Economic Highlights

New Delhi, 5 April 2007

Remove Barriers

Indo-Pak Trade Should Grow

By Dr. Vinod Mehta     

After the 2004 SAARC summit in Islamabad and the meeting between the Prime Minister of India and the President of Pakistan, there were positive indications that direct trade between the two countries would grow in the coming years.  At that time Pakistan was reported to have said that it was willing to give MFN plus  (whatever it may mean) status to India. But till date Pakistan has not moved an inch in that direction.

After nuclear tests by the two countries, while India has been able to maintain its growth rate at around six per cent then and increase it to nine per cent today, Pakistan suffered a decline to 3.1 per cent in 1999 against 5 per cent in 1998. Pakistan’s GDP growth rate in the year 2002 was placed at 2.8 per cent. The steep fall was attributed to fall in exports and in investment.  The economic sanctions imposed by the Western countries following nuclear tests had affected Pakistan the most, as compared to India. 

According to a report prepared by the Centre for Strategic and International Studies, Pakistan, the nuclear test precipitated a balance of payment crisis and near default on its external debt.  It further stated: "The Pakistani economy, unlike India’s, faced an immediate foreign debt crisis. A US dollar 1.56 billion loan from the International Monetary Fund helped stave of default and stabilize the country’s external financing position." 

But now Pakistan’s economy is also growing at a very fast pace, overcoming the debilitating impact of economic sanctions. According to Dawn, “Pakistan’s economy is on the up and business is booming. In 2005, the GDP growth rate hit 8.4%, which was the fastest growth rate achieved in over two decades, and per capita income has now surpassed the US$ 700 mark.

Adding to the buoyancy is the fact that growth is taking place across all sectors of the economy, including agriculture (7.5%), manufacturing (12.5%) and services (7.9%). As a result, Pakistan is now counted among the fastest growing economies in Asia.”  According to Pakistani newspapers, Pakistan is the third fastest growing economy in Asia after China and India.

In 2002 Pakistan exported goods worth US $ 11 billion and imported goods worth US $ 11.6 billion.  As for India, it exported goods worth 65.2 million US $ and imported worth 73.7 million US $ in the same year. Pakistan's major export items are cotton, fabrics and yarn, rice and other agricultural products while its imports consist of machinery, petroleum products, chemicals, transport equipment, edible oil and grains, pulses and flour. 

As far as trade between India and Pakistan is concerned, it is not much by world standards. According to available data, the bilateral trade between the two countries has increased almost 14 times between 1987-88 and 1998-99; in absolute terms it increased from Rs 47.15 crore to Rs 463.92 crore during this period. This is what is legal trade between the two countries either on Government to Government basis or between two private organizations of the two countries. 

However, much of the trade between India and Pakistan is being routed through a third country generally countries from the middle-east are South-East Asia. It is estimated that the trade between India and Pakistan through a third country has increased from about US $ one billion to US $ two billion in the past few years.  If this could be converted into direct trade both would gain a lot.

The older generation would recall that before the partition, the fertile agricultural areas, which are now in Pakistan, were areas which produced surpluses in the agricultural sector and supplied them as raw materials to industries which were in this part of undivided India. This complimentarity relatively speaking still stands. If this was to be revived India would get the raw materials still relatively cheap at international prices as the transport costs between the two countries will be much lower.

In fact, since the two countries are contiguous, freight charges of any commodity that moves between the two countries will be much lower whether they are transported by ship or by rail.  Therefore, if they open up their economies to each other, they would be able to satisfy each other's demand at much lower prices.

It is common knowledge that there is a great demand for commodities like tea, tyres and iron ore in Pakistan.  India is well placed to sell these items directly to Pakistan.  But Pakistan at the moment imports tea from countries as far as Kenya, iron ore from Australia and Argentina while Indian tyres are either smuggled or imported via Dubai and Singapore. All these items can be easily purchased by Pakistan from India directly at much lower prices. India on the other hand would still be interested in procuring apart from Sugar goods such as cotton and textiles, moulded plastic goods, fresh and processed agricultural produce, spices, cooking oil etc. directly from Pakistan.

If one goes beyond this India can meet Pakistan's demand for various kinds of machinery and equipment, including transport equipment, extend help in the modernization of its railways while India in turn can buy power from Pakistan.

Apart from trade in merchandise both the countries can benefit from trade in services, especially in the tourist sector.  As a confidence building measure why not start one day conducted tours from Amritsar to Lahore and vice-versa.  One day inter-country-inter-city tours are quite common in Europe.  The tourist industry of the two countries too will gain much from the regulated movement of tourists.

It has been generally argued in Pakistan that opening up of its economy would hurt its industry and business.  But one can counter-question Pakistan that if opening up of its economy to China has not hurt it, how could opening up to Indian economy will hurt its economic interests? The argument as advanced by some groups in Pakistan in defence of its industry is not valid.  India has already extended MFN status to Pakistan.  It is now for Pakistan to decide whether it wants to reciprocate in the same manner. The sooner the better.

Apart from Iran-Pakistan-India gas proposed gas pipeline, If the business grows India and Pakistan may also think of a gas pipeline from Turkmenistan via Afghanistan. The Turkmen gas will be the cheapest even after paying to Afghanistan and Pakistan the royalty/fee for transit to India. Similarly Pakistan has a number of products to offer, including dry and fresh fruit to India. It is also interested in selling electricity to India.

According to a report prepared by Indian Council for Research on International Economic Relations (ICRIER), trade between India and Pakistan could increase manifold, to US $ 6.6 billion, if barriers are removed and Pakistan implements the requirements of the South Asia Free Trade Area (SAFTA) agreement. The World Bank Chief believes that the trade between India and Pakistan has the potential to grow to US $ nine billion.

The sectors identified by the ICRIER report for trade between India and Pakistan are textiles, agriculture, engineering, chemicals, pharmaceuticals, electronics, metals and minerals, rubber and plastic. In addition, there is scope for trade in several services such as health, entertainment, IT, energy and tourism, the report concludes.---INFA

 (Copyright, India News and Feature Alliance)