India-Pakistan friction threatens South Asia trade at SAARC summit

By Gopal Sharma and Frank Jack Daniel

KATHMANDU (Reuters) - Hostilities between rivals India and Pakistan on Wednesday threatened to scupper efforts by South Asian leaders to boost trade among almost a quarter of the world's people, throwing into doubt any prospect of a regional customs union.

India and Pakistan have fought three wars, and just last month exchanges of fire across the border in disputed Kashmir killed 20 people. The bickering spilled into a two-day regional summit in Kathmandu, and their leaders refused to meet.

Indian and Nepali officials said Pakistan declined to sign three multilateral pacts with the eight members of the South Asian Association for Regional Cooperation (SAARC).

The agreements aim to boost road trade and electricity sharing, including across Pakistan's heavily militarized border with India.

In an apparent reference to Pakistan, India's foreign ministry spokesman said one country had cited incomplete "internal processes" for not signing the pacts, but stopped short of naming it.

Pakistani officials did not respond to telephone calls seeking comment.

Such a refusal threatens efforts by Indian Prime Minister Narendra Modi to make South Asia a viable economic counterweight to China and limit Beijing's role in the region.

Regional integration would happen "through SAARC or outside it," Modi warned the summit, if the grouping failed to agree on the pacts.

Nepal's former foreign secretary, Madhu Raman Acharya, echoed the sentiment, urging the grouping to step up "sub-regional cooperation".

Almost all the leaders at the summit expressed dismay at Sabre's sparse achievements since it was founded 29 years ago aiming to become a European-style union.

Despite a free trade pact since 2006, trade among South Asian nations makes up five percent of their total trade. They share few transport and power links.

China, free of the baggage that makes much of the region wary of India, has built ports and sold weapons across South Asia, where its new Asian Investment Infrastructure Bank has attracted interest, including from India.Through Pakistan, China suggested it play a larger role in the regional grouping, but India rebuffed the proposal.

Modi held two-way talks with every leader except Pakistan's Prime Minister Nawaz Sharif, since neither was ready to make the first move to defuse tension between the nuclear-armed states.

Modi relaxed visa rules, spotlighted new energy ties with Bangladesh and Nepal and promised to cut India's trade surplus with neighbours, but said progress in ties was too slow.

"Is it because we are stuck behind the walls of our differences and hesitant to move out of the shadows of the past?" Modi asked.

(Additional reporting by Gopal Sharma in Kathmandu, Rupam Jain Nair in New Delhi, Michael Martina in Beijing and Katharine Houreld in Islamabad; Editing by Sanjeev Miglani and Clarence Fernandez)