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India-Pakistan Trade: Making Borders Irrelevant

Tara Beteille's picture

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.

Comments

Submitted by Anonymous on
Your post is politically naïve and out of touch with the reality. Granting of MFN is a moot point. India – Pakistan issue is purely political and that trade, visa and other business or cultural issues could never have any significant impact on the ground. Every 4-5 years, there are always many feel good stories that many get excited as though India- Pakistan are going to live happily here after. A year before Kargil, Vajpayee opened a bus service and traveled in a bus to Pakistan. Well, Pakistan army was planning very diligently to attack India near Kargil during his visit. You can go back Gujaral, Rajiv Gandhi and so on. Of course, you would say that we are not underestimating the challenges but you are overestimating the opportunities. If Pakistan were to make a mistake in opening its market to India, it would be a disaster to Pakistan’s economy and industry. Why would Pakistan give one more lever by opening their economy to India? Trade will benefit more to India than Pakistan by sheer size of economy. If you recall, Bangladesh did not want TATA to explore gas few years back precisely for this reason. Why open knowing India would swallow their economy in a few years? There will not be a leveling playing field in South Asia. Your examples such as opening check-posts, national banks and cutting negative lists are insignificant and will not make a difference. Should there be a political debacle, as it happens every few years regularly, the order will be restored and things will be back to where they were. Anecdotes from some business people are always nice to quote but it is not the ground reality. Few years back, India banned rice exports during the food crisis. Who suffered the most? It was Bangladesh. The imported rice as the percentage of total production was low but how did the market react? The cost of rice shot up about 5 fold the very next day. Who paid the price? Not the importers but it was the poor. Hopefully, Pakistan does not make this mistake.

Submitted by Jawwad Rizvi on
It is interesting to read optimism of Tara Beteille, but the reality is bitter which need to be addressed to make the Pakistan-India Borders irrelevant for the businesses and trade. The anonymous comment is quite realistic in which the person has highlighted many tensions between the two countries clearly but did not discuss where the trade will stand if Mumbai or Samjootha train like incidents would take place in future. How the businesses and trade will react if Pakistan will raise finger about Indian spying agency involvement in unrest in Balochistan on which Pakistan’s government kept silence reasons best known to it or want to highlight some right time suitable for the establishment. India is talking about MFN status to her by Pakistan but ignoring the reality what it was doing with Pakistan despite giving MFN status it to more then one and half decade ago. Still high non tariff barrier exits in Indian side while despite huge need of cement India was not giving fair playing filed to Pakistani cement sector to send it through Wagha-Attari land route and there are many examples there. Yes, potential is exist for both countries in bilateral trade but at what cost and who will be real beneficiary is a million dollar question which need to be answered first? How does Kasmhir, and water related issues would be resolved for long-lasting peace and trade? Does India is sincere to start bilateral trade with Pakistan for the promotion of regional economies or just want to sell some of its items to Pakistan to make it a dependent country on India like exporting electricity to it? It is also bitter reality that India never accepted Pakistan an independent country since after partition and after doing every thing it understand to control Pakistan – it needs to control its economy. What was the decision of India when it faced onion crop failure just one year back and imposed ban on its export to Pakistan ignoring the principle of free trade markets? What is attitude of India towards foreign investment as its reported by doing business report that Indian government policies were not favourable for doing business there by the foreign investments. Its Indian policy that it was imposed ban on Pakistani cricketers to play Indian Premier League while Pakistani officials were supervised these matches. Its India who was not given visa to a former Pakistan cricketer Azhar Mehmood who is not English Nationality too to represent its team in IPL. Its also dual standards of India to allow Waseem Akram a legend cricketer to live there and train their blowers. So the things are opened to everyone that India only do those steps which favor it not Pakistan, Bangladesh or anyone else. There is many other things which need to be resolved first to make borders irrelevant before this trade. Working Journalist in Pakistan, Jang Group of Media Economic Correspondent Jawwad Rizvi

Better late than never. This is a wise decision on the part of India and Pakistan. This process will naturally help not only in lessening the enmity between the people of both these nations but it will also help in solving their other big problems. Need of the hour is that this decision should be implemented in letter and spirit.

The World Bank helped to negotiate the Indus Waters Treaty and it is heartening to see reengagement on the Indo-Pak economic front for regional cooperation. It is important to make a clear empirical case to Pakistan that trade will help not hurt the country. There needs to be assurance that Pakistani business would be welcome in India as well and that is only possible with a relaxation of visa regime (largely prompted by the Indian side).

Thank you for your comments. A few thoughts: Regarding trade benefiting the bigger country (India) more, note that Pakistan has significant trade with another even larger giant China. Pakistan has benefited from this relationship and the same can be expected with India. On the potential for India swallowing Pakistan's economy, we don't agree -- I would like to draw your attention to India's trade with Sri Lanka, which has worked very well for both -- the latter is arguably smaller relative to India than Pakistan. But no swallowing has occurred. While you are correct to note that Bangladesh did not want TATA to explore gas a few years ago, and we certainly agree that history in the region is bad, the fact today is that the status of Bangladesh-India relations has improved considerably--e.g., duty free imports from Bangladesh of garments, benefiting Bangladesh. Additionally, note, India's agreement to share power with Bangladesh, Nepal and Bhutan. On India banning rice exports during the food crisis, there is no question that banning exports to reduce volatility is bad policy. It hurts the poor everywhere including in the country imposing the ban, because it drives the price of the banned good down. More importantly, though, the ban was quickly reversed in the case of exports to Bangladesh. One final point, you are right, much needs to be done to gain trust in the region, but in the past couple of years, disruptions have been much shorter lived than in the past. We cannot afford to ignore these facts, and I believe there is good reason and evidence to be hopeful.

The 2nd Aman ki Asha Indo-Pak Economic Conference concluded on a very promising note in Lahore this week. The conference, a joint initiative of the Jang Group, Pakistan and the Times of India, in collaboration with Pakistani and Indian business associations, brought India’s top industrialists to Pakistan for the first time as a group. The presence of leading businessmen is important – it underlines the significance the community attaches to peace and normalization of relations between the two countries. Several areas were discussed, including the exchange of healthcare services, energy, chemicals and mobile technology for development. Dr Ishrat Husain, former governor of the State Bank of Pakistan, noted that India’s domestic market comprises 300 million people – if Pakistani entrepreneurs get even 1% of the market, it would mean 3 million additional clients – a considerable amount, given that Pakistan’s domestic market is 30 million. In the same vein, Rahul Bajaj, Chariman of Bajaj Auto Limited said that Pakistan's business community should not worry that their business would be adversely affected. He cited India's own experience when it opened up to much greater trade in 1991. Many businesses were apprehensive of losses, but these proved unfounded as freer trade helped Indian companies promote their businesses on a vast scale. Additionally, the Securities and Exchange Commission of Pakistan Chairman, Muhammad Ali, said that the Karachi Stock Exchange and the Mumbai Stock Exchange are going to sign an agreement for cross-border listing of the capital market scrips within a month. Clearly, there are many positive forces that are working hard to grab the opportunity at hand and build a relationship of mutual trust.

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 400000 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.

Submitted by SAT GOEL on

The trade between India & Pakistan has a great potntial beneficial to all. But the trust deficit has to be addressed first. NAFTA agreement amongst the US, Canada and Mexico is a good example to look at for India - Pakistan - Bangladesh. It was a win win for all the three.

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