Recently, cabinet has decided in principle to grant Most Favoured Nation (MFN) status to India that will boost trade ties between the two estranged neighbours. After months of confidence-building measures and peace overtures, the two neighbours are inching towards normalisation of relations. In the 28th September ministerial meeting in New Delhi, the two states committed to increase bilateral trade to $6 billion by 2015, compared to only $1.7 billion in 2011.
Sayed Ali, Economist of Standard Chartered Bank of Pakistan (SCBP) has observed this in his research report titled ‘Pakistan – a win win situation’. According to report, Pakistan agreed to grant MFN status to India, and India agreed not to oppose EU’s three-year tariff waiver on select commodities from Pakistan, mainly textiles from areas devastated by flash floods in 2010. Intraregional trade in South Asia is lowest of all regions in the world, accounting for only 1.5 per cent of GDP compared to 7 per cent for East Asia and Latin America.
The benefits of more trade are significant in today’s global economy, which is characterised by weak growth in US and EU, both major export markets for India and Pakistan. Normalisation of ties between the neighbours will also improve investment climate in the region. From India’s perspective, developing export markets with Pakistan and the energy-rich Central Asian states will counter weaker demand from the West, report said, adding, it will also strengthen India’s role as an influential regional power, with an eye towards getting a permanent seat on the UN Security Council.
India’s fast-growing economy and expanding middle-income consumer market offers huge potential for Pakistani exports. In our view, higher trade could boost the economy by 0.4 per cent of GDP annually over the medium term on higher exports and higher transit trade revenue. India granted MFN status to Pakistan in 1996, but Pakistan did not reciprocate because of opposition from vested power groups and the tense bilateral relations that followed nuclear tests in both states in 1998.
While there is a growing realisation on both sides that peace in the region is critical for sustaining growth, there remains significant opposition to granting MFN to India. Hence, the government has signalled that it will move forward in a structured manner. The first step will be to remove the ‘positive list’ – a list of 1,946 eight-digit Harmonised System (HS) code items that India is allowed to export to Pakistan. This will be replaced by a ‘negative list’ – a much smaller list of banned items.
This effectively gives Indian exports the same status as MFN, but allows Pakistan to continue to protect select industries and sectors. This move will simplify the current trading regime and make it more transparent for the benefit of traders and industrialists in both countries. India has indicated that it will offer preferential access to textiles and other goods from across the border if Pakistan grants MFN status and initiates steps to boost imports from India.
Proposals under consideration include allowing the entry of textiles and other goods from Pakistan at concessional or zero duty to boost trade relations. However, non-tariff barriers remain the biggest hurdle for Pakistani exports. Huge potential for increased bilateral trade: In the 28 September ministerial meeting the two states committed to increasing bilateral trade to USD 6 billion by 2015, compared to only USD 1.7bn in 2011.
This would assume annual growth of 60 per cent year by year in trade between the two neighbours. According to the 2007 World Bank report titled ‘The Challenges and Potential of Pakistan-India Trade’, trade flows between the two countries are 400 per cent below potential owing to trade barriers and hostile relations. This is based on a standard gravity model used to estimate trade flows based on the size of economies and inversely related to the geographical distance between them.
The report states that bilateral trade could increase by 80 per cent if the two sides entered into a regional trade agreement similar to the South Asian Free Trade Agreement (SAFTA) signed by the two states in 2006. SAFTA entails granting MFN status to India and removing all non-tariff barriers to trade. According to our research, the Indian economy is in a super–cycle, with the economy set to expand to USD 30.3trn in 2030 from USD 1.5trn in 2010, with annual average growth of 9.3 per cent. Per capita incomes are set to rise to over $20,406 in 2030 from $1,264 in 2010.
This presents a huge market for Pakistani exports. If trade normalises and Pakistan is able to maintain its share of total Indian imports to 0.2 per cent, exports to India would rise to $4.4 trillion by 2030 from $ 287 million in 2011. This would provide a significant boost of nearly 0.4 per cent of GDP annually to Pakistan over the medium term. If Pakistan increases its share in India’s total imports to 0.4 per cent, it would boost the economy by 0.8 per cent of GDP annually over the medium term.
MFN: A win-win move for Pakistan
