The dynamics of India-Pakistan trade

Sajad Padder

Indian sub continent was an integrated economy prior to partition. Even after partition, 1948-49 Pakistan’s exports to India accounted to 56% of its old exports, 32% of Pakistan imports came from India. But 1965 war changed the situation. In 1989, Pakistan agreed to import 322 Indian items. In 1995, India gave Pakistan the status of  Most Favoured Nation (MFN.). The estimated Indo-Pak trade potential has been put at US $ 10 billion. Another study put it at 10.9 to 19.8 billion. The restrictive trade environment between India and Pakistan has led to a large informal trade flows between the two. Nevertheless, the regional trade integration in South Asia depends on the health of India-Pakistan relations.



Pre-Partition Era:

“The Indian sub-continent was one integrated economy prior to partition in 1947. Greater Punjab was one economic entity for centuries. Karachi and Bombay (Mumbai) were tightly knit sister cities on the sea under the same administrative unit of Bombay Presidency. Today these regions are all but severed. Before 1947, regions specialised in the production of various goods and commodities on the basis of comparative advantage. Cotton grown in areas that became Pakistan was processed in the mills of Bombay and Ahmedabad.  Raw wool produced in the cold regions of North West Frontier Province (Khyber Pakhtunkhwa) and West Punjab went to woolen mills of East Punjab, Uttar Pradesh and Bombay for processing and manufacture of woolen cloth. Gypsum from Sind and Punjab was used by cement and fertiliser factories all over India. Joginder Nagar power station in East Punjab supplied more than 70 million KW of electric energy every year to industrial and domestic units in West Punjab. Similar interdependence existed in the eastern sector, particularly in jute industry. A salient feature of this interdependence was that one region produced raw material that were processed in the other region, thus earning a much higher rate of return”.


Post-Partition Scene:

“In the immediate aftermath of partition, India and Pakistan were highly dependent on each other for trade. In 1948–49, Pakistan’s exports to India accounted for 56 percent of its total exports, while 32 percent of Pakistan’s imports came from India. Until 1965 there were nine branches of six Indian banks operating in Pakistan while Pakistan’s Habib Bank had a branch in Mumbai. Three important land routes used for trade were: Munabao-Khokhrapar;  Attari-Wagah and Hussainiwala- Ganda Singh Wala. The situation suddenly took an ugly turn when the unresolved Kashmir issue came into play. In 1965 war broke out between India and Pakistan. This time, trade relations became the first casualty of war. On the fateful morning of September 6, 1965 customs officers at Wagah post near Lahore became the first civilian prisoners of war. Banks in both countries were seized as enemy properties. After the Simla Agreement of 1972 trade resumed on a limited scale. In 1985, India and Pakistan became signatories to the final document of South Asian Association for Regional Cooperation (SAARC) which committed itself to promote the welfare of the people of South Asia. In July 1989, Pakistan agreed to import 322 Indian items (Positive List). Upon signing the World Trade Organization agreement in 1995 India granted to Pakistan the Most Favoured Nation (MFN) Status in 1996. In the same year, Pakistan increased its positive list to 600 items but till date it’s failed to reciprocate to the MFN status.  The composite dialogue process which was revived in 2004, when Vajpayeeji met General Musharraf on the sidelines of the 12th SAARC summit in Islamabad, gave a boost to the bilateral trade. Trade through the land route at Wagah was restarted in July 2005 while the other two routes are still inoperative. Cross border movement of trucks across Wagah started in August 2007. The other important route for formal trade is the sea route between Mumbai and Karachi. The dialogue process led to some improvements in bilateral trade. Trade increased from a few million dollars to US$ 2.7 billion in 2013-14. Contrary to some expectations, there’s no significant improvement in trade during the present BJP-led government. Since 2014 trade has generally shown a declining trend”.


The Trade Potential:

“A State Bank of Pakistan study in 2006 and a World Bank report in June 2007 estimated India-Pakistan trade potential at US$ 10 billion. But a new study by World Bank titled “A Glass Half Full: The Promise of Regional Trade in South Asia” puts the trade potential at US$ 37 billion. Another study by the Indian Council for Research on International Economic Relations (ICRIER) in 2013 stated that the Indo-Pak trade potential lies between US$ 10.9 billion to 19.8 billion. The formal trade is mostly restricted to vegetables, chemical products, and some textile products. There is a huge potential for trade in services sector”.


“The restrictive trade environment between India and Pakistan has led to a large informal trade flows between them. The Sustainable Development Policy Institute (SDPI), Islamabad, puts informal trade between India and Pakistan at US$ 4.2 billion. More than 90 per cent of the total informal trade is one sided i.e., from India to Pakistan via the routes: Mumbai-Dubai-Karachi; Mumbai – Dubai – Iran (Bander Abbas) – Afghanistan (Kandhar) – Chaman – Karachi; Mumbai – Dubai – Iran (Bander Abas) – Afghanistan (Kabul) – Torkhum/Bara – Lahore and Rawalpindi. Some amount of informal trade also flows through Singapore and Central Asian Republics. Through informal trade routes, the main exports from India to Pakistan are cloth, tires, pharmaceuticals, textile machinery and cosmetics. Pakistan’s informal exports to India consisted mainly of textiles, accounting for approximately 90 per-cent of the total informal trade. The regional trade integration in South Asia depends on the health of India-Pakistan relations. For realising the trade potential both countries need to remove the non-tariff barriers, improve the efficiency of trade routes, dismantle the respective ‘positive’ lists as much as possible, encourage the participation of private sector, implement a liberal visa regime and provide the financial and banking services. The new prime minister of Pakistan Imran Khan is upbeat on improving trade relations with the neighbours. But no significant change is expected before the upcoming general elections in India”.


[Courtesy: daily Greater Kashmir, Srinagar, Kashmir; October 13, 2018].

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