India-Pakistan Bilateral Trade

 India-Pakistan Bilateral Trade: Past, Present & Future

India-Pakistan Bilateral Trade: Past, Present & Future

International  trade  assumes  a  great  significance  in  economic  development  of  both developed and developing countries. In the last three decades, particularly during 1990s and 2000s, most of the countries liberalized their trade as a part of economic reforms adopted  by  them  and  facilitated  by  the  WTO  policies.  One  of  the  most  significant developments in the area of international trade is the emergence of regional groupings especially bilateral trade relations in the every part of World trading system.

 

However,   the   potential   of   bilateral   trade   between   India   and   Pakistan   has   not materialized till yet.India-Pakistan trade has the potential to increase many fold to scale US$10bn in the next very few years if the ‘normal’ relations establishes. The reason is that Pakistan has not yet reciprocated most favoured nation (MFN) status for India. At the   same   time,   India’s   tariff   and   non-tariff   barriers   are   also   substantial.   Poor transportation   linkages   make   trade   costly,   with   railway   and   road   connections inadequate   and   sea   shipments   constrained   by   both   limited   port   facilities   and bureaucratic regulations and restrictions.

 

Unfortunately,  recent  years  have  observed  a  deceleration  in  significance  of  bilateral trade  in  each  other’s  territory.  India  –  Pakistan  bilateral  trade  as  the  percentage  of India’s total trade has been decelerated significantly during the recent years.

 

 

1.        Significance of India –Pakistan bilateral trade

 

Significance of India-Pakistan bilateral trade is diminishing in the recent years; the share of India’s  trade  with Pakistan in India’s  total trade  has  been declined to 0.34%  during FY2010-12 period from 0.48% reported during FY2007-09 period.

 

 

India-Pakistan bilateral trade so far

Period                                                                 % share in total

Pakistan share in India’s total trade

2006-07 to 2008-09                                                                                              0.48

2009-10 to 2011-12                                                                                              0.34

Exports to Pakistan in India’s total exports

2006-07 to 2008-09                                                                                              1.01

2009-10 to 2011-12                                                                                              0.73

 

Imports from Pakistan in India’s total imports

2006-07 to 2008-09                                                                                              0.14

2009-10 to 2011-12                                                                                              0.09

 

Source: PHD Research Bureau, data compiled from Ministry of Commerce, Government of India.

The  share  of  India’s  export  to  Pakistan  in  India’s  total  exports  has  been  declined  to

0.73% during FY2010-12 period from 1.01% during 2007-09 period. The share of India’s imports  from  Pakistan  in  India’s  total  imports  has  been  declined  to  0.09%  during FY2010-12 period from 0.14% during 2007-09 period.

 

India’s foreign trade expanded from US$312149.28 million in 2006-07 to US$793804.80 million during 2011-12 with a CAGR of around 17%. However, India’s trade with Pakistan expanded from US$1673.71 million in 2006-07 to US$1956.57 million in 2011-12 with a CAGR at around 3% only.

 

 

India’s trade with World vis-à-vis Pakistan

Years                  India’s Foreign Trade with World

 

 

India’s Foreign

Trade with Pakistan

(Value in USD Mn)

Pakistan share in India's Total Trade

2006-2007                       312149.28                              1673.71                                   0.54

2007-2008                       414786.18                              2238.50                                   0.54

2008-2009                       488991.66                              1810.05                                   0.37

2009-2010                       467124.30                              1849.26                                   0.40

2010-2011                       620905.30                              2372.12                                   0.38

2011-2012                       793804.80                              1956.57                                   0.25

Source: PHD Research Bureau, data compiled from Ministry of Commerce, Government of India

Formal trade between the two countries due to tariff barriers and quota problems is not significant; significance  is  diminishing  year after year.The  reason for diminishing  India- Pakistan  bilateral  trade  significance  may  be  attributed  to  informal  trade  between  the two  countries.  Informal  trade  between  India-Pakistan  is  generally  done  (1)  re-routing trade  through a  third country  and (2) illegal trade  through land  borders.  The  informal trade  between  India  and  Pakistan  is  estimated  at  more  than  US$3bn  which  could  be brought  into the  mainstream  through  better trade  facilitation  measures.  But  with  the recent untoward incidents at the Line of Control, the informal trade is expected to rise, re-routing from formal to informal channels.The informal exports from India to Pakistan constitute mainly readymade garments, cosmetics and jewellery, spices, livestock, drugs and  pharma,  machinery  mainly  textiles,  chemicals,  tyres  and  informal  imports  from Pakistan  to  India  includes  mainly  cloth,  tobacco  products,  dry  fruits,  leather  products mainly footwear.

 

2.        History of India-Pakistan bilateral trade

 

The  India-Pakistan  bilateral  trade  relations  has,  over  the  last  more  than  five  decades, witnessed  a  chequered  history,  reflecting  the  changing   dimensions  of  geopolitical tensions and diplomatic relations between the two countries.  We have made our effort to capture its essential features and landmarks as follows:

 

   In 1948-49, more than 70 per cent of Pakistan’s trading transactions were with India,  63  per  cent  of  Indian  exports  to  Pakistan.  The  end  of  1949,  however, witnessed a rapid downtown in Indo-Pak trade relations.

   Although between May 1948 and March 1960 as many as 11 Indo-Pak Trade and Payments Agreements were concluded, the bilateral official trade declined from Rs. 184.06 crore of Indian rupees in 1948-49 to Rs. 13.63 crore in 1958 and to an all time low of Rs.10.53 crore in 1965-66.

