TRADE RELATIONS BETWEEN INDIA AND PAKISTAN

India and Pakistan propose to expand economic linkages with each other despite problems persisting in their political relations. Prime Minister Nawaz Sharif told media persons, during Prime Minister Vajpayee's February visit to Lahore, that Pakistan would hold consultations with India on the issue of granting Most Favoured Nation (MFN) status to India which indicates scope for restoration of bilateral trade ties. In tune with such positive signs it is observed that India-Pakistan bilateral trade has risen 14-fold over the past decade from Rs 47.15 crore in 1987-88 to Rs 463.92 crore in 1998-99. To that extent, bilateral trade ties are the only hope in normalising India-Pakistan relations.1 On April 10, 1999, the largest subcontinental neighbours signed a memorandum of understanding in New Delhi to set up the India-Pakistan Chamber of Commerce.

India-Pakistan economic relations can be divided into trade which is done between business communities, and cooperation which is conducted through governments. Scope for cooperation at the government level is generally limited to infrastructure related projects in sectors like the railways, power and telecommunications. However, last year, New Delhi imported onions and sugar from Islamabad purely to cater to the severe shortages of these commodities in India which is only an ad hoc measure, besides the on-going talks over the sale of power supply to India. Though businessmen conduct trade, the government still has to play a facilitatory role and promote this activity by relaxing the visa/travel regime and reducing tariff barriers which are pre-requisites for trade promotion.

This paper examines India-Pakistan economic relations in terms of trade ties which operate at the level of businessmen in either country. The paper discusses the dichotomy in Pakistani perceptions which favour and oppose trade ties. It then provides a brief overview of the Pakistani economy in order to understand its trade policy; besides the problems constricting bilateral trade flows, like the MFN status issue. The paper brings out the factors propelling trade ties and analyses the scope/prospects for improvin

g bilateral trade. In conclusion, it suggests some steps to promote mutual trade ties.

Introduction

India-Pakistan trade ties have three components, namely: "black" or illegal trade transacted through the land borders; circular or "informal" trade which is carried out through "third" countries and re-exported from there to Pakistan; finally, formal trade through imports/ exports of merchandise through all recognised seaports, airports, land customs stations and inland container depots. The illegal trade channels are smugglers who operate along the 675 km unfenced stretch of the Rajasthan sector along the contiguous Indo-Pakistan border; besides carriers, khepias who misuse personal baggage through the "green channel" facilities at international airports. Circular trade is conducted through agents who are stationed in free ports like Singapore or Dubai and estimated to be US $1 billion. Thus, the combined volumes of illegal and circular trade are much larger than formal levels of trade which in reality, therefore, amounts to "pseudo" trade between the two countries.

History of India-Pakistan bilateral trade

1. In 1948-49, more than 70 per cent of Pakistan’s trading transactions were with India, 63 per cent of Indian exports to Pakistan. The end of 1949, however, witnessed a rapid downtown in Indo-Pak trade relations. Although between May 1948 and March 1960 as many as 11 Indo-Pak Trade and Payments Agreements were concluded, the bilateral official trade declined from Rs. 184.06 crore of Indian rupees in 1948-49 to Rs. 13.63 crore in 1958 and to an all time low of Rs.10.53 crore in 1965-66.

2. There was a trade embargo between India and Pakistan after the war of 1965 and it continued till 1974. During this period, several efforts were made by India to revive the trade, but nothing tangible could be achieved.

3. A trade protocol (Shimla Agreement) was signed on 30 November 1974 for lifting the trade embargo with effect from 7 December 1974. In an effort to diversify trade the Pakistan Government permitted its private sector to trade with India with effect from 15 July 1976.

4. In November-December 1981 Pakistan joined the Delhi International Trade Fair. Thereafter, exchange of trade delegations between the two neighbours occurred in quick succession.

5. In June 1983, a Joint Business Commission was constituted, with the main objective to accelerate the decision making process on matters seeking government approval and suggesting new items for bilateral trade.

6. In 1986, India and Pakistan became signatories to the final document of South Asian Association for Regional Cooperation (SAARC) which committed itself to promote the welfare of the people of South Asia.

7. In July 1989, Pakistan agreed to import 322 Indian items. The installation of Nawaz Sharif Government in 1991 also boosted Indo-Pak trade, and trade touched Rs. 522.59 crore in 1992-93 from Rs. 168.09 crore in 1990-91.

8. South Asian Preferential Trading Arrangement (SAPTA), concluded in December 1995, introduced an integrative trading arrangement in the region. At the end of three rounds of trade negotiations, a total of 5550 tariff lines have been included for tariff concessions.

9. India accorded Most Favoured National (MFN) status to Pakistan in 1996. In the same year, Pakistan increased its positive list to 600 items that may be legally imported from India.

10. In 2003 Pakistan’s Prime Minister announced the inclusion of another 78 items to the positive list. Most of the permissible items include chemicals, minerals and metal products. Items such as cardamom and tea still have the high tariffs.

11. In 2003 India’s trade complementarity index (TCI) 1was 50 percent while Pakistan’s TCI with India was only 14 percent. India’s TCI with Pakistan was highest in 2007 and Pakistan enjoyed the highest TCI in 2010 thus improving its complementarity with India which is a positive sign for Pakistan.

12. During the third round of Composite Dialogue process discussions in March 2006, both countries agreed to discuss the new shipping protocol, the deregulations of air services, the joint registration of basmati rice, an increase in the size of Pakistan’s positive list, proposals for information-technology-related medical services and export insurance by India, and work on a memorandum of understanding for cooperation in capital markets by Pakistan.

13. During the 6th Round of Commerce Secretary Level Talks in November 2011 at New Delhi, both countries agreed to develop mechanisms to address issues of Non-Tariff Barriers. The two countries have initialled three agreements i.e., Customs Cooperation Agreement, Mutual Recognition Agreement and Redressal of Trade Grievances Agreement.

14. In November 2011 Pakistan decided to grant the Most Favoured Nation (MFN) status to India to boost bilateral trade.

Objective

To reduce tensions and build public support for the peace process in India and Pakistan by documenting and publicizing the potential economic benefits to all parties from a peaceful resolution of bilateral issues and close economic cooperation.

Rationale

Government efforts to improve bilateral relations between India and Pakistan are constrained by public pressure that are opposed to the peace process. The potential upside of compromise and reconciliation has never been adequately documented or portrayed to counter public perception regarding the downside. The strategy envisioned is to shift the focus of bilateral relations from the military and political spheres to economics.

India's vibrant economic growth in recent years has been noted and become a cause of concern in Pakistan, which could remain content with slower economic progress so long as its larger neighbor fared no better. The realization that the Indian economy is gaining momentum while its own economy sputters is one significant reason for Pakistan's greater willingness to negotiate on bilateral issues.

Informed people in both countries understand that normalization of ties will be beneficial to both countries, but large sections of the population are unaware of the magnitude of the potential benefits that can be generated in terms of employment, growth rates, and foreign investment. Past efforts to document the potential benefits have been carried out under the regional umbrella of SAARC, but these studies have focused primarily on trade opportunities and limited to a mere listing of major tradable commodities. More recently public attention has focused on the proposal to construct a gas pipeline from Iran to India transiting Pakistan, which would provide cheap energy to India and significant transit fees to Pakistan. Trilateral negotiations between the three countries have progressed farther on the pipeline proposal than on any major project during the past five decades since both countries became independent. Projects of this type are indicative of a much wider potential that has not been adequately examined.

