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Economic Trends and Forces

between Pakistan and India27 April, 2012

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Trade relations today are burdened by history

Partition in 1947:

Pakistan: Militarised, weak political structure, political

centre in Western Pakistan, 55% of population in

East Pakistan

India: Some devolution of power prior to 1947, nascentpolitical elite

About 12.5 million people displaced, unclear borders,

division along predominantly religious lines

India and Pakistan made real

progress under Prime Minister

Manmohan Singh. Under Vajpayee,

we were supposed to sign just a

joint statement at Agra. But under

Manmohan Singh, we made

considerable progress on Sir Creek,

Siachen and Kashmir. Perwez

Musharraf

,

After partition:

Pakistan invades Kashmir in 1965

Bangladesh (initially East-Pakistan), becomes

independent in 1971, resulting in Indo-Pakistani war Nuclear weapons: India (1974), Pakistan (1998)

First bus service between Delhi and Lahore (1996)

Agra Summit (2001)

Cease fire in Kashmir since 2005

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Regional geopolitical complexity undermines bilateral trade potential

1. Border disputesUnstable domestic politics + Complicated international politics

2. Nuclear proliferation

Kashmir;

Tension in the

relationship betweenIndia and China.

Access to water

Nuclear threat is a

3. Terrorism

Source: The Economist Fantasy Frontiers (08/02/2012)

deterrent for bothnations;

Nuclear capability has

led to a deterioration

of the relationship

with US and other

countries.

Mumbai in 2008;

Proximity to

Afghanistan.

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Bilateral trade is undermined by 3 main obstacles:

Ille al trade

Trade Barriers:

India Pakistan

High tariff (20%) Positive list (1,945)

Non-tariff barriers

Cycle trading through third countries

India Pakistan

Singapore/Dubai

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However, trade is a strategic imperative for both countries

Benefits for India

An economically more stable Pakistan Decreased terrorist violence

Less extremist domestic pressures

(e.g. BJPs popularity)

Benefits for Pakistan

Employment and higher incomes

Access to more imported Indian goods

at lower prices

India does NOT have to trade with Pakistan due to minimal trade volumes. However,

there are other benefits for both:

Trade and commerce have been the most

effective way of establishing peace (Keynes)

Soft power and co-dependencethrough economic influence

Minimized influence by China: String

of Pearls, could take advantage of an

alienated Pakistan

Increased investment in the country,resulting in lower support from

external players (e.g. USA, IMF)

Ultimately, will give citizens of both countries a greater stake in each others success.

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Efforts have been taken to liberalize the trade between the two

countries :

State Leadersmeet after 7

years

Pakistan agrees

to grant the

Most FavoredNation (MFN)

status to India

Pakistan announces to

phase out restrictions

on imports by end of

2012 to normalize

trade

India decides to

allow foreign direct

investment from

Pakistan

November, 2011 March, 2012Early April, 2012 Late April 2012

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Trade can still happen in spite of political tensions: A Case of

Mainland China and Taiwan

Rank Country 2010 Volume (US$ bn) YOY change (%)

1 USA 385.3 29.2

2 Japan 297.8 30.23 Hong Kong 230.6 31.8

4 South Korea 207.2 32.6

5 Taiwan 145.4 36.9

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Global Forces should not be under-estimated

Role of the USA:

USA supporter of Pakistan

USA major trade partner with India

Facilitate Trade Opportunities: Qualifying

Industrial Zone example (Israel-Jordan)

Role of China:

China 2nd largest trade partner of Pakistan with

9bn trade volume in 2010

China largest trade partner of India despitelong standing border dispute

China has a strategic interest to keep Pakistan

and India apart

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Issues Still To Be Resolved For Future Trade Ties

Kashmir Issue

Access to Water

Mindset Change

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Backup Slide: India and Pakistan, country overview

Pakistan

190.2 m

India Pakistan

Population (m) 1205.1 190.2

Poverty (%) (UNDP) 37.2% 50%

Population below poverty line 25% 22.3%

Remittance from overseas

(USD$/year)

55bn (2010) 12bn (2012)

GDP ($bn PPP) 4,463 488

Labour force 487.6 58m

Adult Literacy rate 61% 49.9%

Budget surplus (% GDP) -5% -6.6%

Public Debt (% GDP) 51.6% 60.1%

Inflation 6.8% 13.7%

Military expenditure 2.5% 3%

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Sources

Unquenchable Thirst South Asias Water, The Economist, Nov 19, 2011

Lights Off Special report on Pakistan, The Economist, Feb 11, 2012

The Challenges and Potential of Pakistan-India Trade, Zareen Fatima Naqvi and Philip

Schuler, The World Bank

Prospects and Challenges for Increasing Pakistan-India Trade, Ishrat Husain, The Atlantic

Council

State of Vulnerability Foreign Policy, The Economist, Feb 11, 2012

zers

Your Friendly Big Brother The Economist, Feb 18, 2012

India and Pakistan a Working Lunch The Economist, April 14, 2012

Fantasy Frontiers The Economist, Feb 8, 2012

To the Bitter End The Economist, Oct 11, 2011

Pakistans Next Batch of Intrigues The Economist, Nov 17, 2011

Indo-Pakistan Business Relations: Trends and Issues Business and Management Review,

Vol 13 pp 32-36 May, 2011

Building Peace through Trade The Future of Indo-Pak Relations Consumer Unity and Trust

Society, 2011