One step ahead, two steps back

Last Updated: Sun, Feb 03, 2013 04:55 hrs

The mood of businessmen engaged in trade between India and Pakistan is once again sombre. The recent tensions and transgressions at the Line of Control (LoC) have impacted trade relations between the two countries.

Just when businessmen from both sides were rejoicing over some unprecedented steps that were taken to "normalise" trading relations between the neighbours, the party appears to have ended abruptly. Ashwani Kumar, the owner of Victor Tools in Jalandhar, Punjab, had been looking forward to establishing greater business contacts in Pakistan by exporting machine tools. As of now, he routes his goods through Dubai which costs an extra Rs 50-100 crore, depending on the size of the consignment. "At present Pakistan imports a bulk of its machine tools from China and Taiwan, which are of much poorer quality that ours. When I spoke with businessmen in Pakistan, they showed a lot of interest in sourcing it from us. But, we cannot follow the normal route due to a complete lack of clarity in the policies," Kumar says.

This sentiment is reflected by Muhammed Akbar Khan, a Peshawar-based businessman who deals in oil and lubricants. "Both sides had taken some historic steps and were committed to take the business relationships to another level. But the recent tensions across the LoC have derailed the entire process," Khan laments. "Businessmen in Pakistan," he says, "were all geared up to do business with India. We started getting orders. But everything is back to square one because of these tensions."

Trade relations between the two countries have always been tricky and defined by the political equations. According to the Ministry of Commerce and Industry, bilateral trade between India and Pakistan currently stands at $1.94 billion, with India's export to Pakistan reaching $1.54 billion and imports totalling $401.19 million in 2011-12. Trade between India and Pakistan soared by almost nine times between 2000 and 2011, states a study by the Indian Council for Research on International Economic Relations (ICRIER).

Though Pakistan has not granted the much-awaited most-favoured nation (MFN), or non-discriminatory, trading status to India, India has always enjoyed a trade surplus with Pakistan. India's trade balance as a proportion of its total trade with Pakistan increased from 55 per cent to 68 per cent between 2000 and 2011, the study notes. Total trade between the two countries has been growing at a compound annual growth rate (CAGR) of nearly 29 per cent, which is mainly on account of the volume of India's exports. For instance, during the period 2001-02 to 2010-11, India's exports to Pakistan grew at a CAGR of 32.1 per cent, while India's imports from Pakistan registered CAGR growth of merely 17.8 per cent. This clearly shows that India's exports to Pakistan have been growing at double the pace in comparison to its imports from Pakistan, says a study by the Confederation of Indian Industry (CII).

"We do not mind having a trade deficit with India. Our problem is that a level playing field is absent," says Amin Hashwani of Karachi-based Hashwani Group. "Very few products from Pakistan come into India. It's not as if we do not have competitive products. Looking at India's size, it is difficult for us to understand why Pakistani goods worth $200 million are exports, while your exports to Pakistan run into billions. The non-tariff barriers need to be removed to start open trade based on fair game," adds Hashwani whose containers were held at the Jawaharlal Nehru Port in Mumbai. He had to finally go in for an auction.

R U Das of New Delhi-based think tank Research and Information System says that the main reason why India enjoys a trade surplus with Pakistan is because Pakistan has failed to diversify the basket of products it can offer to India.

Latest data released by the Directorate General of Commercial Intelligence and Statistics in the ministry of commerce & industry, however, shows that the steps taken to improve trade relations, in fact, did prove favourable for Pakistan. The data shows that exports from Pakistan to India grew faster compared to India's exports to Pakistan. Exports from Pakistan grew by 66 per cent to $460 million during the period April-December 2012 from $277 million in the corresponding period last fiscal. This was also higher than $401 million, which was Pakistan's total export to India in the whole of 2011-2012. On the contrary, the rate of growth of exports from India to Pakistan during April-December 2012 was only 16 per cent, the data indicates.

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In 2006, India and Pakistan decided to ratify the South Asian Free Trade Area (SAFTA) agreement owing to their membership to the South Asian Association for Regional Cooperation (SAARC), which mandates the granting of MFN status to each other. While India accorded the status to Pakistan, the latter continued the old practice of maintaining a positive list which outlines the number and types of products it can import from India.

