Why we must normalise Indo-Pak trade

The Financial Express, February 14, 2012

By Pradeep S mehta and Faisal Ahmed

The Indian commerce minister’s visit to Pakistan is likely to help develop a sustainable model of bilateral trade. The Maldives SAARC Summit has already asserted the vitality of bilateral cooperation as a necessity not only for the region, but for all its trading partners as well.

The Pakistan’s Cabinet nod for grant of Most Favoured Nation (MFN) status to India and the Indian PM’s optimism for gradually moving towards a Preferential Trade Agreement (PTA) are defining the baselines of trade normalisation. The visits by the two commerce secretaries (Rahul Khullar and Makdhoom Fahim to Pakistan and India) have already generated an atmosphere of optimism, heralded by the business community on both sides and by policy honchos as more than baby steps.

Bilateral relations have to be strengthened to reach the true potential. A study by CUTS in partnership with SDPI Pakistan and other think tanks in the region, entitled Cost of Economic Non-Cooperation to Consumers in South Asia, supported by the Asia Foundation, has taken a close look at the impact of tariff liberalisation under SAFTA on consumption expenditure of five of the largest countries of South Asia. The study finds that trade between India and Pakistan has the highest growth potential. While a large share of gains to Indian consumers will be through Pakistani exports of plastic-based articles, minerals and mineral fuels, Indian exports of pharma ingredients and electrical equipment will significantly help Pakistani consumers.

In order to have a comprehensive and deeper engagement, both countries need to focus on several issues besides tariffs that act as impediments to bilateral trade and regional integration. A bilateral cooperation package covering transport and connectivity, harmonising standards in pharma, textile, cement, food products etc, streamlining financial institutions and banking facilities, and working for a common competition regime in South Asia has become a highly desirable goal.

In the context of MFN, one of the crucial issues to be addressed is trade in petroleum products, which a joint working group is addressing. India accounts for an estimated average of 1m barrels of petroleum products exports per day, and enjoys a global comparative advantage in petroleum products owing to its efficiencies in cost of production and R&D. Interestingly, the $7.6bn Turkmenistan-Afghanistan-Pakistan-India gas pipeline project is also moving ahead. In January, both countries have agreed to a transit fee formula for this project, with Pakistan agreeing in-principle to accept the formula as is settled between India and Afghanistan.

Another pertinent issue is poor trade infrastructure and transport connectivity through the Wagah-Attari land route. Both sides agree that all infrastructure construction would be completed by February and trade through this route shall resume to its full potential. A R150 crore package is all set to upgrade the check posts. The integrated check post at Attari will also help reduce various non-tariff bottlenecks, like lack of mechanised loading and unloading facilities. Also, it is hoped that plans of Amritsar-Lahore grid connectivity, which can enable trade of up to 500 MW of power, reach fruition.

Pakistan currently uses a positive list approach, but a sensitive list approach would benefit both countries. Recently, it added 12 commodities to the list of items that can be imported from India. This takes the total number to 1,946 in the positive list. It is also important to save time and cost incurred in third country trade, which encompasses almost 20,000 items, which is marred by exorbitantly priced imports from countries like UAE. Moreover, the illegal trade between the two countries, which is estimated at over $4bn, can also be checked, thereby contributing to a three-fold increase in bilateral trade over a short span of time.

The CUTS study also shows about 91.24% of the total consumer welfare due to India will accrue by way of imports of rice, plastic and polyethylene based articles, household articles made of polymers, cotton yarn and woven fabrics from Pakistan. India’s total current import expenditure on these items is about $939.54m, out of which not less than $545m can be saved if imports from outside SAFTA are replaced by imports from Pakistan. India and Pakistan could together save a minimum of 55% of their import bills in about 200 product categories, reducing the consumption expenditure by consumers of both the countries by more than $800m per year.

The main product categories which exhibit maximum consumer welfare gains for Pakistan from imports from India are pharma, electrical and electronic products, and automotive spare parts. Application of SAFTA preferential tariff rates on a number of commodities on which both Indian and Pakistani consumers would gain will be an important step leading to an eventual PTA between India and Pakistan.

The business visa regime is also all set to be relaxed. We thus need maintain the momentum of optimism of smoother business relations, taking it towards a peak. Here, two vital ideological considerations need continuous attention. One is political willingness, and the other is the effort to eliminate the trust deficit through change of hearts on both sides!

(The author is Secretary General, CUTS International. Faisal Ahmed of CUTS contributed to this article)

This article can also be viewed at: