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India, Pakistan can step up direct trade

The Hindu (India)
Syed Munir Khasru
September 5, 2023

The cessation of India-Pakistan direct trade for a significant period is a result of enduring political tensions and conflicts between the two. In August 2019, Pakistan halted trade with India in response to constitutional amendments made in the Jammu and Kashmir region. India slapped 200 per cent tariff on Pakistani imports earlier that year, when Pakistan’s Most Favoured Nation (MFN) designation was removed in the aftermath of the Pulwama terrorist incident. In 2020-21, trade with Pakistan was worth $329.26 million.

Despite sporadic attempts to enhance trade ties, such as the creation of the Wagah-Attari border crossing and the implementation of trade pacts like the South Asian Free Trade Area (SAFTA), advancements have been constrained due to ongoing political discord.

Following the suspension of trade in 2019, a few relatively less freight sensitive products — such as dry dates — that were formerly traded directly began coming via indirect channels to enter each other’s markets. Previously, Indian merchandise such as fabric, skincare products, and jewellery freely made their way into Pakistani markets, gaining popularity among local consumers. Tensions between the neighbours disrupted cross-border trade, leading to a void that was filled by Indian goods entering through Afghanistan, China and Dubai.

In the past, Indian fabric would enter Pakistan via Chakoti and Rawalkot, while the Samjhauta Express and the Dosti Bus facilitated transportation of goods from Delhi to Lahore. Shortage of raw material for the textile industry due to low domestic cotton production compelled Pakistan to lift the ban on cotton imports from India, as importing cotton and sugar from countries like the US and Brazil is expensive and time-consuming. A bundle of cloth imported from India via train costs ₹150-200 per kg. When the train service was discontinued, importing through Dubai cost ₹2,500-3,000 per kg.

During the first quarter of fiscal 2022, India’s exports to Pakistan — primarily driven by sugar, organic compounds and pharmaceutical products — rose significantly; 72 per cent over the previous year, to touch $205 million. Although Pakistan had initially halted all imports from India, it later permitted import of pharmaceuticals and drugs following the outbreak of the pandemic in 2020.

Dubai has served as an alternative route for trade between India and Pakistan. Dubai has enabled trade between the two countries by acting as a neutral ground for the respective enterprises to conduct business without being hampered by political tensions and border crossings. Though traders typically assess the cost, ease of doing business, and market access when conducting business, it is the convenience that draws Indian and Pakistani traders to trade through Dubai.

Items demanded by India and Pakistan from each other are traded indirectly, if logistically feasible. Jewellery, machinery, medications and chemicals are examples of low-volume, high-value commodities. Businesses can afford to take a longer route, particularly via Dubai, because the increased cost are passed directly to consumers. However, direct routes are unlikely to be substituted by circuitous or informal routes for time and cost-sensitive items. For example, traders are reluctant to grapple with price hikes or delivery delays for perishables like fruits and vegetables as well as freight-sensitive commodities like cement, gypsum, and glass.

Direct trade could have brought additional benefits like reducing transportation costs, expediting delivery schedules, facilitating interaction among businesses, and establishing direct trade channels that could unlock potential economic cooperation and foster beneficial trade relationship.

The Pakistan government’s decision to allow vegetable imports from India via Wagah was triggered by the destruction of onion and tomato harvests by torrential rains last year. India’s trade with Pakistan increased dramatically in the June 2022 quarter, thanks to Pakistan’s willingness to restore commerce, though mostly of necessities, with India. Sugar and medicines topped Indian exports to Pakistan in the three months ending June 30, 2022. Some experts link the surge in direct commerce also to Pakistan’s new leadership and the country’s mounting economic woes, compounded by high global commodity prices.

What lies ahead?
Recent developments offer an opportune moment for India to consider reducing its import duties, currently at 200 per cent, on products that can benefit its industries. Steps by Pakistan, though driven by necessity, have sparked hope for additional measures to improve bilateral relations, including the resumption of sports-related visas by India after a three-year hiatus, the scheduling of a long-delayed meeting between the Indus Water Commissioners, and establishment of peace at the Line of Control (LoC) following over 5,000 ceasefire violations.

If India-Pakistan trade resumes through the land crossing at Attari (India)-Wagah (Pakistan), it can be a win-win situation. The Pakistani consumer would profit from lower pricing for vital items, particularly agricultural commodities. Wheat flour prices in Pakistan have risen dramatically in recent months due to shortage caused by a variety of events, including the Russia-Ukraine war and floods. North Indian farmers, particularly those from Punjab, can sell their agricultural products, mainly wheat, at a better price in Pakistan.

Indirect trade routes like Dubai entail additional intermediaries, increasing transaction costs. Direct trade routes would help cut these costs, making trade efficient and profitable. Through direct economic engagements, both countries can promote people-to-people exchanges, cultural interaction, and business collaborations, paving the way for improved bilateral ties.

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