Several major political initiatives have been taken in recent years without adequate public understanding of their economic impact, including the breakup of the former Soviet Union and the reunification of East and West Germany. The cost of both initiatives was grossly underestimated. Political leaders in the former Soviet republics assured their people of enormous economic benefits from breaking up the USSR, but actually all the republics suffered a 50% or greater decline in GDP as a result.

A similar rationale applies to India and Pakistan in reverse. While everyone knows that elimination of conflict will reduce costs and open up opportunities for both nations, the true magnitude of these opportunities far exceeds what is commonly recognized. The scope for mutually beneficial economic cooperation between the countries is enormous. These opportunities include bilateral trade, energy, transportation infrastructure, industrial development and tourism. By one estimate, full utilization of these potentials could double the growth rates of both countries.

The purpose of this initiative is to challenge the conventional wisdom which says that economics necessarily follows politics. These are many examples to show that the reverse can also be true. It is generally argued that a dramatic improvement in bilateral political relations between India and Pakistan is necessary before the economic potentials can be tapped. For this reason, there has been little effort to even quantify the potential benefits. Rather than postpone evaluation of the economic potential until the political climate improves, this proposal is predicated on the belief that a full awareness of the economic costs and benefits can be a powerful lever for improving the political climate.

Trade Imperatives

In the post-Cold War period, nations have shifted the emphasis in their domestic and foreign policies from politics to economics. This is evident from the growth of regional economic blocs like the Association of South-East Asian Nations (ASEAN), European Union (EU), North American Free Trade Area (NAFTA). While these groupings had their origins prior to 1991, they gained greater importance in the post-Cold War period. In the Indo-Pakistan context, the role of the South Asian Association for Regional Cooperation (SAARC) has also generated greater awareness among the political leaderships in the subcontinent on the need to increase intra-regional cooperation and trade. Moreover, an enlargement of India-Pakistan economic relations is imperative for increasing the level of South Asian intra- regional trade flows as a whole.

On April 11, 1993, the SAARC member states signed an agreement on a South Asian Preferential Trade Agreement (SAPTA) at the SAARC summit at Dhaka. The agreement provides a broad framework of rules for a phased liberalisation of intra-regional trade.2 It envisages periodic rounds of trade negotiations for exchange of trade concessions on tariff, para-tariff and non-tariff lines. Such preferential trading arrangements imply a reduction of tariffs on trade among SAARC member states. The eighth SAARC summit held in India had decided to establish a South Asian Free Trade Area (SAFTA) on the lines of the European Free Trade Area (EFTA) in order to liberalise intra-regional trade.

Professor Vijaya Katti writes, "Moving from SAPTA to SAFTA would, however, require several initiatives on the part of the member states in many other areas allied to trade. These include : trade facilitation measures like institutional policy, regulations at border controls, transit facilities, trade document procedures and financial procedures connected with trade play an important role in the expansion of intra-regional trade."

Significantly, in Pakistan the repeal of the Eighth Amendment to the Constitution should curtail the military and bureaucratic role in Islamabad's foreign policy which would enable the leadership to take people- oriented political decisions like promotion of bilateral trade.3 This is linked to the fact that the Pakistani military is a major player in the national decision making structure and has articulated the policy of peace first and cooperation later with India.

Scope

The attraction of mutual trading between the two sides is linked to low freight costs which translates into cheaper prices, given the contiguous borders between these two countries. In such a situation, a government keeping in view the people's interests, is obliged to ensure that commodities and merchandise are imported only from such countries. The other conducive conditions are cultural affinity, common language, similar economic and social systems which provide an ideal foundation for broader India-Pakistan trade ties.

For instance, Pakistan imports iron ore from Brazil and Australia, besides tea from Kenya at higher prices, though these items could be available at lower rates from India. Similarly considering Indian pharmaceutical products are 30 per cent cheaper than Pakistani products, it would certainly make a difference to the common citizen in that country. In turn, this would help Indian pharmaceutical products to sell larger volumes in geographically proximate markets, besides impacting positively on industrial growth.

Indian coffee which is now smuggled into Pakistan, due to the absence of formal trade in the commodity, has scope of being a lucrative export item. In 1994-95,

India liberalised its coffee industry and coffee growers/traders are now free to sell their crop to private parties. This has resulted in greater investments in coffee cultivation within the country owing to the higher prices available both in the domestic and international markets.

Pakistan is estimated to be the second largest tea consumer in the world with market size of around 130-150 million kg per annum and for several years it did not import tea from India. Eventually, India and Pakistan signed a contract for the sale of tea in August 1997 owing to compulsions, as the tea gardens in Kenya, Sri Lanka and Indonesia were hit by drought.5 Commenting on Pakistan's tea imports, MP Lama writes, " Tea was not imported from India since 1988 . Two major multinational tea traders in Pakistan have their tea gardens in Kenya and it is natural for them to make Pakistan a captive market. In this context the Kashmir issue is only a veil to justify command over the market by multinationals."

Pakistan's economy which is characterised by inadequate industrialisation, has created a demand-supply gap and drives both "black" and circular trade for truck tyre exports from India. The size of the market in the country is one million truck tyres annually and production facilities exist for only two lakh tyres, of which half is taken by the government sector. This leaves only one lakh truck tyres for sale in the open market. Therefore, Indian truck tyres are a popular product in Pakistan. However, though the item has been placed on the 'open' import list, the high duty structure of 46.6 per cent would make Indian tyres costlier in Pakistan than tyres imported through the Turkmenistan route.

India and Pakistan both being agrarian economies could cooperate in agriculture which is a core component of the GDP and the largest employment generation sector in either country. To quote, "It, therefore, makes sense for the two countries to cooperate in areas of common interests as it would be to their mutual advantage. Just as coal and steel were the 'lead sectors' in European integration, there is every possibility of agriculture emerging as the major sector in which cooperation and joint action can benefit both countries especially in the context of the liberalisation of these sectors."

The food and agri-business industry has a significant impact on the regional economy. This industry has one of the highest economic multiplier effects among the various industries, even ahead of the telecom or power sector. According to an estimate, liberalised India-Pakistan trade in the agro-sector would generate around 2.7 lakh jobs in India and 1.7 lakh jobs in Pakistan.

An India-Pakistan track-two diplomacy group which comprises academics, editors and former military leaders from both countries has made suggestions to improve economic relations between both countries. These include : the two countries should regularly pursue a joint gas pipeline project, encourage tourism and convene a joint meeting of finance and commerce ministers from both sides to promote bilateral trade.

Pakistan's Perceptions

There are two view points in Pakistan on boosting trade relations with India and each has its own rationale to support their respective positions. While the view opposing trade ties with India will be discussed first, the line favouring ties is taken up next.

Pakistan's traditional fears that trade relations with India would prove inimical to its own interests is part of the problem. Pakistani Commerce Secretary Iqbal Fareed has stated, " We cannot afford free trade with India as it would badly hurt our industry". This is linked to the fact that India with its much larger industrial economy would result in an unfavourable balance of trade. Viewed objectively, Pakistan's bilateral trade flows have an unfavourable balance not only with India but also with other industrial economies too. Perhaps Pakistani trade planners are now realising the need to make their economy globally competitive in the aftermath of the US sanctions after the Chagai nuclear tests. In the process, India would then be perceived just as any other trading nation and not necessarily as a hostile neighbour. Surprisingly, Pakistani markets are not really flooded with Chinese products despite free Pakistan-China trade.

The Lahore Chambers of Commerce and Industry study highlights the disadvantages that would accrue to Pakistan in case free trade is allowed between the two countries. Apart from these disadvantages the paper makes a strong case for promoting trade ties with India.

(a) India has a very stringent import policy and is seeking to increase exports at a greater pace than imports

(b) India has lower labour costs than Pakistan and thus has lower prodction costs.

