Pakistan is currently contemplating to grant non-discriminatory nation status (equivalent to MFN status) to India in its bilateral trade. It is hoped that reciprocal gestures by India will lead to the shortening of its SAFTA Sensitive List and give access to Pakistani agricultural and textile products, while simultaneously relaxing its non-tariff barriers that are applied more strictly on imports from Pakistan.
Presently, Pakistan maintains a Negative List with respect to imports from India. This list includes 1,209 tariff lines. Despite this restriction, Indian exports to Pakistan were $2.06 billion compared to only $542 million exported by Pakistan to India in FY13. Therefore, India enjoys a large trade surplus of $1.52 billion with respect to Pakistan.
Major Indian exports to Pakistan include cotton, oil cakes, vegetables, synthetic yarn, fabrics and chemicals. The share of agricultural exports to Pakistan was 55 percent. There have also been years like FY11 when Pakistan imported $337 million worth of sugar from India. On the other hand, Pakistans major exports to India in FY13 included minerals, dates, cement, chemicals and petroleum products. The share of agricultural items to India was only 21 percent.
There has been a dramatic reversal in the pattern of trade between India and Pakistan. At the time of partition, Pakistans exports to India primarily comprised of agricultural products like cotton and wheat. Now, India is the major exporter of Pakistan of agricultural commodities like cotton, vegetables, sugar, animal and poultry feed, etc.
What explains the fundamental change in relative comparative advantage in agriculture between the two countries? The view strongly put forward by the Farmers Associations of Pakistan is that this is primarily due to two factors.
First, India subsidizes its agriculture much more than Pakistan, thereby making it artificially competitive. Second, Pakistan provides little or no protection to its farmers though import tariffs.
Lets examine the validity of these two explanations below.
On the subsidy issue, the latest information, as of FY12, is that India subsidised fertiliser use (all types) to the tune of $15,171 million. Other subsidies went to irrigation ($6,303 million), electricity consumption by farmers ($7,326 million) and to other inputs like seed, tractors, crop insurance, etc ($8,832 million). The total agricultural subsidy bill for India in FY12 is estimated at $37,362 million, equivalent to 2.2 percent of the GDP.
The corresponding estimates for subsidies in Pakistan in FY12 are $356 million on fertiliser (net of the GST on the input). Other subsidies are for irrigation ($193 million), electricity and others ($342 million). The total subsidy aggregates to $897 million, which is 0.4 percent of the GDP. Therefore, controlling for the size of the economy, Indian subsidies to agriculture are over five times as much as of Pakistan. Consequently, yields are somewhat higher by 10 to 27 percent in many crops.
The second explanation is also valid. Pakistans imports of cotton, tomatoes and onions are all importable duty free from any source, including India. This is primarily due to strong trading and industrial lobbies in the country. The cost of production of different crops in India is about 10 to 15 percent lower on average than in Pakistan; mainly due to substantially larger subsidies.
Clearly, if a level playing field is to be provided to Pakistani farmers, then there is a strong case for introduction of a minimum MFN duty on agricultural products of 10 to 15 percent.
In addition, Pakistan must emphasise to India that the trade imbalance has been magnified by the fact that many of its potential exports to India, of agricultural products and textiles especially, are in Indias Sensitive List of SAFTA. Also, both countries must ensure that all non-tariff barriers are not applied in a discriminatory manner towards each other.