Saturday, December 3, 2011
What the most-favoured-nation decision means for India and Pakistan
Pakistan’s decision to grant India most favoured nation (MFN) trading status opens up many potential benefits for both countries; existing trade arrangements will be improved and new opportunities will emerge as bilateral trade is normalised.
At present, a great deal of trade occurs via Dubai, a situation which is inefficient and fraught with illegalities effectively functioning as behind-the-border barriers to trade. Indian products that arrive in Pakistan through this process include tyres, auto components, pharmaceuticals, engineering products, pans, chemicals and some textiles. These sectors will benefit immediately. On the Pakistani side, cement, fruit and vegetables, cotton, some specialised textiles, and sports items — also currently arriving via Dubai — will experience a rapid boost. And these are only the existing sectors.
Intra-industry trade should increase as the MFN agreement takes effect, and a large number of multinational corporations will likely set up their plants to serve both markets. The export of petroleum products from India to Pakistan, for example, is one aspect of trade relations which will benefit from the new arrangement. Lakshmi Mittal, an Indian steel tycoon, is currently constructing a new oil refinery in the border city of Bhatinda in association with Hindustan Petroleum Corporation. It will eventually have the capacity to supply large amounts of petroleum products to northern Pakistan, meaning such commodities would no longer have to make their way up from faraway Karachi. This development should see a huge expansion in the number of new opportunities for trade and commercial enterprise in the region.
Additionally, Bollywood films — a hugely popular source of entertainment in Pakistan — are currently all smuggled into the country, thus representing another potential area for development. Combined with Pakistan’s television industry, improvements in the bilateral trade arrangement will allow the media and entertainment sectors to undergo major expansion.
At present, there is some justified concern in Pakistan that its local industries will be adversely affected by a surge in exports from India. This is similar to the fears aired in India at the time of its FTA with ASEAN. Many Indians worried the nation’s rubber and edible-oil industries would perish. But in the case of MFN agreements, Pakistan can choose to formulate an exclusion list; it may prohibit imports of some particular products to begin with until the agreement’s impact becomes clear.
Significantly, the MFN agreement holds the potential for India and Pakistan to improve their connectivity with Central Asia. If Indian goods are permitted to transit through Pakistan, then the whole region will benefit. For example, the Indian state of Punjab is several thousand kilometres away from seaports, but farmers there and in the state of Haryana will be able to send goods to Central Asia if these are allowed through Pakistan, and the same for Indian textiles. The advent of MFN status will also help complete the implementation of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, as a new environment of trust and cooperation prevails. The Iran-Pakistan-India (IPI) pipeline will be more difficult due to long-standing issues in the negotiations with Iran and, to a lesser extent, the US.
Still, in order to build even greater momentum in the India-Pakistan trade relationship, India must liberalise its visa regime, especially for business people. This issue is even more urgent than the creation of better infrastructure. Pakistani business people should be able to obtain multiple-entry and free visas. At present, and this happens nowhere else in the world, Indians and Pakistanis only receive city-specific visas when travelling between the two countries. As a result, if a business person has a visa only for Delhi, it is not possible to travel to other commercial centres within India.
In regards to physical infrastructure, the Wagah border-control facilities must be greatly expanded. Specifically, sophisticated X-ray machines through which trucks can pass quickly should be a top priority, warehousing is needed at Attari, and several new train stations need to be built. On the Line of Control in Jammu and Kashmir, the government should also invest heavily in all forms of trade-enhancing infrastructure.
Pakistan’s granting of MFN status to India is an enormous opportunity. But some suggestions, such as the feasibility of Indian companies investing in or establishing steel plants and other large-scale projects in Pakistan, are premature. The biggest achievement likely to result from the two-way MFN is an increase in trust as trade begins to take off. After that, everything is possible.
Dr Rajiv Kumar is Secretary-General at the Federation of Indian Chambers of Commerce and Industry.This article originally appeared as an interview transcript in The Asian Age.