TRADE

 

PAK-INDIA TRADE

.



Problems and prospects

 

By HAMMAD BADAR
(hammadbadar@hotmall.com)
Lecturer, Department of Marketing and Agribusiness,
Faculty of Agri Economics and Rural Sociology,
University of Agriculture, Faisalabad.

Mar 14 - 20, 2005
.

 

 

Pakistan and India, the two largest economies of South Asian region, have tremendous potential for bilateral trade. However, the trade and economic relationship between the two has been a victim of the political relationship. Many apprehensions are obstructing the way in increasing trade and economic exchanges. Nevertheless, several attempts have been made to improve the situation, which reflect the mutual recognition of the inherent advantages of trade between the two countries.

In 2003-2004, India exported only $382.4 million worth of goods to Pakistan, out of $61,718 million in total exports. Pakistan's exports totalled at l2 billion, but only $93.7 million went to India, but this has not always been the case. The two-way trade does not represent the real potential that exists in the two countries. According to a study conducted by the Karachi Chamber of Commerce and Industry (KCCI), the actual potential of trade between Pakistan-India is estimated around $10 billion to $15 billion,

During the first four months of fiscal 2004-05, India's exports to Pakistan grew 328 percent to $167.38 million from $39.10 million during the corresponding period of the 2003-04. Imports during April-July 2004, however, dipped to $18.98 million from $25.31 million in the previous fiscal.

Table 1
TRADE WITH INDIA (MILLION $)

YEAR

EXPORTS

IMPORTS

BALANCE

1999-00

53.6

127.4

-73.8

2000-01

55.4

235.1

-179.7

2001-02

49.2

186.5

-137.3

2002-03

70.7

166.5

-95.8

2003-04

93.7

382.4

-288.7

 

 

ECONOMIC BENEFITS

India is the second most populous country of the world after China. Out of a population of over one billion, it has a literacy rate of 64% and houses a huge workforce of over 416 million, the biggest employer of which is the agriculture sector (63%) followed by industry and commerce (22%), service and government (17%) and transport and communication (4%).

In 2003-04, its GDP was $547.75 billion and a per capita income was $453 and growth in average GDP had healthy 8.1% mark. India's principal industries comprise textiles, processed food, steel, machinery, engineering, transport equipment, cement, aluminum, fertilizers, mining, petroleum, chemicals and computer software.

India's external trade totalled $101.47 billion in 2003-04 imports $58.23 billion, exports $43.24 billion. EU, USA, Russia, Japan, Iraq, Iran and Central and Eastern European countries are India's top trading partners.

Though over one-third of the population is living below the poverty line, India has a large middle class, which is still growing. According to Indian High Commissioner Menon, the Indian economy is now the world's fourth largest economy on the basis of purchasing power and its external resources have exceeded US$100 billion. The Indian economy comprises a strong and growing middle class of 300 million people with rapidly increasing purchasing power. The cumulative disposable income of the huge middle class in India makes it an extremely attractive market. Indian market, due to its sheer number alone, offers an unmatched trading potential for Pakistan.

Opening up of trade with India would help instill economies of scale, make our products more competitive in the international markets, lower production costs for the benefit of the consumers, increased productivity and production to absorb increased manpower. Trade is a two-way street and opening up trade with India could benefit us immensely due to the sheer numerical strength of the market.

Trade with India offers both the countries numerous benefits. The textile manufacturers in Pakistan are interested in buying new materials, dyes and chemicals, machinery, and finished goods. They are keen to introduce their fabrics, textile made-ups, and expertise to the vast Indian market. The opportunities are also in plastics, packaging, automobile parts, electrical equipment and many other products. The liberalization of trade between the two countries would reduce the undocumented trade, which is increasing alarmingly to help government earn substantial revenues.

Table 2
MAJOR ITEMS OF EXPORT TO INDIA (MILLION $)

ITEM

1999-00

2000-01

2001-02

Vegetables & Fruits

22.14

35.32

33.37

Textile Yarn & Fabrics

2.90

10.37

7.43

Plants for perfume, pharma

2.24

2.29

2.24

Rice

12.70

0.75

0.20

Leather & manufacture

0.18

0.35

0.41

Petroleum crude

4.17

-

-

Others

9.31

6.35

5.64

Total

53.64

55.43

49.29

 


 

Table 3
MAJOR ITEMS OF IMPORTS FROM INDIA (MILLION $)

ITEM

l999-00

2000-01

2001-02

Sugar, cane, refined

-

92.59

18.77

Organic chemicals

17.52

40.07

62.69

Oil-cake residue of soybeans

23.51

21.77

7.61

Iron ore agglomerated

15.27

13.25

13.48

Dyeing, tanning materials

11.74

10.53

9.23

Rubber manufacturers

9.31

9.20

13.40

Plastic in primary form

3.64

9.87

15.41

Tea

0.61

4.20

2.16

Cardamom, large

3.15

4.02

1.44

Transport vehicles & equipment

2.34

2.70

2.25

Bide Leaves

2.10

1.46

1.97

Iron and steel

2.04

1.35

1.05

Special machinery for particular industry

0.77

1.26

2.11

Manganese ores and concentrates

1.14

1.21

3.20

Ginger, not dried

1.17

1.03

0.64

Betel leaves

0.50

0.79

0.46

Coal

4.66

-

-

Others

27.91

23.03

31.02

Total

127.38

238.33

186.89

 


