India – Pakistan Trade Relations

“The partition of India (1947) has been the most wounding trauma of the twentieth century. It has seared the psyche of four plus generations of this subcontinent.”-Jaswant Singh

India has had bitter relations with Pakistan ever since its creation and the painful memories of partition continue to weaken these two countries till date. Successive wars, the unresolved Kashmir issue and terrorist attacks over the past five decades have only aggravated the situation. The governments of both the nations have constantly tried to maintain diplomatic relations, but in vain.

According to PM Manmohan Singh, the major reason behind such animosity between India and Pakistan is trust-deficit. So before improving overall ties a strong base of mutual trust needs to be built. A major step towards building trust is improving the economical relations between the two neighbours through trade and business.

Kautilya was the first one to write extensively on ‘Political Economy’ as a separate subject in Arthashastra. He theorized that to maintain a strong kingdom the king must develop healthy relations with its neighbouring states through trade. Hence better trade relations between India and Pakistan will help in building trust as it involves people-to-people contact, which will eventually contribute towards the improvement of political relations.

Recently the top political and corporate leaders, CEOs and entrepreneurs of India and Pakistan met under the ‘Aman ki Asha’ initiative organized by the Times of India group and the Jang group to discuss peace initiatives between the two nations through better trade and commerce relations; and urged both the governments to cooperate and help in realizing the enormous trade potential between these two major South-Asian countries. Pranab Mukherjee, Finance Minister, emphasized on the need for mutual trust and interdependence for sustained economic growth of India and Pakistan.

Economic cooperation will definitely lead towards peaceful political relations. Textiles, information technology, agriculture, health care, energy and education were recognized as the key sectors with highest trade potential in both countries. Economic cooperation in these six sectors have been predicted to be convenient and beneficial to both the countries. Committees for IT and textile sectors have already been set up. Apart from promoting bilateral trade, the business meet also recommended steps to build public support and replace the existing trust-deficit with mutual respect and reliance. The need for easing visa restrictions was also highlighted along with improving the telephone connectivity between the two countries by allowing cell-phone roaming.

These initiatives will go a long way in improving the economic relations between India and Pakistan but their success depends on the governments of these two countries and on how well the people cooperate.

As a matter of fact if India and Pakistan integrate their economies through more trade, then both the nations can gain a lot. Recorded trade between the two countries is relatively very small at present even though both of them are members of South Asia Free Trade Area (SAFTA). The potential of formal trade between these two neighbours is around 20 times more than the recorded trade. At the time of independence, Indo-Pak trade relations were very strong – 70% of Pakistan’s trade transactions were with India and 63% of India’s exports were to Pakistan. This came down drastically over the years and in 2008 Indo-Pak trade statistical figures lingered around a mere 1%. There are a number of reasons behind this – high tariffs, trade barriers, poor infrastructure, costly transportation, excessively disproportionate red tape, bureaucratic indolence, strict regulations on visa and custom procedures and major political conflicts.

While India granted MFN (most favored nation) status to Pakistan in 1995-96, Pakistan has still not reciprocated. As a result there is no standard tariff on Indian products in Pakistan. High import duties and other non-tariff barriers have crippled the Indo-Pak trade relation with virtually no foreign direct investment (FDI) flows at present. Ironically, Pakistan needs 140 million kg of tea annually. India even though being its immediate neighbour contributes only five million due to 30% tariff on Indian tea. The cost of Zinetac, a medicine for acidity, is Rs 7.20 per 10 tablets in India but around Rs. 100 in Pakistan. There are a number of other such instances where India produces the goods needed in Pakistan but their export to Pakistan is very low due to strict restrictions. As a result smuggling through third countries and underground routes is becoming rampant. Thus, depriving both the economies of profit from bilateral trade and driving the prices further up.

Many people are against the free flow of trade between India and Pakistan. Some fear that this will lead to an economic invasion of Pakistan while others fear that it will facilitate terrorist activities. Indo-Pak trade relations can not be changed overnight. But winds of change are certainly flowing in the right direction. But before people welcome these winds, certain measures need to be taken. The mind-set of the people needs to be changed first to build public support for liberal trade relations. People of both the countries need to open up but also remain cautious of the negative activities. Better trade between India and Pakistan will benefit both the countries by raising their GDP and household incomes. Strong economic relations will serve as a catalyst towards the peace-building process.

While doing a research project on Partition of India last year, I realized that there is a very long way to go before the animosity in people’s heart completely dissolves and they open up to each other.  The relationship between India and Pakistan is one marked by nostalgia and pain. The people of these two countries were once upon a time ONE but the colonial era ruined the unity. Nonetheless, the people of India and Pakistan have been traders for a long time.  And now is the right time to renew this connection through trade and commerce and let economics guide politics for a change.

Mahima Taneja