Aug 25 - 31, 2008

During the last several years, opening up of trade between India and Pakistan has become the most sought after question at many policy forums. The issue gained particular importance after India granted the Most Favored Nation (MFN) status to Pakistan, to comply with the principles of World Trade Organization (WTO) regime in 1995, and Pakistan's reluctance in reciprocating so far. To some extent, Pakistan has reasons for being sensitive about extending MFN to India out rightly. Although India extended MFN status to Pakistan, throughout the last decade Pakistan has suffered an adverse balance of trade vis--vis India. It is natural for Pakistan to be concerned with one-sided export growth strategies. Pakistan may have to reciprocate with some sort of a favorable trade policy towards India sooner rather than later because the United States wants it that way. Pakistani press reports suggest that the US has stepped up pressure on Pakistan to give India MFN status as mandated by the WTO.

Bilateral trade between India and Pakistan reached US$1.6 billion in 2006-07 from US$835 million in 2004-05, so this has almost doubled. For the first time, imports from India to Pakistan have crossed the US$1 billion mark and currently stand at US$1.25 billion. Pakistan's exports to India on the other hand have grown slowly from US$280 million in 2004-05 to only US$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. Trade between Pakistan and India is very small compared to trade between Pakistan/India and its other large partners in South Asia. There is a vast untapped trade potential between the two countries. Viewed in a larger regional context, South Asia is the least integrated region compared to other regions namely East Asia, Europe and Central Asia, Latin America, Middle East and North Africa, and Sub- Sahara Africa. It is therefore in the interest of the two countries to take necessary steps to enhance trade.

Issues relating to Pakistan-India trade are of immense interest not only to both countries but to the whole South Asian region. There are three key reasons why trade between Pakistan and India needs to be enhanced. First, viewed in a larger regional context, South Asia is the least integrated region and stronger economic relations between Pakistan and India is key element of regional integration in South Asia. Second, there are vast untapped trade and investment possibilities between the two countries which can be gainfully exploited with significant welfare gains for their populations. 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.


After the Indo-Pak war in 1965, trade was almost negligible for a period of nine years. Bilateral trade did resume in 1975-76, following the 1974 protocol for the restoration of commercial relations on a government to government basis, signed by the two countries after the 1971 war but it remained at an insignificant level till very recently. Since 1996, trade between the two countries has been at much higher levels than before. In that year India granted MFN status to Pakistan. Pakistan in turn increased its list of permissible items to 600. In 2003, another 78 items were added to the permissible list. Again, in 2004 and 2006 the permissible list was expanded further to include 72 and 50 new items. Interestingly, neither the Indian Government officials nor the Chambers of Commerce has the list of permissible items; this clearly means that Indian is playing double game. The number of items exported from Pakistan on the other hand has shown a more fluctuating trend. Pakistan exported 112 items in 2000. The number of items peaked in 2002 at 193, after which there was a declining trend and then in 2005 the number of items traded was the highest ever at 451 and 500 in 2006. As Pakistan and India are members of the South Asian Association for Regional Co-operation (SAARC), they have exchanged tariff concessions under the South Asian Preferential Trading Arrangement (SAPTA) Rounds.


Textiles and clothing is the largest industry in the manufacturing sector in Pakistan in terms of its contribution to GDP and exports. Pakistan's export of textile manufactures, accounting for 57% of total exports not only registered a negative growth of 2.5% but also was a drag on the overall performance of exports in fiscal year 2007-08. The textile and clothing industry in India accounts for 4% of its GDP and 17% of total export earnings. Thus, even though India's textile and clothing exports are higher than Pakistan's, they are much more important for Pakistan than for India. The two countries can trade with each other to improve the supply of different varieties of cotton yarn. India produces good quality short staple yarn whereas Pakistan produces medium and long staple yarn. Also, the short-term shortages in cotton, created by crop fluctuation in both countries can be overcome through trade. Products that have a huge potential market in India are raw wool for the carpet industry, clothing accessories, cotton fabric and hand and machine made carpets.


Despite trade barriers, trade in agriculture items helps to overcome short-term fluctuations in supply. Trade in agricultural commodities between the two countries could bridge the short term supply shortages caused due to seasonal crop fluctuations. Items of potential import from Pakistan are molasses, dry fruits, and fresh fruits. Items of potential export from India are tea, coffee, wheat, oil meals and fresh vegetables. India and Pakistan are both exporters of processed fish. The two countries have adequate marine resources which could be gainfully tapped to benefit both countries. India and Pakistan can set up joint ventures for the export of value added fish products.


India has a strong engineering and capital goods base as compared to Pakistan. The key sectors that contributed to exports were automobiles and automotive components, electrical equipment and machinery, steel and machine tools. India has emerged as a low cost producer of steel. Imports from India of steel, a major input for engineering goods, could help in reducing production costs of engineering goods in Pakistan.


There is a huge potential to export several basic chemicals to Pakistan. In particular, Pakistan can import petrochemicals that can be used by Pakistan in the manufacture of a large number of goods including synthetic fibres, dyestuffs, plastic products and artificial rubber. The demand for petrochemicals in Pakistan is growing steadily and so is its import. Buying directly from India would mean lower prices for materials used in the export oriented industries such as textile and leather. Joint ventures in the field of petrochemicals would be beneficial to both countries.


Healthcare in India has undergone significant changes with the entry of private players in the healthcare sector. Indian hospitals have set up hospitals in several countries. Some Indian hospitals have also set up specialized centres in foreign hospitals. Pakistan could also enter into joint ventures with hospitals in India. Pakistani patients could also go to India for treatment. So far, only a handful of Pakistani patients have visited India for treatment.


