Trading with Pakistan

From our point of view, the neighbour’s continuing sponsorship of cross-border terrorism stands in the way of more commerce. (Reuters)

How should India respond to the flurry of signals from Pakistan regarding the resumption of bilateral trade which has been in deep freeze since 2019? Obviously, any response is likely only after a new government is in office in June. Businessmen have urged Prime Minister Shehbaz Sharif to initiate bilateral talks to promote commerce which would benefit its cash-strapped economy.

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Earlier this month, Maryam Sharif, chief minister of Punjab, while addressing 3,000 Sikh pilgrims at Kartarpur Sahib, made an even stronger pitch for the improvement of ties with India and quoted her father, Nawaz Sharif, who was three times PM, as saying don’t fight wars with neighbours, open the doors of friendship and open the doors of your hearts.

She also talked about plans to develop the area around Kartarpur Sahib and called for investments from Sikhs around the world. The Punjab CM’s views were positively received in New Delhi.

In March, foreign minister (now the deputy Prime Minister) Muhammad Ishaq Dar stated that Pakistan may “seriously examine” the question of resuming trade with India as businessmen felt that while imports were ongoing from India, this was via Dubai and Singapore, resulting in higher freight and transshipment costs.

The big question is whether the preconditions for normalising trade exist. From our point of view, the neighbour’s continuing sponsorship of cross-border terrorism stands in the way of more commerce.

Pakistan, for its part, considers the restoration of the pre-August 5, 2019, status of Jammu and Kashmir as the core issue bedevilling bilateral relations. Islamabad has for long denied most-favoured-nation status to India’s goods. MFN status ensures non-discriminatory trade between partner countries.

India, too, withdrew MFN status to Pakistan in February 2019 after the Pulwama terror attacks. Unless there is an improvement in this regard, the prospect for normalising commerce is only wishful thinking. India is also mindful of different voices within the Pakistan government on trading with India.

In March 2021, the Economic Coordination Committee announced that it would allow the private sector to import white cotton and sugar from India via the Wagah border. But this decision was swiftly reversed following severe criticism from the political opposition.

Dar’s remarks on the resumption of trade with India were later denied by the foreign office spokesperson. For such reasons, India has consistently taken the position that the onus is on Pakistan for trade to resume. Interestingly, however, bilateral frictions have not come in the way of some trade.

Despite Islamabad’s ban on commerce with India, it imports mineral oils and fuels, bituminous substances, sugar and sugar confectionery, organic chemicals, and pharmaceutical products.

There is also no reason why India cannot significantly step up its negligible imports from that country beyond ships, boats, and floating structures, and project goods for special uses. India’s trade with Pakistan almost doubled to $1.1 billion in FY24 (April-February) from $594.6 million a year earlier.

For perspective, our bilateral trade with Bangladesh is 10 times larger at $11.6 billion in FY24 (April-February). It is also a well-established fact that the scale of informal trade is several multiples larger than formal trade. Clearly, there are interdependencies between India and Pakistan that must be seized on the trade front.

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Otherwise there will be a huge loss in potential opportunities, contrary to economic theory which states that neighbours often tend to trade more with each other. The upshot is that India must respond to Pakistan’s overtures.