Pakistan’s decision to grant India the Most Favoured Nation (MFN) status may have rekindled hopes of a significant increase in bilateral trade between the two neighbouring countries. However, it will be useful to remember that according MFN status to a trading partner alone is not always a sure-fire way of boosting bilateral trade. India had given MFN status to Pakistan in 1996, which effectively meant that imports from Pakistan from that year began enjoying the same terms as those applicable to imports from its other trading partners. In spite of that, Pakistan’s exports to India have made no major gains in the last 14 years. Last year, exports from Pakistan to India, estimated at $332 million, accounted for less than two per cent of its total merchandise exports. Worse, India’s imports from its western neighbour as a percentage of its total imports have declined in this period. Expectations of Indo-Pakistan bilateral trade going up from the current $2.6 billion to $6 billion in the next three years, therefore, are not rooted in reality. Nor do they recognise the many hurdles that Indian and Pakistani business entities will still have to overcome before planning to expand their trade ties.
What Pakistan’s decision to grant India the MFN status will achieve is an expansion of the list of items that it can import from Indian companies. Islamabad at present allows import of only 1,933 items, included in a “positive” list, from India, leaving out a little more than 12,000 items that remain on its negative list. The expectation now is that Pakistan would prune the negative list, allowing India to export a host of new items like textiles, engineering goods, chemicals, raw materials and spices. Indirect exports of Indian goods to Pakistan, routed mostly through Dubai and estimated at over $3 billion, will also decline. Enhanced and direct bilateral trade between the two countries will bring in its wake other economic benefits. According to Pakistan-based trade analysts, the country can save up to $2 billion annually after granting India the MFN status since its import costs would come down. Pakistan’s apparel and cement industries will also benefit from increased bilateral trade as a result of the MFN regime.
Such benefits, however, will accrue only when the governments of India and Pakistan lose no time in initiating the follow-up measures including steps to ease visa restrictions for travel by Indian and Pakistani business leaders. The current restrictions are not conducive to enhancing trade relations between the two countries, but given the security-related concerns, it is also doubtful if either government would be able to take expeditious steps. One way of ensuring the success of the new MFN regime would be to consider removing barriers to foreign investment of Indian companies in Pakistan and vice versa. India’s trade with Pakistan is balanced heavily in its favour and with the new MFN facility, the trade balance is likely to get worse for Pakistan as more Indian companies gain higher access to the Pakistani market. More investments by Indian companies in Pakistan would help reduce exports from India and hopefully counter the likely criticism of the current imbalances in bilateral trade. It, therefore, makes sense to follow up the MFN initiative with liberalisation in the foreign investment regime to facilitate greater two-way investment by both Pakistan and India.