With a new government taking charge in Islamabad, chances of a thaw in Indo-Pak relations look less gloomy than they have been in recent years. One obvious place to start is to improve bilateral trade and then take things from there. Yet, despite trying, the three governments in the last 15 years – headlined by Musharraf, Zardari and Sharif in their respective terms – couldn’t quite manage to score big on this front.
Despite enjoying geographical proximity, Pakistan has been unable to grow its exports to an economy that is now eight times its own. Instead, most of Pakistan’s exports are dispatched to faraway destinations. From $84 million in FY04, Pakistan’s exports to India had reached $418 million in FY18, as per SBP data. Yet, the share of Pakistan’s exports to India has averaged a paltry 1.5 percent in Pakistan’s overall goods’ exports in the last 15 years.
In recent years, bulk of Pakistan’s exports to India has been accounted for by three items: fruits (dates, figs, pineapples, etc.), cement, and petroleum. There is a bit of gypsum, leather and cotton also thrown into the mix. Just as exports, Pakistan’s imports from India have also grown fivefold between FY04 and FY18, but have averaged 3.6 percent in Pakistan’s overall imports in the period under review. Key imported items are related to cotton, vegetables, chemicals and cyclic hydrocarbons.
Pakistan, being the smaller economy, should feel more incentivized to trade more openly with a larger economy. The country needs to substantially improve its currently-abysmal share in Indian imports. Pakistan had a 0.1 percent share in India’s imports in FY17 – an abysmal level seen throughout this decade. India’s share in Pakistani imports is also languishing low – at 0.6 percent in FY17.
That the two countries have less than one percent share in each other’s imports, explains the fact that Saarc – of which India and Pakistan are the two largest economies – remains one of the least inter-connected trading blocks in the world. The experience of the three most inter-connected regions – North America (where US is the hub), Western Europe (Germany is the hub) and Southeast Asia (China is the hub) – suggests that trading with countries in proximity can lead to regional prosperity.
It must be noted, though, that official statistics might not be capturing the true scale of Indo-Pak trade. Circuitous trade is said to be a thriving phenomenon. An Asia Foundation report in 2015 put this informal Indo-Pak trade at $5 billion. Seaports in regional countries like the UAE, Sri Lanka, Singapore and Hong Kong are said to be used as intermediary routes by Indo-Pak traders. But this phenomenon is a result of difficulties in trading – and on both sides of the border.
For instance, a 2016 report by the Indian Council for Research on International Economic Relations noted that Indian exporters used the informal channels due to issues like Pakistan’s negative list, inadequate payment mechanisms, and forming trading relationships in Pakistan. A 2017 report by Rawalpindi Chamber of Commerce noted a variety of non-tariff barriers facing Pakistani exporters in India, including strict certification requirements, higher security checks, visa curbs and inadequate banking relationships.
It is up to the two nations’ leadership to ponder how relevant and urgent is a “re-set” in trading relationship. That will require a broader political understanding. It is a complex issue, for geopolitical and domestic political issues are also involved on both sides. If it were purely an economic issue, some progress would, arguably, have been made by now. Follow this space for more on that subject later.
(This news/article originally appeared in Business Recorder on September 3rd, 2018)