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India-Pakistan trade: status, outlook

Prime Minister Imran Khan wants the subcontinental neighbours to start trading. What efforts have been made in this direction earlier, and why have they failed? How can the current situation change?

Written by Anil Sasi | New Delhi |
Updated: August 23, 2018 7:10:33 am
India-Pakistan trade Prime Minister Imran Khan wants the subcontinental neighbours to start trading. (AP Photo/File)

Pakistan’s new Prime Minister Imran Khan posted on Twitter Tuesday that “the best way to alleviate poverty and uplift the people of the subcontinent is to resolve our differences through dialogue and start trading”. Where do India-Pak trade ties stand, and why?

Minuscule numbers

Trade between the neighbours jumped nearly three-and-a-half times between 2000-01 and 2005-06 (from $251 million to $869 million per annum), but progress was slower in the decade that followed, with volumes rising a little over three times. India’s trade with much smaller Bhutan is over half that with Pakistan (In 2016, total India-Bhutan bilateral trade was Rs 8,723 crore; with Pakistan, it was around Rs 17,200 crore.) Back in 2007, the Indian Council of Research on International Economic Relations (Icrier) had projected a bilateral trade potential of $11.7 billion (Rs 46,098 crore), if both neighbours took proactive measures to exploit untapped areas of economic cooperation. But in FY17, India-Pakistan trade was a mere $2.29 billion, or about 0.35% of India’s overall trade.

Potential vs reality

The Icrier study had identified export potential of $2.2 billion from Pakistan to India, and $9.5 billion from India to Pakistan per annum. Of the top 50 potential export items from Pakistan at the time, India was importing 45 from countries other than Pakistan. This situation remains largely unchanged even now.

There has been minimal increase in Indian exports to Pakistan after Islamabad changed its import policy in 2012. According to fresh estimates by Icrier, in 2016-17, “new exports” accounted for only 12% of India’s total exports to Pakistan. The bulk (88%) of Indian exports is still made up of commodities that were being traded earlier, too.

Policy bottlenecks

Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994, requires every WTO member country to accord Most Favoured Nation (MFN) status to all other member countries. India accorded Pakistan MFN status in 1996; a Pakistani cabinet decision of November 2, 2011 to reciprocate this, however, remains unimplemented. In March 2012, Pakistan substituted a “Positive List” of a more than 1,950 tariff lines permitted for import from India, by a “Negative List” of 1,209 lines that could not be imported.

In August 2012, India announced a 30% reduction in its SAFTA Sensitive list for Non-Least Developed Countries (NLDCs), including Pakistan, allowing for peak tariff on 264 items to be cut to 5% within three years. At the Commerce Secretary-level talks in Islamabad on September 20-21 that year, a roadmap was established to move towards full normalisation of bilateral trade. However, Indian officials say, Pakistan’s failure to take the first step of permitting all importable items through the Wagah-Attari land route (only 137 items are allowed currently), the roadmap has remained unimplemented.

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At their meeting in New Delhi on January 18, 2014, the Indian and Pakistani Commerce Ministers reaffirmed their commitment to expedite normal trading relations, and to provide Non-Discriminatory Market Access (NDMA) on a reciprocal basis. While both governments have facilitated a degree of industry outreach in recent years, progress on the ground has been subdued. These restrictions notwithstanding, India continues to maintain a substantial trade surplus with Pakistan.

Industry pressure

An influential grouping of businesses in Pakistan has recently sought a moratorium on new trade agreements, and renegotiation of the trade agreement with China. The 100-Day Economic Agenda of the Pakistan Business Council (PBC) has called upon the new government to not pursue proposed trade agreements with countries such as Turkey and Thailand, and to ensure complete transparency of costs, benefits and financial flows associated with the China-Pakistan Economic Corridor (CPEC) projects, Dawn reported. Instead, the grouping has urged increased trade with immediate neighbours such as India, Iran and Afghanistan.

In a presentation in Kathmandu last year, the Islamabad-based think tank Sustainable Development Policy Institute (SDPI) identified obstacles in the way of normalising India-Pakistan trade relations, including weak logistics and customs processing, and technical barriers to trade such as sanitary or phytosanitary (SPS) restrictions, visa and travel restrictions, and lack of financial intermediation and telecommunication connectivity.

There is pressure on Prime Minister Khan because Pakistan’s annual trade deficit, which was $20.435 billion when the Nawaz Sharif government came to power in 2013, has been rising steadily, according to Pakistan Bureau of Statistics data. The deficit has been driven by the rising import bill of capital goods, petroleum products, and food products, and a steep fall in exports. The external balance of payments position is expected to be one of the top concerns for Khan’s government.

Beyond goods

While India’s electricity diplomacy with Bangladesh has broken new ground, a similar initiative with Pakistan continues to hang fire. Under a proposal that was actively discussed until early 2015, Pakistan wanted to hook up a portion of Lahore with the Indian side, enabling the capital of its Punjab province to draw electricity from the Indian grid. Pakistan made the proposal to an Indian government expert group that visited the country in June 2013, and met then Punjab Chief Minister Shahbaz Sharif in Lahore and then federal Minister for Water and Power Khawaja Muhammad Asif in Islamabad. The idea then was to transfer 250-300 MW from India as a short-term fix for Pakistan’s power crisis, and there is potential to revive it yet.

Illegal trade

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In the absence of full trade relations, illegal trading is rampant, mostly routed through West Asian countries and Nepal. Two years ago, India had received information on illegal transfer of funds from Pakistan through import of California almonds via Trade Facilitation Centres in Jammu and Kashmir. The National Investigation Agency (NIA) registered a case on December 16, 2016.

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