(c) India has several mills which are 100 per cent export-oriented and can freely import raw materials from anywhere, including Pakistan. On the other hand, Pakistan has tried to give a similar impetus to industry by providing export processing zones, but no concrete outcome is yet evident.

(d) The resources in Pakistan and India have many similarities. Consequently, in world markets, we are competing countries rather than being able to supplement each other's deficits in resources.

According to Pakistani economist Ejaz Ahmad Naik, "A trade regime that exposes the domestic market to international competition has to be an essential element of Pakistan's developmental strategy." For Pakistan, it would be appropriate to initially get exposure to regional competition which will not be as stiff as international

competition. On the other hand, dealing with regional competition will enable Pakistani manufacturers and marketeers to develop an orientation to international business with higher stakes. And India-Pakistan trade offers Pakistan exactly such an opportunity to improve its economy.

India-Pakistan trade potential is best reflected in an advertisment supplement published in the mainline English daily newspaper Dawn of December 30, 1997, printed from Karachi and Lahore. This was the first ever trade report published on India and it reflects the pulse of the Pakistani business community to initiate trade with India. While governments have been known to go wrong in gauging the thinking of citizens, newspaper advertising sales managers can seldom afford to make such mistakes because such business costs them money. Importantly, such supplements enable business communities to develop market intelligence databases so necessary for trade promotion.

A research paper prepared by the Karachi Chamber of Commerce and Industry entitled, "Freer Trade With India: Raison d' etre and Impact" argues strongly in favour of Indo-Pakistan trade relations. The paper sees the possibility of transfer of appropriate technology to Pakistan from India; besides, that liberalised bilateral trade would give the two countries a bargaining chip in negotiating with the developed countries. The reasons listed out are as follows: low cost capital and consumable inputs which would help to cover the short fall in agricultural produce;

— labour wages in Indian manufacturing sector are two-thirds those in Pakistan with better productivity;

— superior technology;— Indian engineering goods are 30-35 per cent cheaper than corresponding

Pakistani products. While an Indian scooter sells at Rs 20,000 which is one-third the price of a Pakistani scooter which is priced at Rs 65,000; a car costs Rs 4.5 lakh compared to Rs 6 lakh.

— India licence-produces Swiss and German textile machinery which Pakistan imports at higher costs from other sources

Pakistan's Trade Policy

Pakistan's trade policy is best understood in the context of its economy which is more agriculture based than industry based. This is because the Indian economy, prior to partition, was treated as a single entity and the regional diversity resulted in a degree of interdependence. According to Professor B.M. Bhatia, the region comprising Pakistan had surpluses in foodgrain, jute, finer varieties of raw cotton and industrial raw materials which served as inputs to the area now called India; whereas the Indian side supplied cotton cloth, coal, steel and household products or manufactures owing to a comparitively higher level of industrial activity. Thereafter,

in the post-partition period, out of a total of 14, 677 industrial units, only 1,414 units or 9.6 per cent of the total were located in Pakistani territory; similarly, of the 3.14 million industrial workers Pakistan's share was only two lakh workers or 6.3 per cent of the total manpower strength. The smaller industrial profile of Pakistan is highlighted by the fact that prior to partition the manufacturing sector contributed only 5 per cent of the total industrial production of undivided India, observes Professor Bhatia.

At the time of partition, both India and Pakistan inherited economies which were complementary in nature. However, their politically-driven economic policies resulted in divergence as the two neighbours promoted competition among themselves. For instance, Pakistan developed its cotton textile industry soon after gaining nationhood and in the process obviated the need for importing cotton manufactures from India. Instead, it competed with Indian garments in international markets. Similarly, India also enhanced cotton production levels and the resultant surplus enabled it to compete with Pakistan in international markets. The other cases include sugar and leather industries wherein Pakistan which was earlier dependent on India attained self-sufficiency. Pakistan also developed an indigenous leather manufacturing industry to eliminate the need to export raw leather hides and skins to India.

Pakistan's economy was, therefore, resource rich and agro-based without an adequately developed industrial infrastructure and lacked technology. Its limited manufacturing capacity included a few textile mills, cement factories and an oil refinery. Thus, its trade policies revolved around finding markets for its commodities and acquisition of technology. In view of this, Pakistan's trade relations, like those of most developing countries, are primarily with the Western industrialised democracies owing to its dependence on technology and their reverse-dependency for raw materials. Yet the Western nations' terms of trade proved to be unfavourable and this prompted Pakistan to develop an inward looking trade policy which resulted in a switchover of resources from export-oriented policies to import-competing industries.

During the early 1950s Pakistan pursued an import substitution policy wherein exports were not subsidised and this resulted in stagnation (decline in some areas) in export earnings. This led to a change-over to an export oriented policy "but the objective was only partially realised because the net protective margin on import substitution industries was greater than that for export-oriented industries. Thus, the overall impact of the revised policies was quite limited."

Islamabad's import policy has been restricted through licensing and quantitative constraints and tariffs have been used mainly to generate revenues. The country started exports of manufactured items only during the early 1960s with the

introduction of an export bonus scheme. Eventually, almost two-thirds of the total exports were manufactured by the end of the decade. Pakistan, it would appear in this context, has never really had a proper and planned economic policy to promote trade and instead has alternated its approach between an internal and external orientation. A major step to boost trade relations is to develop strong trade ties with regional countries and, therefore, Pakistan focussed on South-west Asia rather than South Asia due to politico-religious reasons. It is a member of the Economic Cooperation Organisation (ECO) which includes Iran, Turkey, and, later in November 1992, the CARs along with Afghanistan also became members. However, in the 1990s, Pakistan slowly began trading with new partners like India and Bangladesh and shifting away from Sri Lanka.

Problems

Though political relations are an impediment to bilateral trade ties, the role of vested economic interests perpetuating the present Indo-Pakistan "black" trade also become relevant as they amount to pressure groups who prefer to sustain the status quo to their advantage. This refers to the nexus of the politician-businessman-criminal-official who collectively make money from smuggling activity through bribery and corruption of officialdom to sustain the flow of illegal trade. It results in a loss of revenue like customs duties, sales tax and income tax to both governments but in turn enhances the profit margins of traders on both sides.

Commerce Minister Rama Krishna Hegde stated in Parliament on July 28, 1998, that Pakistani intelligence harassed businessmen who attempted to contact the commercial wing of the Indian High Commission at Islamabad. Such state sponsored moves are serious obstacles to the growth of bilateral trade ties.

More recently, on April 21, 1999, the Indian commercial attache, Ravindranath, at the Indian High Commission in Islamabad was assaulted by Pakistanis while on a visit to Lahore.

While India has taken the initiative and already granted Pakistan MFN status, this economic initiative has not yet been reciprocated and thereby constricts natural trade flows between the two sides. Today there are three views in Pakistan about liberalising trade with India. Significantly, a section of economists and businessmen advocate trade with India as they feel that it would be a mutually beneficial proposition. However, another group of businessmen does not favour trade ties which are considered synonymous with an Indian economic invasion. Finally, the security services are opposed to economic relations with India for purely political reasons. They feel that bilateral trade ties should be formed only after the Kashmir problem is solved between the two nations.

Pakistani Commerce Minister Ishaq Dar, commenting on the reciprocation of MFN status to India told media persons in 1998, "We have neither given nor have intention to give it. We are not bound to give them MFN status. The government does not deem it proper to give MFN status to India."

In reality, Pakistan's trade policy towards India goes against the World Trade Organisation (WTO) rules wherein a country accorded MFN status by another one is under obligation to reciprocate the same. However, Pakistan has chosen to flout this rule of international economic diplomacy vis-à-vis India despite being a signatory to the WTO agreement. While India on its part has not yet raked up the issue with a multilateral forum, it has reminded Pakistan about this discriminatory trade policy.

