TRADE RELATIONS BETWEEN INDIA AND

PAKISTAN
India and Pakistan propose to expand economic linkages with each other despite
problems persisting in their political relations. Prime Minister Nawaz Sharif told
media persons, during Prime Minister Vajpayee's February visit to Lahore, that
Pakistan would hold consultations with India on the issue of granting Most
Favoured Nation (MFN) status to India which indicates scope for restoration of
bilateral trade ties. In tune with such positive signs it is observed that IndiaPakistan bilateral trade has risen 14-fold over the past decade from Rs 47.15 crore
in 1987-88 to Rs 463.92 crore in 1998-99. To that extent, bilateral trade ties are the
only hope in normalising India-Pakistan relations.1 On April 10, 1999, the largest
subcontinental neighbours signed a memorandum of understanding in New Delhi to
set up the India-Pakistan Chamber of Commerce.
India-Pakistan economic relations can be divided into trade which is done between
business communities, and cooperation which is conducted through governments.
Scope for cooperation at the government level is generally limited to infrastructure
related projects in sectors like the railways, power and telecommunications. However,
last year, New Delhi imported onions and sugar from Islamabad purely to cater to
the severe shortages of these commodities in India which is only an ad hoc
measure, besides the on-going talks over the sale of power supply to India. Though
businessmen conduct trade, the government still has to play a facilitatory role and
promote this activity by relaxing the visa/travel regime and reducing tariff barriers
which are pre-requisites for trade promotion.
This paper examines India-Pakistan economic relations in terms of trade ties which
operate at the level of businessmen in either country. The paper discusses the
dichotomy in Pakistani perceptions which favour and oppose trade ties. It then
provides a brief overview of the Pakistani economy in order to understand its trade
policy; besides the problems constricting bilateral trade flows, like the MFN status
issue. The paper brings out the factors propelling trade ties and analyses the
scope/prospects for improvin
g bilateral trade. In conclusion, it suggests some steps to promote mutual trade ties.

Introduction
India-Pakistan trade ties have three components, namely: "black" or illegal trade
transacted through the land borders; circular or "informal" trade which is carried
out through "third" countries and re-exported from there to Pakistan; finally,
formal trade through imports/ exports of merchandise through all recognised
seaports, airports, land customs stations and inland container depots. The illegal
trade channels are smugglers who operate along the 675 km unfenced stretch of the
Rajasthan sector along the contiguous Indo-Pakistan border; besides carriers,
khepias who misuse personal baggage through the "green channel" facilities at
international airports. Circular trade is conducted through agents who are stationed
in free ports like Singapore or Dubai and estimated to be US $1 billion. Thus, the
combined volumes of illegal and circular trade are much larger than formal levels
of trade which in reality, therefore, amounts to "pseudo" trade between the two
countries.

History of India-Pakistan bilateral trade

1. In 1948-49, more than 70 per cent of Pakistans 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.
2. 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.
3. 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.

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

Thereafter, exchange of trade delegations between the two neighbours occurred in
quick succession.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. In 2003 Pakistans 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.
11. In 2003 Indias
Pakistans TCI with
highest in 2007 and
complementarity with

trade complementarity index (TCI) 1was 50 percent while

India was only 14 percent. Indias TCI with Pakistan was
Pakistan enjoyed the highest TCI in 2010 thus improving its
India which is a positive sign for Pakistan.

12. 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
Pakistans 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.
13. 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 NonTariff Barriers. The two countries have initialled three agreements i.e., Customs

Cooperation Agreement, Mutual Recognition Agreement and Redressal of Trade

Grievances Agreement.
14. In November 2011 Pakistan decided to grant the Most
(MFN) status to India to boost bilateral trade.

Favoured

Nation

Objective
To reduce tensions and build public support for the peace process in India and
Pakistan by documenting and publicizing the potential economic benefits to all
parties from a peaceful resolution of bilateral issues and close economic cooperation.

Rationale
Government efforts to improve bilateral relations between India and Pakistan are
constrained by public pressure that are opposed to the peace process. The potential
upside of compromise and reconciliation has never been adequately documented or
portrayed to counter public perception regarding the downside. The strategy
envisioned is to shift the focus of bilateral relations from the military and political
spheres to economics.
India's vibrant economic growth in recent years has been noted and become a cause
of concern in Pakistan, which could remain content with slower economic progress
so long as its larger neighbor fared no better. The realization that the Indian
economy is gaining momentum while its own economy sputters is one significant
reason for Pakistan's greater willingness to negotiate on bilateral issues.
Informed people in both countries understand that normalization of ties will be
beneficial to both countries, but large sections of the population are unaware of the
magnitude of the potential benefits that can be generated in terms of employment,
growth rates, and foreign investment. Past efforts to document the potential benefits
have been carried out under the regional umbrella of SAARC, but these studies
have focused primarily on trade opportunities and limited to a mere listing of
major tradable commodities. More recently public attention has focused on the
proposal to construct a gas pipeline from Iran to India transiting Pakistan, which
would provide cheap energy to India and significant transit fees to Pakistan.
Trilateral negotiations between the three countries have progressed farther on the

pipeline proposal than on any major project during the past five decades since both
countries became independent. Projects of this type are indicative of a much wider
potential that has not been adequately examined.
Several major political initiatives have been taken in recent years without adequate
public understanding of their economic impact, including the breakup of the former
Soviet Union and the reunification of East and West Germany. The cost of both
initiatives was grossly underestimated. Political leaders in the former Soviet republics
assured their people of enormous economic benefits from breaking up the USSR,
but actually all the republics suffered a 50% or greater decline in GDP as a result.
A similar rationale applies to India and Pakistan in reverse. While everyone knows
that elimination of conflict will reduce costs and open up opportunities for both
nations, the true magnitude of these opportunities far exceeds what is commonly
recognized. The scope for mutually beneficial economic cooperation between the
countries is enormous. These opportunities include bilateral trade, energy,
transportation infrastructure, industrial development and tourism. By one estimate,
full utilization of these potentials could double the growth rates of both countries.
The purpose of this initiative is to challenge the conventional wisdom which says
that economics necessarily follows politics. These are many examples to show that
the reverse can also be true. It is generally argued that a dramatic improvement in
bilateral political relations between India and Pakistan is necessary before the
economic potentials can be tapped. For this reason, there has been little effort to
even quantify the potential benefits. Rather than postpone evaluation of the
economic potential until the political climate improves, this proposal is predicated on
the belief that a full awareness of the economic costs and benefits can be a
powerful lever for improving the political climate.

