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Pak India trade relations

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    The purpose of this study is to analyze the trade relationship between india and pakistan over the past ten years. And to determine the ways through which trade between these two countries could be increased in coming years. For examine the trade relation between both countries 10 yrs data from (2001- 2010) will be use for the analysis. Further we will analyze the impact of indo-pak trade on pakisstan’s GDP.

    Issues relating to India-Pakistan trade are of immense interest not only to both countries but to the whole South Asian region. While it is widely recognised that SAFTA’s success depends critically on promoting trade links between the two countries, the area has remained generally under-researched. This paper is a timely and useful contribution to developing a fuller perspective and better understanding of the key aspects of India-Pakistan trade. It comprehensively identifies core issues and bottlenecks, particularly at the firm-level, and also give recommendations.

    Trade between India and Pakistan is of immense importance to both countries. The interest in understanding the trade dynamics between the two countries is a recent phenomenon, particularly in India. This interest, in part, has arisen following the signing of the South Asian Free Trade Agreement in January 2004. There has also been a very visible initiative on the part of the private sector to work avidly towards furthering bilateral trade and creating awareness in each other’s countries, about the potential for mutual economic engagement.

    India and Pakistan are the two largest economies in South Asia. Together, they account for 90 percent of the gross domestic product (GDP) and 85 percent of the population of the region. They share a long contiguous border, have similar cultures, and, in the nottoo- distant past, enjoyed well-integrated transport and market links. If we look at neighbouring countries which are similar in size to India and Pakistan in terms of population or current GDP, such as Malaysia and China or Brazil and Argentina, bilateral trade accounts for 2.2 percent and 10.2 percent, respectively, of world trade in these countries. The case of Pakistan and India is quite different. In 2007/8, the share of total trade in goods between Pakistan and India was less than 0.5 percent of their combined trade with the rest of the world.

    India-Pakistan trade ties have three components, namely: “black” or illegal trade transacted through the land borders; circular or “informal” trade which is carried out through “third” countries and re-exported from there to Pakistan; finally, formal trade through imports/ exports of merchandise through all recognised seaports, airports, land customs stations and inland container depots. The illegal trade channels are smugglers who operate along the 675 km unfenced stretch of the Rajasthan sector along the contiguous Indo-Pakistan border; besides carriers, khepias who misuse personal baggage through the “green channel” facilities at international airports.

    Circular trade is conducted through agents who are stationed in free ports like Singapore or Dubai and estimated to be US $1 billion. Thus, the combined volumes of illegal and circular trade are much larger than formal levels of trade which in reality, therefore, amounts to “pseudo” trade between the two countries. India has no separate commerical office in Pakistan at this point in time—only a commercial wing attached to the high commission which is headed by an experienced counsellor assisted by a personal assistant, an assistant and a lower division clerk.

    The handful of staff for commerce shows that till now the two neigbours have only emphasised the political and military elements of their bilateral relationship at the cost of economic, social and cultural components for the past five decades. However, Indian trade bodies like the Federation of Indian Chambers and Commerce and Industry, Confederation of Indian Industry, Punjab Haryana Delhi Chambers of Commerce and Industry and Federation of Indian Exporters Organisation with their Pakistani counterparts namely the Lahore Chambers of Commerce and Industry and Karachi Chambers of Commerce and Industry have over the past couple of years exchanged visits from time to time. Pakistan prefers to first solve the Kashmir issue and only thereafter promote trade relations with India.

    However, Kashmir issue despite being unresolved has not stopped the considerable amount of illegal trade taking place between Indian and Pakistani business interest groups. Voluminous smuggling of commodities and merchandise between the two sides is an indication of the mutually profitable economic opportunities and reflects the suppressed desire of the business communities in either country to trade with each other. Indian ‘black’ or smuggled trade exports to Pakistan are industrial machinery, cement, tyres, chemicals and tea. Indian ‘black’ trade imports are edible oils, spices, dry fruits and pulses. There are three key reasons why trade between India and Pakistan needs to be enhanced First, viewed in a larger regional context, South Asia is the least integrated region and stronger economic relations between India and Pakistan is key element of regional integration in South Asia. Second, there are vast untapped trade and investment possibilities between the two countries which can be gainfully exploited with significant welfare gains for their populations. Third, as natural trading partners with a common border, trading with each other can be substantially higher as the potential is estimated to be 10 times the current level.

    Litrature Review

    Many past researches conducted and many economists explained Indo-Pak trade few of them are presented below:

    According to Muhammad Sohail, head of research at InvestCap Securities says, holds true for all commodities such as cement, paper, pharmaceuticals, auto, consumer items, electronics, synthetic fibre and possibly even the textiles.