A distinguished Pakistani economist, the late Mahbub-ul-Haq had stated, "Pakistan is totally wrong in denying non-discriminatory trade to India. It is an inferiority complex. If we can compete with other developed nations , why can't we compete with India", he told a reporter from the Indian news agency, the Press Trust of India (PTI).

Pakistan had set two pre-conditions for according India MFN status: one external and the other internal. The external condition was that New Delhi must stop subsidising manufacturers/exporters; and the internal condition was that Pakistani industry prepares itself to compete with Indian imports. Some Pakistani manufacturers feel that Indian industry gets massive incentives on raw material and other inputs which gives it a competitive edge against them. Prospects for India-Pakistan free trade by 2000 appear bleak with Islamabad subscribing to a section of the business community's view that trade with India would hurt the Pakistani economy.

The reported reason underlying Islambad's decision to withhold MFN status is because the Pakistani security services are not keen on initiating a policy of trade

and cooperation with New Delhi till the Kashmir problem is settled between the two countries. Probably, the Pakistani security services believe that once Indo-Pakistan trade ties take shape, the Kashmir issue could recede from public memory and could cease to be an issue within the country.29 According to newspaper reports Islamabad is keen on a treaty to avoid double taxation. Perhaps this could be interpreted as a face-saving device to promote bilateral trade with India while publicly maintaining that the MFN status will not be given to India.

DATA ANALYSIS

FY2010-12 period from 0.48% reported during FY2007-09 period. India-Pakistan bilateral trade so far

Source: PHD Research Bureau, data compiled from Ministry of Commerce, Government of India.

Period % share in total

Pakistan share in India’s total trade2006-07 To 2008-09 0.48

2009-2010 To 2011-12 0.34

Exports to Pakistan in India’s total exports2006-07 to 2008-09 1.01

2009-10 to 2011-12 0.73

Imports from Pakistan in India’s total imports2006-07 to 2008-09 0.14

2009-10 to 2011-12 0.09

The share of India’s export to Pakistan in India’s total exports has been declined to 0.73% during FY2010-12 period from 1.01% during 2007-09 period. The share of India’s imports from Pakistan in India’s total imports has been declined to 0.09% during FY2010-12 period from 0.14% during 2007-09 period.India’s foreign trade expanded from US$312149.28 million in 2006-07 to US$793804.80 million during 2011-12 with a CAGR of around 17%. However, India’s trade with Pakistan expanded from US$1673.71 million in 2006-07 to US$1956.57 million in 2011-12with a CAGR at around 3% only.

India’s trade with World vis-à-vis Pakistan:

Years India’s Foreign Trade with World

India’s Foreign Trade with Pakistan

Pakistan share in India's Total Trade

2006-07 312149.28 1673.71 0.54

2007-08 414786.18 2238.50 0.54

2008-09 488991.66 1810.05 0.37

2009-10 467124.30 1849.26 0.40

2010-11 620905.30 2372.12 0.38

2011-12 793804.80 1956.57 0.25

Formal trade between the two countries due to tariff barriers and quota problems is not significant; significance is diminishing year after year.The reason for diminishing IndiaPakistan bilateral trade significance may be attributed to informal trade between the two countries. Informal trade between India-Pakistan is generally done (1) re-routing trade through a third country and (2) illegal trade through land borders. The informal trade between India and Pakistan is estimated at more than US$3bn which could be brought into the mainstream through better trade facilitation measures. But with the recent untoward incidents at the Line of Control, the informal trade is expected to rise, re-routing from formal to informal channels. The informal exports from India to Pakistan constitute mainly readymade garments, cosmetics and jewellery, spices, livestock, drugs and pharma, machinery mainly textiles, chemicals, tyres and informal imports from Pakistan to India includes mainly cloth, tobacco products, dry fruits, leather products mainly footwear.

TRADE BETWEEN INDIA PAKISTAN SURGES21% TO$2.4 BILLION

According to latest figures of the Directorate General of Commercial Intelligence and Statistics, Ministry of Commerce and Industry India, which were released here on Monday, the volume of bilateral trade recorded a net increase of $410 million from April last year to March this year.

Pakistan’s exports to India grew 28% while Indian exports to Pakistan increased 19%.

Bilateral trade has increased to $2.4 billion, which may soar to $6 billion in the next two years if both countries decide to treat each other equally. Currently, most of the trade between India and Pakistan takes place via Dubai and its volume is estimated at over $4 billion.

According to an official statement released by the Indian High Commission in Islamabad, Pakistan’s exports to India in the last Indian financial year (April 2012-March 2013) grew 28% and reached $513 million. Metalliferous ores and metal scrap, organic chemicals, raw cotton and leather were among the commodities that contributed significantly to the increase.

The High Commission termed the 28% increase in Pakistan’s exports “impressive” when viewed in the context of negligible increase (0.3%) in India’s overall imports.

India’s exports to Pakistan in the same period increased $300 million, a growth of 19%. Total Indian exports to Pakistan stood at $1.84 billion, putting the trade balance in favour of New Delhi.

“The growth in bilateral trade, especially in Pakistan’s exports to India, reflects the positive effect of a number of steps taken towards fully normalised trade relations,” the High Commission stated.

It added three bilateral agreements signed in 2012 in the areas of customs cooperation, mutual recognition of standards and addressing trade grievances were intended to further improve trade environment.

In February last year while taking a giant leap forward, Pakistan abolished the positive list containing only 1,956 tradable items and enforced a negative list of 1,209 untradable items until both sides agree on absolute trade normalisation. Pakistan was expected to abolish the negative list by December last year, but the deadline was missed due to Indian reluctance to address Islamabad’s concerns about non-tariff barriers and resistance by Pakistan’s automobile and pharmaceutical sectors.

Pakistan and India signed here on Friday three technical agreements and discussed trade in gas and electricity.The agreements on redressal of trade grievances, mutual recognition and customs

cooperation will facilitate bilateral business mechanism and ease issues relating to

certification, licensing, lab testing, etc.The two sides agreed to a number of

specific steps and timelines for implementing the agreements.They agreed to

reduce the number of items to 100 in the sensitive list before the end of 2017

under the South Asia Free Trade Agreement (Safta) on a reciprocal

basis.Another agreement between the Export Inspection Council of India and

Pakistan Standard and Quality Control Authority will also be signed soon.

Indian Commerce Secretary S.R. Rao said the agreements would be implemented

in litter and spirit.“We will identify barriers restricting our exports to India for

their removal,” Pakistan’s Commerce Secretary Munir Qureshi said.Pakistan

agreed to lift a restriction on trade through the Wagah-Attari land route for all

commodities by the end of October this year. At present trade of only 137 items

is allowed through the route. Working groups of the two countries will meet

next month to explore the possibility of opening the Munabao- Khokhrapar land

route for trade.India agreed to bring down the number of items in its sensitive

list by 30 per cent before December this year keeping in view Pakistan’s export

interests.As agreed earlier, Pakistan will complete the transition of most-

favoured nation (non-discriminatory) status for India by the end of this year.

After that India will bring down its Safta sensitive list to 100 tariff lines by

April next year. The items placed in the sensitive list are allowed for trade, but

these attract much higher customs duties and reduce their trading margin. As

India will notify the reduced sensitive list, Pakistan will reduce its sensitive list

to 100 items over the next five years. Before the end of 2020, the peak tariff

rate for all tariff lines, except for a small number of products in the sensitive

lists, will not be more than five per cent. It will be an ultimate goal for

achieving complete liberalisation process between the two countries.

