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Trade potential between India, Pak is untapped

Financial Express, India

Trade potential between India, Pak is untapped

By Arif Zaman

25 March 2008

If to some people, the words ‘cricket’ and ‘conflict’ come to mind when thinking of India and Pakistan, we need to update the language to embrace another two ‘Cs’ -connections and commerce.

The year 2008 has in fact already seen a wide-ranging number of breakthrough developments in areas such as film, finance and flights. Bollywood could finally be coming to Pakistan as Pakistan’s parliamentary committee on culture has given its go-ahead to lift a four-decade ban on Hindi films. The Securities and Exchange Board of India (SEBI) and the Securities and Exchange Commission of Pakistan (SECP) have signed a MoU to encourage greater co-operation in promoting and developing their respective capital markets. Of perhaps the greatest impact, both countries have agreed to double the number of weekly passenger flights with direct flights commencing between Delhi and Islamabad.

A key reason why intra-regional trade is being impeded in South Asia is the persistent hostility between India and Pakistan. Trade between these countries has been abnormally low. The share of total trade between Pakistan and India measured by the sum of the bilateral exports amounts only to 0.9% of total exports from India and Pakistan. This is only 40% of the equivalent measure of bilateral trade between Malaysia and China, two countries of comparable GDP and proximity and only 9% of the equivalent measure of trade that occurs between Argentina and Brazil, other countries of comparable size.

Bilateral trade between India and Pakistan reached $1.6 billion in 2006-07 from $835 in 2004-05-therefore, this has almost doubled. For the first time, imports from India to Pakistan have crossed the $1billion mark and currently stand at $1.25 billion. Pakistan’s exports to India on the other hand have grown slowly from $280 million in 2004-05 to only $370 million in 2006-07 despite the fact that India has granted MFN status to Pakistan. While Pakistan has so far not applied the provisions of South Asia Free Trade Agreement (SAFTA) to Indo-Pakistan trade, the largest component of intra-regional trade in South Asia, there is no doubt that strong economic relations between Pakistan and India would go a long way in securing SAFTA’s success.

However, trade flows between India and Pakistan have been low over the course of the past half a century for three main reasons: political tensions, the use of import-substitution policies to promote industrialisation, and in contrast to other regions of the world, relatively little commitment to regional integration.

There are three key reasons why trade between India and Pakistan needs to be enhanced. First, viewed in a larger regional context, South Asia is the least integrated region and stronger economic relations between India and Pakistan is a key element of regional integration and stability in South Asia. Second, there are vast untapped trade and investment possibilities between the two countries which can be gainfully exploited with significant welfare gains and opportunities to alleviate poverty and strengthen human security-South Asia is the home to 24% of the world’s population but 42% of its poorest people. Third, as natural trading partners with a common border, trading with each other can be substantially higher as the potential is estimated to be 10 times the current level.

Research for the World Bank found that informal trade between India and Pakistan was around $545 million in 2005, a finding based on field research in border regions, Dubai, and major urban markets. There is a need to simplify and align the bilateral trade regime so that incentives for smuggling are reduced. This would expand trade through formal channels. Indeed, there is evidence that informal trade between India and Pakistan has declined in recent years, as both countries have liberalised their trade policies.

The Indian Council for Research on International Economic Relations in a 2007 survey of Indian firms found that there are vast untapped trade and investment possibilities between the two countries both in goods and services. However, there are still no Indo-Pakistan joint ventures despite strong business interest on both sides due to the absence of an enabling environment for such investment. For example, there are no institutional mechanisms for bilateral investment guarantees.

In recent years, the private sector has played an active role in identifying areas of trade interest, areas of possible joint ventures and other forms of co-operation between the two countries. Potential sectors for mutual cooperation between India and Pakistan include agricultural products, tyres, auto spare-parts, minerals, chemicals, pharmaceuticals, leather, textiles, telecommunications, gas pipeline, electricity generation using coal and wind energy in the Sindh province of Pakistan.

Studies undertaken by the private sector also see a large scope for trade in several service sectors such as health, entertainment services, information technology, energy and tourism. India and Pakistan have mostly common multinational companies operating in their respective countries-such as Standard Chartered, Unilever, GSK, BAT and British Airways, which are a force to be harnessed as they can act as meaningful conduits for trade and investment if they source raw material from each other. There are huge opportunities for a two-way trade in readymade garments, particularly ethnic garments such as shawls, salwar kamees and saris. 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 the arrangement in terms of technology supply and marketing support.

There is immense potential for co-operation in the energy sector. India and Pakistan could enter into joint ventures to tap the global market for software. There is scope for trade and cooperation in the film, television and music sector capitalising on a common culture and dynamic and expanding media industries in both countries. Tourism holds immense potential for the two countries recognising the shared cultural heritage and the emergence of new, more dynamic and less risk averse airlines in both countries.

As India and Pakistan commence the fifth round of composite dialogue in April with a new government in place in Pakistan keen to accelerate progress, it is important for both countries to build on the recent gains from the composite dialogue process. The dialogue process has already resulted in better political relations and defence cooperation and has underpinned stronger trade ties.

With an improved security and political environment and a resolution of the long-standing Kashmir conflict, citizens of both countries would be able to reap a large peace dividend. It would come not only through more trade in goods and services, but also from joint ventures and investments in each other’s country, improved coordination of economic and financial policies, and — last but not the least -from financing investments in human capital and economic infrastructure by releasing budget resources that are now committed to defense and security.

To reap the full benefits of Pakistan-India trade requires complementary economic and social reforms. First, trade liberalisation between Pakistan and India would be even more successful if it is pursued in the context of a wider reform agenda that enhances domestic productivity, international competitiveness and economic growth. Second, trade liberalisation will work best with a level-playing field. Pakistan and India would gain by continuing to discuss ways to streamline their domestic trade regimes to provide equal opportunity for producers and exporters in both countries to gain from expanding bilateral trade. Third, investments in the hardware (transport and communication) as well as software (legal and regulatory trade framework) are required for effective trade integration. As the SAARC chamber has recently pointed out, the bilateral economic discussions could focus on concrete steps to remove hindrances in logistics of trade, ease visa restrictions for business travel, improve trade facilitation and strengthen infrastructure. Other strong and growing fora in both countries, such as the Indus Entrepreneurs and YPO networks should also be mobilised to act as a push for progress in these and other areas.

 The author is advisor, Commonwealth Business Council