Aug. 4 (Bloomberg) -- India, Pakistan, Sri Lanka and five other South Asian nations pledged to cut trade barriers to spur growth, underscoring the importance of regional groupings after the collapse of World Trade Organization talks last week.

The leaders of the South Asian Association for Regional Cooperation, or Saarc, which also includes Afghanistan, Nepal, Bangladesh, Maldives and Bhutan, agreed to slash the number of items on the ``sensitive'' list of commodities that are banned from trading and include services in their free-trade pact.

South Asian nations, where a quarter of the world's population lives, have each kept about 800 items outside their free-trade accord -- almost double the number of goods excluded from India's accord with the Association of Southeast Asian Nations, known as Asean. That's undermined trade within South Asia, which contributes less than 2 percent to global commerce.

``Free trade in South Asia was never implemented in the true spirit,'' said Ameeta Sarkar, head of the South Asia division at the Federation of Indian Chambers of Commerce and Industry in New Delhi. ``One hopes this time the countries go beyond the rhetoric.''

Intra-Saarc trade is less than 5 percent of the countries' total, according to the Federation of Indian Chambers. By comparison, trade among Asean accounts for 30 percent of their total while intra-European Union commerce is about 55 percent. Saarc's two-day summit in Colombo ended yesterday.

Frustrated by Hostility

Economic progress in the region has been frustrated by hostility between India and Pakistan, South Asia's biggest economies. India accuses Pakistan of supporting armed extremists in Jammu and Kashmir, its only Muslim-dominated state. Pakistan denies it and says it offers only moral support to separatists.

``We need to open our eyes to the wonder of the great opportunities that we missed,'' said Lyonchhen Jigme Y. Thinley, prime minister of Bhutan, a landlocked country in the Himalayas. ``Furtherance of intra-regional trade is the key to promoting economic growth.''

The World Bank estimates about 40 percent of South Asia's 1.4 billion people live on less than $1 a day. If the region can accelerate growth to 8 percent a year from the average 6 percent since 2000 by opening up for greater trade, poverty can be wiped out in one generation, the World Bank says.

Annual trade between India and Pakistan, which make up more than four-fifths of the $1.2 trillion South Asian economy, is currently at about $1 billion. With trade liberalization, it can be as much as $9 billion, according to the Washington-based institution.

WTO Collapse

The collapse of global trade talks last week at the World Trade Organization in Geneva may help increase the relevance of regional groupings like Saarc.

``The failure of WTO talks is a severe blow to multilateral trading system,'' said Tapan K. Bhaumik, chairman of economic affairs committee of New Delhi-based Associated Chambers of Commerce and Industry. ``Emergence of regional trade blocs will be the way forward.''

Sri Lanka has already forged a free-trade agreement with India to take advantage of the world's fastest growing major economy after China. India also has open borders with Bhutan and Nepal. Pakistan has a free trade accord with Sri Lanka.

The leaders from the eight South Asian nations identified terrorism as the biggest threat to growth in South Asia, home to half the world's poor. They signed an accord to classify terrorism as a crime for the first time.

Indian Prime Minister Manmohan Singh and his Pakistan counterpart Yousuf Raza Gilani, who met Aug. 2 on the sidelines of a Saarc regional summit in Colombo, agreed to adhere to a 2003 cease-fire plan along their border, defusing tensions between the two sides after a series of bombings last month.

At least 52 people died in 23 blasts in two Indian cities while a suicide bomber targeted India's embassy in the Afghan capital, killing at least 40 people. The Afghan and Indian governments said the attack was carried out with the assistance of Pakistan's intelligence service. Pakistan denied the claims.

To contact the reporters on this story: Cherian Thomas in Colombo at cthomas1@bloomberg.netAnusha Ondaatjie in Colombo at anushao@bloomberg.net

Last Updated: August 4, 2008 00:46 EDT