BANK BRANCHES:

The Indian commerce secretary said the names of banks willing to open

branches in each other’s country would be exchanged in the next couple of

months. But, he said, the State Bank of Pakistan and the Reserves Bank of

India would look into modalities and put in place a mechanism for opening the

branches.

About export of electricity, Mr Rao said an understanding had been reached to

use the available infrastructure as a short-term measure to transfer limited

electricity. It would be used for both ways, he added.

India offered Pakistan 500MW of electricity, but Mr Rao said the infrastructure

required to transmit it would take time to be put in place.India also offered to

export up to five million cubic metres per day of gas for an initial period of

five years.The Pakistani side said it had received the offer and was considering

it.Bharat Heavy Electrical Ltd, an Indian public sector company, made an offer

to cooperate with the Pakistan government in setting up of 500-2000MW

coal/hydro or gas power plants. India expressed its willingness to cooperate with

Pakistan in areas of wind and solar energy and offered to help Pakistan

Railways in meeting its requirements of up to 100 locomotives .A demand was

made to allow high capacity wagons for trade from Pakistan which carry load

three times more than regular wagons. For this and other issues, railway

ministries of the two countries will meet on a monthly basis to work out

measures for increasing trade through train. The two sides agreed to simplify

procedures and encourage investment. Outreach programmes will be held with

business communities on both sides on investment opportunities, application

procedures and regulatory issues. A joint working group will be constituted

before Nov 15 to work out a liberalised regime of reciprocal bilateral rights for

commercial flights between Delhi and Islamabad.

Improving India-Pakistan relations through trade

While successive Indian and Pakistani governments have often repeated the desire for peaceful relations, reaching a comprehensive agreement that settles outstanding disputes, such as Kashmir and the Indus waters agreement, still does not seem to be in the cards as yet. However, developing stronger economic relations between the two countries could be a base on which to build overall ties and trust. More specifically, despite the political issues that divide them, steps could be taken toward better economic relations through expanding trade between the two countries.

The potential gains from increased economic integration between India and Pakistan are large. Even though both countries are members of the South Asia Free Trade Area (SAFTA) established in January 2006, trade between the two countries is unnaturally small and the scope for gains from increased trade correspondingly large. Total trade (exports plus imports) between India and Pakistan in 2008 amounted to a little more than US$2 billion, up from a paltry US$500 million in 2000. But still Pakistan accounts for less than 0.5 per cent of India’s trade, and India accounts for a little over 1 per cent of Pakistan’s trade compared with the very large trade shares following the independence of the two countries in 1947. In 1948-49, 70 per cent of Pakistan’s trading transactions were with India, while 63 percent of Indian exports went to Pakistan. Informal trade, via third countries (such as Dubai), is estimated at some US$2-3 billion per year, and this trade could obviously be undertaken bilaterally at significantly lower cost.

There have been a number of studies using gravity models to assess the effects of SAFTA on interregional trade. Based on these studies, India-Pakistan trade could increase up to 50 times its current level. A more recent study, using the Peterson Institute for International Economics (PIIE) gravity model, shows the potential of formal trade between India and Pakistan is roughly 20 times greater than recorded trade. This means that at 2008 trade levels total trade (exports plus imports) between India and Pakistan could expand from its current level of US$2.1 billion to as much US$42 billion if the ‘normal’ relations estimated by the PIIE gravity model for trading partners were to hold for the two countries.

What then is holding trade back between the two countries? Constraints on economic integration include high tariff and nontariff barriers, inadequate infrastructure, bureaucratic inertia, excessive red tape, and direct political opposition.

Pakistan has not yet reciprocated most favoured nation (MFN) status for India and maintains a fairly narrow positive list (of about 1400 items) on goods that India may export to Pakistan. At the same time, India’s tariff rates remain high, especially for goods of particular interest to Pakistan, such as textiles, leather, and the mineral onyx, and nontariff barriers are substantial. Poor transportation linkages make trade costly, with railway and road connections inadequate and sea shipments constrained by both limited port facilities and bureaucratic regulations and restrictions. Moreover, constraints on visas and cumbersome payments and customs procedures further limit the scope for trade. Finally, although there are no specific restrictions, there is virtually no trade in services or foreign direct investment (FDI) flows between the two countries. In both the cases of services and FDI, prior government approval has to be obtained, and it is clear that such approvals have been granted very sparingly by either country.

Before undertaking more long-term and wide-ranging fundamental trade reforms, both countries need to build public support for trade liberalisation between them. Initial steps should focus on bilateral measures that can be accomplished relatively easily—by executive order rather than via legislation and with minimal resource

implications—and that would meaningfully increase trade while gaining support for bigger and bolder steps down the line. Reducing these various and eventually achieving regional integration could involve two phases: short-term (say one year) and medium-term (say 1-3 years).

The specific short-term measures, mainly related to trade facilitation, could include: easing restrictions on visas; eliminating the requirement that ships between India and Pakistan touch a third country port before bringing in imports; removing the requirement that rail wagons carrying goods across the border return empty; opening additional road border crossings and bus routes; increasing air links between the two countries (particularly establishing flights between Islamabad and New Delhi); increasing the number of customs posts; and allowing branches of Indian and Pakistani banks to operate in the other country.

The specific medium-term measures towards greater economic integration between India and Pakistan could include: Pakistan granting MFN status to India, and in turn India significantly lowering tariff rates for goods of particular interest to Pakistan (such as textiles and agricultural products); Pakistan allowing transit trade from India, which is required by WTO rules; facilitating energy trade between the two countries through building gas pipelines and eventually joint energy grids; allowing trade in information technology; harmonising customs procedures; and eliminating obstacles to foreign direct investments by the other country.

With relatively new governments in both India and Pakistan, there is once again a window of opportunity to improve economic ties. As shown by numerous empirical studies, the potential for trade between the two countries is huge, perhaps twenty-fold or even higher than at present. There is no doubt that increasing trade would significantly raise GDP and household incomes in both countries, and would particularly benefit Pakistan. While the measures for reducing trade barriers proposed here generally have the support of businessmen on both sides of the border, broader constituencies in each country need to be built for greater bilateral trade liberalisation. Trade will of course not solve all the problems between the two countries, but it could be an important catalyst in the lowering of tensions, which certainly has to be in the interest of both India and Pakistan.

India-Pakistan Trade: The Most Favored Nation Breakthrough

On November 2, 2011, the Pakistan government announced that it was ready to grant most favored nation (MFN) status to India. This means that Pakistan's tariffs on Indian imports will have to be the same as the tariffs it imposes on imports from its other trading partners. Why is MFN important? To answer this question one has to ask why India and Pakistan trade so little with each other despite the existence of common history, language, culture, and long borders. Economic theory predicts that trade between the two largest economies in South Asia would be at least five to ten times greater than its current level of around $2 billion. While both sides are fully aware of the advantages of trade, a variety of political, infrastructural, legal, and regulatory impediments have essentially paralyzed bilateral trade relations

One of the main constraints to trade has been that Pakistan did not reciprocate India's granting of MFN in 1996 to Pakistan. Thus, the approval to grant MFN to India by the Pakistan cabinet is clearly a major breakthrough in trade relations between the two countries, and finally fulfills Pakistan's obligations as a member of the World Trade Organization (WTO). It is interesting to note that Pakistan and India were among the original 23 signatories to the General Agreement on Trade and Tariffs (GATT) in 1947, which articulated the MFN principle. It has taken Pakistan some 64 years to finally start implementing what it signed on to between the two neighbors

Not discounting the importance of the announcement, there is still an enormous amount of work to be done to implement the cabinet decision. Pakistan will have to abandon the positive list of some 2000 items that it maintains on goods that can be imported from India. To be consistent with the MFN principle this positive list is to be replaced by a negative or "sensitive" items list of goods that will still be restricted. The Pakistan Ministry of Commerce has prepared this negative list but needs to consult with stakeholders on the items to be covered. This will take time as the sectors of the economy that feel that they would be adversely impacted by imports from India will lobby hard to have their products put on the negative list. The military is also a stakeholder, not just from a defense standpoint but wearing its hat as a major industrialist, and will naturally weigh into the discussion of the composition of the negative list.

