India-Pakistan Trade: Making Borders Irrelevant

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.
• Both countries recently agreed to allow yearlong multiple-entry visas for business visitors, with visitors allowed to enter and exit through different cities.
• The two countries have agreed to allow each other’s central banks – the Reserve Bank of India and the State Bank of Pakistan – to open bank branches across borders to facilitate financial transactions and ensure smooth trade.
• A second checkpost gate was inaugurated this March at the Attari-Wagah border to ease road traffic between the two countries. The checkpost, with elaborate security features and capable of accommodating 600 trucks at a time, will provide upgraded infrastructure, including new storage go-downs, wide roads, and a luxurious passenger terminal.


Opportunities and gains

Making borders irrelevant can have far-reaching effects for economic prosperity across sectors in Pakistan and India. Consider a key driver of growth: electricity. South Asia’s recent More and Better Jobs flagship report estimated that industrial load shedding in Pakistan has resulted in the loss of 400,000 jobs. Trade between energy surplus and deficit regions could counter such losses — indeed, Pakistan is already in negotiations with India to import up to 500 MW of electricity.

The two countries are also likely to gain from exploiting vertical and horizontal linkages across key industries, such as textiles, given Pakistan’s advantage in cotton and textiles and India’s in apparel production. Additionally, they can gain through collaborations across educational institutions, as happened recently when the Indian School of Business, Hyderabad signed a memorandum of understanding with Pakistan’s Institute of Business Administration, Karachi to train Pakistani leaders in core areas such as health care, infrastructure, manufacturing, small- and medium-sized businesses, and entrepreneurship. The possibilities are tremendous, as two distinguished panels discussed during the 2012 Bank-Fund Spring Meetings.

Leveling the playing field

Changing policies is one thing, and that in itself is complicated, but changing norms and attitudes is equally hard. Pakistan recently held a trade show in Delhi, showcasing a range of products from furniture to food, and while it was welcomed by the Indian market, media reported the difficulty faced by businesspeople in getting clearances for goods to be shipped across the border. Pakistan’s commerce secretary noted, “Pakistani businessmen are under a very strong impression they will not get a level playing field in India.”

So while there’s momentum for sure, we should not underestimate the challenges ahead. Businesses in both countries will need to believe they can get a good deal in the other country, that their property and rights are protected, and that the gains from trade will increase prosperity in both countries.