Bilateral International Relations Prelims cum Mains

India, Pak trade: Status, outlook:

The news

  • Pakistan’s new Prime Minister said that the best way to alleviate poverty and uplift the people of the subcontinent is to resolve differences through dialogue and start trading.


Potential of trade between India and Pakistan

  • 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.
  • 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.


Reality of trade between India and Pakistan

  • 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.)
  • In FY17, India-Pakistan trade was a mere $2.29 billion, or about 0.35% of India’s overall trade.
  • 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.


Hurdles in India-Pakistan trading relations

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 2011 to reciprocate this, however, remains unimplemented.
  • In 2012, a roadmap was established to move towards full normalisation of bilateral trade.
  • However, as per India, 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.
  • In 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.
  • 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.
  • While India’s electricity diplomacy with Bangladesh has broken new ground, a similar initiative with Pakistan has not taken off.
  • 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. The idea then was to transfer 250-300 MW from India as a short-term fix for Pakistan’s power crisis.
  • In the absence of full trade relations, illegal trading is rampant, mostly routed through West Asian countries and Nepal.


Why Pakistan is keen to increase trade

Industry pressure

  • 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.
  • Instead, the grouping has urged increased trade with immediate neighbours such as India, Iran and Afghanistan.


Rising trade deficit

  • There is pressure on Prime Minister Khan because Pakistan’s annual trade deficit, which was about $20billion 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.


Way forward

  • Both countries can look for bilateral comparative advantages that can enhance trade potential.
  • Calling for removing non-tariff trade barriers between India and Pakistan, the Indian envoy said both the countries need to shun violence and normalise relations in order to take the two-way trade.
  • There is no better way of improving bilateral relations than mutually beneficial economic ties.

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