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India-Pakistan trade: growth potential, barriers and issues

Published on 18th Jan, Edition 3, 2016

 

Presently, India-Pakistan official bilateral trade accounts for only one percent of their respective global trade because of restrictions on the types of goods that can be traded revenue and will be the future takings of economic progress of both the countries. This restriction on traded goods has forced both countries to rely on trade with far off countries for important raw materials, which is leading to high transportation costs.

The World Bank has estimated that annual trade between India and Pakistan could grow to as much as $9 billion if barriers are lifted. Much of the current trade of the illicit products goes through Dubai, where they are repackaged and are smuggled into both countries, meaning higher prices and less tax revenue.

Bilateral trade through land route is beneficial to both countries, as the extra cost of transportation on trade via sea route is estimated to be $3 billion. Similarly, the both need to increase the list of items that can be traded through the route of land, as many items including hosiery, garment and sweets can be easily traded via Wagha border, says the Bank.

Comprehensive analysis of trade data shows that the two countries are important partners in trade. Pakistan’s exports to India are almost half its exports to South Asia, while its imports from India are in excess of 70 percent of its imports from South Asia, which in value terms are more than its imports from France, Canada, the Netherlands, Turkey, Iran and Thailand. Nevertheless, trade between the two countries is lower than its potential.

With 75 percent imports and 25 percent exports from Pakistan, the bilateral trade balance currently goes in favor of India.

Number of barriers MAR exports

Pakistani exporters want India to move for unified standards and remove non-tariff barriers (NTBs). For example, India is the most feasible market for exporting Pakistan’s excess cement capacity, while it is most competitive for India in the form of transportation charges as compared to other regional countries, which usually constitute 15 percent of the imported price of cement. There is also no big gap in the cement prices of Pakistan and India. China is the biggest rival to Pakistan in the regional markets. The quality of Pakistan’s cement is, however, far better than China. The country produces four types of cement and the raw material — gypsum, limestone, clay/shale — used for cement manufacturing is found in abundance in the country.

Due to abolished countervailing duty and additional customs duty on cement imports, the Pakistani cement would become competitive in the huge Indian market.

Analysts calculate that the landed cost of Pakistani cement in India would be cheap. The Pakistani exporters have yet to fully explore the Indian market where annual demand stands at around 5 million tons. Though India is the non-traditional cement market, yet a number of NTBs are hampering Pakistani exporters to export cement to India. The cement exports to India have largely been through sea or by railway. Cement exports are also affected by the high freight charges, which are received by the tucks and foreign shipping companies for the haulage of cement from Pakistan to India.

Bilateral trade on MFN Basis

In 2011, Pakistan announced to grant India the status of the Most Favored Nation (MFN). Islamabad took 16 years to reciprocate India that granted MFN status to Pakistan in 1996 in a move to improve trade relations between the two countries. Hardline religious organizations announced countrywide protests against the Islamabad’s decision to this status to India in a move to force the government to backtrack on its decision.

The country’s stand on granting MFN status to India has so far been conditional to the removal of New Delhi’s restrictive trade policies like tariff and non-tariff barriers, which inhibit export growth from Pakistan. Islamabad also announced a list of negative items, which will not be traded between the two as opposed to a small list of positive items, which would get announced every year.

Some analysts believe that the bilateral trade on the basis of MFN would enable Pakistan to achieve a higher and more equitable GDP growth with a salutary effect on prices.

The hardliners on both sides of Indo-Pak border must not be allowed to disrupt the peace process through trade normalization as the Islamabad’s reciprocating step is likely to put an economic brake on military escalation in the subcontinent.

Critics say the open trade of agricultural goods with India under MFN status is likely to destroy local growers who do not enjoy farm subsidies like Indian farmers have had. The agriculturalists fear that the local markets would be flooded with Indian goods, which are cheap because of low input cost in India.

Peace is vital

Will the idea of applying an economic brake on military escalation in the subcontinent through greater trade work? Fact of the matter is that this has not worked in the past. It has been the political tension and military escalation on both sides of the border, which has so far been disrupting peace process through trade. All bilateral efforts made in 2011 and 2012 to promote trade relations fizzled out in January 2013 when two countries traded fire on disputed Kashmir border. This started a blame game leading to more skirmishes on border and even causing casualties on both sides.

India’s former External Affairs Minister S. M. Krishna played a key role in the revival of the Indo-Pak peace process, which had collapsed after the 2008 Mumbai attacks. It goes to the credit of Krishna that the countries in 2011 witnessed a genuine movement on issues such as trade and visa liberalization.

Under the Foreign Ministry of S. M. Krishna, India took some very important steps to open trade and investment doors to Pakistan. For instance, India overturned a ban on foreign direct investment (FDI) from Pakistan and allowed a citizen or entity from Pakistan to make such investments in India.

The Reserve Bank of India (RBI) allowed Pakistani citizens and entities to invest in shares and convertible debentures of Indian companies under the FDI scheme. The Indian cabinet excluded 254 items, which make up to 30 percent of the total sensitive products’ list. The approval had been given under the South Asian Free Trade Agreement (SAFTA).

It is not only trade that will promote peace process between India and Pakistan, but enhancing smoothly the volume of bilateral trade between the two much closed countries complete peace can play a major role.

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