The Impact of India-Afghanistan Relations on the Economic Situation in Afghanistan

Abstract

Afghanistan lost nearly all its economic infrastructure during more than three decades of war. Following the events of September 11 and the establishment of a new order, the country adopted a market-based economic system in its new constitution and pursued policies aligned with this model. Currently, Afghanistan maintains trade and transit agreements with neighboring and South Asian countries, including India, a key economic power in the region. Globally, India ranks as one of the largest developing nations and the fourth-largest economy, offering substantial economic opportunities for both countries through enhanced bilateral ties. Over the past decade, India has funded several development projects in Afghanistan, primarily in infrastructure. These initiatives have not only provided thousands of jobs but also laid the groundwork for the growth of other economic sectors. For instance, the construction of the Salma Dam has supplied electricity to western provinces and enabled the irrigation of thousands of hectares of farmland. In terms of investment, India has expressed interest in extracting the Hajigak mine in Bamiyan, which could create 32,222 to 35,222 jobs and generate $322 million annually for Afghanistan. Bilateral trade relations reflect India’s need for raw materials from Afghanistan and Central Asia, while these regions serve as significant markets for Indian goods. Afghanistan, strategically positioned as a bridge between India and Central Asia, also relies on India for access to global markets. This study examines the economic opportunities and challenges of India-Afghanistan relations and evaluates India's role in Afghanistan’s trade, investment, and reconstruction sectors. Findings highlight India’s influential role in Afghanistan’s political, social, and economic transformation, emphasizing the strategic alliance's mutual benefits. However, Afghanistan must strengthen its security and defense to address shared threats, particularly from Pakistan, to fully leverage this partnership.