Trade Imperatives
In the post-Cold War period, nations have shifted the emphasis in their domestic
and foreign policies from politics to economics. This is evident from the growth of
regional economic blocs like the Association of South-East Asian Nations (ASEAN),
European Union (EU), North American Free Trade Area (NAFTA). While these
groupings had their origins prior to 1991, they gained greater importance in the
post-Cold War period. In the Indo-Pakistan context, the role of the South Asian
Association for Regional Cooperation (SAARC) has also generated greater awareness
among the political leaderships in the subcontinent on the need to increase intra-

regional cooperation and trade. Moreover, an enlargement of India-Pakistan

economic relations is imperative for increasing the level of South Asian intraregional trade flows as a whole.
On April 11, 1993, the SAARC member states signed an agreement on a South
Asian Preferential Trade Agreement (SAPTA) at the SAARC summit at Dhaka. The
agreement provides a broad framework of rules for a phased liberalisation of intraregional trade.2 It envisages periodic rounds of trade negotiations for exchange of
trade concessions on tariff, para-tariff and non-tariff lines. Such preferential trading
arrangements imply a reduction of tariffs on trade among SAARC member states.
The eighth SAARC summit held in India had decided to establish a South Asian
Free Trade Area (SAFTA) on the lines of the European Free Trade Area (EFTA) in
order to liberalise intra-regional trade.
Professor Vijaya Katti writes, "Moving from SAPTA to SAFTA would, however,
require several initiatives on the part of the member states in many other areas
allied to trade. These include : trade facilitation measures like institutional policy,
regulations at border controls, transit facilities, trade document procedures and
financial procedures connected with trade play an important role in the expansion
of intra-regional trade."
Significantly, in Pakistan the repeal of the Eighth Amendment to the Constitution
should curtail the military and bureaucratic role in Islamabad's foreign policy which
would enable the leadership to take people- oriented political decisions like
promotion of bilateral trade.3 This is linked to the fact that the Pakistani military
is a major player in the national decision making structure and has articulated the
policy of peace first and cooperation later with India.

Scope
The attraction of mutual trading between the two sides is linked to low freight costs
which translates into cheaper prices, given the contiguous borders between these two
countries. In such a situation, a government keeping in view the people's interests,
is obliged to ensure that commodities and merchandise are imported only from such
countries. The other conducive conditions are cultural affinity, common language,
similar economic and social systems which provide an ideal foundation for broader
India-Pakistan trade ties.

For instance, Pakistan imports iron ore from Brazil and Australia, besides tea from
Kenya at higher prices, though these items could be available at lower rates from
India. Similarly considering Indian pharmaceutical products are 30 per cent cheaper
than Pakistani products, it would certainly make a difference to the common citizen
in that country. In turn, this would help Indian pharmaceutical products to sell
larger volumes in geographically proximate markets, besides impacting positively on
industrial growth.
Indian coffee which is now smuggled into Pakistan, due to the absence of formal
trade in the commodity, has scope of being a lucrative export item. In 1994-95,
India liberalised its coffee industry and coffee growers/traders are now free to sell
their crop to private parties. This has resulted in greater investments in coffee
cultivation within the country owing to the higher prices available both in the
domestic and international markets.
Pakistan is estimated to be the second largest tea consumer in the world with
market size of around 130-150 million kg per annum and for several years it did
not import tea from India. Eventually, India and Pakistan signed a contract for the
sale of tea in August 1997 owing to compulsions, as the tea gardens in Kenya, Sri
Lanka and Indonesia were hit by drought.5 Commenting on Pakistan's tea imports,
MP Lama writes, " Tea was not imported from India since 1988 . Two major
multinational tea traders in Pakistan have their tea gardens in Kenya and it is
natural for them to make Pakistan a captive market. In this context the Kashmir
issue is only a veil to justify command over the market by multinationals."
Pakistan's economy which is characterised by inadequate industrialisation, has
created a demand-supply gap and drives both "black" and circular trade for truck
tyre exports from India. The size of the market in the country is one million truck
tyres annually and production facilities exist for only two lakh tyres, of which half
is taken by the government sector. This leaves only one lakh truck tyres for sale in
the open market. Therefore, Indian truck tyres are a popular product in Pakistan.
However, though the item has been placed on the 'open' import list, the high duty
structure of 46.6 per cent would make Indian tyres costlier in Pakistan than tyres
imported through the Turkmenistan route.
India and Pakistan both being agrarian economies could cooperate in agriculture
which is a core component of the GDP and the largest employment generation
sector in either country. To quote, "It, therefore, makes sense for the two countries
to cooperate in areas of common interests as it would be to their mutual advantage.
Just as coal and steel were the 'lead sectors' in European integration, there is every
possibility of agriculture emerging as the major sector in which cooperation and

joint action can benefit both countries especially in the context of the liberalisation
of these sectors."
The food and agri-business industry has a significant impact on the regional
economy. This industry has one of the highest economic multiplier effects among the
various industries, even ahead of the telecom or power sector. According to an
estimate, liberalised India-Pakistan trade in the agro-sector would generate around
2.7 lakh jobs in India and 1.7 lakh jobs in Pakistan.
An India-Pakistan track-two diplomacy group which comprises academics, editors
and former military leaders from both countries has made suggestions to improve
economic relations between both countries. These include : the two countries should
regularly pursue a joint gas pipeline project, encourage tourism and convene a joint
meeting of finance and commerce ministers from both sides to promote bilateral
trade.

Pakistan's Perceptions
There are two view points in Pakistan on boosting trade relations with India and
each has its own rationale to support their respective positions. While the view
opposing trade ties with India will be discussed first, the line favouring ties is taken
up next.
Pakistan's traditional fears that trade relations with India would prove inimical to
its own interests is part of the problem. Pakistani Commerce Secretary Iqbal Fareed
has stated, " We cannot afford free trade with India as it would badly hurt our
industry". This is linked to the fact that India with its much larger industrial
economy would result in an unfavourable balance of trade. Viewed objectively,
Pakistan's bilateral trade flows have an unfavourable balance not only with India
but also with other industrial economies too. Perhaps Pakistani trade planners are
now realising the need to make their economy globally competitive in the aftermath
of the US sanctions after the Chagai nuclear tests. In the process, India would then
be perceived just as any other trading nation and not necessarily as a hostile
neighbour. Surprisingly, Pakistani markets are not really flooded with Chinese
products despite free Pakistan-China trade.
The Lahore Chambers of Commerce and Industry study highlights the disadvantages
that would accrue to Pakistan in case free trade is allowed between the two

countries. Apart from these disadvantages the paper makes a strong case for
promoting trade ties with India.
(a) India has a very stringent import policy and is seeking to increase exports at a
greater pace than imports
(b) India has lower labour costs than Pakistan and thus has lower prodction costs.
(c) India has several mills which are 100 per cent export-oriented and can freely
import raw materials from anywhere, including Pakistan. On the other hand,
Pakistan has tried to give a similar impetus to industry by providing export
processing zones, but no concrete outcome is yet evident.
(d) The resources in Pakistan and India have many similarities. Consequently, in
world markets, we are competing countries rather than being able to supplement
each other's deficits in resources.
According to Pakistani economist Ejaz Ahmad Naik, "A trade regime that exposes
the domestic market to international competition has to be an essential element of
Pakistan's developmental strategy." For Pakistan, it would be appropriate to initially
get exposure to regional competition which will not be as stiff as international
competition. On the other hand, dealing with regional competition will enable
Pakistani manufacturers and marketeers to develop an orientation to international
business with higher stakes. And India-Pakistan trade offers Pakistan exactly such
an opportunity to improve its economy.
India-Pakistan trade potential is best reflected in an advertisment supplement
published in the mainline English daily newspaper Dawn of December 30, 1997,
printed from Karachi and Lahore. This was the first ever trade report published on
India and it reflects the pulse of the Pakistani business community to initiate trade
with India. While governments have been known to go wrong in gauging the
thinking of citizens, newspaper advertising sales managers can seldom afford to
make such mistakes because such business costs them money. Importantly, such
supplements enable business communities to develop market intelligence databases so
necessary for trade promotion.
A research paper prepared by the Karachi Chamber of Commerce and Industry
entitled, "Freer Trade With India: Raison d' etre and Impact" argues strongly in
favour of Indo-Pakistan trade relations. The paper sees the possibility of transfer of
appropriate technology to Pakistan from India; besides, that liberalised bilateral
trade would give the two countries a bargaining chip in negotiating with the