    He reasons that in the manufacturing of all commodities, the rule of ‘economy of scale’ applies. Pakistan’s entire demand of cement at around 10 to 11 million tons, is currently met by over two dozen cement plants in the country. But just one or two giant cement plants in the neighbouring country could fulfil all that demand for they have such large installed production capacities. Cheaper labour is another plus for Indian industries.

    Mr. Zaheer Ahmed, secretary, Balochistan Chamber of Commerce and Industry, said the volume of dry fruits and herbs export to India stood around $400 million annually. After December 13, the trade between Balochistan and India
    had stopped and exporters of dry fruits and herbs were facing serious problems, Zaheer Ali said.

    “We want to trade with India,” said a leading bullion traders, adding trade and business with India can play vital role in providing necessary items on cheap rates because of less transport charges. He was of the view that restoring trade activities between India and Pakistan would be in favour of both the countries and would also help in boosting their economies.

    President of the Pakistan Institutes of Development Economics (PIDE) Dr. Kamal said that after a long time things looked moving in some clear direction to revive the country’s economy. The issue of 38 billion foreign debt was being addressed by seeking soft loans and by cutting unnecessary expenditure. He was of the view that economic activity will further pick up once relations with India were improved specially by removing current tension between the two countries.

    The secretary, Economic Affairs Division (EAD), Naveed Ahsan told Dawn that foreign aid was being offered to Pakistan on relatively low interest rate and in some cases high concessional soft loans had also been approved for Pakistan. “Then we have been extended cash grants by US and other countries, which is very good for our economy,” he said adding that budgetary support was being offered both by the bilateral and multilateral agencies to Pakistan.

    In 2006-07, Indian exports to Pakistan stood at US $ 1.35 billion, but comprised a mere 1.06% of India’s exports to the rest of the world. The next year was slightly better with Indian exports to Pakistan reaching 1.1%. Exports from India to Pakistan increased by 95.63 percent to US $ 1.3 billion in 2006-07 against US $ 690 million in the previous fiscal. Imports from Pakistan in the same year were worth US $ 320 million, an 80 per cent increase over the previous year figure of US $ 180 million. On the other hand, Indian imports from Pakistan were insignificant as compared to its imports from the rest of the world- just 0.17% or US $ 0.32 billion in
    2006-07, which further reduced to 0.12% in 2007-08. Compared to its imports from the rest of the world, India’s imports from Pakistan are only 4% (Khan 2009).

    Currently, the official trade is about US $ 2 billion per year. Pakistan accounts for less then 1 percent of India’s trade and India accounts for less than 5 percent of Pakistan’s trade. Estimates from gravity models suggest that trade between the two countries could be 5 to 10 times larger, and would also lead to an increase in their household incomes and GDPs in both countries. Pakistan’s Commerce Secretary, Suleman Ghani recently stated that trade between India and Pakistan could go up to US $ 10 billion annually in 5-6 years, if both countries would resume their dialogue (Khan 2009).

    A 2007 study by the Indian Council for Research on International Economic Relations (ICRIER), an economic think tank located in Delhi, indicates that there exists an Indian export potential of US $ 9.5 billion vis-à-vis Pakistan and a smaller import potential of US $ 2.2 billion. In other words, India and Pakistan are exploiting around 15% of each other’s export potential. Official trade between the two countries might be low but there is a covert market for unofficial trade. There is a lucrative underground market for Indian goods in Pakistan illustrating a demand for tea, sugar and other essential commodities, industrial machinery, cement, tyres and chemicals, which are smuggled into Pakistan. Similarly, edible oils, spices, dry fruits and pulses are smuggled into India from Pakistan.

    The trade route for this underground trade is the long border between the two countries and also through Iran and Afghanistan. There is another trade link, which is routed through third countries such as the United Arab Emirates, particularly Dubai. This circuitous route enriches middlemen and also drives prices upwards. This trade is estimated at some US $ 2 billion to US $ 3 billion per year, and this trade, if undertaken bilaterally, could be done at a much lower cost (Khan 2009). This unofficial trade, in other words, is about 10 times the size of the official trade, and is symptomatic of the trade potential and reflects the business class’s anxiety to trade with each other.

    Relations between India and Pakistan, the two largest states in the region, embody the permanent regional instability, and to which these countries have contributed in large measure. The two states have been locked in perpetual conflict – either overt or covert, since they gained independence in 1947, constituting the single largest constraint to regional economic integration. The early part of the 1980s was marked by dormant rather than active conflict. Having lost a decisive war to India in 1971 that resulted in the separation of Bangladesh from Pakistan, Pakistan took a more muted, possibly realistic stance on Kashmir, allowing the two countries to address economic and trade issues. Discussions, eventually, led to the creation of SAARC in 1985. However, the underlying intransigence, reflecting the historical, religious and military dynamics, led to a significant deterioration in relations by the late 1980s. The Kashmiri separatist movement gained momentum in Indian Kashmir in the late-1980s. Soon after, Pakistan started providing political and military support to the insurgents. Such support kept the two sides at loggerheads throughout the 1990s. India continuously blamed Pakistan for the unrest in Kashmir, accusing it of training and sending cadres to join the insurgency (Bose 2004).

