India and Pakistan have been traditional neighbours with bouts of uncertainties in their relationships for years caused by deep-seated political differences. But geographically and culturally, they have so much in common. Yet trade ties have not taken off the way they should have. India has better trade relations with its other neighbours Sri Lanka and Bangladesh.

At the beginning of this decade, while India's total export trade was 44 billion USD, total exports to Pakistan were just 204 million USD. During the same period exports to Bangladesh of goods and services stood at 930 million USD and to Sri Lanka stood at 662 million USD. It clearly showed that Pakistan's need for Indian goods, at least through official bilateral channels, was less than that of the other two neighbors in the SAARC region. 

What really ails Indo Pakistan trade ties?
The reasons are not far too seek. The two nations have grown in suspicion of each other's intentions and motives at least at the political level. While India has enjoyed continuous democracy, Pakistan has had rough times with the military regime often calling the shots. Obviously policies suffer when regimes alternate between autocratic and democratic. India had good relations with Pervez Musharraf even though he was an autocratic ruler. However, Indo Pak talks on several issues made little headway.

Now that Musharraf is out and civilian regime is in, Indian industry hopes to exploit the situation and boost bilateral trade. Various chambers of commerce and trade and industry have made their own projections on future indo Pak ties.

Let’s look at some of these:
First the Associated Chambers of Commerce and Industry of India  (ASSOCHAM) looks at Indo Pak trade ties in a positive manner despite the hurdles that persist and the mindsets of the political regimes and even asserts that a target of 9 billion USD is not beyond reach.

An ASSOCHAM paper points out that while India has granted Pakistan the most favored nation (MFN) status, Pakistan has not reciprocated presumably because the trade balance is highly in favour of India. Both the countries should devise ways and means  to reduce the imbalance by opening fresh trade routes and encouraging Indian traders to identify more commodities for import. Improved trade relations between India and Pakistan would lead to an environment more congenial for strengthening SAARC as a whole.

Smuggling and trade through third countries flourish…
Informal trade is a bottleneck to boosting formal trade. ASSOCHAM holds that informal trade proves to be costly, as the product has to be first exported to some other country, (Dubai or Singapore) and then re-exported to Pakistan. Informal trade is reportedly as voluminous and diversified as the regular trade.

Illegal across-the-borders trade is said to be more in quantum than the regular bilateral trade. The voluminous smuggling of commodities and merchandise between the two countries indicates mutually profitable economic opportunities. It also indicates the suppressed desire of the business community in the two countries to trade more with each other. The smuggled trade exports to Pakistan include industrial machinery, tyres, chemicals and tea. Indian imports in this category include edible oil, spices, dry fruits and pulses.

Despite their trade touching around $ 2 billion, with potential of further growth as their inter- dependence on economic and trade related issues would expand in future, Indo-Pak political differences will tend to blur the prospects, says the ASSOCHAM president, Sajjan Jindal.

Says ASSOCHAM Secretary General, D S Rawat: rail and road linkages between India and Pakistan would intensify, thus paving the way for larger movements of trade and tourism.

The prospects for increased two way trade are also based on the assumptions that cooperation between the India and Pakistan has been accelerating in the field of banking, freight transport and goods like tea and rice.  After the launch of SAFTA in January 2006 and opening up of rail and road transport, bilateral trade increased to $ 400 million.  With SAFTA becoming operational in July 2006, over 4000 commodities were opened for trade compared to less than 1000 under the India’'Positive Lists' maintained by Pakistan.

Exports from India to Pakistan have grown at a compounded annual growth rate (CAGR) of 60 per cent and imports at a CAGR of 64 per cent for the period 2002-07. Bilateral trade swelled from $235.74 million in 2001-02 to more than $1 billion in 2006-07. Share of Pakistan's exports to India in total exports rose from 0.5 per cent in 2001-02 to 1.8 per cent in 2005-06. Balance of trade has remained in favour of India. The main commodities exported to Pakistan include sugar, dyes, plastics, petroleum products and cotton while main import items from Pakistan are petroleum and crude products, fruits and nuts (excluding cashew nuts), cotton yarn and fabrics and organic chemicals.

The Chamber has come out with host of recommendations which include the key to solving Indo-Pak issues lie in increasing bilateral trade, promoting people-to-people contact and raising businessmen's stake.

India and Pakistan, according to ASSOCHAM, should also discuss the issue of establishing web portals. Traders on both sides should be informed about the policy environment in the country through government websites. Improving information flows between the two countries will reduce the search cost of trading.

Pakistan's fears…
Let's look at the Indo Pak trade ties from a Pakistan perspective now. The Pakistani Press, particularly the vernacular Urdu Press, is crying foul on the new trade policy announced mid-July. The usual refrain is that Indian goods will flood Pakistan. With a common border of around 3000 km, striking cultural similarities, a common DNA and almost no linguistic barriers, India and Pakistan are natural trading partners.

Let us look back at the immediate past and then envision the changes that might breathe fresh life and amity into the relationship between these two often-hostile nations. In 2006-07 Indian exports to Pakistan were valued at $1.35 billion - a mere 1.06 per cent of India's exports to the rest of the world and indeed a small fraction when compared to the 3 per cent of the rest of the world population residing in Pakistan. The next year, 2007-08, was only slightly better: official Indian estimates show Pakistani share in total Indian exports of 1.1 per cent.

Miniscule volume of bilateral trade...
India's imports from Pakistan were in even more minuscule proportion to its imports from the rest of the world - just 0.17 per cent or $0.32 billion in 2006-07, which fell to 0.12 per cent in 2007-08, according to official estimates.

Intensity of India's trading relations with Pakistan appears very weak when compared with Indonesia, a country which is otherwise similar to Pakistan in many respects - Asian, with comparable population, predominantly Islamic and a per capita income that is not vastly different from Pakistan’s. Yet, Indonesia accounted for $2.026 billion and 1.6 per cent of Indian exports in 2006-07; its imports were even more impressive at 2.24 per cent of Indian imports.

Both countries have adopted different methods to shut out imports from the other country - Pakistan imports strictly on the basis of a positive list, which catalogues items from India to be allowed across the border; India's technical barriers to trade and sanitary and phyto-sanitary measures often block potential Pakistani exports to India.

It may be recalled that in March 2004, the then Union minister for disinvestment, Arun Shourie's estimated unofficial trade was as high as 10 times the official figure, on which basis the current total India-Pakistan trade may be valued at around $18.7 billion (unofficial plus official trade), meaning that the 2010 trade target has actually been surpassed.

Bring unofficial trade within official ambit
Therefore, thrust of the bilateral effort should be to bring unofficial trade within the official ambit, which can be easily achieved if the restrictions on open trade (mainly imposed by Islamabad) are lifted.

From this perspective, New Delhi's decision to ease restrictions on Pakistan's cement exports and the facilitating of mutual banking operations - among other steps (including Islamabad's intention to encourage Indian tea exports) taken at the recent meeting - though welcome, may not be enough to regularise unofficial trade between the countries.

What is important is that Islamabad grant India most-favoured nation status (thereby reciprocating New Delhi's decision taken some years ago) and conduct mutual trade on the basis of a 'negative list' (in place of today's 773-item 'positive list'). This, however, is easier said than done because of the non-economic compulsions trumped up by Islamabad.

One solid step Pakistan should take to tackle the problem of unofficial trade is to agree to New Delhi's suggestion (made at the New Delhi meeting) is to increase the ‘positive list’ by 484 tariff lines. Islamabad's response will reveal Pakistan's desire to improve economic ties with India in the long run.