Guest analyst Dr. Kiran Hassan discusses the strained trade relations India and Pakistan have endured since the partition. India’s scheduled elections later this year and thawing political relations could help restart interstate trade.
By waving an olive branch at the larger and more economically advanced India, Pakistan’s Punjabi chief minister, Shahbaz Sharif, has made a strong pitch for improving Indo-Pakistani relations during his visit to India in December 2013. During a meeting with Prime Minister Manmohan Singh, visiting his ancestral village and attending various cultural events, Shahbaz had the same message. He stressed better trade ties with India.
This recent emerging rhetoric from Pakistan indicates a thaw between the two arch rivals suggesting that Pakistan might grant the much-awaited ‘Most Favoured Nation’ (MFN) status to India.
The MFN status means the recipient country must receive trade advantages equal to the most favoured nation by the granting country. MFN status simply means competitive opportunities for Pakistani and Indian manufacturers in each other’s market.
In 1995-1996, India gave MFN Status to Pakistan while Pakistan continued to allow Indian imports based on its Order/ Import Policy/ Positive list. Reluctant to grant the MFN status to India, Pakistan alleged at the time that India practiced a very strict bureaucratic import policy. These non-tariff barriers are still believed to be the main reason Pakistan does not grant India the MFN status.
However, recent energy shortages, terrorism and international isolation has pushed Pakistan to be more market flexible within the region, leading the previous Pakistan People’s Party government to pursue trade normalisation with India. Yet, despite many efforts, in December 2012, the grant of MFN decision was deferred until Pakistan’s general election in May 2013, and the status remains unchanged.
This time Pakistan’s hesitation to accord the MFN status has been explained in the context of a lack of framework available to encourage trade. Pakistan stresses that relaxation on visa requirements, removal of trade grievances and customs cooperation on the Indian side should be prioritized.
But that may not be the only reason: Some Pakistani business lobbies are to trying to safeguard their interests, while competing with a more expanded, experienced and a globalized Indian market. There have been clear pressures from the textiles, auto parts, pharmaceuticals and agriculture industries, which have prevented the government from allowing access to the Indian market.
At the same time, many in Pakistan believe that trade opening with India can result in huge market gains. They argue that trade during unexpected food shortages in India can provide instant economic boosts to the Pakistani economy. For example, during an Indian onion shortage this summer, Pakistan was able to export onions to India. The bilateral trade enthusiasts also advocate that trade normalization benefits both countries by capturing revenue currently lost via smuggling and informal trade.
India, however, has always welcomed trade ties with its neighbours. Trade and industry bodies in India are particularly interested in exploring the Pakistani market. These bodies recently estimated bilateral trade was worth $2.34 billion and an Indian investment up to over $50 billion in Pakistan.
Such a win-win situation has prompted optimists on both sides to emphasise that despite the 2013 cross-border firings along the Line of Control (LoC), trade continued at a crawl between the two traditionally hostile neighbours. They believe that MNC status is one of the most significant confidence building measures, which could affect future dialogues between the two countries positively.
Relations between the two countries were expected to stay frosty, especially before the upcoming Indian general election in 2014. But Delhi’s recent hospitality towards Pakistan’s Punjabi chief minister and Pakistan’s backing of India in the recent Indian–American diplomatic row suggest otherwise. By breaking the trade barrier with Pakistan, if the groundwork for better relations is laid by the seemingly outgoing Congress party, Prime Minister Manmohan Singh could leave office with a legacy of easing ties with Pakistan.
If Pakistan’s current prime minister Nawaz Sharif opens trade ties with India, not only will his government provide a short-term, instant economic injection into the Pakistani market but Islamabad will also have better chances of re-engaging New Delhi on many other critical outstanding issues after the upcoming Indian election.
Dr. Kiran Hassan is a Research Analyst covering South Asia at the International Institute of Strategic Studies. She received her PhD from the School of Advanced Studies, University of London.