    The security concerns between Pakistan and India peaked in 1998, when both sides tested nuclear weapons, introducing a highly unstable dimension to the security paradigm. In 1999, Pakistan and India were embroiled in an armed confrontation in the Kargil region of Kashmir. Although the conflict ended in a stalemate, Kargil marked the first conflict between two nuclear-armed neighbours and brought many to realize the potential for a nuclear catastrophe. Tensions reached a new high in 2002 when India blamed Pakistan for having engineered a terrorist attack on the Indian parliament. The two sides found themselves in the midst of a ten-month long stand-off, with a million troops amassed on the Indo-Pakistan border, making this the largest military mobilization in the region’s history. Given intense international pressure, a détente was finally reached before the conflict escalated (Synnott 1999; Khan 2003).

    Amidst continuing tensions, Pakistan and India have made several attempts to initiate a peace process geared towards settling their disputes. Major initiatives were undertaken preceding the Kargil War in 1999, when the two sides signed the “Lahore Declaration”, and in 2001 when the Pakistani President Parvez Musharraf made an unsuccessful attempt at initiating a peace bid (Bose 2001).


    The above chart shows the over all picture of Indo-Pak import export, Pakistan’s trade balance and its GDP. As we can see from FY00-04 Pakistans import to india was stagnant or we can say slight change in export but when we look toward import during these years coniniously rising due to which trade balance start loosing its stability. During the FY 05-07 Indo-Pak trade relation enhanced due to good forign policies of that time government and Pakistan exports to India start increasing. But in the last of 2007 Pakistan suffered from extreme bad political era and after that Mumabi attack in 2008 cause sharp decline in trading activities of both countries and it left bad impact on Pakistan’s GDP. Since 2008 till now relationship of both countries are not so good that is hitting their trade activities badly specially Pakistan.


    The above chart is showing the import and export of pakistan with india in last ten years. It shows the trend of both countries and their willingness to trade with each other. As we can see the import and export was continously rising in past years but the sudden decline in import and export shows the both countries are not willing to trade. From Indian perspective reason for decline in import export is terrorism activities increasing in Pakistan day by day and if we talk about Pakistan’s point of view we come to know they want to trade but high tension between both countries become
    hurdle in trading between both countries.


    The above chart is explaining the complex condition of trade balances due to increasing Gap between import and export the balance of trade of Pakistan become extreme negative in case of India and it also leave effects on over all balance of trade of the country. Due to this Gap Pakistan’s Balance of payment deficit is increasing and that cause many problems within the country and internationally too. As above shown in past 2 3 years balance of trade deficit decreased that is only due to less intraction between both countries.

    Reasons Behind Continous Decline in Trading Between Both Countries:

    While trade between the two countries has been at low levels, and the political situation between the two countries has not always been conducive to trade, it is interesting to analyze firm behavior and the trading environment under such circumstances. The questions posed are:

    • for how long have firms been trading with Pakistan?
    • how do firms enter trading and how do they locate their trading partner?
    • how are banking transactions dealt with?
    • what are the non-tariff barriers faced by traders?

    It has often been the view that firms trading with Pakistan, have been in the trade for several years. Ethnic links between trading partners in both countries facilitate trade, minimize risk and also serve as an important channel of information flows on quantities and commodities to be traded. The survey revealed interesting results. Contrary to our expectation, 35% of the firms had been trading with Pakistan for less than five years. Most of the new firms were located in Mumbai. Further, the survey revealed that 62% of the firms located their trading partner through friends and relatives and 35% of the firms located their trading partner through the internet. The government and the Chambers of Commerce did not play any significant role in helping traders identify a partner. In sum, entry of new firms into trading with Pakistan indicates anonymous entry into trading which is facilitated by modern modes such as the internet.

    Traders were also asked about the problems they faced in banking. Several firms pointed out that some Indian banks do not recognize L/Cs from all Pakistani banks. Also firms have pointed out that confirmation of L/Cs can take up to a month. Sometimes payments are delayed as the banks point out discrepancies in the L/Cs. Some firms also mentioned that they were trading without an L/C. Because of the problems related to acceptance and confirmation of L/Cs, sometimes trade transactions are carried out through a contract offered by the bank, which states the details of the trader and of the transaction. However, such contracts do not offer any guarantees but trade is carried out on the basis of trust. An interesting finding in the survey was that 50% of the firms were settling their payments through the Asian Clearing Union.53 Trading partners in both countries are required to have an ACU account with a bank in their respective countries. While payments through the ACU are ensured, there is often a delay. This is mainly because the ACU has weekly clearing tranches.