developed countries. The reasons listed out are as follows: low cost capital and
consumable inputs which would help to cover the short fall in agricultural produce;

labour wages in Indian manufacturing sector are two-thirds those in

Pakistan with better productivity;

superior technology;
Indian engineering goods are 30-35 per cent cheaper than corresponding
Pakistani products. While an Indian scooter sells at Rs 20,000 which is onethird the price of a Pakistani scooter which is priced at Rs 65,000; a car
costs Rs 4.5 lakh compared to Rs 6 lakh.
India licence-produces Swiss and German textile machinery which Pakistan
imports at higher costs from other sources

Pakistan's Trade Policy

Pakistan's trade policy is best understood in the context of its economy which is
more agriculture based than industry based. This is because the Indian economy,
prior to partition, was treated as a single entity and the regional diversity resulted
in a degree of interdependence. According to Professor B.M. Bhatia, the region
comprising Pakistan had surpluses in foodgrain, jute, finer varieties of raw cotton
and industrial raw materials which served as inputs to the area now called India;
whereas the Indian side supplied cotton cloth, coal, steel and household products or
manufactures owing to a comparitively higher level of industrial activity. Thereafter,
in the post-partition period, out of a total of 14, 677 industrial units, only 1,414
units or 9.6 per cent of the total were located in Pakistani territory; similarly, of
the 3.14 million industrial workers Pakistan's share was only two lakh workers or
6.3 per cent of the total manpower strength. The smaller industrial profile of
Pakistan is highlighted by the fact that prior to partition the manufacturing sector
contributed only 5 per cent of the total industrial production of undivided India,
observes Professor Bhatia.
At the time of partition, both India and Pakistan inherited economies which were
complementary in nature. However, their politically-driven economic policies resulted
in divergence as the two neighbours promoted competition among themselves. For
instance, Pakistan developed its cotton textile industry soon after gaining nationhood

and in the process obviated the need for importing cotton manufactures from India.
Instead, it competed with Indian garments in international markets. Similarly, India
also enhanced cotton production levels and the resultant surplus enabled it to
compete with Pakistan in international markets. The other cases include sugar and
leather industries wherein Pakistan which was earlier dependent on India attained
self-sufficiency. Pakistan also developed an indigenous leather manufacturing industry
to eliminate the need to export raw leather hides and skins to India.

Pakistan's economy was, therefore, resource rich and agro-based without an

adequately developed industrial infrastructure and lacked technology. Its limited
manufacturing capacity included a few textile mills, cement factories and an oil
refinery. Thus, its trade policies revolved around finding markets for its commodities
and acquisition of technology. In view of this, Pakistan's trade relations, like those
of most developing countries, are primarily with the Western industrialised
democracies owing to its dependence on technology and their reverse-dependency for
raw materials. Yet the Western nations' terms of trade proved to be unfavourable
and this prompted Pakistan to develop an inward looking trade policy which
resulted in a switchover of resources from export-oriented policies to importcompeting industries.
During the early 1950s Pakistan pursued an import substitution policy wherein
exports were not subsidised and this resulted in stagnation (decline in some areas)
in export earnings. This led to a change-over to an export oriented policy "but the
objective was only partially realised because the net protective margin on import
substitution industries was greater than that for export-oriented industries. Thus, the
overall impact of the revised policies was quite limited."
Islamabad's import policy has been restricted through licensing and quantitative
constraints and tariffs have been used mainly to generate revenues. The country
started exports of manufactured items only during the early 1960s with the
introduction of an export bonus scheme. Eventually, almost two-thirds of the total
exports were manufactured by the end of the decade. Pakistan, it would appear in
this context, has never really had a proper and planned economic policy to promote
trade and instead has alternated its approach between an internal and external
orientation. A major step to boost trade relations is to develop strong trade ties
with regional countries and, therefore, Pakistan focussed on South-west Asia rather
than South Asia due to politico-religious reasons. It is a member of the Economic

Cooperation Organisation (ECO) which includes Iran, Turkey, and, later in

November 1992, the CARs along with Afghanistan also became members. However,
in the 1990s, Pakistan slowly began trading with new partners like India and
Bangladesh and shifting away from Sri Lanka.

Problems
Though political relations are an impediment to bilateral trade ties, the role of
vested economic interests perpetuating the present Indo-Pakistan "black" trade also
become relevant as they amount to pressure groups who prefer to sustain the status
quo to their advantage. This refers to the nexus of the politician-businessmancriminal-official who collectively make money from smuggling activity through
bribery and corruption of officialdom to sustain the flow of illegal trade. It results
in a loss of revenue like customs duties, sales tax and income tax to both
governments but in turn enhances the profit margins of traders on both sides.
Commerce Minister Rama Krishna Hegde stated in Parliament on July 28, 1998,
that Pakistani intelligence harassed businessmen who attempted to contact the
commercial wing of the Indian High Commission at Islamabad. Such state sponsored
moves are serious obstacles to the growth of bilateral trade ties.
More recently, on April 21, 1999, the Indian commercial attache, Ravindranath, at
the Indian High Commission in Islamabad was assaulted by Pakistanis while on a
visit to Lahore.

While India has taken the initiative and already granted Pakistan MFN status, this
economic initiative has not yet been reciprocated and thereby constricts natural
trade flows between the two sides. Today there are three views in Pakistan about
liberalising trade with India. Significantly, a section of economists and businessmen
advocate trade with India as they feel that it would be a mutually beneficial
proposition. However, another group of businessmen does not favour trade ties
which are considered synonymous with an Indian economic invasion. Finally, the
security services are opposed to economic relations with India for purely political
reasons. They feel that bilateral trade ties should be formed only after the Kashmir
problem is solved between the two nations.
Pakistani Commerce Minister Ishaq Dar, commenting on the reciprocation of MFN
status to India told media persons in 1998, "We have neither given nor have
intention to give it. We are not bound to give them MFN status. The government
does not deem it proper to give MFN status to India."
In reality, Pakistan's trade policy towards India goes against the World Trade
Organisation (WTO) rules wherein a country accorded MFN status by another one
is under obligation to reciprocate the same. However, Pakistan has chosen to flout
this rule of international economic diplomacy vis--vis India despite being a
signatory to the WTO agreement. While India on its part has not yet raked up the
issue with a multilateral forum, it has reminded Pakistan about this discriminatory
trade policy.
A distinguished Pakistani economist, the late Mahbub-ul-Haq had stated, "Pakistan
is totally wrong in denying non-discriminatory trade to India. It is an inferiority
complex. If we can compete with other developed nations , why can't we compete
with India", he told a reporter from the Indian news agency, the Press Trust of
India (PTI).
Pakistan had set two pre-conditions for according India MFN status: one external
and the other internal. The external condition was that New Delhi must stop
subsidising manufacturers/exporters; and the internal condition was that Pakistani
industry prepares itself to compete with Indian imports. Some Pakistani
manufacturers feel that Indian industry gets massive incentives on raw material and
other inputs which gives it a competitive edge against them. Prospects for IndiaPakistan free trade by 2000 appear bleak with Islamabad subscribing to a section of
the business community's view that trade with India would hurt the Pakistani
economy.

