Economic Trends and Forces between Pakistan and India

27 April, 2012

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Trade relations today are burdened by history

Partition in 1947: Pakistan: Militarised, weak political structure, political centre in Western Pakistan, 55% of population in East Pakistan India: Some devolution of power prior to 1947, nascent political elite About 12.5 million people displaced, unclear borders, division along predominantly religious lines Kashmir status unclear, leading to war in 1947 After partition: Pakistan invades Kashmir in 1965 Bangladesh (initially East-Pakistan), becomes independent in 1971, resulting in Indo-Pakistani war Nuclear weapons: India (1974), Pakistan (1998) First bus service between Delhi and Lahore (1996) Agra Summit (2001) Cease fire in Kashmir since 2005
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India and Pakistan made real progress under Prime Minister Manmohan Singh. Under Vajpayee, we were supposed to sign just a joint statement at Agra. But under Manmohan Singh, we made considerable progress on Sir Creek, Siachen and Kashmir. Perwez Musharraf

India and Pakistan, so far, yet so close

Indian Politics
Often referred to as the worlds largest democracy (364 parties) Secular state

Pakistani Politics
Prone to coups dtat Islam is the state religion President: Ali Asif Zardari (since 2008)

Numerous layers of national, regional and local government National politics dominated by Indian National Congress Increased regionalism and tensions

Currently a Parliamentary system Highly independent and influential military National politics dominated by Pakistan Peoples Party

Corruption: Transparency International rank (out of 180): India (95), Pakistan (134)
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Regional geopolitical complexity undermines bilateral trade potential

Unstable domestic politics + Complicated international politics 1. Border disputes

Kashmir; Tension in the relationship between India and China. Access to water Nuclear threat is a deterrent for both nations; Nuclear capability has led to a deterioration of the relationship with US and other countries. Mumbai in 2008; Proximity to Afghanistan.

2. Nuclear proliferation

3. Terrorism
Source: The Economist Fantasy Frontiers (08/02/2012)

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The trade relations between India and Pakistan are Limited

Indias trade (import & export) with its three neighbors over last 5 years: (US$bn)
5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 2007 2008 Pakistan 2009 Bangladesh 2010 Sri lanka 2011

India

Pakistan

GDP 2.6 GDP growth Total trade

1,843 7.8% 621

204 2.4% 51

India's relative trade importance to the neighbors: Pakistan Trade % 5%

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Gravity Model (WTO):

Bangladesh 9%

Sri Lanka 19%

US$50bn

Source: Department of Commerce, India

Bilateral trade is undermined by 3 main obstacles:

Trade Barriers:
India
High tariff (20%) Non-tariff barriers

Pakistan
Positive list (1,945)

Illegal trade

US$ 3bn

Cycle trading through third countries

India Pakistan

Singapore/Dubai

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However, trade is a strategic imperative for both countries

India does NOT have to trade with Pakistan due to minimal trade volumes. However, there are other benefits for both:

Benefits for India

Benefits for Pakistan

An economically more stable Pakistan Employment and higher incomes Decreased terrorist violence Less extremist domestic pressures Access to more imported Indian goods Trade (e.g. BJPs popularity) and commerce have been theprices at lower most effective way of establishing peace (Keynes) Soft power and co-dependence Increased investment in the country, through economic influence resulting in lower support from external players (e.g. USA, IMF) Minimized influence by China: String of Pearls, could take advantage of an alienated Pakistan Ultimately, will give citizens of both countries a greater stake in each others success.

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Efforts have been taken to liberalize the trade between the two countries :

Pakistan agrees to grant the Most Favored Nation (MFN) status to India
November, 2011 March, 2012

State Leaders meet after 7 years

Early April, 2012

Late April 2012

Pakistan announces to phase out restrictions on imports by end of 2012 to normalize trade

India decides to allow foreign direct investment from Pakistan

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Trade can still happen in spite of political tensions: A Case of Mainland China and Taiwan

Rank 1 2 3 4 5

Country USA Japan Hong Kong South Korea Taiwan

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2010 Volume (US$ bn) 385.3 297.8 230.6 207.2 145.4

YOY change (%) 29.2 30.2 31.8 32.6 36.9

Global Forces should not be under-estimated

Role of the USA: USA supporter of Pakistan USA major trade partner with India Facilitate Trade Opportunities: Qualifying Industrial Zone example (Israel-Jordan)

Role of China: China 2nd largest trade partner of Pakistan with 9bn trade volume in 2010 China largest trade partner of India despite long standing border dispute China has a strategic interest to keep Pakistan and India apart
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Issues Still To Be Resolved For Future Trade Ties

Kashmir Issue Access to Water Mindset Change

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Backup Slide: India and Pakistan, country overview

India Population (m) Poverty (%) (UNDP) 1205.1 37.2% Pakistan 190.2 50% Pakistan

Population below poverty line 25% Remittance from overseas (USD$/year) GDP ($bn PPP) Labour force Adult Literacy rate Budget surplus (% GDP) Public Debt (% GDP) Inflation Military expenditure 55bn (2010) 4,463 487.6 61% -5% 51.6% 6.8% 2.5%

190.2 m
488 58m

22.3% 12bn (2012)

49.9% -6.6% 60.1% 13.7% 3%

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Sources
Unquenchable Thirst South Asias Water, The Economist, Nov 19, 2011 Lights Off Special report on Pakistan, The Economist, Feb 11, 2012 The Challenges and Potential of Pakistan-India Trade, Zareen Fatima Naqvi and Philip Schuler, The World Bank Prospects and Challenges for Increasing Pakistan-India Trade, Ishrat Husain, The Atlantic Council State of Vulnerability Foreign Policy, The Economist, Feb 11, 2012 Your Friendly Big Brother The Economist, Feb 18, 2012 India and Pakistan a Working Lunch The Economist, April 14, 2012 Fantasy Frontiers The Economist, Feb 8, 2012 To the Bitter End The Economist, Oct 11, 2011 Pakistans Next Batch of Intrigues The Economist, Nov 17, 2011 Indo-Pakistan Business Relations: Trends and Issues Business and Management Review, Vol 13 pp 32-36 May, 2011 Building Peace through Trade The Future of Indo-Pak Relations Consumer Unity and Trust Society, 2011 zers