Pakistan and India share a common culture; hence there is scope for trade and cooperation in the film, television and music sector. Pakistan produces very few movies. On the other hand, India is the second largest producer of films (around 900 per year). Now Indian films are allowed to be screened in Pakistani theatres (and vice versa). The trade potential in the entertainment industry particularly in films, television and music can be tapped by encouraging joint productions. Exchanging broadcasting rights to telecast each other's programs on television is yet another trade opportunity for the two countries.


India has established itself as a major player in the information technology segment. Key success factors are; a huge reservoir of trained software professionals particularly in the areas of software design, project management and network design and management and a large English speaking workforce. The software industry in Pakistan is still in its nascent stages though it has a huge potential to emerge as a major software exporting and training centre. Pakistan and India could enter into joint ventures to tap the global market for software.


There is immense potential for co-operation in the energy sector. India has a large demand for energy. Pakistan's potential role can be seen as a potential transit route for energy from Iran and Central Asia. It is estimated that Pakistan would gain between US $1 to US$ 1.2 billion per year in transit fees. It would also be able to use the pipelines for its own energy needs. India has a manufacturing base for the production of liquefied petroleum gas (LPG) cylinders. Pakistan and India could enter into a joint venture for the manufacturing of LPG cylinders.

Trade in identified potential sectors can be realized only if there is an understanding of the trading environment in which such trade takes place. It is important to identify the non-tariff barriers to trading particularly those related to visas, trade logistics and the conventional non-tariff barriers that arise in the implementation of measures such as Technical Barriers to Trade (TBT).


The sequencing of policy implementation should be such that as a first step trade relations between the two countries should be normalized by trading on MFN basis. As a second step, policymakers should address problems related to information exchange, trade facilitation, banking, non-tariff barriers, visas and communication. As a third step an enabling environment for investment has to be created so that Pakistan and India can enter into joint ventures. The key policy suggestions are outlined as follows:

Trade on MFN Basis - As a first step, and perhaps the most important one, Pakistan and India need to normalize trade with each other on an MFN basis. It is essential to move from a positive list approach to a negative list approach.

Information Exchange - As new firms enter into Indo-Pak trading, trade needs to be facilitated through better information exchange on commodities and quantities to be traded. Establishing web portals towards this end would perhaps be the easiest in terms of implementation. Information on each other's policy environments should be disseminated to traders. Such information should be made available on Government websites. Improving information flows between the two countries will reduce the search costs for trading.

Transport Routes - As there are only two operational routes, Mumbai-Karachi sea route and the Attari/Wagah rail link on the land border, new routes should be opened up. Opening the Attari/Wagah border to allow transportation of goods by road should be done at the earliest as the road link for movement of passengers is already operational. New rail and road links e.g. the Khokrapar-Munabao link and the Srinigar- Muzaffarabad link (for goods transportation) should be opened.

Transport Bottlenecks - Abandoning the positive list approach would allow goods to move freely on the direct routes thereby lowering transaction costs. The rail protocol should be amended such that restriction on wagon balancing is removed and wagon availability is improved. The shipping protocol should be amended so that third country and non-national flagships can ply on the Mumbai-Dubai sea route. This would help in lowering shipping costs.

Banking - Currently, the payments system is formalized through the Asian Clearing Union which is inefficient as payments are often delayed. The two countries need to have an institutional arrangement so that the state, private and foreign banks can participate freely in banking transactions. Visas - Visa restrictions should be eased by eliminating city specific visas prior to entry and police reporting on arrival.

Communication - Uninterrupted telecommunication links between the two countries would facilitate trade between the two countries.


A lot has been written about trade ties between Pakistan and India with opposing views those who think that trade would facilitate cheaper access to goods for the consumers in both the countries while others believing that India being the larger economy will dominate the sub-continent. It is believed that increased trade relationship can play a vital role in normalizing the political relationship between the two countries. This will, therefore, benefit millions of people living in both countries as the resources would be diverted from less desirable areas, such as defense spending, to poverty alleviation initiatives. Having said so, another aspect must not forget i.e. India is not friend of Pakistan and will remain hidden enemy of Pakistan. There are many recent days' examples where it has back stabbed Pakistan. Hindu extremists have done economic blockade of Muslims living in Indian Held Kashmir since last many months which has made lives of Muslims miserable. Likewise, it's in common knowledge that RAW (Indian Intelligence Agency) is involved in insurgency in Balochistan and FATA. RAW is continuously providing financial, technical, logistic, and intelligence support to the ill-wishers of Pakistan. How can we forget its role in the Mukti Bani movement in East Pakistan and subsequent war in 1971? On number of occasions, India has arrested innocent Pakistanis visiting India on tourist visa; subsequently Pakistan got their dead bodies. India always blames Pakistan's ISI for any of their troubles but never give proofs of ISI involvement. It is therefore, safe to say that such allegations are used to pressurize and malign Pakistan. It must be understood that confidence level between Pakistan and India can only be at minimum acceptable level if India amends it ways and treat Pakistan equally and fairly. One can argue that business is business and is above such emotional issues but in reality such emotional behaviors always dominate the trade between the countries. While forming policies, it must be kept in mind that only those initiatives should be taken which result in benefit to Pakistan. Moreover, Pakistan should not trade with India on the price of its sovereignty and closure of local industry.