The reported reason underlying Islambad's decision to withhold MFN status is

because the Pakistani security services are not keen on initiating a policy of trade
and cooperation with New Delhi till the Kashmir problem is settled between the two
countries. Probably, the Pakistani security services believe that once Indo-Pakistan
trade ties take shape, the Kashmir issue could recede from public memory and
could cease to be an issue within the country.29 According to newspaper reports
Islamabad is keen on a treaty to avoid double taxation. Perhaps this could be
interpreted as a face-saving device to promote bilateral trade with India while
publicly maintaining that the MFN status will not be given to India.

DATA ANALYSIS

FY2010-12 period from 0.48% reported during

FY2007-09 period. India-Pakistan bilateral trade so
far
Source: PHD Research Bureau, data compiled from Ministry of Commerce,
Government of India.
Period

% share in total

Pakistan share in Indias total trade

2006-07 To 2008-09

0.48

2009-2010 To 2011-12

0.34

Exports to Pakistan in Indias total

exports
2006-07 to 2008-09
1.01
2009-10 to 2011-12

0.73

Imports from Pakistan in Indias

total imports
2006-07 to 2008-09
0.14
2009-10 to 2011-12
0.09
The share of Indias export to Pakistan in Indias total exports has been declined to
0.73% during FY2010-12 period from 1.01% during 2007-09 period. The share of
Indias imports from Pakistan in Indias total imports has been declined to 0.09%
during FY2010-12 period from 0.14% during 2007-09 period.Indias 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, Indias trade with Pakistan
expanded from US$1673.71 million in 2006-07 to US$1956.57 million in 2011-12with
a CAGR at around 3% only.

Indias trade with World vis--vis Pakistan:

Years

2006-07
2007-08

Indias
Foreign Indias
Trade with World Trade
Pakistan
312149.28
1673.71
414786.18
2238.50

Foreign Pakistan share in

with India's Total Trade

2008-09
2009-10

488991.66
467124.30

1810.05
1849.26

0.37
0.40

2010-11
2011-12

620905.30
793804.80

2372.12
1956.57

0.38
0.25

0.54
0.54

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 IndiaPakistan 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.

TRADE BETWEEN
TO$2.4 BILLION

INDIA

PAKISTAN

SURGES21%

According to latest figures of the Directorate General of Commercial Intelligence

and Statistics, Ministry of Commerce and Industry India, which were released here
on Monday, the volume of bilateral trade recorded a net increase of $410 million
from April last year to March this year.

Pakistans exports to India grew 28% while Indian exports to Pakistan increased
19%.
Bilateral trade has increased to $2.4 billion, which may soar to $6 billion in the
next two years if both countries decide to treat each other equally. Currently, most
of the trade between India and Pakistan takes place via Dubai and its volume is
estimated at over $4 billion.
According to an official statement released by the Indian High Commission in
Islamabad, Pakistans exports to India in the last Indian financial year (April 2012March 2013) grew 28% and reached $513 million. Metalliferous ores and metal
scrap, organic chemicals, raw cotton and leather were among the commodities that
contributed significantly to the increase.
The High Commission termed the 28% increase in Pakistans exports impressive
when viewed in the context of negligible increase (0.3%) in Indias overall imports.
Indias exports to Pakistan in the same period increased $300 million, a growth of
19%. Total Indian exports to Pakistan stood at $1.84 billion, putting the trade
balance in favour of New Delhi.
The growth in bilateral trade, especially in Pakistans exports to India, reflects the
positive effect of a number of steps taken towards fully normalised trade relations,
the High Commission stated.
It added three bilateral agreements signed in 2012 in the areas of customs
cooperation, mutual recognition of standards and addressing trade grievances were
intended to further improve trade environment.
In February last year while taking a giant leap forward, Pakistan abolished the
positive list containing only 1,956 tradable items and enforced a negative list of
1,209 untradable items until both sides agree on absolute trade normalisation.
Pakistan was expected to abolish the negative list by December last year, but the
deadline was missed due to Indian reluctance to address Islamabads concerns about
non-tariff barriers and resistance by Pakistans automobile and pharmaceutical
sectors.

Pakistan and India signed here on Friday three

technical agreements and discussed trade in gas
and electricity.
The agreements on redressal of trade grievances, mutual recognition and customs
cooperation will facilitate bilateral business mechanism and ease issues relating to
certification, licensing, lab testing, etc.The two sides agreed to a number of
specific steps and timelines for implementing the agreements.They agreed to
reduce the number of items to 100 in the sensitive list before the end of 2017
under

the

South

Asia

Free

Trade

Agreement

(Safta)

on

reciprocal

basis.Another agreement between the Export Inspection Council of India and

Pakistan Standard and Quality Control Authority will also be signed soon.
Indian Commerce Secretary S.R. Rao said the agreements would be implemented
in litter and spirit.We will identify barriers restricting our exports to India for
their removal, Pakistans Commerce Secretary Munir Qureshi said.Pakistan
agreed to lift a restriction on trade through the Wagah-Attari land route for all
commodities by the end of October this year. At present trade of only 137 items
is allowed through the route. Working groups of the two countries will meet
next month to explore the possibility of opening the Munabao- Khokhrapar land
route for trade.India agreed to bring down the number of items in its sensitive
list by 30 per cent before December this year keeping in view Pakistans export
interests.As agreed earlier, Pakistan will complete the transition of mostfavoured nation (non-discriminatory) status for India by the end of this year.
After that India will bring down its Safta sensitive list to 100 tariff lines by
April next year. The items placed in the sensitive list are allowed for trade, but
these attract much higher customs duties and reduce their trading margin. As
India will notify the reduced sensitive list, Pakistan will reduce its sensitive list
to 100 items over the next five years. Before the end of 2020, the peak tariff
rate for all tariff lines, except for a small number of products in the sensitive

lists, will not be more than five per cent. It will be an ultimate goal for
achieving complete liberalisation process between the two countries.

BANK BRANCHES:
The Indian commerce secretary said the names of banks willing to open
branches in each others country would be exchanged in the next couple of
months. But, he said, the State Bank of Pakistan and the Reserves Bank of
India would look into modalities and put in place a mechanism for opening the
branches.
About export of electricity, Mr Rao said an understanding had been reached to
use the available infrastructure as a short-term measure to transfer limited
electricity. It would be used for both ways, he added.