   There  was  a  trade  embargo between India  and  Pakistan after the  war of  1965 and it continued till 1974. During this period, several efforts were made by India to revive the trade, but nothing tangible could be achieved.

   A trade protocol (Shimla Agreement) was signed on 30 November 1974 for lifting the trade embargo with effect from 7 December 1974.

   In  an  effort  to  diversify  trade  the  Pakistan  Government  permitted  its  private sector to trade with India with effect from 15 July 1976.

  In November-December 1981 Pakistan joined the Delhi International Trade Fair.

Thereafter, exchange of trade delegations between the two neighbours occurred in quick succession.

   In  June  1983,  a  Joint  Business  Commission  was  constituted,  with  the  main objective   to   accelerate   the   decision   making   process   on   matters   seeking government approval and suggesting new items for bilateral trade.

   In 1986, India  and Pakistan became  signatories  to the  final document  of South Asian  Association  for  Regional  Cooperation  (SAARC)  which  committed  itself  to promote the welfare of the people of South Asia.

   In  July  1989,  Pakistan  agreed  to  import  322  Indian  items.  The  installation  of Nawaz  Sharif  Government  in  1991  also  boosted  Indo-Pak  trade,  and  trade touched Rs. 522.59 crore in 1992-93 from Rs. 168.09 crore in 1990-91.

  South Asian Preferential Trading Arrangement (SAPTA), concluded in December

1995, introduced an integrative trading arrangement in the region. At the end of three rounds of trade negotiations, a total of 5550 tariff lines have been included for tariff concessions.

   India accorded Most Favoured National (MFN) status to Pakistan in 1996. In the same  year, Pakistan increased  its  positive  list  to  600  items  that  may  be  legally imported from India.

   In 2003 Pakistan’s Prime Minister announced the inclusion of another 78 items to  the  positive  list.  Most  of  the  permissible  items  include  chemicals,  minerals and metal products. Items such as cardamom and tea still have the high tariffs.

  In   2003   India’s   trade   complementarity   index   (TCI)   1was   50   percent   while

Pakistan’s  TCI  with  India  was  only  14  percent.  India’s  TCI  with  Pakistan  was highest in 2007 and Pakistan enjoyed the highest TCI in 2010 thus improving its complementarity with India which is a positive sign for Pakistan.

  During  the  third  round  of  Composite  Dialogue  process  discussions  in  March

2006,   both   countries   agreed   to   discuss   the   new   shipping   protocol,   the deregulations of air services, the joint registration of basmati rice, an increase in the size of Pakistan’s  positive  list, proposals for information-technology-related medical services and export insurance by India, and work on a memorandum of understanding for cooperation in capital markets by Pakistan.

   During the 6th Round of Commerce Secretary Level Talks  in November 2011 at New  Delhi,  both  countries  agreed to  develop  mechanisms  to address  issues  of Non-Tariff  Barriers.  The  two  countries  have  initialled  three  agreements  i.e., Customs Cooperation Agreement, Mutual Recognition Agreement and Redressal of Trade Grievances Agreement.

  In November 2011 Pakistan decided to grant  the  Most  Favoured Nation (MFN)

status to India to boost bilateral trade.

 

 

 

3.        Suggestions for strengthening India-Pakistan bilateral trade

 

1.   Pakistan should grant MFN status to India as a trade facilitation measure, India has already granted MFN status to Pakistan way back in 1996.

2.   The volume of informal trade is larger than formal trade; official trade can flourish due  to  regularizing  the  unofficial  trade  by  improving  trade  infrastructure  and bringing the items, which are being traded unofficially into the official tradable list.

3.   Efficient and cost effective transportation and communication is a pre-requisite for  promotion  of  trade  and  commerce  and  movement  of  goods,  services  and people.

4.   Easing   the   complexities   in   visa   procedure,   which   should   be   taken   into consideration by the two countries.

5.   If bilateral trade is increased, producers in both the countries can look for price efficiencies by providing each other lower cost inputs.

6.   Enhanced   trade   cooperation   can   also   mean   lower   prices   for   millions   of consumers.  Given  this  advantage,  both  the  countries  can  jointly  fight  poverty deprivation, hunger and inequality.

 

 7.   Bilateral  trade  between  both  the  countries  will  also  result  in  more  public revenues,  since  governments  can  earn  more  through  custom  revenues  when smuggled items switch to formal trade.

8.   India  and  Pakistan  should  create  an  atmosphere  of  peace  to  boost  trade.

Investment and major ventures can take place in a big way if both sides are able to create an enabling political environment of peace, trust and confidence.

9.   Progress in trade and economic cooperation with India and Pakistan would need a firm and a continuous commitment from Pakistani authorities.

10. India   and   Pakistan   can   learn   from   the   global   experience,   where   trade   is increasingly    being    used    as    a    prelude    to    age-old    geo-political    tensions reconciliation of the Sino-American trade relations offer a convincing example of how  trade  can  be  skillfully  used  to  enhance  mutual  confidence  between  two politically hostile nations.

 

 

 

4.        Conclusions

 

In summing up, PHD Chamber of Commerce and Industry strongly believes that the time is most opportune for two neighbouring countries of South Asia to overcome their past baggage of tension-prone economic and trade relationship and move forward with new hopes and aspirations to build an economically powerful bilateral relationship and forge the spirit of common market. The major beneficiary of trade between India and Pakistan will be the consumer, as it will give them low cost goods and services due to reduced cost of production and large economies of scale. It will enhance the savings capacity of the  people,  which  would  have  positive  visible  effects  on  social  indicators  such  as education, health, and nutrition.