India-Pakistan tensions affect $37 bn trade potential: report
ISLAMABAD: Political tensions between India and Pakistan are a major hurdle in the way of achieving bilateral trade potentially worth $37 billion and also an impediment to boosting trade within the larger South Asian region, according to a World Bank report titled Glass Half Full: The Promise of Regional Trade in South Asia.
Formal trade between India and Pakistan could be $37 billion or 15-fold more than current levels, the report said. It identified four critical barriers to regional trade—tariffs and para-tariffs, real and perceived non-tariff barriers, connectivity costs and a broad trust deficit.
Complex relations and political tensions between the two countries in South Asia have adversely affected India-Pakistan bilateral trade as well as trade within the region, said the report. While Pakistan and India collectively represent 88% of South Asia’s gross domestic product (GDP), trade between the two countries is only a little over $2 billion.
The bank advocated doing more trade via the Wagah-Attari land border, which is cost-effective when compared with the sea route. Pakistan permits only 138 items to be imported from India through the Wagah-Attari land route. The report estimated that by reducing artificial trade barriers, trade within South Asia could grow roughly three times, from $23 billion to $67 billion. Nearly 80% of the value is lost because of tensions between India and Pakistan.
The South Asia Free Trade Agreement (Safta) would not work until the two largest regional economies trade with each other, said World Bank lead economist and lead author of the report, Sanjay Kathuria.
He called on Pakistan to provide India the most-favoured nation (MFN) status in order to enhance bilateral trade. Small markets at the India-Pakistan border should be set up as a confidence-building measure to promote bilateral trade, said Kathuria, adding that the opening of the Kartarpur corridor would assist in bridging the trust deficit that has existed between the two nations.
The report stated that the preferential access granted by Pakistan on 82.1% of tariff lines under Safta was partially blocked in the case of India because Pakistan maintained a negative list comprising 1,209 items that could not be imported from India, it noted.
In practice, many of these items are exported from India to Pakistan through third countries, usually the UAE. The report said the size of informal trade between Pakistan and India was 91% higher than the formal trade.
“A favourable trading regime that reduces high costs and eliminates barriers could boost investment opportunities that are critically required for accelerating growth in the country,” added World Bank country director for Pakistan Illango Patchamuthu.
Pakistan’s trade with South Asia accounts for only 8% of its global trade, despite the region being the world’s fastest growing. Intra-regional trade in South Asia is among the lowest at about 5% of total trade compared with 50% in East Asia and the Pacific.
“The contribution of exports to the total national output of Pakistan is just 10% and the country can no more sustain consumption-led growth,” said World Bank director of macroeconomics, trade and investment Caroline Freund. She said an overvalued exchange rate led to the influx of cheap imports into Pakistan, which also became a barrier to an increase in exports.
“Pakistan’s currency is still far from its market value and the country has performed poorly due to its overvalued currency,” commented Freund, adding that imports into Pakistan from South Asian countries may also be handicapped by China’s preferential access through the Pakistan-China free trade agreement.
The report argues that the costs of trade are much higher within South Asia compared with other regions. The average tariff in South Asia is more than double the world average.