India offered Pakistan 500MW of electricity, but Mr Rao said the infrastructure
required to transmit it would take time to be put in place.India also offered to
export up to five million cubic metres per day of gas for an initial period of
five years.The Pakistani side said it had received the offer and was considering
it.Bharat Heavy Electrical Ltd, an Indian public sector company, made an offer
to cooperate with the Pakistan government in setting up of 500-2000MW
coal/hydro or gas power plants. India expressed its willingness to cooperate with
Pakistan in areas of wind and solar energy and offered to help Pakistan
Railways in meeting its requirements of up to 100 locomotives .A demand was
made to allow high capacity wagons for trade from Pakistan which carry load
three times more than regular wagons. For this and other issues, railway
ministries of the two countries will meet on a monthly basis to work out
measures for increasing trade through train. The two sides agreed to simplify

procedures and encourage investment. Outreach programmes will be held with

business communities on both sides on investment opportunities, application
procedures and regulatory issues. A joint working group will be constituted
before Nov 15 to work out a liberalised regime of reciprocal bilateral rights for
commercial flights between Delhi and Islamabad.

Improving India-Pakistan relations through trade

While successive Indian and Pakistani governments have often repeated the desire
for peaceful relations, reaching a comprehensive agreement that settles outstanding
disputes, such as Kashmir and the Indus waters agreement, still does not seem to
be in the cards as yet. However, developing stronger economic relations between the
two countries could be a base on which to build overall ties and trust. More
specifically, despite the political issues that divide them, steps could be taken toward
better economic relations through expanding trade between the two countries.
The potential gains from increased economic integration between India and Pakistan
are large. Even though both countries are members of the South Asia Free Trade
Area (SAFTA) established in January 2006, trade between the two countries is
unnaturally small and the scope for gains from increased trade correspondingly
large. Total trade (exports plus imports) between India and Pakistan in 2008
amounted to a little more than US$2 billion, up from a paltry US$500 million in
2000. But still Pakistan accounts for less than 0.5 per cent of Indias trade, and
India accounts for a little over 1 per cent of Pakistans trade compared with the
very large trade shares following the independence of the two countries in 1947. In
1948-49, 70 per cent of Pakistans trading transactions were with India, while 63
percent of Indian exports went to Pakistan. Informal trade, via third countries (such
as Dubai), is estimated at some US$2-3 billion per year, and this trade could
obviously be undertaken bilaterally at significantly lower cost.
There have been a number of studies using gravity models to assess the effects of
SAFTA on interregional trade. Based on these studies, India-Pakistan trade could
increase up to 50 times its current level. A more recent study, using the Peterson
Institute for International Economics (PIIE) gravity model, shows the potential of
formal trade between India and Pakistan is roughly 20 times greater than recorded
trade. This means that at 2008 trade levels total trade (exports plus imports)
between India and Pakistan could expand from its current level of US$2.1 billion to

as much US$42 billion if the normal relations estimated by the PIIE gravity model
for trading partners were to hold for the two countries.
What then is holding trade back between the two countries? Constraints on
economic integration include high tariff and nontariff barriers, inadequate
infrastructure, bureaucratic inertia, excessive red tape, and direct political opposition.
Pakistan has not yet reciprocated most favoured nation (MFN) status for India and
maintains a fairly narrow positive list (of about 1400 items) on goods that India
may export to Pakistan. At the same time, Indias tariff rates remain high,
especially for goods of particular interest to Pakistan, such as textiles, leather, and
the mineral onyx, and nontariff barriers are 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. Moreover, constraints on visas and cumbersome payments and customs
procedures further limit the scope for trade. Finally, although there are no specific
restrictions, there is virtually no trade in services or foreign direct investment (FDI)
flows between the two countries. In both the cases of services and FDI, prior
government approval has to be obtained, and it is clear that such approvals have
been granted very sparingly by either country.
Before undertaking more long-term and wide-ranging fundamental trade reforms,
both countries need to build public support for trade liberalisation between them.
Initial steps should focus on bilateral measures that can be accomplished relatively
easilyby executive order rather than via legislation and with minimal resource
implicationsand that would meaningfully increase trade while gaining support for
bigger and bolder steps down the line. Reducing these various and eventually
achieving regional integration could involve two phases: short-term (say one year)
and medium-term (say 1-3 years).

The specific short-term measures, mainly related to trade facilitation, could include:
easing restrictions on visas; eliminating the requirement that ships between India
and Pakistan touch a third country port before bringing in imports; removing the
requirement that rail wagons carrying goods across the border return empty;
opening additional road border crossings and bus routes; increasing air links
between the two countries (particularly establishing flights between Islamabad and
New Delhi); increasing the number of customs posts; and allowing branches of
Indian and Pakistani banks to operate in the other country.

The specific medium-term measures towards greater economic integration between

India and Pakistan could include: Pakistan granting MFN status to India, and in
turn India significantly lowering tariff rates for goods of particular interest to
Pakistan (such as textiles and agricultural products); Pakistan allowing transit trade
from India, which is required by WTO rules; facilitating energy trade between the
two countries through building gas pipelines and eventually joint energy grids;
allowing trade in information technology; harmonising customs procedures; and
eliminating obstacles to foreign direct investments by the other country.
With relatively new governments in both India and Pakistan, there is once again a
window of opportunity to improve economic ties. As shown by numerous empirical
studies, the potential for trade between the two countries is huge, perhaps twentyfold or even higher than at present. There is no doubt that increasing trade would
significantly raise GDP and household incomes in both countries, and would
particularly benefit Pakistan. While the measures for reducing trade barriers
proposed here generally have the support of businessmen on both sides of the
border, broader constituencies in each country need to be built for greater bilateral
trade liberalisation. Trade will of course not solve all the problems between the two
countries, but it could be an important catalyst in the lowering of tensions, which
certainly has to be in the interest of both India and Pakistan.

India-Pakistan Trade: The Most Favored Nation

Breakthrough

On November 2, 2011, the Pakistan government announced that it was ready to

grant most favored nation (MFN) status to India. This means that Pakistan's tariffs
on Indian imports will have to be the same as the tariffs it imposes on imports
from its other trading partners. Why is MFN important? To answer this question
one has to ask why India and Pakistan trade so little with each other despite the
existence of common history, language, culture, and long borders. Economic theory
predicts that trade between the two largest economies in South Asia would be at
least five to ten times greater than its current level of around $2 billion. While both
sides are fully aware of the advantages of trade, a variety of political,
infrastructural, legal, and regulatory impediments have essentially paralyzed bilateral
trade relations
One of the main constraints to trade has been that Pakistan did not reciprocate
India's granting of MFN in 1996 to Pakistan. Thus, the approval to grant MFN to
India by the Pakistan cabinet is clearly a major breakthrough in trade relations
between the two countries, and finally fulfills Pakistan's obligations as a member of
the World Trade Organization (WTO). It is interesting to note that Pakistan and
India were among the original 23 signatories to the General Agreement on Trade
and Tariffs (GATT) in 1947, which articulated the MFN principle. It has taken
Pakistan some 64 years to finally start implementing what it signed on to between
the two neighbors
Not discounting the importance of the announcement, there is still an enormous
amount of work to be done to implement the cabinet decision. Pakistan will have to
abandon the positive list of some 2000 items that it maintains on goods that can be
imported from India. To be consistent with the MFN principle this positive list is to
be replaced by a negative or "sensitive" items list of goods that will still be
restricted. The Pakistan Ministry of Commerce has prepared this negative list but
needs to consult with stakeholders on the items to be covered. This will take time
as the sectors of the economy that feel that they would be adversely impacted by
imports from India will lobby hard to have their products put on the negative list.
The military is also a stakeholder, not just from a defense standpoint but wearing
its hat as a major industrialist, and will naturally weigh into the discussion of the
composition of the negative list.
In some sense, the MFN itself is symbolic, but it is a very important symbol. First,
it means that Pakistan has decided to separate trade issues from other major
political issues (in particular Kashmir) that have strained relations between the two
countries since their independence in 1947. And second, Pakistan has apparently
moved away from its previous position of linking MFN with the removal on Indian
non-tariff barriers on Pakistani exports. While Pakistani businessmen have been

