According to a State Bank study, there is large scope for trade and investment between Pakistan and India. This is the gist of a 76-page SBP report titled 'Implications of Liberalising Trade and Investment with India'.
The potential sectors for mutual co-operation identified by SBP include agricultural products, tires, auto spare parts, minerals, chemicals, pharmaceuticals, leather, textiles, telecommunications, gas pipeline and electricity generation using coal and wind energy in Sindh.
With regard to trade potential, the report says, "compared to the actual trade worth $476 million in FY04, the potential of trade (exports plus imports) between the two countries as estimated by the SBP amounts to $5.2 billion".
The report notes that informal trade between Pakistan and India is estimated at $1.5 to $2 billion, which is being carried out through exchange of goods at the Indo-Pakistan border, the misuse of personal baggage scheme through 'green channel' facilities and Afghanistan. Trade through third countries or 'circular trade' is mainly conducted through agents operating in free ports like Dubai or Singapore and the Central Asian Republics (CAR).
It further says that of the total value of Pakistan's exports in FY04, 32 percent represented items that are also imported by India from the rest of the world, constituting one-third of total Indian imports. About 1,181 items, worth $3.9 billion, were common between Pakistan's exports and India's imports during FY04, covering 45 percent of the total items exported by Pakistan.
About 70.3 percent of the common items exported from Pakistan have unit values less or equal to the Indian import unit values. There is a large scope for export of these items simply by producing the quality required in India.
However, the bank expressed concern over liberalisation of trade of investment between the two countries, as it says that some studies conducted so far have identified three potential areas of Pakistan's economy, ie agriculture, textiles and engineering sector that would be affected following its trade liberalisation with India.
The benefits of trade with India must be weighed against the costs inherent in certain apprehensions about competition from India, which has been feared in the past for a number of reasons, the report adds.
It says that despite liberalisation, India's trade regime still remains more restricted than Pakistan in terms of both tariff and non-tariff barriers. Prohibitive non-tariff barriers in India have made Pakistan's exports to India unattractive.
The report notes that a large part of the resistance in Pakistan comes from the country's business community who feel that the higher cost of production in a relatively smaller economy in comparison with India would make them vulnerable to tough competition. Though low transport cost from India would provide the Pakistani consumers cheaper products, it is also likely to reduce the natural protection of Pakistan's domestic producers.
Relaxing trade links with India should have to be in stages, only opening up sectors first where Pakistani businesses and industries do not feel threatened on a large scale. There is a general apprehension in the business community in Pakistan that the opening up of trade with India would adversely affect the industries, particularly the textiles, automobile and some other industries, in which Pakistan is not so competitive in terms of prices.
It further says though Islamabad is interested to boost bilateral trade with New Delhi, a huge tariff and non-tariff barrier from Indian side not only would squeeze volumes of bilateral trade but would also hinder Pakistan's granting 'Most Favoured Nation' (MFN) status to India.
The relatively restrictive trade regulations of both countries have squeezed the volume of trade between India and Pakistan. India's trade restrictiveness measures 8 (on a scale from 1 to 10), while Pakistan's index stands at 6. Comparatively high trade restrictiveness is partly a regional feature, with the average of South Asian countries at 5.9, compared to an average of all Asian countries of 4.4.
India's tariff peaks are concentrated in the agricultural, automobile, textiles and garments sectors. Its average tariff stands higher at 22.2 percent against 14.9 percent for Pakistan and a developing country median of 11.2 percent.
Pointing out the non-tariff barriers, the Bank says that in India, significant non-tariff barriers include requirement of political or security clearance, sampling or customs inspection, requirement of technical or standard certification, labelling and marking rules, packaging rules specification, etc.
Government-mandated import monopolies in the areas of agricultural and petroleum products are also in place. In addition, India maintains tariff rate quotas in the agricultural sector, and uses technical barriers to trade in the form of technical standards and regulations, administered by the Bureau of Indian Standards.
India's share in Pakistan's total exports remained less than one percent, whereas in total imports, it fluctuated within a narrow range of 1.36 to 2.66 percent during the last five years (FY01-05). Pakistan's share in India's total exports averaged 0.45 percent whereas in imports it constituted only 0.11 percent during FY 1999-00 to FY04.