Cheap Indian imports push Pakistan to open up to neighbour

After four and a half years of suspending trade with India, Pakistan has indicated it wants to “seriously examine” the possibility of resuming economic ties with the arch-rival that has nine times its GDP size.

In a press conference last week, Pakistan Foreign Minister Ishaq Dar referred to the “appeals and demands” by the business community that, he said, was importing Indian goods via Dubai or Singapore at higher freight costs.

“Regional trade is the answer to so many problems. I believe that India-Pakistan trade is principally good for both countries,” says Zubair Motiwala, CEO of the Trade Development Authority of Pakistan, a federal government body set up to help increase exports.

Home to over two billion people, South Asia remains the least integrated economic region in the world because of unresolved political issues, particularly the disputed territory of Kashmir that both India and Pakistan claim in full but administer in part.

“We can reduce our inventory if we import raw materials from India. We can also export so many goods to India, which is a market of 1.3 billion people. In return, India will get a market of 230 million people,” Motiwala tells TRT World.

Trade between the two nuclear-armed nations took a hit in August 2019 when Pakistan severed all economic ties with India in response to New Delhi’s “illegal” actions regarding the constitutional status of Kashmir, the northernmost part of the subcontinent.

India repealed Article 370 of its constitution under which Jammu and Kashmir maintained its separate constitution along with a flag and a two-house legislature with the authority to enact its own laws.

However, bilateral trade ties were already at a historic low even before the change of Kashmir’s constitutional status by India in August 2019. New Delhi had already imposed a 200 percent customs duty on “all goods” that either originated in, or were exported from, Pakistan in February 2019.

India’s punitive decision was in response to the Pulwama attack that killed 38 security personnel. India accused Pakistan of orchestrating the attack, but Pakistan denied its involvement.

What followed the 2019 events was probably the second longest spell of little or no formal trade between the two countries since their independence in 1947. The two countries have fought four wars in the last 76 years, but the only period in which bilateral trade remained completely suspended was from 1965 and 1974.

“While it is desirable to restart trade, it takes two to tango. India has not shown any interest. Neither is it likely until after the general elections in India,” says Ehsan Malik, CEO of the Pakistan Business Council, representative body of Pakistan’s largest private-sector businesses, including multinationals.

“The major obstacles to Pakistan’s exports to India are both non-tariff barriers (NTBs) that apply to imports from all sources as well as the specific aversion of RSS and other politically motivated groups to goods from Pakistan,” he tells TRT World while referring to the right-wing Hindu nationalist group opposed to normalising ties with Muslim-majority Pakistan.

Trade potential: 10 times over

Some bilateral trade is still taking place in selected categories. India exported goods worth $629.4 million to Pakistan in 2022 while Pakistan exported merchandise worth only $121,330 in the same year.

These numbers don’t fully capture the extent of informal trade that takes place via a third party based in countries like the United Arab Emirates. Trading houses in Gulf nations facilitate the buyer-seller relationships by extending guarantees for transactions between Indian and Pakistani businesses. As such, official data doesn’t show the actual exporter of such products.

In the full year before the formal suspension of ties, India exported $2.35 billion worth of goods to Pakistan, which constituted about 0.7 percent of its total exports that year.

Pakistan’s annual exports to India totalled $383 million prior to the 2019 suspension of bilateral trade, less than two percent of its total exports that year.

As for the size of informal bilateral trade, varying estimates suggest it used to be at least twice the value of formal trade before 2019. One of the main reasons for businesses to import or export via a third country is that a majority of the products that India informally exports to Pakistan happen to be on the latter’s list of items that can’t legally be imported from the neigbouring country.

According to Dr. Aadil Nakhoda, assistant professor at Karachi’s Institute of Business Administration, the volume of informal trade is expected to be “more than twice” the formal trade currently taking place between the two countries.

“People say that there are Indian products available in the market in some way or the other… I think (informal trade) could be a lot more than $500 million (a year) given that we imported about $2 billion worth of goods when trade was normal with India,” he tells TRT World.

For the most part of their existence, the two countries maintained a “restrictive trade” regime that relied on a “positive list” carrying the names of items that each country allowed its businesses to import from across the border.

The situation changed in 2012 when the two countries switched from positive to negative lists, which meant the import of all goods were allowed except 1,209 items that were specifically mentioned in that document.

Apart from a negative list, both New Delhi and Islamabad maintained their respective “sensitive” lists, which carried the names of items that were allowed for import but at higher tariff rates.

In Pakistan’s case, for example, the sensitive list protected domestic producers in sectors like auto, iron and steel, paper and board, plastic, and textiles, as these covered almost two-thirds of the 936 listed items.

Another reason for higher informal trade is that many businesses in each country would rather pay higher freight costs than deal with non-tariff barriers like inadequate payment mechanisms as domestic banks lack the resolve to facilitate cross-border transactions.

Experts say the bilateral trade potential could be as high as 10 times larger than the pre-2019 level.

Indian exports to Pakistan are predominantly in sugar, organic chemicals and pharmaceutical products, which are mostly used as raw materials by Pakistani producers.

Dr. Nakhoda says Pakistan may jack up the imports of refined petroleum products from India if trade ties are restored going forward. Data shows mineral fuels, oils and distilled products now constitute the single largest category of Indian exports.

Similarly, the number of smartphones exported from India every year has significantly increased, which may help Pakistan, he says. India is now the world’s largest producer of mobile phones after China, as it sold sets worth $11 billion overseas last fiscal year.

While Pakistan has a “very limited basket” of exportable goods, Dr. Nakhoda says Pakistan can greatly benefit from affordable raw materials sourced from the Indian market.

“We need cheaper Indian imports that can help our balance-of-payments crisis,” he says.