pushing for liberalization of trade with India for some time, they have come up
against a formidable array of opponents, including nationalist politicians,
bureaucrats, industries that could potentially lose out to Indian competition, and
most importantly the Pakistan military. Clearly, the military has now withdrawn its
opposition to trading with India, thereby allowing the cabinet to vote unanimously
in favor of granting MFN to India.
By itself granting MFN will not lead to the levels of trade that India and Pakistan
should have with each other. It is expected there will be a jump in trade as
unofficial trade between the two countries going through Dubai, estimated to be
around $2 billion to $3 billion a year, could then take place directly through official
channels. So some sizable increase in trade is very much in the cards.
However, there are still a host of other obstacles to trade that will have to be
tackled, even after MFN is in place, to significantly boost trade between the two
countries. On the tariff side, even though India's average MFN applied tariff is 13
percent, its tariffs on goods of particular interest to Pakistan such as agriculture,
textiles, and leather goods remain high. For example, on agricultural products the
average applied tariff is about 40 percent. Other constraints on trade between the
two countries include significant non-tariff barriers, inadequate infrastructure,
bureaucratic inertia, and excessive red tape.
The complete liberalization of trade between India and Pakistan is going to be a
long and arduous processbut the granting of MFN by Pakistan to India is an
important start to this process. Higher levels of trade will benefit both countries,
and Pakistan more so than India. Indeed, as India is the engine of growth in South
Asia, Pakistan has to hitch its wagon to the locomotive or risk getting left behind
on the platform. This reality is now recognized and accepted by the Pakistan
government, and it seems finally also by the supposedly "India-centric" Pakistan
military.
Trade will of course not solve all the problems between the two countries, but it
could be an important catalyst in reducing tensions. It is clearly in the interest of
both countries, and the world for that matter, to find a political resolution to IndiaPakistan problems, and increased trade can well be the starting point for this
objective.

QUESSTIONNAIRE:
What
are
commodities?

the

prospects

for

agricultural

At the time of partition, as identified earlier, Pakistans exports to India consisted

primarily of agricultural products. But over the last six decades, Indian agriculture
has significantly developed higher yields in crops like cotton and wheat than
Pakistan. For example, the yield of wheat in the Indian Punjab is 68 percent higher
than the yield of wheat in Punjab, Pakistan. In fact, Pakistan imported large
quantities of cotton and sugar from India in 2010 due to shortfalls in domestic
production. Opening agriculture to trade with India can smooth supply shortfalls in
Pakistan. It is more likely products like fruits, vegetables, livestock products,
flowers, processed foods, etc. will find a receptive market among Indian consumers.
Needless to say, these products will have to satisfy the quality control standards and
the process of regulation in India. The short term potential for gains in agricultural
trade, however, may be limited, due to subsidies and compliance with standards and
certifications in agriculture. own Pakistani investment in India.

What are the views of public intellectuals, especially

economists, and civil society organizations?
NGOs in Pakistan are focused more on social and human rights issues and less on
economic issues. Also, the consumer rights movement is very underdeveloped in
Pakistan and there has not been enough projection of consumer welfare gains

arising from the availability of cheaper grade form India especially for the lower
quintiles of the population. As far as economists are concerned, the profession has
generally highlighted gains from trade with India. In fact, the case for granting
MFN status voiced by the Advisory Panel of Economists to the Planning
Commission, headed by Dr. Hafiz A Pasha (a former commerce Minister) in 2008
More recently, Dr. Mohsin Khan, of the Peterson Institute of International
Economics, has said in a recent seminar at PIDE, that trade potential between India
and Pakistan is as high as USD $40 billion. He has also said that Pakistan could
gain access to markets in Nepal and Bangladesh, while India would gain access via
land routes to Central Asia, Iran and Afghanistan. Other leading economists like Dr.
Ishrat Husain (Dean off the Institute of Business Administration, Karachi and the
former Governor of the State Bank of Pakistan); Dr. Rashid Amjad of PIDE and
Dr. Akmal Husain of BNU/FCU have spoken or written in favor of the process.
There is also a lot of research underway on the implications of Indo Pak trade,
including this study.

WHAT ARE POTENTIAL BENEFICIARIES IN

PAKISTAN MFN STATUS TO INDIA?
The granting of MFN status to India, coupled with measures for trade facilitation,
like the opening of more integrated check posts at the border and removal of
NTBs, could confer significant gains on both sides of the border. International trade
theory shows that, under some assumptions, the smaller country (in this case,
Pakistan) benefits more from opening up of trade. There is, in fact, a view in
Pakistan that since the country has fallen seriously behind India in the rate of
growth, the only way to reduce the gap is to jump on to the bandwagon. Some
proponents of trade liberalization with India have even argued that this will raise
the growth rate of the Pakistans economy by one to two percentage points.
Which types of economic activities are likely to benefit? Subject, of course, to trade
facilitation by India, export oriented sectors of Pakistan will get access to a much
larger market. Husain (2011) says that India has a middle class of 300 million
people with rising purchasing power while Pakistans middle class is about 30
million with more or less stagnant real incomes. A ten percent penetration into the
Indian middle class market can double the market size for Pakistani companies and
businesses. Prime candidate industries which could benefit from access to a large

market are, first, high quality textile products, especially cloth, ladies garments, bed
wear, etc. Second, other export products which could witness a jump in sales are
leather products, surgical instruments, sports goods, carpets, and cement. If, in fact,
outlets for franchise of Pakistani products are given permission to operate in India
then this will greatly facilitate the development of markets, resulting in greater
economies of scale in production More recently, there has been an agreement, in
principle, by India to all

WHAT ARE GLOBAL

INDIA PAKISTAN?

TRADE

PATTERN

OF

The objective of this section is, first, to see the changes in direction of trade of
India and Pakistan respectively over the last few decades, second, to determine the
growth of intraregional trade in South Asia, and third, to identify the various
trading arrangements with different countries and regions by the two countries.
These analyses will help in determining the importance that each country will attach
to bilateral Direction of Trade - Pakistan
Over the last 50 years, the direction of trade of Pakistan has primarily been with
developed countries in North America and Europe in both exports and imports.
However, there appears to be an increase in the share of developing economies
outside the region of South Asia after 1990. This is primarily due to the
intensification of the trading relationship (including entering into a free-trade
agreement) with China. Trade with other economies in South Asia has remained
very restricted, with some indications of an increase in 2010.al trade.