In some sense, the MFN itself is symbolic, but it is a very important symbol. First, it means that Pakistan has decided to separate trade issues from other major

political issues (in particular Kashmir) that have strained relations between the two countries since their independence in 1947. And second, Pakistan has apparently moved away from its previous position of linking MFN with the removal on Indian non-tariff barriers on Pakistani exports. While Pakistani businessmen have been pushing for liberalization of trade with India for some time, they have come up against a formidable array of opponents, including nationalist politicians, bureaucrats, industries that could potentially lose out to Indian competition, and most importantly the Pakistan military. Clearly, the military has now withdrawn its opposition to trading with India, thereby allowing the cabinet to vote unanimously in favor of granting MFN to India.

By itself granting MFN will not lead to the levels of trade that India and Pakistan should have with each other. It is expected there will be a jump in trade as unofficial trade between the two countries going through Dubai, estimated to be around $2 billion to $3 billion a year, could then take place directly through official channels. So some sizable increase in trade is very much in the cards.

However, there are still a host of other obstacles to trade that will have to be tackled, even after MFN is in place, to significantly boost trade between the two countries. On the tariff side, even though India's average MFN applied tariff is 13 percent, its tariffs on goods of particular interest to Pakistan such as agriculture, textiles, and leather goods remain high. For example, on agricultural products the average applied tariff is about 40 percent. Other constraints on trade between the two countries include significant non-tariff barriers, inadequate infrastructure, bureaucratic inertia, and excessive red tape.

The complete liberalization of trade between India and Pakistan is going to be a long and arduous process—but the granting of MFN by Pakistan to India is an important start to this process. Higher levels of trade will benefit both countries, and Pakistan more so than India. Indeed, as India is the engine of growth in South Asia, Pakistan has to hitch its wagon to the locomotive or risk getting left behind on the platform. This reality is now recognized and accepted by the Pakistan government, and it seems finally also by the supposedly "India-centric" Pakistan military.

Trade will of course not solve all the problems between the two countries, but it could be an important catalyst in reducing tensions. It is clearly in the interest of both countries, and the world for that matter, to find a political resolution to India-Pakistan problems, and increased trade can well be the starting point for this objective.

QUESSTIONNAIRE:

What are the prospects for agricultural commodities?

At the time of partition, as identified earlier, Pakistan’s exports to India consisted primarily of agricultural products. But over the last six decades, Indian agriculture has significantly developed higher yields in crops like cotton and wheat than Pakistan. For example, the yield of wheat in the Indian Punjab is 68 percent higher than the yield of wheat in Punjab, Pakistan. In fact, Pakistan imported large quantities of cotton and sugar from India in 2010 due to shortfalls in domestic production. Opening agriculture to trade with India can smooth supply shortfalls in Pakistan. It is more likely products like fruits, vegetables, livestock products, flowers, processed foods, etc. will find a receptive market among Indian consumers. Needless to say, these products will have to satisfy the quality control standards and the process of regulation in India. The short term potential for gains in agricultural trade, however, may be limited, due to subsidies and compliance with standards and certifications in agriculture. own Pakistani investment in India.

What are the views of public intellectuals, especially economists, and civil society organizations?

NGOs in Pakistan are focused more on social and human rights issues and less on economic issues. Also, the consumer rights movement is very underdeveloped in Pakistan and there has not been enough projection of consumer welfare gains arising from the availability of cheaper grade form India especially for the lower quintiles of the population. As far as economists are concerned, the profession has generally highlighted gains from trade with India. In fact, the case for granting MFN status voiced by the Advisory Panel of Economists to the Planning Commission, headed by Dr. Hafiz A Pasha (a former commerce Minister) in 2008

More recently, Dr. Mohsin Khan, of the Peterson Institute of International Economics, has said in a recent seminar at PIDE, that trade potential between India and Pakistan is as high as USD $40 billion. He has also said that Pakistan could gain access to markets in Nepal and Bangladesh, while India would gain access via land routes to Central Asia, Iran and Afghanistan. Other leading economists like Dr. Ishrat Husain (Dean off the Institute of Business Administration, Karachi and the former Governor of the State Bank of Pakistan); Dr. Rashid Amjad of PIDE and Dr. Akmal Husain of BNU/FCU have spoken or written in favor of the process. There is also a lot of research underway on the implications of Indo Pak trade, including this study.

WHAT ARE POTENTIAL BENEFICIARIES IN PAKISTAN MFN STATUS TO INDIA?

The granting of MFN status to India, coupled with measures for trade facilitation, like the opening of more integrated check posts at the border and removal of NTBs, could confer significant gains on both sides of the border. International trade theory shows that, under some assumptions, the smaller country (in this case, Pakistan) benefits more from opening up of trade. There is, in fact, a view in Pakistan that since the country has fallen seriously behind India in the rate of growth, the only way to reduce the gap is to ‘jump on to the bandwagon’. Some proponents of trade liberalization with India have even argued that this will raise the growth rate of the Pakistan’s economy by one to two percentage points.

Which types of economic activities are likely to benefit? Subject, of course, to trade facilitation by India, export oriented sectors of Pakistan will get access to a much larger market. Husain (2011) says that ‘India has a middle class of 300 million people with rising purchasing power while Pakistan’s middle class is about 30 million with more or less stagnant real incomes. A ten percent penetration into the Indian middle class market can double the market size for Pakistani companies and businesses. Prime candidate industries which could benefit from access to a large market are, first, high quality textile products, especially cloth, ladies garments, bed wear, etc. Second, other export products which could witness a jump in sales are leather products, surgical instruments, sports goods, carpets, and cement. If, in fact, outlets for franchise of Pakistani products are given permission to operate in India then this will greatly facilitate the development of markets, resulting in greater economies of scale in production More recently, there has been an agreement, in principle, by India to all

WHAT ARE GLOBAL TRADE PATTERN OF INDIA PAKISTAN?

The objective of this section is, first, to see the changes in direction of trade of India and Pakistan respectively over the last few decades, second, to determine the growth of intraregional trade in South Asia, and third, to identify the various trading arrangements with different countries and regions by the two countries. These analyses will help in determining the importance that each country will attach to bilateral Direction of Trade - Pakistan

Over the last 50 years, the direction of trade of Pakistan has primarily been with developed countries in North America and Europe in both exports and imports. However, there appears to be an increase in the share of developing economies outside the region of South Asia after 1990. This is primarily due to the intensification of the trading relationship (including entering into a free-trade agreement) with China. Trade with other economies in South Asia has remained very restricted, with some indications of an increase in 2010.al trade.

Will it be a new phase in India-Pakistan Relations?The President of the PML(N) Nawaz Sharif is all set to become Pakistan’s next Prime Minister. Both before and after the elections, Sharif was quick to send messages of peace and friendship with India promising to start from where he had left in 1999, when he was unceremoniously thrown out of power by Gen Pervaiz Musharraf. Earlier, Prime Minister Manmohan Singh congratulated Mr Nawaz Sharif on the latter’s victory in Pakistan’s elections and invited him to visit India. The BJP in India has also welcomed the move. Will Nawaz’s tenure as the Prime Minister of Pakistan herald a new beginning in India-Pakistan relations?