    Information was sought on the extent to which firms were facing non-tariff barriers in exporting to Pakistan. Barriers are often encountered in the application of measures related to standards necessary to protect human, animal or plant life or health, to protect environment and to ensure quality of goods. Firms were asked whether they faced any problems in meeting standards related to process, product specifications, labeling, testing and certification. The survey revealed that the exporting firms did not face any problems. Interestingly, this was so because the application of standards to Indian goods was not very rigid.

    Another barrier faced by the entire business community is related to visas. Visas can be obtained only for specific cities prior to entry into Pakistan (and vice-versa). Also, police reporting on arrival is a major irritant. Traders have also pointed out that the restriction on exit from the city of entry alone curbs the business plans and adds to cost and additional time. In Amritsar traders have pointed out that it is difficult for Pakistani traders to get visas for Amritsar, hence, they meet their trading partners in Delhi.


    On the basis of conducted study it can be concluded that the trade relationship between India and Pakistan have been struggled by several chronicled and political matters, and are characterised by the Kashmir dispute and the numerous military conflicts fought between the two nations.

    And we have seen that there have been a number of steps had been taken to improve the relationship. But these efforts have been intrupted by number of terrorist attacks. The 2001 Indian Parliament attack almost brought the two nations on the brink of a nuclear war. After that the 2007 Samjhauta Express bombings, plotted by an Indian Army officer which killed 68 civilians (most of whom were Pakistani), was also a crucial point in relations. Additionally, the 2008 Mumbai attacks carried out by Pakistani militants resulted in a severe blow to the ongoing India-Pakistan peace talks.

    Currently Pakistan is doing efforts to improve the trade relationship with India but it cannot be a successfull attempt untill or unless both countries governments make some flexible policies to imrove the trade relationships.


    On the basis of conducted study here are some useful suggestion for enhancing the trade between two countries:

    Information Exchange

    As new firms enter into Indo-Pak trading, trade needs to be facilitated through better information exchange on commodities and quantities to be traded. Information on each other’s policy environments should be
    disseminated to traders. Such information should be made available on Government websites.

    Transport Routes

    New rail and road links e.g. the Khokrapar-Munabao link and the Srinigar-Muzaffarabad link (for goods transportation) should be opened.

    Transport Bottlenecks

    The rail protocol should be amended such that restriction on wagon balancing is removed and wagon availability is improved. The shipping protocol should be amended so that third country and non-national flagships can ply on the Mumbai-Dubai sea route. This would help in lowering shipping costs.


    Currently, the payments system is formalized through the Asian Clearing Union which is inefficient as payments are often delayed. The two countries need to have an institutional arrangement so that the state, private and foreign banks can participate freely in banking transactions.

    Non-tariff Barriers

    India would need to address barriers related to security considerations so that transaction costs of importing from Pakistan are lowered.


    Visa restrictions should be eased by eliminating city specific visas prior to entry and police reporting on arrival. Communication

    Uninterrupted telecommunication links between the two countries would facilitate trade between the two countries.


    Governments of India and Pakistan should set up an institutional mechanism that would guarantee each other’s investments. The two countries should work together to enhance and facilitate trade and investment.





    1. Baroncelli, Eugenia. 2007. “The ‘Peace Dividend,’ SAFTA, and Pakistan-India Trade.” In The Challenges and Potential of Pakistan-India Trade, eds. Zareen F. Naqvi and Philip Schuler. Washington, DC: The World Bank, South Asia Region.
    2. Bose, T. K., 2001, Resumption of India-Pakistan Official Dialogue and the Prospects of Peace, 2nd International South Asia Forum Conference, 2001
    3. Murshed. S. M., and D. Mamoon. 2008. The Consequences of Not Loving Thy Neighbor as Thyself: Trade, Democracy and Military Expenditure Explanations
      Underlying India-Pakistan Rivalry. MPRA Paper 10429. Munich.
    4. Khan, S Mohsin. 2009. “ India Pakistan trade: A roadmap for enhancing economic relations,” Peterson Institute for International Economics, July.
    5. Khan R.S, Shaheen F.H, Yusuf. M, Aska T, “Sustainable Development Policy Institute, Islamabad, Pakistan.” January 2007.
    6. Taneja, N. 2006. India-Pakistan Trade. Working Paper 182. New Delhi: Indian Council for Research on International Economic Relations.

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