Will it be a new phase in India-Pakistan Relations?

The President of the PML(N) Nawaz Sharif is all set to become Pakistans next
Prime Minister. Both before and after the elections, Sharif was quick to send
messages of peace and friendship with India promising to start from where he had
left in 1999, when he was unceremoniously thrown out of power by Gen Pervaiz
Musharraf. Earlier, Prime Minister Manmohan Singh congratulated Mr Nawaz
Sharif on the latters victory in Pakistans elections and invited him to visit India.
The BJP in India has also welcomed the move. Will Nawazs tenure as the Prime
Minister of Pakistan herald a new beginning in India-Pakistan relations?

The relationship between the two countries had deteriorated in the recent past
especially after the beheading of an Indian soldier by the Pakistani troops in
Jammu and Kashmir, and the fatal attacks on Chamel Singh and Sarabjit Singh, the
Indian prisoners held in Pakistani jail. There is no progress on the trial of 26/11
Mumbai terror attack suspects some of who are till date freely roaming in Pakistan.
Pakistani establishments link to this incident has made this trial complicated. The
public opinion in India has been inflamed at the intransigence of the Pakistani
government. It must be noted, however, Nawaz Sharif has refrained from speaking
about prosecuting the 26/11 perpetrators. Before the elections he said that he would
examine allegations of ISI involvement in the 26/11 attacks and investigate Kargil.
This is not going to be an easy task. It has been reported in the Pakistani media
that the security establishment is uneasy over his victory in the elections. Moreover,
given his links to the anti-India militant organization the Jamaat-ud-Dawa and its
militant wing the LeT, it remains to be seen whether Sharif would be able to
satisfy India on 26/11 trials.
Nawaz Sharifs sentiments for better relationship with India are laudable and should
be welcomed. However, there are still constituencies within Pakistan for whom
Kashmir remains the core issue. The larger question is whether Sharif will be able
to bring the army on board. His first task would be to manage a suspicious army
with whom his relationship has been highly strained. The army is unlikely to give
up its influence and say on Pakistans key foreign policy and security concerns.
Anti-India jihadi constituencies in Pakistan are still very strong. They would do
anything to prevent the normalization of relations with India. To assure India of his
good intentions, he has offered a number of positives. Sharif stated that he will not
allow anti-India speeches to be made against India by anybody including Hafeez
Saab. But it is an acknowledged fact that he does not have any control over the
militant groups operating in Kashmir who are Pakistani intelligence agencys
protge. He also said that he will not allow terrorism to be exported to India
from Pakistani soil. On being asked whether the army would act as a spoiler in
India-Pakistan relations, Sharif boldly stated that I am determined to restore the
authority of the Prime Ministers office. The Army will report to the Prime
Minister, who is the boss. In spite of such assurances, there are several powerful
actors and vested interests that shape Pakistans India policy. Therefore, while
Nawaz Sharif may be genuinely interested in promoting good relations with India,
whether he would be allowed to do so is a big question.

What does Pakistans decision to grant

favored-nation (MFN) status to India mean?

most-

Pakistan announced its intention to begin normalizing trade relations with India,
ultimately granting India MFN status. This means that Pakistans tariffs on Indian
imports would receive the same treatment as imports from its other trading
partners. MFN status was a building block of the General Agreement on Tariffs and
Trade (GATT) system, which required that GATT members treat each other equally
and prohibited discrimination among its members. India and Pakistan were original
members of the GATT (now the World Trade Organization), so this should have
occurred back in 1948. India granted MFN status to Pakistan in 1996, at which
time Pakistan did not reciprocate and instead used a Positive List of items that
were allowed to be imported from India. The Positive List has grown from a few
hundred items to almost 2,000 currently. Once MFN status is granted officially, this
will change from a Positive List to a List of Sensitive Items, which will still be
subject to restrictions.

Do India and Pakistan trade anything yet?

Current bilateral trade is thought to be between $2 billion and $3 billion, most of
it in three sectorschemicals, base metals, and machinery and electronicsgoing
through unofficial channels, mainly Dubai, costing both economies valuable revenue
and increasing the price of goods on both sides of the border. After MFN status is
granted, most of these goods should be traded via direct, official channels, saving
both time and money and benefiting consumers in both countries.
This past September, when the commerce ministers of India and Pakistan met, they
agreed to work jointly toward doubling bilateral trade to $6 billion by 2014. They
also agreed to liberalize the visa regime for the business communities of both
countries by November 2011.

What other challenges to trade remain?

A Nontariff barriers and infrastructure challenges remain. For now, the only point
of trade along the India-Pakistan border is the Wagah crossingbetween Amritsar,
India, and Lahore, Pakistan. A sea route from Mumbai to Karachi is another option
for trade. But ports, like the land crossing, would need significant modernization
and development in order to handle the expected increase in trade. Some economists
in the region note that the most pressing nontariff barriers concern the customs
process, including certifications and labeling of goods.

What does this mean for the future of IndiaPakistan relations?

With an expected jump in trade, a simultaneous increase in people-to-people and
private-sector interaction is logical. Increased trade should be seen as a starting
point for reducing tensions between the two countries and as a step in the right
direction. The move also seems to indicate that the countries are willing to separate
economic issues from their more difficult political issues, which can only help move
forward the formal dialogue they resumed this summer. (These talks were suspended
after the 2008 Mumbai terrorist attacks.)
With Pakistans announcement of MFN status for India and pledges by Prime
Ministers Manmohan Singh and Yousaf Gilani at this weeks South Asian
Association for Regional Cooperation (SAARC) meeting to implement a liberalized
visa regime, Pakistan clearly recognizes the benefits of being connected to the
regions largest economy. At an hour-long meeting on the sidelines of the SAARC
summit, the prime ministers also agreed to move ahead with their obligations under
the South Asian Free Trade Agreement (SAFTA) toward a Preferential Trade
Agreement (PTA)an ambitious goal, but another step in the right direction. The
PTA would require that all tariffs on traded goods be zeroed out by 2016. The

prime ministers also pledged to fast-track implementation of cross-border trade.

There is always the chance that fundamental political differences can sidetrack the
recent goodwill gestures and economically beneficial measures, so cautious optimism
is in order.