 

POTENTIALLY TRADABLE ITEMS BETWEEN PAKISTAN AND INDIA

POTENTIAL ITEMS OF EXPORTS FROM PAKISTAN TO INDIA

POTENTIAL ITEMS OF EXPORT FROM INDIA TO PAKISTAN

1. Cotton yarn and fabrics

1. Iron and steel

2. Rock salt

2. Auto components & spares

3. Dry dates

3. Pharmaceuticals & raw materials

4. Fresh and dried fruits

4. Castings and forgings

5. Finished leather and leather goods

5. Tea

6. Natural gas, electricity

6. Non-metallic mineral products

7. Vegetables

7. By-products of refinery

8. Fish (fresh and frozen)

8. Plastic materials

9. Sugar and molasses

9. Intermediaries for chemicals

10. Limestone

10. Agro-based raw materials

11. Fertilizer

11. Oilseeds

12. Marbles (including Onyx)

12. Cement

13. Precious & semi-precious stones

13. IT related software

14. Articles of textiles and clothing accessories

 

15. Knotted carpets

16. Scientific instruments, etc

Opening up of the Indian market is also essential for Pakistan because Pakistan's trade with major trading partners in the developed world time and again comes under pressure on the pretext of such issues as child labour, labour laws, environment, etc.

The mood of the Pakistani business community seems to tilt heavily in favour of opening up of meaningful, unrestricted, barrier-free trade with India. They feel that the billion plus Indian market offers not only immense potential for exports but also for imports of engineering products, capital goods and machinery as well as services to enhance productivity, lessen production costs and improve the quality of products.

 

 

TARIFF AND NON-TARIFF TRADE BARRIERS

There is an immense potential for the export of Pakistani commodities to India but due to certain barriers, this full potential is difficult to realize. The biggest barriers to trade are political. Because of India's market size and its central location; 80 percent of the intra-regional trade in South Asia is to or from India. All India's neighbours share a concern about being overwhelmed by the Indian goods. Decades of mutual political hostility and suspicion compound the challenges in trying to build strong trade relations between India and Pakistan. Both sides tend to see progress on issues like trade as a favour to the other country rather a benefit to one's own country.

Pakistan does not extend the Most Favoured Nation (MFN) status to India, but maintains a "positive list" of 600 goods that may be legally imported from India. India in principle granted MFN treatment to Pakistan in 1995-1996 and has no list of permitted or forbidden products, but the meagre imports from Pakistan suggest that India has found ways of imposing a de facto ban on most imports from Pakistan. Informal trade between the two countries is much larger, involving such goods as chemicals, medicines, videotapes, cosmetics, and viscose fibre. These goods find their way through third markets such as Dubai and Singapore, or through smuggling.

Indian Import Duty Regime is quite cumbersome and protective. In the presence of a "highly unfair tariff regime", there cannot be any meaningful trade with India. According to one latest observation of the United States Trade Representative (USTR), "Indian economy is the most closed in the world and its tariff remains among the highest in the world." Similarly, the World Bank also maintains that India does not impose formal restrictions on exports to or imports from Pakistan but other restrictions such as travel, remittance, custom clearance, etc., are generally believed to have a similar effect especially when one imports to India. The State Trade Enterprises of India, the WB believes, control most of the agricultural imports. Tariff Rate Quotas (TRQs) and technical standards and regulations, sanitary and phyto-sanitary (SPS) rules, health and safety regulations and TRIMS are being widely used by India to discourage imports. India has second highest average tariff rate in the world after Mexico. (Mexico's average tariff is 33% whereas the Indian was 32%, which has now been slashed to 26% after a lot of persuasion).

The peak rate of customs duty in India is 70%. Average custom duty till early this year was 32%. According to official claims, it was cut down to 18% in the budget this year. However, neutral analysts estimate that it was still around 26%. According to Pakistan High Commission in India, additional customs duty is levied on all articles imported in India equivalent to the excise duty that would have been payable if the goods were manufactured in India. Special duty is levied on specific articles and its rate is equivalent to 5% of the value of goods. Then special additional duty is levied on articles and the rate varies for various items. However, unless specified, it is equivalent to 8% of the value of the goods. Also, there are additional surcharges levied from time to time and include such taxes/duties as National Calamity Contingent Duty.

The rate varies for various items but for most goods it is one percent. In addition, a 2 percent education cess has been imposed on all imports in 2004 budget. After landing, imports are also subject to tax/duties by the state (including octroi, local taxes, local government sales tax and toll tax). The rate varies from state to state and may reach as high as 25%.

