Pakistan's decision to grant Most Favoured Nation (MFN) status to India is an overdue and welcome step. India has reciprocated by announcing its intention to adopt a liberal visa regime and to work towards a preferential trade agreement. These moves are eminently sensible from an economic standpoint. Current bilateral trade is around $2.6 billion. This is rather low compared with trade between other countries of similar GDP, size, and geographic proximity. Studies show that India-Pakistan trade can be ramped up to $10 billion.
By according MFN status to India, Pakistan has met the necessary condition for deeper and wider economic relations. But it is by no means sufficient to achieve this objective. The history of India-Pakistan relations underscores three important factors that have prevented bilateral trade from flourishing — factors that continue to impinge upon the prospects of India-Pakistan ties today.
RESIDUE OF THE PAST
For a start, newly independent India and Pakistan adopted import substitution policies to protect their domestic industries. Although both countries have come a long way since, the after-effects of their older economic systems continue to linger. This is evident in the persistence of high tariffs and quotas. Informal trade barriers have even more pernicious effects. There are only two functional transportation routes: the Attari-Wagah rail link and the Mumbai-Karachi sea route. The shipping and rail protocols continue to be anachronistic. There are no efficient institutional arrangements for banking transactions and for facilitating investment. Equally problematic is the absence of reliable information exchange on trade data and policies. Another hold-over of the past is the strength of domestic cartels and lobbies in both countries. These have, for instance, hampered Indian export of sugar to Pakistan and import of cement from there. All these problems have not only reduced the volume of trade but also shrunk its composition.
LIMITED INTEREST
A second factor that undermined bilateral trade was the lack of interest in wider regional trade and economic relations. Prior to 1947, South Asia had largely open borders, which allowed for free movement of goods, labour and capital. The partition of India fractured the economic unity of various sub-regions of South Asia.
And the subcontinent is still struggling to overcome the economic consequences of the partition. Attempts to promote regional economic cooperation, including the South Asian Free Trade Area (SAFTA) pact of 2004, have been halting and half-hearted. More limited trade and transit arrangements between India, Pakistan and Afghanistan have proved almost as difficult to arrive at.
When Prime Minister Indira Gandhi visited Kabul in 1969, the Afghan government mooted the idea of a tripartite trade and transit accord that would allow trade to flow from Turkey, Iran and Soviet Union through Afghanistan to Pakistan and India. Mrs. Gandhi responded enthusiastically. In her first communication with Gen Yahya Khan later that year, she urged him to consider promoting economic relations.
“Shipping companies and airlines which are neither Indian nor Pakistani are earning foreign exchange”, she observed. Pakistan, however, felt that such an arrangement would increase their dependence on Soviet Union and India, and refused to respond to Mrs. Gandhi's suggestion. Four decades on, the situation has not changed very much. In the trade and transit agreement signed with Afghanistan earlier this year, Pakistan ensured that Indian goods could not move through Wagah into Pakistan and thence to Afghanistan. The recent meeting between the prime ministers of India and Pakistan holds out the prospect of change on this issue.
POLITICAL DISPUTES
The third and most important factor hindering India-Pakistan trade has been political and security disputes. In 1948-49, India's share in Pakistan's exports was nearly 56 per cent.
A decade later it had fallen to a mere 4.1 per cent. Imports from India reduced as drastically over this period. The disputes over Kashmir and division of British India's assets cast a dark cloud on economic relations. In September 1949, the Pound Sterling was devalued by 31 per cent. Both India and Pakistan were part of the so-called Sterling Area and their currencies were pegged to the Sterling. India followed suit by devaluing its currency. But Pakistan refused to do so. The Pakistani leadership evidently wanted to sell raw jute (their main export) to India a higher price. India refused to recognise the new exchange rate of its currency with the Pakistani Rupee and suspended trade. This resulted in a major slump in Pakistan's export earnings from India and forced Pakistan to look for other trading partners. Trade with India resumed following an agreement in early 1951, but on a reduced scale.
In January 1957, India and Pakistan signed another trade agreement. The agreement stated that “Each Government shall accord to the commerce of the country of the other Government treatment no less favourable than that accorded to the commerce of any third country”. The two countries, in effect, granted MFN status to each other.
The agreement was, however, valid only for three years. Pakistan sought to link it to progress on settlement of Kashmir. President Ayub Khan extended it for a further period of three years. Following the collapse of talks on Kashmir in 1963, the agreement was allowed to lapse.
Two years later, India and Pakistan were at war, and that put paid to the prospect of economic cooperation and cut-off transit links between India and the two wings of Pakistan. Subsequent wars and crises continued to undermine the potential of bilateral trade.
If this potential is to be fully realised, it is important that steps to promote trade and commerce are complemented with efforts to stabilise the relationship at political and strategic levels. The former can contribute to the latter. But it would be naïve to assume that improved trade will naturally result in peaceful relations. The Indian government has rightly adopted a step-by-step approach to tackling thorny problems with Pakistan. The recent developments on the economic front should hopefully impart greater resilience to this process.
(The author is Senior Fellow, Centre for Policy Research, New Delhi.)