Being neighbourly

More trade with Pakistan could provide a major boost to India’s flagging economy

Written by Michael Kugelman | Published: April 19, 2013 2:33 am

More trade with Pakistan could provide a major boost to India’s flagging economy

India’s economy continues to sputter. Thanks in great part to a slowdown in services and manufacturing,growth has fallen to 5 per cent. A new OECD report released on April 10,just days after Prime Minister Manmohan Singh spoke optimistically to Indian business leaders about returning growth to 8 per cent,forecasts weakened growth for 2013.

New Delhi has announced various measures to revive the economy. These range from imposing new taxes on the super-rich to lowering the public deficit and creating a more investment-friendly environment. Yet,there’s another step that could bring a major boost to India’s economy: more trade with Pakistan. Officials in New Delhi have disclosed in private conversations with Pakistani business leaders that trade liberalisation could enable the country to enjoy 8 per cent growth.

India-Pakistan trade is closer to normalisation than ever before,thanks to Islamabad’s announcement in late 2011 that it was now ready,in theory,to extend Most Favoured Nation status to New Delhi,15 years after India granted this privilege to Pakistan. Yet,normalisation remains elusive because Pakistan has failed to remove the negative list of the 1,209 goods it won’t trade with India.

Conventional wisdom holds that the ball is in Pakistan’s court. Trade can only be formalised after Islamabad eliminates its negative list. In fact,as explained in a new Wilson Centre report,“Pakistan-India Trade: What Needs To Be Done? What Does It Matter?” (edited by myself and Robert M. Hathaway),there’s also much that India can and should do now to facilitate trade normalisation.

A chief order of business for India,according to our report’s contributors,is to address three major Pakistani grievances — concerns that help explain Islamabad’s delay in removing its negative list.

First,India should simplify,and make more transparent,its trade rules and procedures. Pakistani businesspeople often complain about India’s non-tariff barriers. Yet,in many cases,what they complain about are either not barriers at all (such as measures permitted by the WTO on safety and health grounds),or issues already addressed by India. New Delhi should make its trade regulations clearer — especially for food produce,pharmaceuticals,and other products requiring prompt attention. This would help reduce Pakistan’s confusion and,with time,its complaints about India’s non-tariff barriers.

Second,India,which enjoys a sizeable trade surplus with Pakistan,should pursue a selective export policy towards that nation. New Delhi — at least in the short term — should increase exports to Pakistan (such as machinery and technology) that the latter currently imports from other countries at high prices,but hold back on exports (like bananas and oranges) that are already produced in Pakistan and hence could hurt small and medium businesses there. This would do much to ease Pakistani fears that trade normalisation would cause its markets to be flooded by cheap,subsidised Indian imports with no regard for comparative advantage,and bankrupt multiple sectors.

Third,India should implement — or,more realistically,support the eventual implementation of — measures more sympathetic to South Asia’s economic asymmetries. As the most powerful economy in the region,New Delhi should grant more trade concessions (including the removal of tariff and non-tariff barriers) to smaller economies like Pakistan. It should also address the restrictions it imposes on remittances to Pakistan,a major problem for India-based Pakistani service providers.

Given the unlikelihood that India would make these moves unilaterally,Pakistan should simultaneously make three concessions of its own. In return,Pakistan should grant India transit privileges to access export markets in Afghanistan (a step Islamabad will be more inclined to take if New Delhi allows Pakistan to access Nepal and Bangladesh via its territory). Pakistan should also follow up on its pledge,made last year,to upgrade infrastructure on its side of the Wagah-Attari border crossing (New Delhi operationalised an integrated checkpost on its side of the frontier a year ago,complete with x-ray scanners,fuel stations,and other commercial amenities).

Finally,at least in the short term,Islamabad should de-link trade normalisation from territorial issues. Both nations stand to benefit from trade liberalisation on economic grounds alone,and injecting the poison of politics will simply jeopardise these potential benefits. Admittedly,this would make for a hard,perhaps even impossible,sell in Islamabad,where political leaders have sold trade normalisation to the public as a confidence- and momentum-building measure to bring the two sides back to the negotiating table to talk about Kashmir.

Undoubtedly,all these steps are fraught with political risk. Yet the potential payoffs are immense. Recall India’s earlier experiences with trade liberalisation: the early 1990s,when tariffs were slashed and decades of protectionism came to an end. The country,and its industries,emerged very much the stronger. Given India’s current economic doldrums,such an outcome today,resulting from an effort to liberalise not toward the world,but toward its western neighbour,would be most welcome.

The writer is the senior programme associate for South Asia at the Woodrow Wilson International Centre for Scholars in Washington,DC

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