EXPLOITING PAK-INDIA TRADE POTENTIAL

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

June 28 - July 04, 2010

The bilateral trade between Pakistan and India has a potential to grow in the range of $3 to $10 billion due to geographical proximity and cheaper transportation cost. An Indian envoy recently said that the Pak-India trade potential is much larger than the annual trade of $2 billion in recent years. India increased its export to Pakistan during the first 10 months (July-April) of outgoing fiscal year 2009-10, despite post-Mumbai tensions, while Pakistan witnessed a decline in its export to India during the same period.

Experts in India recommend moving to a most favored nation (MFN) basis and from a positive list approach to a negative list approach. Opening trade with India will also have a salutary effect on prices in Pakistan, according to a recent report prepared by the panel of economists appointed by Indian Planning Commission on "medium term development imperatives and strategy for Pakistan".

The report maintains that the fear of the Pakistani manufacturing sector being swamped and rendered uncompetitive by Indian goods is highly exaggerated. Government of Pakistan has already been suggested by a penal of economists to consider granting India the MFN status to exploit huge trade potential.

The analysts find no change in Pakistan's exports pattern, despite the fact that the entire world has turned their face toward India to improve trade relations. They contend that free trade relations with India would enable the country to achieve a higher and more equitable GDP growth and will have a salutary effect on prices.

This month, Indian High Commissioner Sharat Sabharwal visited the Karachi Chamber of Commerce and Industry (KCCI) and said that India's fast growing economy offers opportunities of an expanding market, investments, technology, and entrepreneurial resources for its neighbors.

"I would like to assure you that any positive move from your side in opening up trade will not find the Indian response wanting, APP quoted Sabharwal as saying while speaking at KCCI on Wednesday.

Pakistani 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.

Referring to the allegations of non-tariff and para-tariff barriers in India, Sabharwal said that requirements of certification, sanitary and health regulations, labeling, marking and packaging are not unique to India as they are prevailing in all countries. He reiterated that such regulations are applied to all trading partners of India and are not specific to Pakistani exports.

The trade barriers have increased the cost of doing business between the two countries, as bilateral trade is routed through third countries 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 favor of India. India exported goods worth $876.75 million during July-April period registering an increase of $10 million over the same period last year, according to the official data. India imported goods worth $216 million from Pakistan during the period. Pakistan witnessed a trade deficit of $660.6 million with India. The increasing trade volume showed improvement in economic relations but the trade balance remains in favor of New Delhi.

Official bilateral trade does not exceed $200 million a year, which is less than one percent of their global trade, while illegal trade via Dubai, Hong Kong and Singapore is however estimated at over $2 billion a year. 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.

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.

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

Pakistan and India, which account for almost 90 percent of South Asia's GDP, should normalise 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 of Pakistan by the Advisory Panel of Economists.

Although the bilateral trade between Pakistan and India in 2007-08 valued $2.3 billion, representing approximately 2 percent and 5 percent 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.

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. Indian goods are in high demand in the entire country but these are smuggled illegally. The prices would be fair for customers and profit margins much higher for traders if these items were coming via legal trade. The goods, which are illegally traded, pass through multiple hands, from Dubai to Afghan Transit Trade (ATT) to Peshawar and then finally to the major cities. Each dealer keeps a profit of at least 10 per cent, which is all passed on to the customers.

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.

The construction work on Integrated Customs Check Posts (ICCP) at Wagaha Border, which is expected to be completed by the next year, would flourish bilateral trade between India and Pakistan and the traders from both the countries would be able to ship their consignments speedily. This is in addition to the two routes across the Line of Control viz. Srinagar-Muzaffarabad and Poonch-Rawalakot, which are already functional.