New Opportunities in Pakistan-India Trade?

By Dr Hassan Askari Rizvi – 

The diplomatic interaction between Pakistan and India 2011-12 provides ample evidence of the desire of the two governments to expand bilateral trade

The diplomatic interaction between Pakistan and India in 2011-12 provides ample evidence of the desire of the two governments to expand bilateral trade.  The prospects of achieving this goal are bright because, in addition to the willingness of the two governments, the business and industrial communities of both countries are supportive of this move.

In India, Federation of Indian Chambers of Commerce and Industry (FICCI) and, in Pakistan, the Chambers of Commerce and Industry of Lahore, Karachi and Islamabad are in favour of improved trade. These organizations are working with their respective governments  for adopting the required legal and administrative measures for expanding trade.

The opposition in both countries comes from extreme-right and religious hardline groups. They continue to express hostility towards each other. In Pakistan, Islamist and militant groups and political far-right are either averse to the notion of friendship with India or they argue that normal diplomatic and trade relations should be linked to the solution of the Kashmir problem to the satisfaction of the people of Kashmir. They have increasingly been sidelined in Pakistan on the trade relations with India because these groups lack widespread support.

In Pakistan, the civilian government and the military appear to share the need of improved relations with India, including augmentation of bilateral trade. The major political parties support this process. The PPP-led coalition government is leading the effort. The PMLN leadership has extended full support to trade and economic relations.  The PTI of Imran Khan has also favoured this. Other political parties like the MQM and the ANP and a large number of societal groups are supportive of improved trade ties between the two countries.

The most significant development was Pakistan’s decision in November 2011 to grant of the Most-Favoured Nation (MFN) status to India. Though India gave this status to Pakistan in 1996 no steps were taken by India to turn this notion into a real-time policy.  After the Government of Pakistan designated India as the MFN, the process was initiated by India and Pakistan to turn the MFN status into concrete policy measures.

In the pre-2012 period the limited bilateral trade was on the basis of a positive list, i.e. only the items identified in the list could be traded. The Pakistani positive list had 1963 items that could be imported from India.  Now, by early 2012, Pakistan and India shifted to a negative list, i.e. the items that could not imported from the other country. Pakistan’s negative list has 1209 items. With the exception of these items, any product could be obtained from India.  Pakistan plans to do away with the negative list altogether by the beginning of 2013. India is expected to reciprocate this gesture.

History of Pakistan-India Trade

The bilateral trade between India and Pakistan has a troubled track record, often overshadowed by political conflicts. The partition of British India and establishment of Pakistan in August 1947 divided the unified economy to the disadvantage of Pakistan which was the source of raw material and depended on India for finished products.  The initial troubles between the two countries had a negative impact on trade and economic relations because India used its economic leverage to pressure Pakistan.  In September 1949, the British Government devalued its currency, Pound Sterling. India also decided to devalue its Rupee but Pakistan refused to devalue its currency.

The higher value of Pakistan Rupee (Indian Rs. 145 equal to Pakistani Rs. 100) annoyed India and it began to put curbs on trade with Pakistan. By the beginning of 1950 their bilateral trade was virtually suspended that caused many problems for Pakistan that has not yet fully developed alternate sources of trade.  This stalemate continued along with other problems between the two countries until February 1951 when they ended the stalemate on trade and currency issues. India accepted Pakistan’s currency value but the Reserve Bank of India declared on February 26, 1951, a day after the agreement to revive trade, that it would treat Pakistani Rupee as a foreign currency and that the usual foreign currency controls would apply.

The second disruption in trade between Pakistan and India occurred on the outbreak of the September 1965 India-Pakistan War.   However, steps were taken in 1966-67 to resume bilateral trade as a part of rehabilitation of their relations after the signing of the Tashkent Declaration in January 1966 by President Ayub Khan and Prime Minister Lal Bahadur Shastri.  The trade and economic relations never returned to the pre-1965 level and remained very selective and restricted.

