Aug 25 - 31, 2008

Trade policy 2008-09 announced by the Commerce Minister Ahmed Mukhtar, last month has opened up much larger avenues of trade with India. This is for the first time that India has been given a special place in Pakistan's trade policy. After successful implementation of this policy it is most likely that India will become the second largest trade partner after china.

The policy does not give India MFN status because of its refusal of removing non-tariff barriers. It facilitates import of 136 new items from India, 72 tariff lines were added to the importable list of raw materials, chemicals and industrial output, nine tariff lines for pharmaceutical products and vaccines, two for fruit and vegetables, 19 for fertilizers, 32 for machinery and parts. Pakistan has officially diverted a big share of its global trade toward India following inclusion of 438 new importable items in the positive list during the last 10 months. Pakistan's tradable list with India had 591 items in 1997, but it has been enhanced to 1938 items in 2008.

It allows import of CNG buses from India with a commitment to manufacture such buses in Pakistan. It allows import of diesel and fuel from India. To boost export the policy extended the scope of Duty and Tax Remission for Export (DTRE) scheme for allowing import of raw materials and input goods from India without payment of custom duty, excise duty, sales tax and withholding tax. Good quality stone for further processing the manufacturing/ equipment for mining / quarrying and grinding of materials will be allowed from India. To give access to our students particularly, it allowed import of academic, scientific books from India. Rice farm machinery namely paddy harvesters will be imported from India through Wagha by road.

The import value of the 136 items now added to tariff lines with India stood at $2.8 billion this means the government has diverted this import value of $2.8 billion to India which will increase its exports to over $3 billion from the current level of $1 billion and become the second largest trading partner of Pakistan after China. This of course a timely and wise step especially in the face of increasing freight charges and making things more expensive when one imports from distant places. In fact, people of the two neighboring countries have suffered heavily due to politics of hatred unleashed in the two countries. The political issues between the two countries should be addressed through dialogue on one hand while the economic interests of the country and the people should be looked at different forum on the other hand so that at least the people who have suffered a lot during last 60 year could be provided a breathing space by such positive policies.

Defending the incentives extended to India, Minister for Commerce said, "India is our neighbour and we are gradually liberalizing our bilateral trade. Composite Dialogue process, especially on economic and commercial cooperation has been instrumental in addressing the bilateral issues. We are announcing to enlarge the list of importable items from India, which is based on the requests of our stakeholders".

"Cheaper raw material sourced from India would make our exports more competitive in international market. Although the list is being issued separately, I may mention that we are allowing import of diesel and fuel oil from India, because it will be cheaper due to the difference in transportation cost. This will also help us to address our global trade deficit. Customs duty on the import of CNG Buses was brought from 15% to zero in the Budget 2008-09. In case any Indian manufacturer of CNG buses makes a firm commitment to establish manufacturing of such buses in Pakistan, the Ministry of Commerce may provide special dispensation for import of 10 buses by road via Wahga from each possible investor as test consignments," the commerce minister said.

Stainless steel and cotton yarn is importable from India by train. In order to further reduce the cost of doing business, it has been decided to allow their import by trucks through Wahga as well. The prices of academic, scientific and reference books are quite competitive in India and technical and professional books are already importable from India. Now in order to give access to our people to cheaper books it has been decided that import of academic, scientific and reference books may be allowed from India, the Minister argued. Mining industry has serious problems of availability of good quality stones for further processing due to blasting which creates wastage of precious resources. To remedy this it has been decided that import of machinery / equipment for mining / quarrying and grinding of minerals (along with spares) would be allowed from India.

Later at a post policy press briefing Ahmed Mukhtar, replying to critical questions from a number of newsmen that the trade policy had virtually conferred the status of most favored nation to India without any reciprocal measures from the other side, said that measures announced in the policy were more in the interest of Pakistan than India. He stressed the need for coming out of India phobia to reap maximum gains of bilateral trade between the two countries. "India is becoming an important economic partner and trade with this country will be in the interests of Pakistan," he said adding that trade with neighboring countries including India would be very much cost effective as compared with trade with other countries. Mukhtar said Pakistan has not changed polices.

The year 2008 has in fact already seen a wide-ranging number of breakthrough developments in areas such as film, finance and flights. Bollywood could finally be coming to Pakistan as Pakistanis parliamentary committee on culture has given its go-ahead to lift a four-decade ban on Hindi films.

The Securities and Exchange Board of India (SEBI) and the Securities and Exchange Commission of Pakistan (SECP) have signed a MoU to encourage greater cooperation in promoting and developing their respective capital markets. Of perhaps the greatest impact, both countries have agreed to double the number of weekly passenger flights with direct flights commencing between Delhi and Islamabad. A key reason why intra-regional trade is being impeded in South Asia is the persistent hostility between India and Pakistan. Trade between these countries has been abnormally low. The share of total trade between Pakistan and India measured by the sum of the bilateral exports amounts only to 0.9 per cent of total exports from India and Pakistan. This is only 40 per cent of the equivalent measure of bilateral trade between Malaysia and China, two countries of comparable GDP and proximity and only 9 per cent of the equivalent measure of trade that occurs between Argentina and Brazil, other countries of comparable size.

