Numerous earlier efforts to improve relation between India and Pakistan have been ruined by sporadically heightened political tensions between the two countries because of 1965 and 1971 war, 1999 Kargil war, December 2001 Parliament attack, and the most recently the terrorist attack at various cities in India including the Mumbai attacks in November 2008. Adding fuel to the fire, the domestic political oppositions in the two countries have also created obstacle in the ‘confidence-building’ exercise.

The enmity between India and Pakistan is proving increasingly expensive for both the countries. The cost is not only associated in terms of military expenditure, but also in terms of numerous other factors such as GDP growth, terror-economy growth, negative transformation of institutions, politicide, diplomatic losses, education costs, value deficit, and, most importantly, human lives. These costs are both directly and indirectly associated with enmity between the two nations. Since, a lot of these costs such as militarily expenditure, peace, diplomatic losses, human lives etc have gained attention at various points of time and through various channels, little has been said about how a breakdown in Pakistan-India relations would undermine the trade between the two countries. After the Mumbai attack, the India-Pakistan trade declined by approximately 60 % in 2009-10, with the overall trade falling from US$ 2 billion to US$ 900 million. Currently, Pakistan accounts for less than 1 % of India’s trade and India accounts for less than 5 % of Pakistan’s trade compared with the very large trade shares following independence of the two countries in 1947. In 1948–49, 70 percent of Pakistan’s trading transactions were with India, while 63 percent of Indian exports went to Pakistan. The present state of the economic relations between India and Pakistan is similar to the situation during the Kargil war in 1999, when trade volumes declined significantly from US$ 318 million in 1998-99 to US$161.02 million in 1999-2000.

At different point of time, the leaders of the two south Asian countries have repeatedly expressed the desire for better political and economic ties. The peace constituency in both countries believes that better trade relations can play a very significant role in enhancing bilateral ties. Though, settlement of all the outstanding disputes, reaching a comprehensive agreement that settles outstanding disputes still seems far off. But this does not mean that steps toward better economic relations cannot be taken.

Recently, India has proposed high-level talks with Pakistan, the first of their kind since the attack on Mumbai. The stakes for Pakistan are high, with such urgent questions as, terrorism, protection of minority Sikhs in Pakistan, water rights and trade on its agenda. It is globally acknowledged fact that trade is a backbone of economy. Sustained trade and economic activities between the two neighbors is central to improving Pakistan’s chronically dismal trade performance — and its economy on the whole. Pakistan’s current export model involves sending a small group of low-tech, low-value products (notably textiles and clothing) to an equally small set of destinations (particularly the United States and Europe). This is a recipe for trade performance disaster in a world that relishes sleek, modern technology and hungers for services. Indeed, Pakistan has suffered poor export growth and low export competitiveness for decades. This poor performance bodes poorly for Pakistan’s economic prospects, given the difficulty of achieving high macroeconomic growth rates without rising exports. In such a scenario, it seems that there is little chance that Pakistan will decline the new invitation.  Given this notion, an attempt is made in this article to prepare a roadmap and seek the attention of policy makers, politicians, and leaders of the two countries especially Pakistan to enhance the economic relations between two south Asian countries. 

Barrier to Trade between Indian and Pakistan

India and Pakistan together account for roughly 80 % of the GDP of South Asian Association for Regional Cooperation (SAARC) countries. The enmity between them has hindered the progress of not only SAARC but also the two nations. Except for nine years between 1965-74, India-Pakistan trade has been uninterrupted and the volumes of official trade have been negligible. India-Pakistan bilateral trade amounts to only about one per cent of their respective global trade.

Official trade between the two countries might be low, but, the volume of third country and illegal trade indicates the tremendous potential for bilateral trade between the two countries. Informal trade, via third countries (such as the United Arab Emirates, specifically Dubai), is estimated at some US$ 2 billion to US$ 3 billion per year, and this trade could obviously be undertaken bilaterally at significantly lower cost. The guesstimates of illegal trade between India and Pakistan range widely between 0.5 to 3 billion dollars. It exceeds considerably the value of legal trade between the two countries.

The major constraint in Indo-Pak trade is the mindset of the people on both sides of the border. The reasons why this informal and illegal trade flourishes are the trade barriers that both countries have erected against each other. The barriers are both formal and informal. Formal trade barriers comprise high tariff and non-tariff barriers. The latter consist of quota restrictions, trade bans, such as the denial of Most Favored Nation (MFN) status, excessive red tape, political opposition, environmental and quality standards. Informal barriers are defined as transaction costs, and they fall into three categories: transport costs, procedural costs and rent seeking – a euphemism for bribes. Moreover, constraints on visas and cumbersome payments and customs procedures further limit scope for trade. Finally, although there are no specific restrictions, there is virtually no trade in services or foreign direct investment (FDI) flows between the two countries. In addition, the infrastructure in both countries is inadequate or underdeveloped

Indo-Pak Trade Potential

Before we discuss the roadmap for increasing the potentialities of trade between India and Pakistan, it would be better to have a glance at the trade potential between India and Pakistan. The Associated Chambers of Commerce and Industry of India (ASSOCHAM) estimates bilateral trade potential worth US$ 10 bn. The significant growth in trade requires intense political will with very modest investment. There exists high potential for bilateral trade in case of telecommunications, gas pipelines, electricity generation using coal and wind energy, engineering and technology, engineering goods, transport equipments, tea, coffee, pharma, textile, tyre, auto spares-parts, minerals, chemicals, plastics, and agriculture products. There is also a large scope for trade in several services sectors such as health, entertainment services, information technology, and tourism.

