Indo-Pak trade hit by political ties

The Commerce Secretaries of India and Pakistan, Messrs Rahul Khullar and Zafar Mehmood, who met at Islamabad in the last week of April, had no structured agenda to enhance economic engagement between their two countries. This was because New Delhi and Islamabad had suspended Commerce Secretary level trade talks for the last three years following the November 2008 terrorist strikes on Mumbai. To that extent, it would be appropriate to assume the two sides had embarked only on preliminary discussions to shape an agenda for future meetings.

It is reported that the two sides would attempt to focus on the problem of non-tariff barriers that plague bilateral trade. Pakistan's priority issue would be to discuss India's opposition to the European Union's decision to provide duty-free access to Pakistani goods. For India, the agenda is to sell oil and electricity to Pakistan.

Demand and supply pull

The two countries are interested in better coordination and establishing systems that would boost bilateral trade in compliance with multilateral and regional obligations like the South Asian Free Trade Area pact. The average annual Pakistan-India trade volume is around $2 billion. A total of 1,946 items are now traded between the two countries.

Despite the absence of trade talks between the two sides for three years, commerce did not cease, which only suggests the strong demand and supply pull across the borders.

 India-Pakistan trade ties have three components, namely: ‘black' or illegal trade transacted through the land borders; circular or ‘informal' trade which is carried out through ‘third' countries and re-exported from there to Pakistan; finally, formal trade through imports/exports of merchandise through all recognised seaports, airports, land customs stations and inland container depots.

The illegal trade channels are smugglers who operate along the 675-km unfenced stretch of the Rajasthan sector along the contiguous Indo-Pakistan border; besides, carriers misuse personal baggage through the “green channel” facilities at international airports. Circular trade is conducted through agents who are stationed in free ports like Singapore or Dubai, and is estimated to be $1 billion.

Thus, the combined volumes of illegal and circular trade are much larger than formal levels of trade which in reality, therefore, amounts to ‘pseudo' trade between the two countries.

Pakistan is estimated to be the second or third largest tea consumer in the world with a market size of around 100 million kg per annum and for several years it did not import tea from India. Eventually, India and Pakistan signed a contract for the sale of tea in August 1997 owing to compulsions, as the tea gardens in Kenya, Sri Lanka and Indonesia were hit by drought. Otherwise, Pakistan has never imported tea from India since 1988. Instead, Pakistan imports tea from Kenya because it is cheaper than doing so from India via the Dubai route.

Obstacles to growth

Pakistan imports iron ore from Brazil and Australia, though these items could be available at lower rates from India. Similarly, considering Indian pharmaceutical products are 30 per cent cheaper than Pakistani products, it would certainly make a difference to the common citizen in that country. In turn, this would help Indian pharmaceutical products to sell larger volumes in geographically proximate markets, besides impacting positively on industrial growth.

The constraints that hamper the growth of India-Pakistan trade include: Visa restrictions, absence of banking facilities, telecommunication and trade logistics. The business communities in both countries face visa restrictions which are inconvenient for their work. For instance, businessmen have to exit the country only through the city of entry which curtails their flexible travel plans and adds to travel costs. Also, they have to report their presence to police stations regularly, which is a major irritant. The inability to open Letters of Credit owing to the absence of mutual banking protocols between the two sides proves problematic to conduct business.

Whenever tensions occur along the India-Pakistan border telecommunication links become non-operational and businessmen cannot talk to each other. Transportation of goods across the India-Pakistan border is through air, sea and rail links, while no road links have been opened. While the air and rail links tend to be erratic, the sea route Mumbai-Karachi is more useful. Such limited options for trade logistics often results in high transaction costs. For instance, adherence to procedural clearances creates scope for bribery which involves Railways, police, ports and customs officials, and sometimes results in bribes accounting for 30 per cent of transaction costs.

Trade bodies both in India and Pakistan have tried to stimulate bilateral trade, but politics overrides economics between the two neighbours plagued by trust deficit.

(The writer is a Visiting Fellow with the Centre for Land Warfare Studies, New Delhi.)

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