The relationship between the two countries had deteriorated in the recent past especially after the beheading of an Indian soldier by the Pakistani troops in Jammu and Kashmir, and the fatal attacks on Chamel Singh and Sarabjit Singh, the Indian prisoners held in Pakistani jail. There is no progress on the trial of 26/11 Mumbai terror attack suspects some of who are till date freely roaming in Pakistan. Pakistani establishment’s link to this incident has made this trial complicated. The public opinion in India has been inflamed at the intransigence of the Pakistani government. It must be noted, however, Nawaz Sharif has refrained from speaking about prosecuting the 26/11 perpetrators. Before the elections he said that he would examine allegations of ISI involvement in the 26/11 attacks and investigate Kargil. This is not going to be an easy task. It has been reported in the Pakistani media that the security establishment is uneasy over his victory in the elections. Moreover,

given his links to the anti-India militant organization the Jamaat-ud-Dawa and its militant wing the LeT, it remains to be seen whether Sharif would be able to satisfy India on 26/11 trials.

Nawaz Sharif’s sentiments for better relationship with India are laudable and should be welcomed. However, there are still constituencies within Pakistan for whom Kashmir remains the core issue. The larger question is whether Sharif will be able to bring the army on board. His first task would be to manage a suspicious army with whom his relationship has been highly strained. The army is unlikely to give up its influence and say on Pakistan’s key foreign policy and security concerns. Anti-India jihadi constituencies in Pakistan are still very strong. They would do anything to prevent the normalization of relations with India. To assure India of his good intentions, he has offered a number of positives. Sharif stated that he will not allow anti-India “speeches to be made against India by anybody including Hafeez Saab”. But it is an acknowledged fact that he does not have any control over the militant groups operating in Kashmir who are Pakistani intelligence agency’s protégée. He also said that he “will not allow terrorism to be exported to India from Pakistani soil.” On being asked whether the army would act as a spoiler in India-Pakistan relations, Sharif boldly stated that “I am determined to restore the authority of the Prime Minister’s office. The Army will report to the Prime Minister, who is the boss.” In spite of such assurances, there are several powerful actors and vested interests that shape Pakistan’s India policy. Therefore, while Nawaz Sharif may be genuinely interested in promoting good relations with India, whether he would be allowed to do so is a big question.

What does Pakistan’s decision to grant most-favored-nation (MFN) status to India mean?

Pakistan announced its intention to begin normalizing trade relations with India, ultimately granting India MFN status. This means that Pakistan’s tariffs on Indian imports would receive the same treatment as imports from its other trading partners. MFN status was a building block of the General Agreement on Tariffs and Trade (GATT) system, which required that GATT members treat each other equally and prohibited discrimination among its members. India and Pakistan were original members of the GATT (now the World Trade Organization), so this should have occurred back in 1948. India granted MFN status to Pakistan in 1996, at which time Pakistan did not reciprocate and instead used a “Positive List” of items that were allowed to be imported from India. The Positive List has grown from a few hundred items to almost 2,000 currently. Once MFN status is granted officially,

this will change from a Positive List to a List of Sensitive Items, which will still be subject to restrictions.

Do India and Pakistan trade anything yet? Current bilateral trade is thought to be between $2 billion and $3 billion, most of

it in three sectors—chemicals, base metals, and machinery and electronics—going

through unofficial channels, mainly Dubai, costing both economies valuable revenue

and increasing the price of goods on both sides of the border. After MFN status is

granted, most of these goods should be traded via direct, official channels, saving

both time and money and benefiting consumers in both countries.

This past September, when the commerce ministers of India and Pakistan met, they

agreed to work jointly toward doubling bilateral trade to $6 billion by 2014. They

also agreed to liberalize the visa regime for the business communities of both

countries by November 2011.

What other challenges to trade remain?A Nontariff barriers and infrastructure challenges remain. For now, the only point

of trade along the India-Pakistan border is the Wagah crossing—between Amritsar,

India, and Lahore, Pakistan. A sea route from Mumbai to Karachi is another

option for trade. But ports, like the land crossing, would need significant

modernization and development in order to handle the expected increase in trade.

Some economists in the region note that the most pressing nontariff barriers

concern the customs process, including certifications and labeling of goods.

What does this mean for the future of India-Pakistan relations?With an expected jump in trade, a simultaneous increase in people-to-people and

private-sector interaction is logical. Increased trade should be seen as a starting

point for reducing tensions between the two countries and as a step in the right

direction. The move also seems to indicate that the countries are willing to separate

economic issues from their more difficult political issues, which can only help move

forward the formal dialogue they resumed this summer. (These talks were

suspended after the 2008 Mumbai terrorist attacks.)

With Pakistan’s announcement of MFN status for India and pledges by Prime

Ministers Manmohan Singh and Yousaf Gilani at this week’s South Asian

Association for Regional Cooperation (SAARC) meeting to implement a liberalized

visa regime, Pakistan clearly recognizes the benefits of being connected to the

region’s largest economy. At an hour-long meeting on the sidelines of the SAARC

summit, the prime ministers also agreed to move ahead with their obligations under

the South Asian Free Trade Agreement (SAFTA) toward a Preferential Trade

Agreement (PTA)—an ambitious goal, but another step in the right direction. The

PTA would require that all tariffs on traded goods be zeroed out by 2016. The

prime ministers also pledged to fast-track implementation of cross-border trade.

There is always the chance that fundamental political differences can sidetrack the

recent goodwill gestures and economically beneficial measures, so cautious optimism

is in order.

Overview of the Economies of Pakistan & India

Pakistan and India are two neighboring countries which prior to Partition in 1947 were part of the same colony under the British Raj. Along with Bangladesh the three countries constitute the Indian sub-continent, which houses over 1.494 billion people, almost 22 percent of the global population. India is by far the biggest country with a population of 1.171 billion, almost seven times that of Pakistan. The per capita income of India, as per the World Bank 201013 data, is estimated at USD $3,425 in purchasing power parity terms, just over 33 percent above the per capita income of Pakistan of USD $2,688 in the same period. The two countries have had a variable growth record, as highlighted in Table 1. In the three decades, 1960s, 1970s, and 1980s, the GDP growth rate of Pakistan exceeded that of India. But in the last two decades – the 1990s and 2000s – India has caught up and gone ahead. During the last ten years, the Indian economy grew at an average annual rate close to 8 percent, whereas the growth rate of Pakistan remained below 5 percent despite an intervening period of high growth from 2002 to 2007. Today, India is considered as one of the fastest growing economies in the world, only behind China.

The agricultural sectors of both the economies have shown moderate growth rates of about 3 percent in the 2000s. Dynamism of the Indian economy is attributable to an over 9 percent annual growth rate in the services sector, followed by industry at

close to 8 percent. In Pakistan’s case, the leading sector has been industry with annual growth rate just over 6 percent.