Third trade disruption was caused by the 1971 India-Pakistan War (November-December) but they agreed to normalize their relations in the Simla Agreement, July 1972. It was in November 1974 that trade embargo was lifted.  A full-fledged trade agreement was signed in January 1975. Railway service through Wagah-Attari and direct air-links were not restored between Pakistan and India until July 1976.

Fourth disruption in trade took place in 2002 when India moved its troops to Pakistan’s border as a part of coercive diplomacy in the aftermath of the terrorist attack on Indian Parliament on December 13, 2001.  India suspended railroad and air-links with Pakistan and withdrew over-flight facilities to Pakistani aircraft. The embassy/high commission staff was reduced.  Pakistan responded by moving its troops to the border and suspended over-flight rights to Indian aircraft.

This standoff continued until October 2002 when the Indian Government decided to withdraw its troops gradually from the Pakistan border.  After the first disruption of trade in 1949-51, Pakistan and India (especially Pakistan) worked on decreasing their dependence on each other. There was not much enthusiasm on either side to strengthen economic and trade ties.  Political conflicts and issues dominated their worldview to such an extent that they wanted to be as independent of each other as possible.   Pakistan assigned a high priority to strengthening economic and trade ties with the rest of the world.  This trend was reinforced during 1965-75 when there was very limited or no trade between the two countries.

The Changed Disposition

The desire to improve trade between Pakistan and India surfaced at the un-official level in the Track-Two diplomacy in the late 1980s and especially in the 1990s. The non-official and semi-official participants in these dialogues viewed trade as an important confidence building measure. There was some increase in bilateral trade in the first decade of the 21st Century but it continued to be an insignificant portion of each country’s international trade.

The trade issues were taken up in the dialogue between the two countries during 2004-2008. When their relations nose-dived after the terrorist attack in Mumbai on November 26, 2008, India suspended the dialogue process but adopted less belligerent disposition towards Pakistan than was the case in 2002.  India moved its troops from peacetime positions but these were not brought on the Pakistan border and communication and transportation links were not severed. Some trade continued despite the trouble in their relations.

The revival of Pakistan-India dialogue in March 2011 witnessed an active interest in improving trade in the business and industrial communities of two countries. It seems that they are influenced by globalization trends and the notion of regional trade arrangements.  The two governments responded favourably to the demand of the business and industrial community to work earnestly on trade relations. Unlike the past, the business and trading communities on both sides have taken the initiative to lead their respective governments on bilateral trade matters.

The Recent Trends 

There have been significant moves to improve trade relations between Pakistan and India during September 2011-May 2012 that are expected to produce a breakthrough in their trade and economic relations by the first quarter of 2013.

Pakistan’s Commerce Minister, Makhdoom Amin Fahim, visited Mumbai and Delhi in September 2011 with a large delegation of business and industrialist community for expanding trade and economic ties.    Pakistan agreed in principle in early November to give the Most Favoured Nation (MFN) status to India, arguing that this status would become operational when all technical formalities had been completed through negotiations. Another delegation of Pakistani business people visited Delhi in January 2012 to participate in a seminar on South Asia Economic Cooperation. Pakistan’s Federal Minister for Petroleum visited New Delhi in the same month.  This visit synchronized with the visit of a delegation of Indian officials to Pakistan to provide briefings to Pakistani business people on India’s custom procedures and standardization and certification requirements for entry of foreign goods into Indian markets.

In mid-February 2012, there were a host of activities in Pakistan for strengthening trade and economic relations. A big delegation of Indian business from FICCI visited Lahore, Karachi and Islamabad. Indian’s Commerce Minister, Anand Sharma, also visited Pakistan for exploring ways and means to expand trade. First Indian Trade Exhibition, labeled as “The India Show” was held in Lahore on February 11-13.  All these people were enthusiastic about trade between the two countries and some of them hinted at investment in joint ventures in Pakistan.

