May 3 - 16, 2010

Government of Pakistan has been suggested by a penal of economists to consider granting India the status of 'Most Favourite Nation' (MFN) to exploit huge bilateral trade potential. Pakistan and India, which account for almost 90 per cent of South Asia's GDP, should normalize trade with each other on the basis of MFN and for this it is essential to move from a positive list approach to a negative list approach, according to a report recently submitted to the Planning Commission by the Advisory Panel of Economists.

Free trade relations with India would enable Pakistan to achieve a higher and more equitable GDP growth and will have a salutary effect on prices. Analysts believe that the normalisation of Pakistan-India trade would put an economic brake on military escalation in the subcontinent and could lead to economies of scale and greater efficiency, as transportation costs for bilateral trade would be minimal because of their shared land borders.

Islamabad's stand on granting MFN status to India, which already granted Pakistan MFN status in 1996, 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.

The trade barriers have increased the cost of doing business between the two countries, as bilateral trade is routed through third destinations like Dubai, Singapore and Hong Kong.

With 75 per cent imports and 25 per cent exports from Pakistan, the bilateral trade balance currently goes in favour of India. Official bilateral trade does not exceed $200 million a year, which is less than one per cent of their global trade, while illegal trade via Dubai, Hong Kong and Singapore is however estimated at over $2 billion a year.

Pakistan's textile sector is facing the brunt of price hike. Cotton, an important cash crop, accounts for 8.2 per cent of the value added in the agriculture sector, about 2 per cent to gross domestic product and adds over $2.8 billion to the national economy.

Local business community wants India to take the lead and continue reducing tariffs, among the highest in the world, especially those on goods from Pakistan. In case of a free trade deal with India, Pakistan's textile sector, which accounts for two-thirds of the country's exports, would gain access to India's largest middle class.

Last month, the panel of economists, constituted by the Planning Commission, made its final report public. The sequencing of policy implementation as a first step, trade relations between the two countries should be normalised by trading on the 'most favoured nation' (MFN) basis, the report said. Although the bilateral trade between Pakistan and India in 2007-08 valued $2.3 billion, representing approximately 2 per cent and 5 per cent of Pakistan's total exports and imports respectively 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 per cent 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.

The panel led by Dr Hafiz Pasha in its report urged the government to allow import of raw material from India by expanding the negative list. The panel described the fear of Pakistani manufacturing sector being swamped and rendered uncompetitive by Indian goods as highly exaggerated. The panel stated that the Pakistani industry has learnt to survive against the heavy competition that it has had to face on account of rather porous borders. Pakistani governments have historically not only had a rather lax attitude to widespread smuggling but have also followed fairly liberal import policies in respect of capital goods, technology import and production processes.

Local business community wants India to lower its export subsidies that put Pakistan at a disadvantage.

Presently, imports of around 200,000 cotton bales are in the doldrums as Indian government has imposed an export duty on the produce. The lint prices hit a record high level in the country after India imposed regulatory duty on its exports besides shortfall of 2.6 million bales in crop season 2009-10.

Analysts urge on lessening trade restrictions that would not only expose consumers to a wider variety of goods at cheaper prices but manufacturers would have access to larger markets.

There is a huge scope for increasing bilateral trade between India and Pakistan with gigantic consumer markets.

There is a market for Pakistani cement, fabrics and many other items in India, whereas Indian automobile and pharmaceutical industry eyes Pakistan with interest because of a price differential in similar products in the two countries. India could achieve its target of tripling tea exports to Pakistan, while Pakistan could capture the India's cement market.

Smuggling of Indian goods into Pakistani markets is hurting national exchequer, local traders, and consumers. Though the country's import list with India declares hardly 30-40 items, yet the local markets are flooded with goods coming from India.

Indian goods are in high demand in the entire country but these are smuggled illegally. The business community suggests that the prices would be fair for customers and profit margins much higher for traders if these items were coming via legal trade.

India-Pakistan composite dialogue was the first casualty of mounting tension between the two south Asian neighbors after Mumbai terrorist attacks in 2008. The proposed secretary-level talks on enhancing trade ties between the two countries scheduled for December 2008 in Islamabad had been postponed for indefinite period due to tense atmosphere that emerged after Mumbai carnage.

Before Mumbai attack, the two countries were engaged in negotiations to devise a comprehensive mechanism for removing the bilateral trade barriers.

The two countries were expecting to enhance the bilateral trade to $10 billion a year. The prospects for expanding direct trade between the two countries had brightened after trade talks resumed between the two neighbors in 2003. The two countries had agreed to allow trucks to move into each other's border up to half or one km and construct truck terminal facilities.

While Pakistan has already developed a truck terminal at Wagah border with a capacity to accommodate about 100 truck lorries, India has yet to construct the facility on its side at Attari border.