Major trade deals with countries of concern including Pakistan/all Saarc countries as well as China, need political clearance from the Ministry of External Affairs. For example, import of molasses from Pakistan is permitted only in small drums. The Indian government does not allow import in regular rail tankers for security reasons, making it more cumbersome and expensive.

Around the world, normally 2% of the consignment is inspected but in India, inspectors can inspect up to 25% of the consignment. Particularly imports from Pakistan are subjected to aggressive/unfair inspections by customs officials/inspectors.

Entire consignment is opened/inspected frequently, which results in loss of time and money besides making the import of perishable items impossible/unviable. Also, import of any item is subject to mandatory compliance of India Quality Standards and requires certification by the Indian Standard Institute (ISI) or by an agency which has a tie-up with ISI.

India requires that all imported items must be labelled as per specification by the Indian government. It must mention, besides the list of ingredients, the percentage of constituents/ingredients in the product. In the absence of IPR Act (intellectual property rights), it exposes the foreign exporters/manufacturers to the hazard of copying/counterfeiting.

The import of certain agriculture and sensitive items is controlled by the government/ministry of agriculture and require import licence/permit. Tariffs are high on agricultural products also.

Pakistani exporters are required to obtain licence by the government, which is a very cumbersome and frustrating experience. Due to non-availability of representatives of local banks in each other's country (India and Pakistan), opening of LC is a major problem. New Delhi allows opening of LC in the banks recognized by Indian government.

Sanitary and Phyto-Sanitary (SPS) provisions of WTO are being used to unfairly discourage imports or restrict import of some items like rexene, certain types of rayon and food items, which are used/produced elsewhere and in India as well. All Pakistani textiles/bed wears are subject to colour testing at a rate of Indian Rs2500 per colour consignment making the Pakistani textile in India highly uncompetitive.

CONFIDENCES BUILDING MEASURES

Taking into account all the aforementioned barriers, Pakistan should strongly urge India to remove unnecessary tariff barriers; otherwise there is absolutely no hope for improved trade and business environment in the region. Besides, there is an urgent need to take following confidence building measures to enhanced trade between the two countries.

1. The private business sector is the vehicle for national and regional economic development. The private sector in both the countries should be allowed a much greater role in economic policy formulation and implementation.

2. The government should extend permission for visit of trade delegations, holding trade fairs and business visits of business persons immediately on the recommendation of FPCCI. Frequent exchange of trade delegations promotes understanding and goodwill and helps remove misgivings and apprehensions. They provide opportunity for materializing contracts for trade and business joint ventures.

3. Before any business can effectively enter the export market, it needs to be viable and competitive locally. This requires that the local business environment and cost of doing business is made viable and attractive. The governments of both the countries need to improve the local conditions of business risk, cost and time of setting up and operating business, infrastructure and communications. This will require allocation of greater resources to these sectors from the federal budget, which should be diverted from large allocation to unproductive expenditures.

4. Marked differences in the tariff structure of Pakistan and India is a major obstacle in implementation of free trade agreements between them. India has the highest tariffs in the South Asia Region coupled with subsidy policy for certain sectors. If a uniform tariff structure is agreed and is simultaneously implemented equitably in consultation with the private sector, a level playing field will be provided and no country will feel disadvantaged due to tariff disparity which can adversely affect cost competitiveness of traded goods and services.

5. Pakistan should immediately grant Most Favored Nation (MFN) status to India. In the short run, there could be some economic distortions but within three years things will improve economically. After initial adjustment both the countries would find a new economic equilibrium in which they would be producing and trading goods and services in which they have a comparative and competitive advantage.

6. Availability of efficient means of transportation is essential for efficient movement of goods and services. Presently all modes of transport i.e. air, rail, road and sea are not available between the two countries of South Asia. All possible modes of direct transportation should be opened to facilitate efficient movement of goods and people. Easy availability of efficient and cost effective modes of transport will reduce time and cost of travel and transport within the region for goods and people.

7. Restrictive visa policy and inefficient visa processing staff and system greatly retard movement of people. A liberal visa policy should be implemented through efficient visa staff. Businessmen and professionals recommended by their representative Chambers and Associations, students and tourist groups organized by authorized tour operators should be granted visa within 24 hours. Greater personal interaction between people of two countries, particularly the private business sector, will promote positive understanding and goodwill. Business visitors and recreational tourists will also generate significant revenue from tourism and provide opportunities for accelerated socioeconomic development and regional trade.

CONCLUSION

Bilateral trade between the two countries will bring benefits not only to both the governments but also for the business circles on both sides as well. It is easy to list the benefits of expanded India-Pakistan economic relations, but much more difficult to develop a road map for getting there. Ultimately, trade is unlikely to be the lead issue in this complex relationship. Both sides are accustomed to their current economic isolation from one another. Once the two countries' leaders decide to start a political dialogue, expanding trade could become a useful adjunct to the political process, instead of being hamstrung by it. For making the South Asian region economically developed, India and Pakistan being the larger countries and nuclear powers have a major responsibility for taking the lead for transforming the region into an economic bloc, worthy of its physical and human potential. Given the required political will and active support of the private sector, this expectation can soon be materialized.