Pakistan’s Federal Secretary for Petroleum and Natural Resources, Mohammad Ejaz Chaudhury, led a delegation to New Delhi for talks with his Indian counterpart on trade of petroleum products and the TAPI gas pipeline. He also participated in an international conference on natural gas.

The return visit of Pakistan’s Commerce Minister Amin Fahim with a delegation of business people took place in April. An exhibition of Pakistani textile and other products was held in New Delhi under the title of “Life Style Pakistan” on April 12-15. Similar exhibitions of Indian and Pakistani goods will be held later in 2012 in Karachi and Mumbai respectively.

In order to improve facilities for trade at Wagah-Attari border, a new integrated check post and new gate for trade only was inaugurated on April 13, 2012. This is expected to reduce the time spent on immigration and trade related formalities.

The biggest-ever India-Pakistan Business Conference was held at Lahore on May 7-8, 2012 which included the major business and industrial groups from both countries. The Prime Minister of Pakistan inaugurated this conference and the leaders of the PMLN and the PTI addressed different sessions, expressing their support to trade relations.

The enthusiasm shown by the business people of both countries and Pakistan’s official circles strengthened the hope that India and Pakistan would be able to settle logistical and procedural issues for bilateral trade by the end of this year. It is useful to engage in consultations and talks on the need of expanding bilateral trade.  They have to take concrete steps to turn their commitments into a reality. They need to note that bilateral trade amounted to $ 1.5 billion during April 2011-January 2012 which is not a big amount. Even this shows about 30 percent decline for the corresponding ten month of the last year. During April 2010-January 2011 the bilateral trade amounted to $ 2.22 billion. This figure was released by the Indian Government to the Lok Sabha on May 21, 2012.

There is a need of taking concrete action both at the official and non-official levels if the pledges for improving trade are to materialize.  The following issues need urgent attention if trade is to be given a boost.

• Banking services are needed between the two countries. The communication arrangements, especially rail, road and air services, should be strengthened so that direct travelling between the two countries is easy. Road transport for supply of goods needs to be improved.
• A liberal visa policy for enabling the business people and others to travel easily. Police reporting of each other’s visitors should be done away with.
• Non-tariff barriers, especially procedures regarding standardization, quality and verification should be simplified to save time, especially for perishable food items.   It must be made sure that the bureaucrats, customs and immigrations officials dealing with bilateral trade and travelling are not tainted with anti-feelings against the other country.
• The current trade shows imbalance to the disadvantage of Pakistan. Indian business people buy very little from Pakistan. Consequently, Pakistan’s exports are a small part of India’s exports to Pakistan. This imbalance needs to be addressed.
• Trade may not be linked with political disputes. However, these cannot be ignored. There is a need to work towards resolving disputes and problems between India and India. This will facilitate economic relations.
• There is a strong perception in Pakistan that India is interested only in bilateral trade and transit of its goods through Pakistan to Afghanistan and Central Asia and that it is not interested in resolving any contentious issue with Pakistan.  This perception builds anti-trade sentiments. If India and Pakistan resolve the easily resolvable issues in the next year or so, it will generate a lot of goodwill for trade and economic ties. The more difficult and complex issues can take time. There should be no sleeping over the contentious issues.
• Terrorism is an unfortunate reality in Pakistan and India. Terrorist incident can take place in the future. The leaders of two countries should make up their mind that they would not disrupt trade and other relations if there is any terrorist attack. If India and Pakistan suspend their relations due to some terrorism incident, they help the terrorist groups to achieve their goal of conflict between India and Pakistan.
• India and Pakistan can change their old habit of minimum economic and trade dependence on each other only if the expanded relations prove rewarding to each other and the threat of disruption of this relationship for one reason or another is set aside. Public support for bilateral trade can be increased if trade assigns priority to movement of goods and services that directly benefit the common people.