Indo-Pak trade: Cutting the Gordian knot

Economic Times, August 06, 2008

By Pradeep S Mehta & Siddhartha Mitra

Pakistani press, particularly the Urdu press, is crying foul on the new trade policy announced mid-July . The usual refrain is that Indian goods will flood Pakistan. With a common border of around 3,000 km, striking cultural similarities, a common DNA and almost no linguistic barriers, India and Pakistan are natural trading partners.

However, the bloody partition that resulted in the birth of the two nations, wrangles over territory and inflated egos often characterising young and proud nations have ensured that only a tiny fraction of potential cooperation has been achieved. Yet, recent developments, particularly on the Pakistani front, indicate that all is not lost and there might be lasting peace and much more trade between these nations.

Let us look back at the immediate past and then envision the changes that might breathe fresh life and amity into the relationship between these two often hostile nations. In 2006-07 Indian exports to Pakistan were valued at $1.35 billion – a mere 1.06% of India’s exports to the rest of the world and indeed a small fraction when compared to the 3% of the rest of the world population residing in Pakistan. The next year, 2007-08 , was only slightly better: official Indian estimates show Pakistani share in total Indian exports of 1.1%.

India’s imports from Pakistan were in even more minuscule proportion to its imports from the rest of the world – just 0.17% or $0.32 billion in 2006-07 , which fell to 0.12% in 2007-08 , according to official estimates. In other words, India’s imports from Pakistan per Pakistani resident are just 4% of its imports per rest-of-the-world resident.

The intensity of India’s trading relations with Pakistan appears very weak when compared with relatively distant Indonesia, a country which is otherwise similar to Pakistan in many respects – Asian, with comparable population, predominantly Islamic and a per capita income that is not vastly different from the Pakistan. Yet, Indonesia accounted for $2.026 billion and 1.6% of Indian exports in 2006-07 ; its imports were even more impressive at 2.24% of Indian imports.

There is no doubt that there is immense untapped potential for trade between India and Pakistan. A 2007 study by Icrier, an economic think tank located in Delhi, indicates an Indian export potential of $9.5 billion vis-à-vis Pakistan and a smaller import potential of $ 2.2 billion. This implies that currently India and Pakistan are exploiting around 15% each of their export potentials vis-à-vis each other.

Both countries have adopted different methods to shut out imports from the other country – Pakistan imports strictly on the basis of a positive list which catalogues items from India to be allowed across the border; potential Pakistani exports to India are often blocked by India’s technical barriers to trade and sanitary and phyto-sanitary measures.

Lack of information on each side about the other is also responsible for the lack of depth in trading relations. After years of treating each other like strangers in a rapidly globalising world, good sense has made a sudden appearance in Indo-Pak trading relations. Pakistan in its new trade policy of 2008-09 has announced that it plans to promote raw material and capital good imports from India and take advantage of the lower freight charges to reduce its cost of producing output.

Imports of CNG buses, processed diesel and fuel oil, machinery, mining, quarrying and grinding equipment, stainless steel, cotton yarn, academic and scientific books from India are now being allowed into Pakistan. These measures follow other enabling steps like facilitation by both parties of trade across the Wagah border and the increasing use of rail transport as a vehicle for trade.

These steps not only signify a new era in Indo-Pak trading relations but as a consequence will also usher in a new age of diplomacy and peace between the two nations. Pakistan’s willingness to repose trust in India as a conveyor of essential inputs can be interpreted also as a goodwill gesture and an olive branch; a nation will surely not quarrel with another on which its economic interests depend crucially.

The time has also come for India to respond generously. While the mentioned non-tariff barriers cannot be relaxed by India for just one country, the Indian government can help in alleviating information constraints about potential importables from Pakistan; infrastructure improvements like wider roads, more spacious truck depots and warehouses near the Wagah border as well as a reduction in time involved in Customs and related procedures might help. These constitute possible demand and supply side drivers of an increase in imports from Pakistan.

Apart from productivity enhancing and cost reducing effect of greater trade between the two countries, consumers too will benefit. Many goods which now fall in the category of nontradables in either country might become tradable as borders become more porous to goods and services over time. The resulting competition transcending national boundaries would surely imply lower prices and higher quality, resulting in greater consumer welfare.

The more dire possibility that India will not reciprocate also exists. There is a temptation to let Pakistan make all the liberalising moves and benefit through the expanding trade surplus and the lopsided relationship that it might imply. However, this is not an advisable course of action — Pakistan might be forced to retract its steps if it does not get a reciprocal response from India.

The authors are Secretary-General and Director (Research), CUTS International and can be reached at
and respectively.

This article can also be viewed at: