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Much more than just trade

November 04, 2011

The possibilities and opportunities to move forward in South Asia are immense and with extraordinary possibilities, but so are the constraints and hurdles, and the many burdens of history. —File Photo

DESPITE the confusion created by different actors, over whether India has been granted the MFN status by Pakistan, ‘actually’ or simply ‘in principle’, the general response and reaction has been extremely favourable and positive. This sentiment, with so much ambiguity surrounding the decision, itself says a great deal. Those who understand the complexities of the India-Pakistan relationship, and the political economy of Pakistan, know that this is much more than just about trade.

On the trade front, the impact will favour Pakistan much more than India. Research has shown that if trade between the two countries grows, since Pakistan’s is the much smaller economy, the gains which accrue to Pakistan will be far greater. There are numerous aspects to the MFN decision which will have a profound impact on relations between India and Pakistan. In the most obvious of outcomes, it is expected that Pakistan will now treat India like all the other 100 countries with which Pakistan trades. This small move might look a little mundane and matter-of-fact, but given the history of India-Pakistan relations, is a huge departure from the recent past. Trade between India and Pakistan, of around $2.5 billion at the moment, is expected to double over the next three years on account of this change. While not such a big deal for India, this will mean a huge change for Pakistan.

At the moment, and this is bound to be the case for some time to come, India exports far more to Pakistan than it imports from Pakistan. Pakistani importers are dependent on cheap raw materials from India, especially plastics and chemicals, and many find their way into Pakistani products. More trade will allow Pakistani producers even more inputs at lower prices, allowing them to produce cheaper goods. Some trade switching from other countries from which Pakistan imports, is bound to take place in favour of India. Once trade relations are even partially normalised, trade between India and Pakistan will grow a great deal. Not many people realise this, but India is already Pakistan’s sixth largest non-oil trading partner, even larger than Japan or Canada.

One can expect that the Pakistani consumer (on account of lower prices and more choices), Pakistani government (import taxes and the fall in smuggling) and Pakistani producers (lower input costs), will all benefit on account of increased trade. Perhaps Pakistani businessmen will also make a dent in the lucrative Indian market with middle class consumers twice the size of Pakistan’s total population. Pakistan will clearly benefit from the gains which accrue on account of increased trade with India.

Pakistan and India, for reasons that are too well known, have not had proper relations – of trade or of any other kind – for almost half a century, since 1965. For this reason, the MFN announcement by Pakistan, needs to be seen in a different light by India, and not simply related to trade or economic opportunities, by all accounts, quite insignificant for the large Indian economy. The fact that such normalisation of relationships can lead to a peace dividend, is probably the most significant externality of the announcement.

There is little ambiguity, in Pakistan or abroad, that Pakistan’s military determines key decisions related to a host of issues, especially India and Kashmir. Government ministers and retired generals have all been emphasising the fact, that Pakistan’s military is ‘on board’ and the Minister of Information in a press conference stated, that all stakeholders, including military and defence institutions, had been ‘taken into confidence’ about the MFN decision. If this is indeed the case which it is likely to be, it is not just consumers and traders who will benefit from the MFN status, but both civilian governments and the many hundreds of millions who live in South Asia.

The possibilities and opportunities to move forward in South Asia are immense and with extraordinary possibilities, but so are the constraints and hurdles, and the many burdens of history. Visa restrictions and non-tariff-barriers are mere bureaucratic hurdles which both countries will have to get around, but the fear and apprehension, as is the mistrust on India’s side, is also justified. India-Pakistan trade and normalisation was at its peak in 2008, but then the Mumbai attacks were orchestrated by Pakistani groups with institutional backing.

The prospects for trade and for peace in South Asia, rest critically on how Pakistan’s democratic civilian government can seize the moment away from the praetorian state in Pakistan. For trade and peace to prosper in South Asia, the Indian government needs to recognise this, and distinguish between the two and continue to dialogue with the former.