When the current government led by Mr. Nawaz Sharif came into power, there was talk about improving bilateral trade relations with India. Despite tensions rising along the Line of Control, cross-border track-II meetings led by the business community on both sides continued, indicating the substantial interest of stakeholders in the trade and peace agenda. It is also interesting to note that the flow of bilateral trade between India and Pakistan has not been affected by recent skirmishes, which might indicate that businesses continue to see prospective markets across both sides of the border.
There have already been numerous studies on the gains from enhanced bilateral trade between India and Pakistan. Yet trade figures continue to be far from encouraging. Moreover, the lack of sectoral analyses has limited the scope for policy advocacy in favor of increased trade. In what follows, we present initial findings from our case study on the prospects of bilateral trade in the pharmaceutical sector.
While geographical proximity provides for a strong case for trade with India, it is also interesting to note that India has now emerged as a global leader in the pharmaceutical sector, gaining from lower costs, higher sophistication in technology, and advanced research capabilities. Our analysis suggests that geographical proximity supplements industrial comparative advantages in the pharmaceutical sector for both India and Pakistan.
Official statistics suggest that Pakistani manufacturers are unable to meet domestic pharmaceutical demands. There is a need to enhance both the quality and quantity of pharmaceutical products. Further, locally manufactured pharmaceutical products are often highly priced (unless available from government hospitals, where the poor are usually clamoring to get hold of medicines), making access to cheaper medicines even more difficult for the vulnerable.
Pakistan can cut down its cost of producing pharmaceuticals if more economical intermediate inputs are imported from India. The idea is certainly not new and there are examples from South Asia where such trade in pharmaceutical inputs is underway.
Currently, a number of pharmaceutical products are in the negative list of Pakistan, which has so far constricted trading options in this sector. Pakistan has been providing protection to its pharmaceutical industry and has prevented import of several high-demand products from India. Previously, under the positive list regime, pharmaceuticals were also not part of the positive list.
In order to boost bilateral trade, Pakistan replaced the positive list with a short negative list comprising of 1,209 items in 2012. Of these, 49 items were from the pharmaceutical sector. The negative list was to be completely phased out by December 2012. However, that decision did not materialize.
In 2012-13, India-Pakistan trade in pharmaceutical products (chapter 30 of the Harmonized System of Classification) was recorded at US$17 million. The figure below shows Pakistan’s pharmaceutical imports from India in 15 categories of chapter 30. However, not every product from these groups is being traded, thereby leaving significant room for exploring cost-effective trading options.
While policy deliberations are currently underway to improve India-Pakistan bilateral trade, the following options, specific to the pharmaceutical sector, can be explored.
Various studies have shown that a substantial amount of Indian pharmaceutical items find their way into Pakistan through informal channels. Indian medicines are easily available across the four provinces. In a city like Peshawar, doctors are seen giving prescriptions of Indian medicine to their patients. It is important for the Pakistani government to recognize the domestic availability of Indian medicine and gradually allow exit of these items from the negative list.
However, keeping in view the apprehensions of the Pakistani pharmaceutical manufacturers, one can also look into the potential for formal trading options in the pharmaceutical sector with the current negative list in place. There are prospects in products from currently under-traded categories, if sector-specific non-tariff barriers (NTBs) in the pharmaceutical sector are removed. There is enough evidence on both sides to suggest that many such barriers are specific to the neighbor.
For India, the trade potential in terms of exporting pharmaceutical products (not included in the negative list) to Pakistan
is currently estimated around US$350 million (only for chapter 30 of HS classification). The current flow of informally traded pharmaceutical items from India is valued at around US$60 million annually. Thus, even with the negative list in place, the volume of bilateral trade in this sector can be substantially increased.
On the other hand, Pakistan has a lucrative opportunity for the export of alternative medicines to India. These products from Pakistan are highly sought by both the Indian and Pakistani Diaspora. The Indian pharmaceutical sector has expressed interest in the various formulae developed at the HEJ Research Institute of Chemistry located in Karachi, Pakistan. The institute has done renowned work in the pharmacology of herbal medicines and plant biotechnology.
The research as well as development in livestock and veterinary medicines in India has so far been low. On the other hand, Pakistan specializes in these products and can export to India. Moreover, the surgical industry (in Pakistan), having a close interface with pharmaceuticals, has achieved global accreditation and the products are amongst the most sought after in Western markets.
Now that both governments have allowed foreign direct investment, Indian and Pakistani manufacturers can also consider cross-border options in their production processes. As trade theory suggests, intra-industry trade and vertical specialization can minimize cost and enhance product quality with each country focusing on the product/service in which it has a comparative advantage. In this regard, one can look at numerous examples globally where industrial joint-ventures have benefitted both trading partners.
Indian investment in Pakistan can take the shape of horizontal as well as vertical FDI. Vertical FDI may be introduced at the South Asian level to develop an integrated trade supply chain in the pharmaceutical sector. The time is ripe for conceiving such ideas given that such collaboration is already being thought out across Indian and Pakistani Punjab, particularly in sectors such as milk processing, cement, leather and fertilizer.
Mutual gains can also be reaped in technology, knowledge and skills transfer by forming industrial research and development (R&D) alliances. For example, Pakistan can extend its research facilities, such as the International Centre for Chemical and Biological Sciences (ICCB), for joint projects with the pharmaceutical sector. Both the countries have similar demographics and a similar consumer base, allowing research from one country to be replicated in the industry of the other.
Going forward, both countries should also explore innovative research in pharmaceuticals such as process intensification technologies, nano-technology, alternative medicine, green manufacturing etc. Designing of plants and related systems can be done by seeking technical consultancy from the much-advanced diaspora in the pharmaceutical sector.
Lastly, the track-II meetings between pharmaceutical manufacturers, service providers and traders must take place to specifically identify areas of comparative advantage. This will help each country to focus on specialised products and services, while importing those in which it is not competitive. This will also give confidence to Pakistan’s pharmaceutical sector that is, at present, wary of India being given MFN status.
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