A regular concern of this blog is the internal constraints on India’s rise as a great power.  But for decades the country’s global aspirations also have been encumbered by a quite problematic regional environment.  Unlike China, India has had the misfortune of residing in a highly volatile neighborhood, surrounded by weak and unstable, and often hostile, countries that habitually top various failed-states indices.   Fortunately, and somewhat unexpectedly, the situation is starting to improve.

As detailed in a previous post, India’s relations with Pakistan, its perennial arch-nemesis, are warming, driven by growing trade ties.  And against all odds, a remarkable measure of political stability has taken root in Islamabad.  The civilian government is weak and unpopular but looks like it will become the first one in the country’s 65-year existence to complete its allotted term.  It’s even managed to claw back authority in the foreign policy arena from the overbearing military establishment.

To be sure, Pakistan’s long-term prospects continue to be cloudy at best and the ever-latent rivalry with India will be re-ignited by coming regional scramble to secure influence over post-NATO Afghanistan.  But the present situation along India’s western flank is much better than one could have imagined just a year ago.

Ditto for the eastern flank, where the national fortunes of Bangladesh and Myanmar are trending upwards.  Not too long ago, Bangladesh was a pitiable basket case, known for its cyclone disasters, ferry boat tragedies and outbreaks of famine.  But the country has maintained a 5-6 percent growth rate for much of the last two decades and earned a spot on Goldman Sachs’ “Next 11” roster of countries with a high potential to become economic success stories.  It is a prime destination for labor-intensive manufacturing that is now migrating out of China and a hub for the global garment trade.  It has largely tamed the scourge of religious radicalism that keeps Pakistan, its erstwhile sibling, aflame.  And it has now embarked upon a cooperative approach vis-à-vis India, eschewing the confrontational line it pursued for decades.  Prime Minister Manmohan Singh’s visit to Dhaka last September is widely seen as inaugurating a new era in India-Bangladesh relations.

Like Pakistan, Bangladesh is just four years removed from military dictatorship and it is conceivable that the army will once again storm out of its barracks given the prospect of political turbulence as the 2013 parliamentary elections approach.  The country also faces long-term environmental challenges.  Still, the overall situation there is a welcome relief to security managers in New Delhi.

Things also are suddenly looking up in Myanmar, which was part of the British empire in India until the mid-1930s.   Despite being blessed by abundant natural resources, decades of economic mismanagement made it one of Asia’s poorest countries.  Repressive, xenophobic and quixotic military rule guaranteed that it was an international pariah subject to Western embargoes as well as suspicion by even its Association of Southeast Asian Nations (ASEAN) brethren.

But a series of dramatic political and economic reforms over the past year, which have prompted a lifting of U.S. and European sanctions, have given rise to new hopes.   According to media reports (here and here), Yangon, the country’s commercial hub, has become a boomtown filled with foreign investors searching out long-denied deals.  Earlier this month, the International Monetary Fund released a report highlighting the country’s “historic opportunity” to become the next economic frontier in Asia.  Similarly, the Asia director of the United Nations Development Program notes that Myanmar “could become the economic engine of the region,” while an Asian Development Bank official states that it “has the capability for private-sector growth that we haven’t seen anywhere else for a long time.”

The new stability and prosperity among the immediate neighbors promises to bring economic and security dividends to New Delhi.   For all the talk about the country as a rising global actor, it remains a less than “fully convincing hegemon within its own subregion,” as David Malone, former Canadian ambassador in New Delhi, recently put it.  Despite the common civilizational and historical links that permeate South Asia, India up to now has been unable to integrate the area in the same way that China has economically stitched together the much more culturally diverse and geographically dispersed East Asian region.

The result is a strategic paradox for India: A broadening diplomatic, economic and even military profile in East Asia, juxtaposed with a rather lackluster record of leadership in its own back yard.  In recent years, New Delhi’s economic diplomacy has been firing on all cylinders in East Asia, penning trade and commercial deals with Japan, South Korea, Thailand, Malaysia, Singapore and the ten-country ASEAN.  It is also deepening security relations with Japan, South Korea and Vietnam.  Yet until recently, it has not displayed the same dynamism in its sub-continental diplomacy.  Conspicuously unsuccessful were efforts at promoting cross-border economic cooperation via the South Asian Association for Regional Cooperation – a forum largely created by New Delhi.

But that may be changing.  Deepening economic linkages with Pakistan promise to enliven the 2006 South Asia Free Trade Agreement which up until this point has been all but a dead letter.  Last week, New Delhi also approved an ambitious $7.6 billion gas pipeline project that runs from Turkmenistan through Afghanistan and Pakistan to India.

New Delhi has become more magnanimous and imaginative in its relations with Dhaka.  It has liberalized Bangladeshi apparel imports; offered generous terms for a free trade accord geared toward services to complement an existing pact for goods; and worked out agreements to settle complex border disputes and nettlesome water-sharing problems.

With Myanmar distancing itself from China’s longtime patronage, New Delhi is moving with celerity to fill the void, including developing the deep-water port of Sittwe on the Bay of Bengal.  This landmark $120 million project, scheduled for completion next year, would directly link India’s economically-isolated and insurgency-ranked northeastern states to the growing markets of Southeast Asia and so is significant for both commercial and geopolitical reasons.

Citing Sri Lanka’s flirtations with China and New Delhi’s slow response to the toppling of the democratic government in the Maldives in February, some Indian pundits lament the erosion of regional influence.  But India’s position in the neighborhood, at least for the time being, is actually brightening.  Now if New Delhi could only get its act together on domestic policy, it would go places.

This commentary was originally posted on Chanakya’s Notebook.  I invite you to follow me on Twitter.