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Relationship between Pakistan and India is always fragile and uncertain. However, there is a sense of realization that one has to learn to live with its neighbours. Hence, despite every odd, the voice of sanity, although in minority, has prevailed and catalyzed the peace process between the two countries.

Until the last few weeks, things were quite promising on the Indo-Pak bilateral trade front. We will discuss the latest developments that may stall this process of trade normalization later, but let us first analyse the positive developments that took place last year.

Pakistan made a historic move by granting most-favoured-nation (MFN) status to India. It took Pakistan 16 years to decide “in principle” that it would also grant MFN status to India, which the latter had granted to the former in 1995 when both countries became founder members of the World Trade Organization (WTO). Pakistan’s decision is a quantum leap in improving trade relations between the two countries, and a majority (except few extremist groups and some business cartels) on both sides of the border, has welcomed this move. There are a few ifs and buts on the implementation of the MFN status and the way it would change the trade dynamics between the two countries. However, the most pertinent question is: how will this decision change the Indo-Pak relationship?

First and foremost, it has a symbolic value. Second, it helps in striking an item out from the list of objections that a major group in India raises against Pakistan. Third, and most important is that a dialogue on visa relaxation followed this move to facilitate the movement of not only business persons but also common citizens. Finally, there is a hope in Pakistan that India would also reciprocate to Pakistan’s move by relaxing some of the non-tariff barriers (NTBs) on imports from Pakistan.

Bilateral trade

The official bilateral trade between Pakistan and India in 2010 stood at an estimated US$1.83 billion. India accounts for approximately 1.2 percent of Pakistan’s global exports, while Pakistan accounts for less than 0.9 percent of India’s global exports. India maintains a sensitive list of 850 items for non-least-developed country (NLDC) members under the Agreement on South Asian Free Trade Area (SAFTA). This is also applicable to Pakistan. Therefore, everything apart from those 850 items imported into India from NLDC members, including Pakistan, will be subject to 0–5 percent tariffs by 2013. Pakistan, on the other hand, was following a more restrictive arrangement (a positive-list approach) for imports from India. Only 1,946 items on Pakistan’s positive list could be imported from India.

In March 2012, the Ministry of Commerce of Pakistan issued a Statutory Regulatory Order (SRO) for switching over to a negative-list regime to trade with India. Accordingly, 1,209 items have been included in the negative list and would not be importable from India to Pakistan. Of the total importable items from India, 137 items would be importable through the Wagah land route. Pakistan has announced that it would phase-out its negative list by 31 December 2012, provided that access of Pakistani products to the Indian market is ensured through the removal of all NTBs.

The change in the trading regime would allow trade between Pakistan and India in a greater number of goods, implying that Pakistani consumers would have increased choices of quality and variety along with the benefit of competitive prices—provided there are minimal NTBs on both sides of the border.

Moreover, it is a safe assumption that implementation of MFN status to India would divert most of the informal and indirect trade, currently estimated at US$2–3 billion, to formal channels. That means the bilateral trade between the two countries could rise to about US$4–5 billion in a couple of years.

By providing MFN status to India, Pakistan seems to gain more than India as the current exchange rate is in its favour. However, in order to export to India or compete with Indian imports, Pakistani industry would have to learn to be more dynamic and competitive.

Regional trade

Intra-regional trade in South Asia has been relatively low, owing much to the geo-economic dynamics, mainly the sour Indo-Pak relations, as well as other factors, and not merely the existing tariff regimes. Hence, Pakistan’s decision to grant MFN status to India would help to expedite effective implementation of SAFTA.

In societal terms, it would mean increased business-to-business and people-to-people connectivity, which would not only help in making SAFTA—signed during the Islamabad SAARC Summit in 2004—effectively operational, but also help in trust building at the people-to-people level. This would create a demand at the grassroots for resolution of bilateral disputes through dialogue. This demand is a must to generate political will at the state level for initiation of trade normalization. Some of these steps include giving a human face to the existing torturous visa regime; improving connectivity; relaxing flow of bilateral investment; giving permission to open bank branches and allowing trade in other financial services; and establishing mobile phone roaming arrangements.

Sand in the wheels

While things seemed to be sailing smooth, the first hiccup came in the form of inconclusive talks in May 2012 between Pakistani and Indian interior secretaries on a liberal visa regime. A liberal visa regime, which is a must for Indo-Pak trade normalization, still exists in the realm of diplomatic promises, for the joint statement issued after the secretary-level meeting speaks of its signing “at an early date”, but does not specify when.

The second hiccup came in June 2012 when a meeting between Indian Foreign Secretary and his Pakistani counterpart got soured by India’s recent arrest of Sayed Zabiuddin Ansari, suspected of being a key handler for the Mumbai attackers who were alleged members of the Lashkar-e-Taiba militant group. India says Ansari has admitted to helping to coordinate the deadly assault from a command post in Karachi, and his testimony has renewed Indian accusations that “state elements” in Pakistan were involved.


The important aspect of all the abovementioned positive and negative developments is that the process of trade normalization is still on, though at an extremely slow pace. The point that both the countries ought to remember is that they have to find non-traditional trade partners and diversify their export destinations, especially in the face of the Eurozone crisis and a weak United States economy. It is high time that Pakistan and India focused on regional trade for the stability of businesses and industries as well as for the welfare of their consumers who have been paying a very high price of economic non-cooperation.

We must give peace a chance. By living as friendly neighbours in South Asia, we will be able to divert a substantial portion of our defense budgets to social sector development and turn this region into a hub of global growth.

          Dr Suleri is Executive Director, Sustainable Development Policy Institute, Islamabad.

This article was originally published at: Trade Insight

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.