Research Analyst
Nov 7 - 20, 2011

India's market is quite bigger than Pakistan's. Its 1.2 billion population forming 17 per cent of the world's population holds great opportunities for any exporting country let alone Pakistan.

Although, India had awarded Pakistan most favored nation (MFN) trade status back in 1996 under the obligation of world trade organization (WTO), the latter still seems to be indecisive in reciprocating.

Controversial media reports are doing round about Pakistan's grating the MFN trade status to India, but until filing this report no official notification was received from commerce ministry. It is, however, confirmed that cabinet had approved the decision in principle and the proposal had yet to be ratified by the parliament and commerce ministries of both the countries.

During 2009-10, India-Pakistan trade saw a 60 per cent decline with the overall trade falling from $2 billion.

Few Indian exporters and importers do business with Pakistan via third countries like Dubai and Singapore.

According to a survey, the sectors likely to see a significant dip in cross-border trade included textiles and apparel, textile machinery, cotton, agricultural products particularly cereals, steel and chemicals.

Recently, Pakistan and India agreed to work jointly to double their bilateral trade from $2.7 billion to around $6 billion per annum within three years.

To enhance bilateral trade, an MoU has been signed between the trade development authority of Pakistan (TDAP) and India's trade promotion organization.

The ministers agreed that joint and concerted efforts would be made in all areas to create an enabling environment for trade and encourage the business communities of both countries with greater intra-regional connectivity through road, rail, shipping, and air.

The ministers also agreed that the bilateral trade liberalization process should be uninterruptible and irreversible and asserted that both countries would cooperate and work in close coordination at multilateral forum, such as the WTO and south Asian association for regional cooperation (SAARC) to support each other to strengthen their economies.

Further, Pakistan's economy is small, its balance of payment position is weak, and agriculture and industrial growths record decline.

High cost of production, faulty tax system, lack of skilful work force, absence of competitiveness and efficiency are the biggest obstacles.

The present power tariffs are not only unrealistic but also have led to the failure of many small and medium size industries in the country.

It is feared that once trade with India is resumed, Indian goods will flood Pakistani market leading to dwarfed local industry and agriculture due to their cheap price and better quality.

There is an advantage of importing raw materials from India at low cost and with minimum transportation charges. This will enable our manufactures to spend saved capital on improving the efficiency and skill of the local industry.

Unfortunately, there are also some demerits. It is an irony while formal bilateral trade is small compared to original potential due to tense political relations, yet informal trade between the two countries continues unabatedly. Smuggling fosters illegal trade and traders in connivance with the officials are minting money. Subsequently, custom departments lose substantial money, which can be generated through legal trade.

India-Pakistan trade is stymied because of the tariff differences. Indian government says this is due to the Pakistan government's restrictive policy on imports from India. Under these circumstances, it is not feasible to formulate a promotion strategy for trade with Pakistan, even if there is vast scope. The Indian government has made a formal demarche to the Pakistani government to bag MFN status.

In reality, Pakistan's trade policy towards India goes against the WTO rules, which bind member countries to assign MFN status to each other. However, Pakistan has chosen to flout this rule despite being a signatory to the WTO agreement. While India on its part has not yet raked up the issue at multilateral forums, it has reminded Pakistan about this discriminatory trade policy.

Pakistan set two preconditions for according India the MFN status: one external and the other internal. The external condition is that New Delhi must stop subsidizing manufacturers/exporters; and the internal condition is that Pakistani industry prepares itself to compete with Indian imports.

Local manufacturers feel that Indian industry gets massive incentives on raw materials and other inputs, which give it a competitive edge over them.

The security services may oppose the economic relations with India for purely political reasons. They feel that bilateral trade ties should be formed only after the Kashmir problem is solved between the two nations.

Probably, they believe that once Indo-Pakistan trade ties take shape, the Kashmir issue could recede from public memory and cease to be an issue within the country.