India-Pakistan: Trade Ties

Spearhead Analysis – 01.04.2019

By Shirin Naseer
Senior Research Analyst, Spearhead Research

For large and expanding economies of the world trade and good trade relations can be a crucial source of development and progress. With India and Pakistan, both nations’ economies offer the ideal conditions to make significant gains from trade. According to the World Bank’s “Glass Half Full: The Promise of Regional Trade in South Asia”, trade potential between Pakistan and India is estimated at $37 billion. Moreover India and Pakistan are one of the central members of the South Asian Association for Regional Cooperation (SAARC)—yet, during the past seven decades both India and Pakistan have maintained fairly restrictive trade regimes. In fact, relative to their individual global trade volumes, recorded trade between the two neighbors continues to remain insignificant.

After the Pulwama attack and India’s decision to retract Pakistan’s non-discriminatory ‘Most Favored Nation’ (MFN) status, Pakistan’s economy has also been hit by an increase of 200 percent in custom and tariff duties. Furthermore, India has cancelled export orders from Pakistan and banned the export of certain products to Pakistan. There are fears that this may exacerbate the state of Pakistan’s economy, and perhaps also any chances of improved trade relations and economic integration between the two neighbors.

That being said, it is important to note trade between the two countries has historically been negligible, owing to a history of bitter and volatile political ties that have influenced mutual trade relations. The South Asian Free Trade Agreement in 2006 laid the foundation towards removing some barriers to trade between the two countries, more specifically the positive and negative list for products. This again did not lead to any substantial changes in the level of total trade volume.

Bilateral formal trade between the two neighbors typically hovers around the USD 2 billion mark annually, out of which Pakistan’s exports to India make up about USD 400 to 500 million. In the 2018 fiscal year, formal trade between India and Pakistan was recorded at $2.4 billion; with a 6 percent growth (compared to the 2016-17 fiscal year) after a fall of 12.8 percent in the previous fiscal year. Meanwhile, Pakistani imports remained extremely low: 0.10 percent of India’s total imports of $488.56 million. These trends were related to the 2016 Uri attack and subsequent developments in the volatile India-Pakistan relationship.

Perhaps then it can be said with some certainty that the imposition of a custom duty and revoking of Pakistan’s MFN status will have limited impact on Pakistan’s trade balance, owing to already limited trade between the two neighbors.    

Majority trade taking place between the two countries is ‘informal or proxy trade’, which is primarily trade through third countries. India does not have any restrictions on imports coming from or exports going to Pakistan after signing the South Asian Free Trade Area (SAFTA) agreement. There are however some non-tariff barriers in place to restrict the access of imports coming in freely from Pakistan to the Indian market. It is also important to consider, even though informal trade has been going on for a long time, the gains from this particular channel of trade do not add to the officially recorded trade figures.

Economist Dr Ashfaq Hassan Khan said, “We are not dependent on India as far as trade is concerned because there are no normal trade ties between the two counties.”

Informal channels generally operate through porous borders and through the misuse of green channel facilities at international airports and railway stations alike. Vegetable smuggling from India for instance reportedly resumed as tensions de-escalated after the release of captured Indian Air Force (IAF) pilot by Pakistan. The general secretary of the Traders Association at Badami Bagh Fruit and Vegetable Market, Chaudhry Khalid Mehmood, was quoted saying the fruits and vegetables imported from IOK are smuggled to markets in Punjab after meeting the local demands. “Despite informing the Customs Chief Collector and several authorities in writing, the smuggling remains unhindered,” he revealed.

According to reports, trade between India and Pakistan also takes place through Afghanistan; goods are exported from India to Afghanistan, eventually to be smuggled through the Afghanistan-Pakistan border into Peshawar, Pakistan.

Third country trade is typically carried out through agents operating in free ports like those of Dubai, Singapore and some Central Asian States. Trade through third countries may also be preferred since for example trade carried out through Dubai between India and Pakistan would be less open to investigation and suspicion compared to consignments that move directly between the two countries. According to a study conducted in 2016, informal trade thrives between the two countries. It was recorded to stand at an astounding estimate of $4.71 billion; India’s exports to Pakistan were estimated at $3.99 billion and imports from Pakistan at $0.72 billion. Moreover, the Sustainable Policy and Development Institute (SPDI) in Pakistan estimated informal trade at $545 million (2005) between the two countries. It is important to note however that the actual value of the volume of informal trade still cannot be known and can in all likelihood even be much larger than the estimated sums, especially considering the channel of operation of such trade can be extensive and may include several other countries as well.

As for the impact on recorded trade between the two countries, imposing a custom duty and withdrawing the MFN status may not make any substantial changes. Perhaps then these steps can be seen as more of a way then to pressure Pakistan and make political gains before the upcoming Indian general elections. In any case, ‘trust’ is a basic starting point towards building any trading relationship-unfortunately it is significantly lacking in the contentious India-Pakistan relationship.