India-Pakistan trade relations: Seizing golden opportunities

Facilitating cross-border transactions of funds and allowing seamless transportation of cargo in each other’s territory needed

India-Pakistan relations are drawing considerable attention from the world at large, with the two countries now at a point where significant economic gains could serve as a powerful means for conflict resolution. After a hiatus of three years, the bilateral relationship has received a boost, with a series of positive developments in the last one month—the meeting between the two Prime Ministers on the sidelines of the Paris climate summit; the meeting between the two National Security Advisors in Bangkok; Sushma Swaraj’s visit to Islamabad for the Heart of Asia summit; and the recent surprise visit of Narendra Modi to Lahore to greet and meet Nawaz Sharif on his birthday have rekindled hope for the two countries.

The underlying message behind these meetings indicates the two governments’ commitment to take the bilateral dialogue process forward and mutually resolve all outstanding issues for attaining long-term peace and economic integration in South Asia.

With the foreign secretaries of the two countries slated to meet, all eyes are now set on when an official meeting between Indian and Pakistani commerce secretaries will be fixed, with a focus on fresh proposals to speed up the trade normalisation process.

At this stage, it is expected that Pakistan will grant India most-favoured nation (MFN) status. India should, in turn, announce deeper market access to Pakistan by offering to reduce tariff duties to zero. India has already offered duty-free access to the least developed countries of the SAARC—Afghanistan, Bangladesh, Bhutan, Maldives and Nepal. It also offers duty-free access to Sri Lanka under the India-Sri Lanka bilateral FTA. Offering similar treatment to Pakistan would not only foster trade relations, but would also help in achieving the goals of the South Asian Free Trade Area (SAFTA).

The most substantial impact of the trade normalisation process would be on informal trade flows, which are often considered a defining characteristic of the India-Pakistan economic relationship. According to a study done by ICRIER, informal trade flows are estimated to be $4.71 billion in 2013-14. Of this, India’s exports to Pakistan are estimated to be $3.99 billion and imports from Pakistan $0.72 billion. The main export items from India, via informal channels, are jewellery, textiles, machinery and machine parts, electronic appliances, scraps, paper, chemicals, tyres, and betel leaves. India’s informal imports from Pakistan consist of textiles, dry fruits, spices, cement, carpets, fruits and vegetables. The primary reason for informal trade is the high transaction costs of trading, as a result of which traders often resort to trading through third-country ports, mainly Dubai. Today, goods travel from Delhi to Lahore through Mumbai, Dubai and Karachi, making the journey 11 times longer and four times costlier. The move towards trade normalisation would certainly lead to a reduction in transaction costs and consequently shift informal trade flows to formal channels.

However, for this potential to be realised, India and Pakistan need to prepare themselves to facilitate the expansion of bilateral trade. The transport protocols between the two countries also need to be amended to allow seamless transportation of cargo in each other’s territory. If the two countries agree to grant transit rights to each other, India could be connected to Afghanistan and further to Central Asia through its western neighbour. Pakistan, meanwhile, will be able to access India’s eastern neighbours.

An increase in trade will be difficult without requisite financial mechanisms. Even though the central banks of India and Pakistan signed an agreement that allowed for the opening of branches by two Indian banks in Pakistan and two Pakistani banks in India in 2005, this agreement has not still been implemented. Without banking services, the provision of letters of credit and the facilitation of cross-border transactions of funds, it will be hard for firms to trade across the India-Pakistan border even when MFN is granted.

For several decades, limited people-to-people interactions because of barriers to communication have inhibited information flows that could help expand trade. Creating multilevel channels of communication is important for bringing businessmen of both the countries together—which would help bridge information gaps, reduce misconceptions and generate a significant change in the business environment of the two countries.

Finally, there is a need to engage with the media. In both India and Pakistan, the media has a powerful influence on public sentiments. Negative reporting has so far dominated India-Pakistan relationship. It would be much more helpful for reporters to create a positive environment that is conducive to holding talks on trade normalisation between the two countries. The media should try to be optimistic about the benefits of trade normalisation and the possible impact this could have on strengthening bilateral ties and regional integration.

Golden moments in the history of India-Pakistan relationship are few and far between. The two countries should capitalise on every opportunity that comes their way. A successful meeting between the foreign secretaries could pave the way for a new era in India-Pakistan relations.

Authors are with the Indian Council for Research on International Economic Relations (ICRIER), New Delhi

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First published on: 14-01-2016 at 00:17 IST