India-Pakistan trade relations: Current and Potential
- by: Rohit Kumar
- Date: January 3, 2014
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In recent years, efforts towards promoting peace in South Asia have pivoted around the idea of improving trade relations as the best bet in forging a lasting relationship between India and Pakistan. Trade was certainly one of the most steadfast solutions proposed when six Indians and five Pakistanis met for the India-Pakistan Regional Young Leaders Initiative (IPRYLI) conference organised by the Asia Society in collaboration with the Jinnah Institute in Islamabad.
Currently, any altercation between the two countries inevitably leads to the cessation of some, if not all, trade activity. If healthy trade relations are built up between India and Pakistan – and the potential is immense –it can integrate the lives of millions of people in both countries. With livelihoods at stake, both India and Pakistan will be forced to stay engaged and find alternate means of dispute resolution. Over a period of time, this has the potential to significantly shift the paradigm of cross-border relations in South Asia.
Context
Though trade between the two countries has increased in the last couple of years, it is still far from reaching its potential, and remains extremely vulnerable to political fluctuations . In 2012-13, trade between India and Pakistan totalled $2.4 billion, a fraction of the total trade of the two countries
Following partition in 1947, India-Pakistan trade fell drastically; and came to a near standstill for almost nine years in the aftermath of the 1965 war. In more recent history, India stopped trade via land and air routes following the attack on Indian Parliament in 2001. In 2013, trade was blocked following cross-border firing.
Barriers to trade and consequences
The real breakthrough in Indo-Pak trade came in 2005 – 58 years after partition – when a land route was opened at Attari for a limited number of commodities. India has now opened an Integrated Check Post (ICP) at Attari in April 2012 with improved warehousing and screening infrastructure. This has brought about a marked change in support to traders on both sides and facilitated faster movement of goods.
Similarly, trade through sea routes has also witnessed improvement after changes in the maritime protocol were introduced in 2005. These changes led to a decrease in freight rates. However, despite these positive changes, several barriers to trade continue to exist.
Infrastructure constraints
Even though infrastructure was improved through the ICP on the Indian side, similar facilities are yet to be created on the Pakistani side. Also, this quality of infrastructure does not extend to the rail cargo system even on the Indian side.
Transit rights
India has not allowed Pakistan to access Nepal, Bangladesh and Bhutan via its territory and Pakistan has not given transit rights to India to access Afghanistan. This significantly affects trade potential, even with other neighbours.
Financing and banking facilities for traders
Guaranteed payments are essential for building reliable business partnerships and for this banking channels need to be improved. In 2005, the Reserve Bank of India Governor and the Governor of the State Bank of Pakistan had signed an agreement to open branches of two Indian banks in Pakistan, and two Pakistani banks in India. This agreement has not yet been implemented.
Limitations on goods that can be traded
Pakistan switched from the positive trading regime (which listed products that are permissible for trade between the two countries) to a negative list regime (that only bans a few items from trade, but permits the rest) in 2012. Under this, only the import of 1,209 Indian products is barred.
This is a positive development. However, Pakistan is yet to offer the Most Favoured Nation (MFN) status to India. This would grant India the same trading privileges as Pakistan offers any other country in the world. In any case, road based trade is still severely restricted and only 137 items are allowed to be imported via road.
India had already granted MFN to Pakistan in 1996. In August 2012, India has also opened Foreign Direct Investment from Pakistan except in defence, space and atomic energy sectors.
Consequences
Besides limiting trade between the two countries, the restrictive trading regime has resulted in large informal trade flows, most notably through third countries such as Dubai.
Informal trade flows are estimated to range from $250m to $3bn. One estimate pegs trade via the Mumbai-Dubai-Karachi route to be 88% of the total informal trade, and the remaining as cross-border informal trade through the Amritsar-Lahore and Rajasthan-Sind border routes.
Trade potential
Due to the impediments listed above, the trade potential between India and Pakistan – estimated at 2011 to be ten to twenty times greater than its current levels – has yet to be realised. Similarly, the potential in mineral fuels (such as petroleum, coal, or natural gas) was another $10.4 bn – $10.7 bn. In fact, there are further trade possibilities in the service sector, which is becoming increasingly important – IT, healthcare and entertainment (music, movies) etc.
Sector wise analysis reveals that bilateral trade is likely to increase from sectors such as textile, automobile, IT, BPO, health and entertainment, if these sectors are liberalised.
While it is important to recognize domestic constraints in opening markets, it is also important to minimize barriers wherever possible. Trade will also promote sectors where each country has a comparative advantage, thereby creating more jobs in those sectors. Moreover, as the FDI regime is liberalised, the investments will likely deepen the trade linkages between the two countries.
Trade figures should not be seen as mere statistics and numbers. Trade is inextricably linked to livelihoods. If trade relations between the two countries are normalized, Pakistan will get access to a market of over 1.2 bn consumers and India will get access to a market of over 180 mn consumers. The increased economic activity will lead to more employment opportunities and higher stakes for people on both sides in the maintenance of peaceful relations between the two countries. This will force the political class to tone down the ‘enemy’ rhetoric and institutionalise dispute resolution.
Examples from the European Union and ASEAN show how good trade linkages can provide a foundation for regional peace. India and Pakistan need to do just that.
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Major information sources:
India-Pakistan Trade Statistics, Ministry of Commerce, Government of India
“Pakistan-India Trade: What needs to be done? What does it matter?”, Wilson Centre, 2013
“Normalizing India Pakistan trade”, Indian Council for Research on International Economic Relations, September 2013
Rohit Kumar is a policy researcher. He works with a Member of Parliament in Delhi.
He can be contacted at rohit02@gmail.com