of its electricity from hydropower, which is limited and 15% from expensive oil fuel. The state-owned Ceylon Electricity Board controls most of the power generation capacity in Sri Lanka, and it might be unable to undertake new investments, given the government default in 2022.
Meanwhile, India gets over 70% of its electricity from domestically produced coal. Nepal, on the other hand, has plenty of hydropower potential, but neither the capital nor the demand to develop it.
Grid connectivity within South Asia can help with some of these issues. Bangladesh and Sri Lanka can buy cheaper coal-generated electricity from India. Bangladesh is already buying 15% of its electricity supply from India via an established grid, it’s not the same for Sri Lanka for whom grid connectivity is still in the proposal stage[4]. It works both ways: Sri Lanka has significant wind energy potential that it does not have the demand for, but which it can export as renewable electricity to the Indian grid, once connected via a subsea cable.
Likewise, Nepal can sell electricity to consumers in India and other countries (it exported a small amount of electricity to Bangladesh in late 2024)[5]. The first major foreign-funded power project in Nepal, the 900 MW Arun Project is being developed by India’s SJVNL (Satluj Jal Vidyut Nigam) and starting by 2025 end- this will start exporting primarily to India. A network of south Asian export markets in Bangladesh and Sri Lanka can offset concerns of excessive dependence on India.
India relies on imports for over 85% of its petroleum needs but has surplus petroleum refining capacity; it exports over 60 million tonnes of petroleum products annually. India’s petroleum refineries are large and modern–offering economies of scale as well as efficiency.
In contrast, Bangladesh and Sri Lanka have one petroleum refinery each, both built in the 1960s and with small capacities. Upgrading these, or building new ones is a multibillion-dollar proposition that neither country can undertake, despite many efforts. One was a joint venture between the government of Bangladesh and S Alam, a private sector local conglomerate. The S Alam group has been accused by its new government of money-laundering, embezzlement, and other financial crimes, putting the refinery project on halt for now. Sri Lanka’s agreement with China’s Sinopec to construct a new petroleum refinery in Hambantota[6] may not move beyond the planning stage, given the country’s economic problems.
Buying fuel from India is a better option for these economies. India already has petroleum product pipelines to Nepal[7] (from the Barauni Refinery) and Bangladesh[8] (from the Numaligarh Refinery). The logical step will be to connect Sri Lanka with one of India’s southern refineries (Kochi or Chennai), facilitating oil trade between the two countries.
This connectivity can also be extended to natural gas. India aims to increase the use of natural gas in its economy from under 6% at present to 15% by 2030[9]. It will require a network of LNG terminals and pipelines, with some of it already in place, and more in the works. Bangladesh’s two LNG terminals, both floating type are more vulnerable to disruptions such as cyclones: one of these stopped operations for three months in 2024, after cyclonic damage[10]. More pragmatic and cheaper too, for Sri Lanka to link to India’s gas infrastructure.
The flow of energy is easier and less controversial than the movement of goods or people. Cooperation in energy – a regional market in electricity, petroleum, and natural gas can pave the way for greater collaboration in other areas, bringing about economic integration in the region.
Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity.
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References:
[1] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2123826#:~:text=According%20to%20the%20April%202025,over%20global%20
[2] https://www.tbsnews.net/bangladesh/load-shedding-crosses-1000-mw-amid-sweltering-heat-834916
[3] https://www.tbsnews.net/bangladesh/energy/govt-run-more-oil-fired-power-plants-ease-load-shedding-energy-adviser-1140311
[4] https://www.themorning.lk/articles/OpHi4R9CtyjqgRBa3lU7
[5] https://kathmandupost.com/money/2024/11/16/nepal-begins-historic-power-export-to-bangladesh-via-india
[6] https://www.reuters.com/world/asia-pacific/sri-lanka-china-agree-fast-track-sinopecs-37-bln-refinery-hambantota-2025-01-22/
[7] https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=193109
[8] https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1908377
[9] https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1987803
[10] https://www.spglobal.com/commodity-insights/en/news-research/latest-news/lng/081324-bangladeshs-summit-lng-fsru-restart-delayed-further-on-pipeline-damage