In our blog post last November, we discussed Pakistan’s decision to grant India most favored nation (MFN) status. We were hopeful about the gains from easier trade between the two, but noted the many stumbling blocks in between. In the past 20 weeks, both countries have made serious efforts to address these blocks. Things are looking good. Here is an update.
Both countries mean business
In addition to the goodwill gesture of Pakistani President Asif Ali Zardari visiting India this April and Indian Prime Minister Manmohan Singh considering visiting Pakistan, important issues addressed include:
Pakistan issued an order in March 2012 to move from a positive list of 2,000 items for India to a negative list of 1,209 banned items. Pakistan intends to phase out the negative list altogether and formally give India MFN status by the end of 2012.
India, which formally granted Pakistan MFN status in 1996 (but maintained barriers) has agreed to reduce its sensitive list of 865 items by 30% within four months. India has also agreed in principle to allow Pakistani foreign direct investment in the country.
Recently, India has seen a heated debate on the entry of foreign direct investment (FDI) in the country’s $400 billion retail market. In November 2011, the government proposed a policy change to open up the country’s multi-brand retail segment -- for retailers such as Wal-Mart and Carrefour. Foreign investors were to be allowed to own up to 51 percent of a multi-brand retailer if they invested at least $100 mn, with half spent on infrastructure development in India. Within weeks of the announcement, the government suspended the decision amid protests from opposition parties and small shopkeepers citing concerns over large scale job losses, especially in the small, unorganized retail sector.
What is FDI?
Foreign direct investment (FDI) refers to the net inflows of foreign investment to acquire a lasting management interest (more than 10 percent of voting stock) in a domestic company. In 1997, the government permitted 100 percent FDI in the wholesale cash and carry trade, in which customers arranged the transport of goods from wholesalers and paid for goods in cash (not credit), on a case-by-case basis.
Trade relations between India and Pakistan appear set to improve significantly with Pakistan likely to grant India Most Favored Nation (MFN) status. The potential gains from easier trading relations are considerable for both countries. In 2009-10, official trade between the two stood at $2 billion. Studies suggest this volume could be much higher, absent formal and informal barriers. For instance, a recent SAARC report estimates trade potential to be $12 billion.
What exactly does MFN status mean?
All WTO members are bound to grant MFN treatment to member countries with respect to trade in goods. India granted Pakistan MFN status in 1996, but Pakistan held back, citing strategic considerations. Despite granting Pakistan MFN status, India continued to impose high tariffs on goods of interest to Pakistan—textiles and leather. Thus, merely according MFN status does not imply easier trade. So, does Pakistan’s offer matter? Yes, it does. It signals enthusiasm, goodwill, and a keenness to build peaceful and productive economic and political relations in the region.
In our 
Recently, India has seen a heated debate on the entry of foreign direct investment (FDI) in the country’s $400 billion retail market. In November 2011, the government proposed a policy change to open up the country’s multi-brand retail segment -- for retailers such as Wal-Mart and Carrefour. Foreign investors were to be allowed to own up to 51 percent of a multi-brand retailer if they invested at least $100 mn, with half spent on infrastructure development in India. Within weeks of the announcement, the government suspended the decision amid protests from opposition parties and small shopkeepers citing concerns over large scale job losses, especially in the small, unorganized retail sector.
Trade relations between India and Pakistan appear set to improve significantly with Pakistan likely to grant India Most Favored Nation (MFN) status. The potential gains from easier trading relations are considerable for both countries. In 2009-10, official trade between the two stood at $2 billion. Studies suggest this volume could be much higher, absent formal and informal barriers. For instance, a recent SAARC report estimates trade potential to be $12 billion. 