There are huge opportunities for a two-way trade in readymade garments, particularly ethnic garments such as shawls, shalwar-kameez and saris. There is immense potential for cooperation in the energy sector. Trade in agricultural commodities could bridge the short-term supply shortages caused due to seasonal crop fluctuations. India and Pakistan can enter into joint ventures for the production of bulk drugs with arrangement in terms of technology supply and marketing support. There is scope for trade and cooperation in the film, television and music sector capitalizing on a common culture and dynamic and expanding media industries in both countries. Tourism holds immense potential for the two countries recognizing the shared cultural heritage and the emergence of new, more dynamic and less risk-averse airlines in both countries. This vibrant regional trade would generate new export markets, revitalized export sectors (particularly agricultural, banking, services and transport) and more value-added products for Pakistan as well as India.

A Road Map for Increasing Trade

If to some people, the words ‘cricket’ and ‘conflict’ come to mind when thinking of India and Pakistan, there is a need to update the language to embrace another two Cs connections and commerce. A secretary level discussion is scheduled and a discernible momentum between the two nations is seems to be building, hence it is expected that it would add long term value to both the nations. In order to increase the potential trade dynamics and economic activities between the two countries, it is necessary to finesse trade policies further to maximize fiscal benefits. The immediate measures which can be taken up are mainly related to trade facilitation and include:

• Cross-border trade requires the uninhibited movement of people and investments. Easing restrictions on visas and issue multiple entry visas for businessmen, eliminating requirements to report arrival to the police at each place of stay, eliminating city-specific visas, and speeding up the approval processes would be much useful.
• Open additional border crossings and increase traffic frequency on the road, rail and air. Open Wagah/ Attari border and Hussainiwala Checkposts for road and rail cargo traffic, which can catalyze the two-way trade. Starting several other rail and road routes like Sindh-Rajasthan rail link, Khokhrapur-Munabao route. Allow sea shipments in addition to the current Mumbai-Karachi route. Open additional bus route. Apart from Lahore-New Delhi, Karachi-New Delhi and Karachi-Mumbai, air link between the two capitals (Islamabad-New Delhi) should also be started.
• Increasing the number of custom posts where sensitive items can be cleared.
• Allowing branches of Indian and Pakistanis banks to operate in the other country.
• A south Asian regional train service, connecting Pakistan, India and Bangladesh would be a milestone in developing bilateral trade relations.
• Creating awareness of the usage of internets/websites, information technology etc would also be useful.
• Trade fairs and exhibitions in through various bodies like FICCI and Pakistan Chambers of Commerce and Industry would also be helpful in improving the bilateral trades.
• Improving the infrastructure near the border.

Medium Term Measures:

• Granting Most Favored Nation (MFN) status to India.
• India should reduce tariff rates on good of particular interest to Pakistan and removing nontariff barriers including in agriculture.
• The custom procedures should be made more transparent.
• Double taxation should be removed in order to improve the cross-border trades.
• The two political leaderships should make South Asian Free Trade Agreement (SAFTA) a potent force for the economic uplift of the whole region.. Removal of tariff and non-tariff
  barriers between India and Pakistan can take bilateral trade to $9 billion.
• Developing transport and communication links, infrastructure; joining power grids and pipelines (Iran-Pakistan-India); and sharing airports and ports would reduce transport and communication costs.

Medium to Long Term Measures:

• Sustained and long-term bilateral trade requires cooperation on regulating cross-border capital flows.
• Private sector initiatives should be strengthened. Foreign Direct Investment (FDI) should be encouraged. Each country’s companies should be allowed to float shares in the securities markets of the other.
• The trade in Information Technology (IT), Business Process Outsourcing (BPO), Software services, etc should be encouraged.
• Promoting entrepreneurship through mentoring, networking and education.

Summing Up

There is enormous potential of trade between both the neighboring countries. With a fresh talks at secretary level is on table, there is once again a window of opportunity to improve economic ties. A small trading step by India and Pakistan could be a giant leap for South Asia. Higher levels of economic and trade cooperation would certainly result in more friendly relations between the two countries that, in turn, would usher in an era of peace, prosperity and development. Peaceful relations between the two neighboring countries would also result in lot of savings in defense expenditure. That would further help to spare resources to address their more serious problems, such as poverty, unemployment and inequality.

Acknowledgement: The article has been benefitted from the working paper number 09-15 by Mohsin S. Khan of Peterson Institute for International Economics and IPCC Issue brief 119 by Pia Malhotra of Institute of Peace and Conflict Studies.

Manish Kumar and Swati Priya are research scholars at the IIT Madras and Tilka Manjhi Bhagalpur University respectively.