However, in April 2011 both sides made some path-breaking commitments to normalise trading relations. Pakistan shifted to a much smaller negative list, thereby opening up its markets to a much wider range of Indian goods. The negative list contained only 1,209 items that it could not import from India. As a result, India can now export more than 7,500 products to Pakistan. Business communities on both sides hailed the move. In March 2012, Pakistan promised that it would finally grant India the MFN status by December 2012, which it eventually did not.

In mid-October, Punjab Deputy Chief Minister Sukhbir Singh Badal had prophesied that the list of tradable items would be expanded to 6,000 by month-end. "The biggest incentive for Punjab will be the opening up of the border," he had told Business Standard. "The possibilities for the leather industry will be tremendous once trade with Pakistan is liberalised (from the current list of 300 items)." Entrepreneurs in the state, he said, could then import inexpensive raw leather from Pakistan, stitch it into shoes or garments, and export it back across the border. No such thing has happened. Local businessmen are less enthusiastic. Unless Pakistan designates India a most-favoured nation, which looks very difficult right now, nothing will move, they know.

"Them not giving MFN status to us is one of the major impediments that we are facing in doing business with Pakistan," complains Durgesh Buxi, senior manager, Raymond. "They have also not granted multiple-entry visa to Indian businessmen, restricting our entry into the country. Despite all this, business environment was looking conducive and opportunities were coming in. But with the recent tensions, things have again come to a standstill," Buxi says.

Nisha Taneja of ICRIER says bilateral trade potential between the two countries is estimated to be $19.8 billion - that's 10 times more than the current level. Of this, export potential accounts for $16 billion and import potential accounts for $3.8 billion.

The commerce secretaries from both the countries had met in September last year. It was then decided that Pakistan would expand the number of items traded through the Attari-Wagah border, while India would reduce the number of items in the sensitive list under SAFTA to allow more goods from Pakistan. But nothing has come of it so far.

But the process of trade normalisation came to a halt with the killing of two Indian soldiers across the LoC coupled with Pakistan's failure to adhere to the December 31, 2012 deadline to grant MFN status to India.

In an interview to Business Standard, before the LoC incident, Pakistan's High Commissioner to India, Salman Bashir, had said that normalising trading relations with India was in Pakistan's interest and that the government would not go back on any commitment that it had made.

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Stringent visa restrictions, such as city-specific visa, police reporting and maintaining the same mode of transport during entry and exit, are other major impediments.

Now, owing to the tensions, the Indian government has also delayed issuing visa on arrival to senior citizen coming from Pakistan through the Attari-Wagah border. A senior government official involved in the talks said that the government might put on hold the entire visa agreement which seeks to offer a liberal visa regime for Pakistani businessmen.

There is also severe pressure on the Pakistan government from the agriculture and automobile lobbies which fear that Indian goods will flood their market. "Various lobbies and interest groups are working to stop the government of Pakistan from granting MFN status to us. We keep telling them that if they could survive the Chinese, then why not us?" asks Vikramjit Singh Sahney, president of SAARC Chamber of Commerce and Industry.

Global fora have expressed concern over the prevailing situation given that trading relations between India and Pakistan have a bearing on peace and prosperity in the whole of South Asia.

Speaking to Indian industry recently, Robert D Hormats, under secretary for economic growth, energy & environment, US Department of State, said bilateral trade between the neighbours has the potential of growing to $10 billion in the next three years if some of the barriers owing to restrictions and regulations are removed. Pascal Lamy, director general of World Trade Organization, on a recent visit to India said at a discussion organised by International Institute for Strategic Studies that the India-Pakistan relationship will be "quite different" with the creation of a vibrant business relationship. "Indian and Pakistani policymakers have recognised this, and have set targets for opening and expanding trade. Their leadership deserves praise," Lamy had said. "A similar case could be made for the Israelis and the Palestinians, for whom two decades of increasing economic separation have helped to make peace an even more distant prospect than it was twenty years ago. To put it bluntly, it is important for people to have a stake in something other than wanting to kill each other," he had added.

Khan, the Peshawar-based businessman, sums up the sentiment when he says, "Governments and countries will continue to fight because of their vested interests. It is we, the businessmen, who suffer the wrath of siyasat (politics)."

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