India-Pakistan trade - Ishrat Husain - Friday, March 25, 2011

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Pakistan and India signed SAFTA in January 2004 – which came into force in January 2006. SAFTA is aimed at reducing and eventually eliminating tariff barriers, facilitating cross-border movement of goods, promoting fair competition in the region and creating an effective framework for regional cooperation. But the agreement is still hindered by fairly restrictive sensitive lists, strict rules of origin and a slower time frame and scope.

Regional Trade Agreements like SAFTA will have positive effect on growth, trade, technological diffusion and foreign investment. Trade within the region will unleash new technology, lower domestic prices, provide new technology and usher in economics of scale in production and distribution as the effective market size expands. Joint ventures in pharmaceuticals, chemicals, petrochemicals, automobiles, agro processing, technology transfer arrangements among IT firms, and joint gas pipeline projects are some of the possibilities that can take place within SAFTA if harmonisation takes place.

India – a much bigger economy accounting for more than 80 percent of Gross Regional Product, imbued with self-confidence and aspirations to become an economic power – should demonstrate a greater degree of generosity instead of insisting upon reciprocity. A wider offer to its neighbouring countries in terms of opening up the markets and trade and removing barriers to mobility would be of ultimate benefit to India. It is advisable for India to establish asymmetric relationships with its neighbors and provide more concessions to them and expect less from them in return.

Given the large and growing size of its effective market the economic losses to India would be miniscule while political good will and returns would be substantial over time. Pakistan, Bangladesh, Sri Lanka will be much better off economically if they are able to penetrate the buoyant Indian market. Friendly, peaceful and irritant-free neighbours would aid rather than hinder India in moving towards its long term goals. A region with the highest number of people living below the poverty line would surge ahead.


What needs to be done in practical terms to open up bilateral and regional economic cooperation. While India and Pakistan should continue the dialogue to resolve the core political issues they should start by focusing on non-political constraints that will promote bilateral trade. Businessmen of the two countries will then take care of the opportunities that will present themselves.

• Pakistan should grant MFN treatment to India while India should reduce its tariffs on agriculture commodities, textiles and other goods that are of potential value to Pakistan.

• Both countries should reactivate SAFTA and agree on a phasing out of the sensitive list over next few years. A restrictive list would nullify all the potential gains of preferential trade access.

• Technical barriers to Trade (TBT), Sanitary and Phyto Sanitary Measures (SPS) that are in fact, acting as powerful deterrents to exchange of goods should be rationalized and simplified. These are, in fact, non-tariff barriers that hinder the flow of goods.

• Trade facilitation through expeditious border crossings, new border crossings, quick custom clearance, telecommunication, improved transport links, shipping protocols, easing visa restrictions for businessmen should be carried out immediately. Railway, air and road connections between the two countries should be increased.

• Governor Reddy and I had signed an agreement for opening of branches by two Indian banks in Pakistan and two Pakistani banks in India in 2005. This agreement has not yet been implemented. Without banking services, opening of letters of credit, cross border transactions of funds, trade cannot take place.

• Domestic tax, tariff and subsidy policies that distort incentives for production and trade should be substituted in both the countries by more neutral policies.

• Institutions to manage and facilitate trade integration such as setting standards, quality control, technical regulations, material testing should be strengthened and made user friendly.

• Harmonisation in legal regulations for investor protection, contract and IP Rights enforcement, labour relations, would promote relocation of industries within the region as the expanded market size and mobility of goods and services would result in economies of scale. Locations for inputs, components, raw materials with low transaction costs would confer comparative advantage to final finished goods.

Let us recall that the 2006 composite dialogue had on its agenda resumption of Rail Service between Khokhrapar and Monabao, bus service between Srinagar and Muzaffarabad, religious visits to Lahore and Nankana Sahib, new shipping protocol, deregulation of air services and joint registration of Basmati rice.

The above outlined measures, if implemented sincerely, can open a new vista for the two countries in the 21st Century. It is high time political leaderships of India and Pakistan demonstrate courage and conviction.

The writer is dean and director IBA and former governor of the State Bank of Pakistan.

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