Overview of the Economies of Pakistan & India

Pakistan and India are two neighboring countries which prior to Partition in 1947
were part of the same colony under the British Raj. Along with Bangladesh the
three countries constitute the Indian sub-continent, which houses over 1.494 billion
people, almost 22 percent of the global population. India is by far the biggest
country with a population of 1.171 billion, almost seven times that of Pakistan. The
per capita income of India, as per the World Bank 201013 data, is estimated at
USD $3,425 in purchasing power parity terms, just over 33 percent above the per
capita income of Pakistan of USD $2,688 in the same period. The two countries
have had a variable growth record, as highlighted in Table 1. In the three decades,
1960s, 1970s, and 1980s, the GDP growth rate of Pakistan exceeded that of India.
But in the last two decades the 1990s and 2000s India has caught up and gone
ahead. During the last ten years, the Indian economy grew at an average annual
rate close to 8 percent, whereas the growth rate of Pakistan remained below 5
percent despite an intervening period of high growth from 2002 to 2007. Today,
India is considered as one of the fastest growing economies in the world, only
behind China.
The agricultural sectors of both the economies have shown moderate growth rates of
about 3 percent in the 2000s. Dynamism of the Indian economy is attributable to
an over 9 percent annual growth rate in the services sector, followed by industry at
close to 8 percent. In Pakistans case, the leading sector has been industry with
annual growth rate just over 6 percent.
Next, we turn to the degree of openness of the two economies. This is measured
as the sum of exports and imports as a proportion of the GDP the fact that
Pakistan has historically been a more open economy, more inclined to trade, than
India. The latter was virtually a closed economy in the 1960s following a strong
strategy of import substitution, with a degree of openness of only 7 percent. At that
time, the corresponding ratio for Pakistan was 12 percent. Following the process of
trade liberalization in both countries since the early 1990s, the economies have
become much more open. Based on the 2010 data in Table 2, the degree of

openness of India is 31.6 percent while that of Pakistan is 34.2 percent. In the case
of Pakistan, the increase is largely due to a rise in the share of imports in the
GDP. India has experienced a process of export-led growth and the share of exports
in the GDP has increased by almost 4 percentage points over the last decade

Trade Agreement
1. Pakistan-Sri Lanka Free Trade Agreement
2. Economic Cooperation Organization Trade Agreement (ECOTA) (Pending)
3. South Asian

Free Trade Agreement (SAFTA)

4. Pak Iran Preferential Trade Agreement

5. Pakistan-China

Free

Trade Agreement

6. Pakistan China Free Trade Agreement

(Goods and Investment)

(on Services)

7. Developing-8 (D-8) - Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria,

Pakistan and Turkey (Pending)
8. Malaysia Pakistan Comprehensive Economic Partnership Agreement (MPCEPA)
9.

Pak - Mauritius Preferential Trade Agreement

10. SAARC Agreement on Trade in Services (SATIS)

11. Pakistan Indonesia Preferential Trade Agreement (PTA) (Pending)
12. Unilateral Trade Preference to Afghanistan Pakistan Transit Trade Agreement
(APTTA) for fresh and dry fruits

Pakistans Restrictions on Trade with India

Given the fact that Pakistan had earlier not granted MFN status to India, it is
important to identify the nature and extent of restrictions on import from India. As
such, we first analyze the Positive List of imports which were permissible from
India until the Positive List was replaced with a Negative List, expanding the tariff
lines importable by Pakistan from India. The subsequent section looks at the
Negative List, which has been approved recently by the Federal government as a
prelude to the granting of full MFN status to India. This list is expected to be
phased out by the end of December 2012. The tentative implications of full trade
liberalization with India are brought out. The last subsection highlights the nature
and quantum of flows of goods through informal channel from India in the
presence of restrictions. Re-exports from other countries of goods originating in
India are also examined. This analysis enables the quantification of the potential
increase in formal trade following the liberalization.
This list was initially finalized under a Trading Arrangement between India and
Pakistan. It was periodically been expanded and the latest list consisted of 1870
tariff lines out of the total of 6857 lines. Items included in the Positive List
included basic food items; raw materials (especially these which are not produced in
Pakistan); and intermediate and capital goods (especially those which are not
produced inPakistan). 22Items excluded from the Positive List were generally higher
value added goods posing potential competition to local Pakistani industry.
Therefore, the approach towards determining the Positive List was based on the
desire to insulate value adding Pakistani industries from competition by imports
from India. Good examples of such cases are footwear, ceramic and glass products,
paper products, value added textiles, metallic products and the automotive produces.
Therefore, trade with India has hitherto been managed in such a way as to exert
minimum competitive pressure on existing major Pakistani industries.

Informal & Quasi-Legal Trade

As result of restrictions there is a significant volume of informal and quasi-legal
trade from India to Pakistan. According to the Sustainable Development Policy

Institute (SDPI) study published in 2005, the main routes for illegal imports of
India goods are:
1. Dubai-Bandar Abbas-Hirat-Kabul-Jalalabad-Torkham
2. Dubai-Bandar Abbas-Hirat-Kandahar-Chaman
3. Sind-Gujarat Cross Border
4. India-Dubai-Karachi
5. Lahore Border

Suggestions
for
bilateral trade

strengthening

India-Pakistan

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

consideration by the two countries.

procedure,

which

should

be

taken

into

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.1 A measure of the extent to which one of two
countries, j, exports what the other, k, imports.PHD Research Bureau 7
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.

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.
The Analysis and Conclusions that are presented below are based on the following:
i- Detail study of the responses of the questionnaire.
ii- Report of the Trade Wing of Pakistans High Commission in New Delhi.
iii- Report of the Research Wing of the FPCCI.
iv- Interviews and desk research conducted by the Research and Analysis
v- Directorate of the TDAP.
The Issue of NTBs has been at the forefront of Pakistans discussions with the Indian
counterpart for quite some years now. It has time and again been claimed that India
maintains certain Pakistan specific Non-Tariff Barriers which are stunting our exports
to India. The numerous studies, reports and interviews conducted during the last one
year can all be said to contain two common elements. i.e.
i The so called Pakistan specific NTBs claimed are fundamentally Non Tariff
Measures employed by the Indian Government at a multilateral level.
ii The overwhelming number of issues alluded to by our Exporters pertain to;
Infrastructural issues at port of entry, bureaucratic and administrative mishandling,
psychological barriers emanating from our bilateral political issues, visa restrictions
and surveillance of visitors to India, Banking restrictions, investment restrictions and
restrictive trade routes, which constitute the real Pakistan specific non tariff barriers
to our trade with India. It has also been observed that even when companies have
complained of an existence of a Non-Tariff Measure to be Pakistan specific in nature,
it has turned out to be a question of the mind set of the particular administrative
officials in dealing with Pakistan specific consignments. Needless to say this mindset
stems from the hostile political relations between the two countries which have
metamorphosized into an unwritten rule of business in the Government agencies of the
two countries.

SUMMARY:
India has been able to conclude many more bilateral and regional trade agreements
than Pakistan, given its vastly larger domestic market. India trade agreements are
also more diverse regionally. In return, this has given much greater market access
to Indian exports. Trade agreements of Pakistan have primarily been with neighbors
and proximate countries like China, Sri Lanka, Malaysia and Iran. Indias
agreements are spread across the Asia pacific region. Indias trade with trade with
major developing and developed countries in world trade like China, East Asian
countries and other countries in G-20 appear to be strengthening. For example, the
volume of trade with China has grown rapidly at 20 percent per annum to reach
USD $63billion in 2010-11. Pakistan, a relatively smaller economy as compared to
India is unlikely to get the same degree of interest in the trading partners for
market access initiatives as India does. As such, along with market access
opportunities available in the Indian market under SAFTA, Pakistan must continue
to make inroads into the large and fast growing market in China, especially after
the FTA.

BIBILOGRAPHY:

WWW.GOOGLE.COM

INDIA PAKISTAN TRADE RELATIONS BOOK

TRADE RELATIONS BOOK

INTERNATIONAL ECONOMICS 6Th EDITION

MORDERN ECONOMICS