India & Pakistan: Being economically savvy yields a peace dividend

Economic Times, July 18, 2008

By Pradeep S Mehta & Abid Qayyum Suleri

THE first foreign secretary and foreign minister level talks between India and Pakistan, held in Islamabad in May, after the restoration of democracy in that country, led to a consensus to continue the ongoing peace process and push for an improvement in bilateral economic relations with the resolution of all issues related to Kashmir.

In a bid to improve and make relations more cordial through a series of confidence building measures, the two sides agreed to increase the frequency of bus services between the two countries, firm up modalities for intra-Kashmir trade and truck service and implement other measures to give a fillip to cross-border travel.

They reaffirmed the significance of ceasefire along the Line of Control (LoC) and committed themselves to cooperation with a mission of safeguarding the LoC as well as liberalisation of visa norms to facilitate people-to-people contact. It was recognised that the menace of terrorism plagues both countries; both sides reaffirmed not to permit it at any cost to obstruct the peace process. It was agreed to activate a joint anti-terror mechanism so that incidents of terrorism do not affect their ties.

What is more important is that both nations now realise that improvement in economic (trade) relations should not wait for conflict resolution. The dawning of this realisation has led to an emphasis on the development of better political relations and defence cooperation as well as stronger trade ties through the dialogue process. That trade and conflict resolution are complementary, as shown in many other instances in geo-political history, was also spoken about. Importantly, trade can also result in almost normal relations despite unresolved problems between countries. For example, foreign minister Pranab Mukherjee said, trading relations between India and China have improved continuously over time in the recent past (total trade has touched $40 billion and is expected to reach $60 billion by 2010), despite their relationship being characterised by contentious issues.

It is expected that the resumption of the composite dialogue process between India and Pakistan will give a fillip to bilateral trade, besides facilitating early execution of various gas pipeline projects such as Iran-Pakistan-India (IPI) and the Turkmenistan-Afghanistan-Pakistan-India (Tapi) projects involving the two neighbours. It is hoped that bilateral trade between the two countries, which stood at $2 billion in 2007-08, rising from a low of just $235.74 million in 2001-02, would touch $5 billion by 2010. During 2002-03 and 2007-08, India’s exports to Pakistan and its imports from Pakistan have grown by 62% and 65%, respectively.

Indo-Pak trade could have grown by even higher rates had Pakistan reciprocated in according the Most Favoured Nation (MFN) status to India under its WTO obligations. Pakistan has expanded its positive list of imports from India from 774 products to 1074 products. These products include machinery/equipment, raw materials, chemicals and accessories of a number of manufactured items that are in great demand in Pakistan. Presently, the main commodities of export to Pakistan are dyes, sugar, plastic and petroleum products and cotton while the main items of import are petroleum and crude products, fruit, cotton yarn and fabrics and organic chemicals.

As the figures above indicate, the formal trade between the two countries has been abysmally low, although a great potential to increase it exists. Trade between India and Pakistan, measured by the sum of their bilateral exports, is less than 1% of total exports from India and Pakistan. It is just 4% of the equivalent measure of bilateral trade between Malaysia and China, two countries of comparable GDP and proximity and only 9% of the equivalent measure of trade that occurs between Argentina and Brazil, other countries of comparable size.

A World Bank study based on field research in border regions, Dubai and major urban markets has estimated informal trade between India and Pakistan at $545 million in 2005. The Indian Council for Research on International Economic Relations (Icrier) in its 2007 survey of Indian firms estimated a vast untapped trade and investment potential between the two countries in goods and services. The study showed that the total trade potential between the two countries is $11.6 billion, of which Pakistan’s export potential is $2.1 billion and $9.5 billion is the figure for India. Business chambers of India and Pakistan have also identified several items with export potential, including services and tourism.

Recent trends do show that trade has picked up considerably between the two countries and therefore there is much hope of salvaging the situation and tapping the hidden potential for trade between the countries. In fact, the deepening of trading relations has been accompanied by more peace building measures such as opening up of bus and truck services and greater social contact.

The current political atmosphere in both countries favours deeper political and economic interactions leading to more trade and investment. In the joint press conference after the ministerial meeting, Pakistan’s foreign minister Shah Mahood Qureshi declared that his government was ready for a “grand reconciliation” with India through dialogue to resolve all outstanding issues with self-respect and dignity. Though such statements are not new, they might be considered significant in the changed circumstances, in particular, the return of democracy to Pakistan and the two main ruling political party leaders Asif Ali Zardari and Nawaz Sharif expressing their desire to improve ties with India and reap the benefits of trade and closer social contact.

With foreign minister Pranab Mukherjee reciprocating the feelings expressed by counterparts across the border, India and Pakistan have probably entered a crucial stage in their relations which could herald a new spirit of complementarity and synergy as both countries develop rapidly. It is hoped that such trends will be consolidated by the proposed visit of the prime minister Manmohan Singh to Pakistan later this year.

The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at and Suleri is executive director of Sustainable Development Policy Institute, Islamabad

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