The most-favoured notion

Improved India-Pakistan trade will be mutually beneficial

The trade talks between the commerce secretaries of India and Pakistan have laid the foundation for expanded bilateral trade, and the legitimacy of existing unreported trade. The ringing endorsement for the talks in the media and trade circles of both countries clearly demonstrates the presence of constituencies in both countries that favour greater engagement in trade and commerce. This positive energy should not be allowed to dissipate as has happened so often in the past. The two biggest positives at the meeting were: Pakistan’s decision to finally seek to move forward on extending the standard “most-favoured nation” (MFN) status to India (this remains an irritant if not a substantial trade barrier, and has been blocked by political prejudice in Pakistan rather than economic reason); and an agreement to delink progress in trade and commerce from “pending bilateral” issues (a euphemism for Kashmir). More to the point, the MFN status to India will be granted in a time-bound manner, even though the exact date has not been specified. Moving to a negative list-based tariff line approach will mean the focus would be on items that cannot be traded. In cases where this model has been followed, the incentive has been to reduce the size of the negative list, bringing it closer to the free trade ideal.

Both sides also agreed to expand rail and road links to boost trade, evaluate the feasibility of a South Asia electricity grid (India has already entered into agreements with Bangladesh and Sri Lanka, over and above existing arrangements with Nepal and Bhutan), resume export of petroleum products to Pakistan and so on. Issues of financing, harmonising of regulatory arrangements, fuel linkages and pricing will have to be meticulously worked out before a feasible power-sharing arrangement is in place. The decision to allow the export of Bt cotton seeds to Pakistan reflects both magnanimity and confidence on India’s part. As is well known, the introduction of Bt cotton has hugely boosted productivity and output in India, resulting in India’s emergence as the world’s second-largest cotton producer, only marginally behind China. In allowing their export, India’s textile industry is signalling its coming of age, whereby it can withstand competition from its Pakistani counterpart, which is bound to benefit from lower input costs, thanks to the greater availability of domestic cotton.

A logical extension of expanded trade would be to initiate a similar relaxation of the investment regime in Pakistan. Indian trade associations have been vigorously campaigning for Indian industry to be allowed to invest freely in Pakistan, a view that is increasingly finding support in Pakistan. For reasons well known, foreign investors have not been too eager to invest in Pakistan in recent years. While some of those reasons would apply to Indian firms as well, geographical contiguity and cultural familiarity would compensate for some of those downsides. Indian firms would benefit from scale economies that accompany a larger market that would in time extend to Central Asia, while Pakistan would reciprocally benefit from the basket of benefits that foreign direct investment brings with it. South Asia is regrettably one of the world’s least integrated regions, despite the existence of a regional free trade agreement. Last week marked an important step forward towards greater economic re-integration in the sub-continent.