India-Pakistan Potential for Trade Liberalization
Over the years, a pattern of ‘switching’ negotiations has been seen between India and Pakistan, alternating between terrorism and trade. But the talks in 2011 presented both agendas on the table. Interestingly, these talks come after a period of silence of two years after the 2009 Mumbai attacks and have been triggered by the cricket diplomacy seen at the World Cup. The difference in the nature of the two events marks a healthy way forward.
Under the impact of globalization, trade interdependence between countries is very important. However, in the case of India and Pakistan these aspects have been seriously marred by political disputes.
Though the trade talks are unstructured and open to multiple issues, the major target appears to be the recognition of MFN status for India by Pakistan. It is expected that if Pakistan offers this status to India, major political differences could be resolved.
Current trading volume
In 2005, both India and Pakistan witnessed a trade boom with exports of 76% and 64%, respectively. This was a contrast to the post-Mumbai attacks scenario. The current trend of India’s outward trade with US and China, with Pakistan looking towards China and Iran for trade opportunities, cannot be described as wholly negative. But if Pakistan and India were to come on board together, trade would witness newer possibilities.
The 2009-10 figures reveal a total of only $1.78 billion trade between the two countries, with Indian exports comprising $1.5 billion and Pakistan $0.28 billion. This shows that the region contributes less than 3 percent of the GDP to the global economy, while it makes up 23 percent of the total global population.
In contrast to formal revenue building trade, informal trading worth billions of dollars is being carried across the borders of India and Pakistan. In fact, cross border smuggling and movement of goods through personal baggage are major contributors to the informal trade sector.
An item being sold at $1 in India double in price by the time it reaches Pakistan as it has crossed a long distance and passed through many hands. The corruption of informal trading is harming both the countries equally, just like the problem of terrorism is not a single country issue.
In Pakistan’s interest, Indian imports like sugar can boost the country’s stocks. Reduction of import duties on fresh fruit, dry fruit and textiles could move the trade graph upwards. Cotton from China is expensive for India; Pakistan can promote cotton trade by road and through sea and rail to earn high revenues.
Chemicals and dyes, precious minerals and stones, pulses and spices and automobile tyres are all billions of worth in trade between the two countries. Machinery and mechanical appliances, along with rubber and plastic can open new investment opportunities.
The fashion industry and computer software from Pakistan are ripe enough to reach the Indian market. If collaborations in the IT, media and fashion sectors are encouraged in Pakistan and India can build strong trade ties in a short time.
Permission to bring in livestock and vegetables through the Wagah border to cut soaring prices in Pakistan is not worth it, unless marketing of Pakistani products in the Indian market is done by applying the Economies of Scale concept.
Bulk manufacturing of commodities like cement, textiles, pharmaceutical products, synthetic fiber and consumer products can be undertaken for the Indian market for sale at cheaper rates. This could enable Pakistan to get a considerable share with Indian producers. Similarly, the production from the Indian industry could be utilized on the basis of its huge manufacturing capacity and cheaper labour.
More importantly, Pakistan has attained a sound pace of development in the telecommunication sector. Effective strategies to penetrate the Indian market would bring huge profits. In the consumer goods and medicines, India and Pakistan should collaborate for high production at lower prices. This will create a further boost in demand.
As far as the transportation of products is concerned, the growth of both rail and air transport between the two neighbours have suffered over the years under political pressure and security concerns. Road links have done better but they have not helped build trade volumes at any significant level.
Indirect routes used by traders such as Dubai, entail high cost with low returns. It is all the more important that shipping and aviation agreements be revived in the interest of meaningful profits for both sides. According to analysts, a free trade agreement could bring in nothing less than $10 billion worth of trade to the two countries