Foreign Minister Ishaq Dar's recent statement regarding consultations with stakeholders on the potential resumption of trade relations with India signifies a substantial step towards rejuvenating the economy and promoting peace in the region.
For many years, it has been apparent that major political parties on both sides have pushed for normalizing trade relations. However, some key stakeholders held reservations. Nevertheless, the National Security Policy (NSP) introduced in 2021 signaled Pakistan's readiness to move forward, prioritizing geoeconomics over geopolitics.
Recognizing the significance of timing, it is imperative to make informed decisions for the future. Pakistan's economy has faced challenges, with a 0.6% contraction in FY23 and a projected 2% growth in FY24 against a population growth of 2.6%.
Poverty remains a significant concern, impacting approximately 40% of the population, exacerbated by high inflation and sluggish growth.
Establishing a bilateral trading relationship could boost Pakistan’s exports by 80pc or $25bn
Secondly, the shortest path to alleviate inflation pressure, which has persistently remained high since direct trade ceased, is through reopening trade channels. To control inflation, the State Bank must maintain a high interest rate. Currently at 22%, this has led to the private sector halting borrowing, severely impacting industrial and GDP growth.
Furthermore, resuming bilateral trade will save valuable foreign exchange, currently spent rerouting goods through third countries, notably the United Arab Emirates (UAE). With much of the trade flowing through UAE, Pakistan could save over $1 billion annually by eliminating freight and other expenses associated with third-party routes.
The halt in bilateral trade has disproportionately affected small and medium-sized enterprises (SMEs). For example, date farmers in Khairpur are compelled to sell to middlemen who then export via Dubai, significantly reducing their profits. Normalizing trade with India would provide significant benefits to economically disadvantaged segments of society, making regional trade more accessible than distant export markets.
Moreover, Pakistan is missing out on opportunities from new industries relocating from China to diversify supply chains. Investors seek locations to source raw materials and export to regional markets quickly. With India being a major source of raw materials and a significant export market, not engaging in trade makes Pakistani goods less competitive.
Additionally, Pakistan is missing opportunities to grow its trade share through global value chains, which constitute 70% of world trade but only 5% of Pakistan's.
While some argue against normalizing trade until the Kashmir issue is resolved, many countries with border disputes continue trading, such as China and India, China and Taiwan, and Israel and Arab countries. Despite Pakistan's border dispute with India since independence, trade remained open as the founding fathers did not resort to trade closures.
Opposition to opening trade often stems from fears that India's export potential could worsen Pakistan's trade deficit. However, importing from India could replace costlier imports from other sources, thus reducing the overall trade deficit.
For instance, India's trade deficit with China is approximately $100 billion, and Bangladesh's deficit with India is around $14 billion. Despite these imbalances, both countries continue trading due to the cost benefits.
Pakistan can take the first step by lifting the ban on imports from India, contingent on India reciprocating by removing extra duties on Pakistani imports. The Agreement on South Asian Free Trade Area framework already exists, simplifying negotiations.
The upcoming elections in India may complicate matters temporarily, but the government can prepare by building consensus and outlining a roadmap for trade resumption.
The author, a senior fellow at the Pakistan Institute of Development Economics and former ambassador to the World Trade Organisation and Food and Agriculture Organisation, stresses the economic benefits and strategic importance of resuming trade ties with India.
Published in CNN PAKISTAN, The Business and Finance Weekly, April 22nd, 2024
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