Next, we turn to the degree of “openness” of the two economies. This is measured as the sum of exports and imports as a proportion of the GDP the fact that Pakistan has historically been a more open economy, more inclined to trade, than India. The latter was virtually a closed economy in the 1960s following a strong strategy of import substitution, with a degree of openness of only 7 percent. At that time, the corresponding ratio for Pakistan was 12 percent. Following the process of trade liberalization in both countries since the early 1990s, the economies have become much more open. Based on the 2010 data in Table 2, the degree of openness of India is 31.6 percent while that of Pakistan is 34.2 percent. In the case of Pakistan, the increase is largely due to a rise in the share of imports in the GDP. India has experienced a process of export-led growth and the share of exports in the GDP has increased by almost 4 percentage points over the last decade

Trade Agreement

1. Pakistan-Sri Lanka Free Trade Agreement

2. Economic Cooperation Organization Trade Agreement (ECOTA) (Pending)

3. South Asian Free Trade Agreement (SAFTA)

4. Pak – Iran Preferential Trade Agreement

5. Pakistan-China Free Trade Agreement (Goods and Investment)

6. Pakistan China Free Trade Agreement (on Services)

7. Developing-8 (D-8) - Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey (Pending)

8. Malaysia Pakistan Comprehensive Economic Partnership Agreement (MPCEPA)

9. Pak - Mauritius Preferential Trade Agreement

10. SAARC Agreement on Trade in Services (SATIS)

11. Pakistan Indonesia Preferential Trade Agreement (PTA) (Pending)

12. Unilateral Trade Preference to Afghanistan Pakistan Transit Trade Agreement (APTTA) for fresh and dry fruits

Pakistan’s Restrictions on Trade with India

Given the fact that Pakistan had earlier not granted MFN status to India, it is important to identify the nature and extent of restrictions on import from India. As such, we first analyze the Positive List of imports which were permissible from India until the Positive List was replaced with a Negative List, expanding the tariff lines importable by Pakistan from India. The subsequent section looks at the Negative List, which has been approved recently by the Federal government as a prelude to the granting of full MFN status to India. This list is expected to be phased out by the end of December 2012. The tentative implications of full trade liberalization with India are brought out. The last subsection highlights the nature and quantum of flows of goods through informal channel from India in the presence of restrictions. Re-exports from other countries of goods originating in India are also examined. This analysis enables the quantification of the potential increase in formal trade following the liberalization.

This list was initially finalized under a Trading Arrangement between India and Pakistan. It was periodically been expanded and the latest list consisted of 1870 tariff lines out of the total of 6857 lines. Items included in the Positive List included basic food items; raw materials (especially these which are not produced in Pakistan); and intermediate and capital goods (especially those which are not produced inPakistan). 22Items excluded from the Positive List were generally higher value added goods posing potential competition to local Pakistani industry. Therefore, the approach towards determining the Positive List was based on the desire to insulate value adding Pakistani industries from competition by imports from India. Good examples of such cases are footwear, ceramic and glass products, paper products, value added textiles, metallic products and the automotive produces. Therefore, trade with India has hitherto been managed in such a way as to exert minimum competitive pressure on existing major Pakistani industries.

Informal & Quasi-Legal Trade

As result of restrictions there is a significant volume of informal and quasi-legal trade from India to Pakistan. According to the Sustainable Development Policy Institute (SDPI) study published in 2005, the main routes for illegal imports of India goods are:

1. Dubai-Bandar Abbas-Hirat-Kabul-Jalalabad-Torkham

2. Dubai-Bandar Abbas-Hirat-Kandahar-Chaman

3. Sind-Gujarat Cross Border

4. India-Dubai-Karachi

5. Lahore Border

Suggestions for strengthening India-Pakistan bilateral trade

1. Pakistan should grant MFN status to India as a trade facilitation measure, India has already granted MFN status to Pakistan way back in 1996.

2. The volume of informal trade is larger than formal trade; official trade can flourish due to regularizing the unofficial trade by improving trade infrastructure and bringing the items, which are being traded unofficially into the official tradable list.

3. Efficient and cost effective transportation and communication is a pre-requisite for promotion of trade and commerce and movement of goods, services and people.

4. Easing the complexities in visa procedure, which should be taken into consideration by the two countries.

5. If bilateral trade is increased, producers in both the countries can look for price efficiencies by providing each other lower cost inputs.

6. Enhanced trade cooperation can also mean lower prices for millions of consumers. Given this advantage, both the countries can jointly fight poverty deprivation, hunger and inequality.1 A measure of the extent to which one of two countries, j, exports what the other, k, imports.PHD Research Bureau 7

7. Bilateral trade between both the countries will also result in more public revenues, since governments can earn more through custom revenues when smuggled items switch to formal trade.

8. India and Pakistan should create an atmosphere of peace to boost trade. Investment and major ventures can take place in a big way if both sides are able to create an enabling political environment of peace, trust and confidence.

9. Progress in trade and economic cooperation with India and Pakistan would need a firm and a continuous commitment from Pakistani authorities.

10. India and Pakistan can learn from the global experience, where trade is increasingly being used as a prelude to age-old geo-political tensions reconciliation of the Sino-American trade relations offer a convincing example of how trade can be skillfully used to enhance mutual confidence between two politically hostile nations.

Conclusions

In summing up, PHD Chamber of Commerce and Industry strongly believes that the time is most opportune for two neighbouring countries of South Asia to overcome their past baggage of tension-prone economic and trade relationship and move forward with new hopes and aspirations to build an economically powerful bilateral relationship and forge the spirit of common market. The major beneficiary of trade between India and Pakistan will be the consumer, as it will give them low cost goods and services due to reduced cost of production and large economies of scale. It will enhance the savings capacity of the people, which would have positive visible effects on social indicators such as education, health.

The Analysis and Conclusions that are presented below are based on the following:

i- Detail study of the responses of the questionnaire.

ii- Report of the Trade Wing of Pakistan’s High Commission in New Delhi.

iii- Report of the Research Wing of the FPCCI.

iv- Interviews and desk research conducted by the Research and Analysis

v- Directorate of the TDAP.

The Issue of NTBs has been at the forefront of Pakistan’s discussions with the Indian counterpart for quite some years now. It has time and again been claimed that India maintains certain Pakistan specific Non-Tariff Barriers which are stunting our exports to India. The numerous studies, reports and interviews conducted during the last one year can all be said to contain two common elements. i.e.

i‐ The so called Pakistan specific NTBs claimed are fundamentally Non ‐Tariff Measures employed by the Indian Government at a multilateral level.

ii‐ The overwhelming number of issues alluded to by our Exporters pertain to; Infrastructural issues at port of entry, bureaucratic and administrative mishandling, psychological barriers emanating from our bilateral political issues, visa restrictions and surveillance of visitors to India, Banking restrictions, investment restrictions and restrictive trade routes, which constitute the real Pakistan specific non – tariff barriers to our trade with India. It has also been observed that even when companies have complained of an existence of a Non-Tariff Measure to be Pakistan specific in nature, it has turned out to be a question of the ‘mind set’ of the particular administrative officials in dealing with Pakistan specific consignments. Needless to say this mindset stems from the hostile political relations between the two countries which have metamorphosized into an unwritten rule of business in the Government agencies of the two countries.

SUMMARY:

India has been able to conclude many more bilateral and regional trade agreements than Pakistan, given its vastly larger domestic market. India trade agreements are also more diverse regionally. In return, this has given much greater market access to Indian exports. Trade agreements of Pakistan have primarily been with neighbors and proximate countries like China, Sri Lanka, Malaysia and Iran. India’s agreements are spread across the Asia pacific region. India’s trade with trade with major developing and developed countries in world trade like China, East Asian countries and other countries in G-20 appear to be strengthening. For example, the volume of trade with China has grown rapidly at 20 percent per annum to reach

USD $63billion in 2010-11. Pakistan, a relatively smaller economy as compared to India is unlikely to get the same degree of interest in the trading partners for market access initiatives as India does. As such, along with market access opportunities available in the Indian market under SAFTA, Pakistan must continue to make inroads into the large and fast growing market in China, especially after the FTA.

BIBILOGRAPHY:

WWW.GOOGLE.COM INDIA PAKISTAN TRADE RELATIONS BOOK TRADE RELATIONS BOOK INTERNATIONAL ECONOMICS 6Th EDITION MORDERN ECONOMICS