(Bloomberg)
(Bloomberg)

Trade diversion to rise as Indo-Pak ties deteriorate

  • Pakistan has been imposing higher tariffs on its imports from India than it charges other countries
  • It also restricts trade with India through land routes

The India-Pakistan trade relationship has been stuck at $2-2.5 billion per annum for several years, with India being the dominant exporter. With Pakistan deciding to suspend trade and downgrading diplomatic ties after India ended special status of Jammu and Kashmir, languishing bilateral trade has come to a halt.

The low level of trade between the neighbours is despite Pakistan enjoying benefits of lower tariffs on its exports to India due to the unilateral Most Favoured Nation (MFN) status it enjoyed until February this year. Pakistan has been imposing higher tariffs on its imports from India than it charges other countries. It also restricts trade with India through land routes.

After the Pulwama terror attack in February, India withdrew the non-discriminatory MFN status it granted to Pakistan in 1996. India imposed heavy customs duties on items imported from Pakistan. Imports from Pakistan since have almost come at $7 million during the April-June quarter, while exports during the same period stood at $452 million.

After the Uri terror attack in 2016, India had also reviewed MFN status to Pakistan but had decided not to withdraw it.

The complex relations between India and Pakistan have adversely affected bilateral trade as well as trade within the region. Traditionally, a large portion of bilateral trade, around $3 billion, between the two countries is routed through either the United Arab Emirates or Singapore because of trade restrictions imposed by Islamabad. Trade diversion is likely to increase after the latest escalation in tension.

Trade between India and Pakistan can increase to $37 billion if both countries do away with artificial trade barriers, a World Bank report said in September last year.

Although Pakistan had agreed to grant MFN status to India during a secretary-level agreement in September 2012, it later changed its mind. The translation of most-favoured nation into Urdu (Sabse Pasandida Mulk), Pakistan’s official language, was also said to be a problem. Pakistan had, however, moved from a so-called positive list trade regime to a negative list regime with India in which it does not allow imports of 1,209 items.

Both countries have a preferential trading arrangement under the South Asia Free Trade Area (Safta) process. However, Pakistan had blocked some of these benefits to India through the negative list.

Heightened tension between the two countries will not only stop trade in goods, it could adversely affect the trade in services as well. Citizens of Pakistan have been a major beneficiary of the better healthcare facilities available in India. The highest average earnings per patient through export of health services from India comes from Pakistan at $2,906, followed by Bangladesh ($2,084), the CIS (Commonwealth of Independent States) countries ($1,950), Russia ($1,618) and Iraq ($1,530), according to a first of its kind survey on export of health services by the Directorate General of Commercial Intelligence and Statistics released in 2017. This means a patient from Pakistan visiting a hospital in India spends more than people from any other country, boosting India’s foreign exchange reserves.

Yet the number of medical visas issued to Pakistani patients in 2015-16 stood at a measly 1,921 compared to 58,360 to patients from Bangladesh and to 29,492 patients from Afghanistan. Due to the low number of medical visas issued, Pakistan contributed only $6 million to India’s services exports compared to $343 million by Bangladesh in 2015-16.

The latest data submitted by the home ministry in the Lok Sabha shows the number of visas under various categories issued to Pakistan nationals declined from 52,525 in 2016 to 35,144 in 2017. During the same period, visas issued to citizens of Bangladesh increased from 9.3 lakh in 2016 to 13.7 lakh in 2017.

Bilateral trade between India and Pakistan has clearly become a victim of their troubled politics.

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