Pakistan and India should go further than MFN to boost integration

Authors: Nisha Taneja and Vatsala Shreeti, ICRIER

Is the time ripe for a new push for normalised trade between India and Pakistan? The foreign secretaries of both nations recently met in Islamabad. The two countries can expect formal talks to resume after a hiatus of six months. This came soon after the announcement by Khurram Dastgir, Pakistan’s Commerce Minister, that Pakistan may grant ‘non-discriminatory market access’ or Most Favoured Nation (MFN) status to India, a move that will get the two countries closer to striking a deal to fully liberalise trade between them. 

A Pakistani labourer carries an empty fruit basket following his day's work in Lahore on November 12, 2011.  (Photo: AAP).

While a lot of emphasis is put on the completion of the trade normalisation process, a substantial part of this process has already been completed. The crucial turning point was when, following a joint statement issued by the two countries in March 2012, Pakistan switched from a positive list approach — under which it allowed only about 1900 items to be imported from India — to a small negative list of only 1200 items that could not be imported. This move was followed by India pruning its sensitive list to 614 items from 866 items during the 7th round of talks held in September 2012. The two major restrictions that remain on Pakistan’s imports from India are a separate positive list of 137 items on road-based trade and a negative list of 1200 items.

There is a large trade potential between India and Pakistan which could be unlocked if the two countries are able to trade normally with each other. A study by the Indian Council for Research on International Economic Relations shows that potential trade between the two countries is in the order of US$21.2 billion a year. The large informal trade between the two countries is also indicative of considerable trade potential. The question is, if substantial trade liberalisation has already taken place, why has there not been a substantial increase in trade in the last two years? Total merchandise trade between India and Pakistan increased from US$1.5 billion in 2011–12 to US$2.2 billion in 2013-14.

While Pakistan granting MFN status to India would help trade, it does not go far enough. Addressing infrastructure constraints that continue to hamper the free flow of goods across the border is just as important. In particular, land connectivity between the two countries remains dismal. Both rail and road connections are marred by weak transport protocols, inadequate infrastructure, lack of coordination amongst border agencies and security concerns.

As a result, most of the expansion of bilateral trade has taken place by the sea route, which is often longer and more costly than direct land routes. There is an urgent need to work towards lowering transaction costs, strengthening border institutions in both countries and formulating a comprehensive land border policy. Businesses wanting to trade face other constraints, too, including a restrictive visa regime, ineffective and inadequate communication channels and information asymmetries related to government policies.

In the last year, with the new Modi government in New Delhi, the bilateral trade dialogue has gone through several ups and downs. Despite the strong signal sent by the prime minister’s invitation to all leaders of the South Asian Association for Regional Cooperation (SAARC) to attend his swearing-in ceremony, at the bilateral level, India and Pakistan have not been able to revive the dialogue.

But Indian Foreign Secretary Subrahmanyam Jaishankar’s recent visit to all SAARC countries, including Pakistan, has raised hopes that bilateral dialogue will resume in the near future. In the broader context, this could serve as a much needed step towards redefining the significance of the SAARC. Even after three decades of existence, South Asia continues to be one of the least integrated regions of the world, with intraregional trade constituting less than 5 per cent of the region’s global trade. India and Pakistan, being the two strong economic forces of the region, have determined the course that SAARC has taken over the years. Pakistan granting MFN status to India thus raises hopes for a rejuvenated SAARC.

Amidst the hype around MFN status, it must not be forgotten that in the absence of appropriate measures to address infrastructural and communication concerns, the process of trade liberalisation and economic integration will remain incomplete. And not just between India and Pakistan — these are problems facing the entire South Asian region. Bringing the trade dialogue under the SAARC umbrella would help all members to deal with common issues at one platform.

Nisha Taneja is Professor at the Indian Council for Research on International Economic Relations (ICRIER).

Vatsala Shreeti is a research assistant at ICRIER.

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