Recent trends in India-Pakistan trade

Context:

Cross-LoC trade continues to be a key confidence building measure between India and Pakistan

Introduction:

• Of late, cross-LoC, trade has been in focus after the National Investigation Agency (NIA) began probing the funding patterns of traders.
• In October, cross-LoC trade will complete nine years. Irrespective of the negative perception around it, trade continues to be one of the most successful CBMs between India and Pakistan.

Background:

• Trade was stopped in Uri on July 21 after banned drugs were seized from a truck while trade on the Poonch-Rawalakot route has stopped for over a month now after border tensions.
• After the Uri attack, Pakistan had brought down the number of banned Indian goods to 1,209 items from about 6,000 while India has reduced duties sharply on a number of Pakistani products.

Why India should continue trading in the times of conflicts?

• Trade normalisation would benefit producers and consumers in both the countries.
• Greater trade integration will give producers access to a much wider market and will allow them to achieve greater efficiency in production by exploiting economies of scale in production, thus enhancing productivity.
• The consumers in both countries would also benefit from lower product prices and better quality and more variety.
• The most substantial impact of the trade normalisation process would be on informal trade flows, which are often considered a defining characteristic of the India–Pakistan economic relationship.
• Today, goods travel from Delhi to Lahore through Mumbai, Dubai and Karachi, making the journey 11 times longer and four times more costly. The move towards trade normalisation would certainly lead to a reduction in transaction costs and consequently shift informal trade flows to formal channels.

India-Pakistan trade areas:

• For exports from India, there is tremendous scope in chemicals, textiles, machinery, mechanical appliances and electrical equipment.
• As for imports from Pakistan, trade possibilities exist in textiles, jewellery and precious metals, and base metals.
• The services sector, which has become increasingly important in both countries’ economies, provides fertile ground for trade, especially in sectors such as information technology and business process outsourcing, healthcare and entertainment sectors.

Hidden trades:

• Informal trade between India and Pakistan is nearly two times the trade through formal channels
• Real jewellery, including gold, diamond and precious stones, accounted for the largest share of 23% of informal exports from India to Pakistan
• Factors such as high tariffs, political tension, infrastructure impediments, ease of trading goods via third countries have generated a thriving industry for informal trade between the two South Asian giants.
• Pakistan’s negative list of 1,209 items as the most important factor pushing informal exports from India
• Items on the negative list are those that are not allowed to be imported from India.
• More than one in every two items exported informally to Pakistan were on Pakistan’s negative list.
• About 30% of items on India’s current sensitive list comprise of textiles, indicating that shift to formal trade can be expected once India relaxes its tariffs.
• India’s imports from Pakistan included items such as dry fruits and spices, informal exports from India included chemicals, tyres, alcohol and tobacco products, among several others.
• Informal exports from India to Pakistan in 2012-13 stood at $3.9 billion, much higher than the just over $2 billion worth of formal exports. Informal imports, on the other hand, from Pakistan valued $0.7 billion, slightly more than formal imports of $0.5 billion.

Recent steps:

• In order to strengthen trade practices, the recent joint meeting between officials of both sides decided that permanent and formalized communication facilities will be set up between the respective trade officers.
• The Bureau of Research on Industry and Economic Fundamentals (BRIEF) is conducting on strengthening cross-LoC trade, a number of steps have been proposed that could lead to a change in the trading mechanism
• Traders and chambers of both sides have come up with the idea of a joint chamber called the Jammu and Kashmir Joint Chambers of Commerce and Industry, which will have traders of both sides as well as the local chambers of Jammu and Kashmir and the Mirpur Chamber.
• This will help in creating more transparency in transactions and information flow among traders in both inter and intra LoC.

What should be done to better trade?

• A joint investigation team from India and Pakistan should be should be set up to investigate cases of narcotic and arms smuggling across the border.
• At present, truck drivers end up being the victims although they may or may not be involved directly.
• Such a team should address the root cause of such instances in a speedy and transparent manner.
• To keep a check on the traders and trade practices, a monitoring cell of officials from State and Central agencies must be constituted.
• It should monitor daily trade practices such as registration of traders, invoicing, and exchange of goods, trade balancing, etc to address allegations of hawala money, under-invoicing, and even misrepresentation of goods.
• Trade data and information for each registered trader should be mandatorily recorded in an electronic format by the trade facilitation officer and shared with the cell at regular intervals for analysis and other checks.
• There is also need to institutionalize and formalize trading communities.
• It is important to impart training to LoC traders. With support from excise and security agencies, training sessions should be conducted on the standard operating procedures of this trade as well as established accounting practices such as maintaining balance sheets. This would help trader and government agencies monitor trade and ensure trade accountability.

Present situation:

• Despite mounting tensions along the border, the trade between India and Pakistan has remained intact since the beginning of the current fiscal year. The trade balance, however, remained in favour of India.
• The two countries have long been locked in a bitter rivalry. But worsening political relations seem to have little impact on bilateral trade relations,
• A report by the State Bank of Pakistan (SBP) revealed that Pakistan grew its exports to India during the first eight months of 2016-17 while curtailing imports by 23 per cent.
• After growing by 14 per cent, exports from Pakistan to India amounted to $286 million in the July-February period. Imports from India fell 23 per cent to $958.3 million from $1,244 million recorded a year ago,.
• This has offset the negative impact of a decline in Pakistan’s cement exports to Afghanistan and South Africa,
• Meanwhile in the first eight months of the current fiscal year, Pakistan recorded a trade deficit of $672 million with India.
• Imports from India in 2015-16 were worth over four times the exports from Pakistan, a five-year high.
• Pakistan imported goods worth $1.8 billion in 2015-16 compared to the exports of just $400 million.

Challenges:

• Poor land connectivity is a major problem.
• Currently there is only one land route — through Attari- and Wagah in Punjab — for rail and road transport of goods.
• To handle the increase in traffic and de-congest the route, more land routes need to be opened, such as the Munabhao–Khokhrapar and Hussainiwala–Ferozepur routes.
• Limited people-to-people interactions because of barriers to communication have for several decades inhibited information flows that could help expand trade

Solutions:

• It is imperative that steps be taken to strengthen trade practices and ensure that it does not fall victim to speculation and allegations once again.
• It is important that the Central and State governments take the necessary steps towards reforming trade and ensuring capacity building of traders.
• The government must ensure that trade continues to flourish between India and Pakistan
• The transport protocols between the two countries also need to be amended to allow seamless transportation of cargo in each other’s territory.
• If the two countries agree to grant transit rights to each other, India could be connected to Afghanistan and further to Central Asia through Pakistan. Pakistan, meanwhile, will be able to access India’s eastern neighbours.
• Creating multilevel channels of communication is important for bringing businessmen of both countries together — which would help bridge information gaps, reduce misconceptions, and generate a significant change in the business environment of the two countries.
• In both India and Pakistan, the media has a powerful influence on public sentiments. Negative reporting has so far dominated the India–Pakistan relationship

Conclusion:

• Over the past years, cross-LoC trade has been affected by a number of allegations. The government must uphold its promise of taking cross-LoC confidence building measures (CBM) to the ‘next level’ as mentioned in the ‘Agenda of Alliance’.
• Today, in a globally interdependent marketplace no two nations can afford to be isolated. Trade can serve as a powerful tool for conflict resolution between India and Pakistan. It is a peak time that the two neighbours throw off the shackles of history and realize the benefits of economic partnership. Together India and Pakistan should take on joint responsibility for peaceful, prosperous, and cooperative development in South Asia.