Bilateral trade between India and Pakistan reached $1.6 billion in 2006-07 from $835 million in 2004-05, so this has almost doubled. For the first time, imports from India to Pakistan have crossed the $1 billion mark and currently stand at $1.25 billion. Pakistanis exports to India on the other hand have grown slowly from $280 million in 2004-05 to only $370 million in 2006- 07 despite the fact that India has granted MFN status to Pakistan. While Pakistan has so far not applied the provisions of South Asia Free Trade Agreement (SAFTA) to Indo-Pakistan trade, the largest component of intra-regional trade in South Asia, there is no doubt that strong economic relations between Pakistan and India would go a long way in securing SAFTA's success.

However, trade flows between India and Pakistan have been low over the course of the past half a century for three main reasons: political tensions, the use of import substitution policies to promote industrialisation, and in contrast to other regions of the world, relatively little commitment to regional integration. There are three key reasons why trade between India and Pakistan needs to be enhanced. First, viewed in a larger regional context, South Asia is the least integrated region and stronger economic relations between India and Pakistan is a key element of regional integration and stability in South Asia. Second, there are vast un-tapped trade and investment possibilities between the two countries which can be gainfully exploited with significant welfare gains and opportunities to alleviate poverty and strengthen human security. South Asia is home to 24 percent of the world's population but 42 per cent of its poorest people. Third, as natural trading partners with a common border, trading with each other can be substantially higher as the potential is estimated to be 10 times the current level.

Research of the World Bank found that informal trade between India and Pakistan was around $545 million in 2005, a finding based on field research in border regions, Dubai, and major urban markets. There is a need to simplify and align the bilateral trade regime so that incentives for smuggling are reduced. This would expand trade through formal channels. Indeed, there is evidence that informal trade between India and Pakistan has declined in recent years, as both countries have liberalized their trade policies.

The Indian Council for Research on International Economic Relations in a 2007 survey of Indian firms found that there are vast untapped trade and investment possibilities between the two countries both in goods and services. However, there are still no Indo-Pakistan joint ventures despite strong business interest on both sides due to the absence of an enabling environment for such investment. For example, there are no institutional mechanisms for bilateral investment guarantees. In recent years, the private sector has played an active role in identifying areas of trade interest, areas of possible joint ventures and other forms of co-operation between the two countries. Potential sectors for mutual cooperation between India and Pakistan include agricultural products, tyres, auto spare-parts, minerals, chemicals, pharmaceuticals, leather, textiles, telecommunications, gas pipeline, electricity generation using coal and wind energy in the Sindh province of Pakistan. Studies undertaken by the private sector also see a large scope for trade in several service sectors such as health, entertainment services, information technology, energy and tourism. India and Pakistan have mostly common multinational companies operating in their respective countries such as Standard Chartered, Unilever, GSK, BAT and British Airways, which are a force to be harnessed as they can act as meaningful conduits for trade and investment if they source raw material from each other. There are huge opportunities for a two-way trade in readymade garments, particularly ethnic garments such as shawls, shalwar-kameez and saris. Trade in agricultural commodities could bridge the short-term supply shortages caused due to seasonal crop fluctuations. India and Pakistan can enter into joint ventures for the production of bulk drugs with arrangement in terms of technology supply and marketing support.

Experts believe that there is an immense potential for cooperation in the energy sector. India and Pakistan could enter into joint ventures to tap the global market for software. There is scope for trade and cooperation in the film, television and music sector capitalizing on a common culture and dynamic and expanding media industries in both countries. Tourism holds immense potential for the two countries recognizing the shared cultural heritage and the emergence of new more dynamic and less risk-averse airlines in both countries. With an improved security and political environment and a resolution of the long-standing Kashmir conflict, citizens of both countries would be able to reap a large peace dividend. It would come not only through more trade in goods and services, but also from joint ventures and investments in each other's country, improved coordination of economic and financial policies, and, last but not the least, from financing investments in human capital and economic infrastructure by releasing budget resources that are now committed to defence and security.

To reap the full benefits of Pakistan-India trade requires complementary economic and social reforms. First, trade liberalization between Pakistan and India would be even more successful if it is pursued in the context of a wider reform agenda that enhances domestic productivity, international competitiveness and economic growth. Second, trade liberalisation will work best with a level-playing field. Pakistan and India would gain by continuing to discuss ways to streamline their domestic trade regimes to provide equal opportunity for producers and exporters in both countries to gain from expanding bilateral trade. Third, investments in the hardware (transport and communication) as well as software (legal and regulatory trade framework) are required for effective trade integration. As the SAARC chamber has recently pointed out, the bilateral economic discussions could focus on concrete steps to remove hindrances in the way of logistics of trade, ease visa restrictions for business travel, improve trade facilitation and strengthen infrastructure.