Pakistan seems to have taken one more step towards normalizing its trade relations with India by agreeing to allow a larger volume of Indian imports from February 2012. At present, Pakistan’s imports from India are restricted to a few items that are included in the “positive list”. The “positive list” will give way to a “small negative list”, whereby all products other than those appearing in this list can be exported by India to Pakistan. This announcement by Pakistan’s commerce secretary, Zafar Mahmood, after talks with his counterpart Rahul Khullar will go a long way in promoting bilateral trade between the two neighbours, which, in recent years, has been an unfortunate victim of deteriorating political relations. Such has been the progress made in the two consecutive rounds of commerce secretary-level talks that expectations have well and truly been raised that Pakistan will, sooner rather than later, take the crucial decision to grant the most-favoured nation (MFN) treatment to India, which would seal the process of normalizing India-Pakistan trade.
Why does the announcement by commerce secretary Mahmood raise the kind of expectations that they have? The first is that this decision comes in the backdrop of the announcement that Pakistan’s cabinet had taken a decision to grant MFN status to India. This announcement was, however, promptly contradicted by government agencies, which pointed out that Pakistan had only taken the decision to “normalize trade relations” with India. The clarification is significant for this is what MFN actually means.
Photo: Subhav Shukla/PTI
Granting of MFN status, which is the cornerstone of normal trade relations between two countries, is what Pakistan has continued to deny India thus far. In fact, Pakistan has been so resolute in shying away from establishing normal trade relations with India that it has not hesitated in denying India the MFN status that it is required to grant as a member of the World Trade Organization. Pakistan’s constant refrain is that the imposition of non-tariff barriers by India has prompted denial of MFN status to its neighbour.
There is no denying the fact that trade and economic relations between India and Pakistan have tremendous potential. This is confirmed by several studies that have estimated that the two-way trade could reach $10-20 billion. However, this potential was never realized as non-trade issues have forever hijacked the trade agenda. As a result, actual trade between the two countries had not gone beyond $2 billion, except for once in 2007-08. However, during the last fiscal year, a new high was reached as the two-way trade between India and Pakistan exceeded $2.6 billion.
It should be pointed out that these trade figures mask the actual level of trade taking place between the two neighbours. For long, Dubai and Singapore have been used as the third countries through which India and Pakistan have traded. Although the actual magnitude of trade taking place via these third countries is not immediately obvious, the emergence of Dubai as India’s top export destination in recent years seems to suggest that this would not be too insignificant.
From the point of view of Pakistan’s consumers and business, such a situation should be completely unacceptable for they are forced into a situation where they have to not only bear the burden of rent-seeking intermediaries, but also forgo the benefits that could have accrued to them if normal trade relations existed. Moreover, Pakistan faces shortages of several critical products that are ruining its economy. And, despite sitting next to a large neighbour to whom it can turn to meet its shortages, the policies that have persisted for so long are forcing Pakistan to deny itself the benefits it could have had through normal trade relations with India. What should be more galling to Pakistani citizens is that while most South Asian economies are registering healthy growth rates, their country is growing ever so slowly. In recent years, South Asia’s economic growth has been among the most impressive, which has been particularly so in the aftermath of the most recent economic slowdown; but Pakistan has failed to join the party.
It is a no-brainer that improved trade relations between India and Pakistan would not only provide tremendous impetus to economic activities on both sides of the border, the impact of this positive development would benefit the entire South Asian region. The region has significant trade and production complementarities that have not got the chance to get realised because of the India-Pakistan conundrum.
Analysts have long lamented that South Asia is the least integrated among all the regions that have embarked on the road to deepen economic integration. Leaders of the region have drawn up a road map for economic integration between the countries, which would eventually move towards a common market and economic union. But these efforts have stumbled at the very first step, the implementation of the South Asian Free Trade Area (Safta) agreement, since the two largest economies have not maintained normal trade relations. With Pakistan giving the all-important signals to normalize its trade relations with India, fast-tracked implementation of Safta may not be too distant.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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