India–Pakistan Trade and Regionalism in South Asia

AuthorIsha Dayal,Samridhi Bimal,Nisha Taneja
Publication Date01 Oct 2013
India–Pakistan Trade and
Regionalism in South Asia
Nisha Taneja1
Isha Dayal2
Samridhi Bimal2
In 2006, India, along with Bangladesh, Bhutan, Maldives, Nepal, Pakistan and
Sri Lanka, signed the South Asian Free Trade Agreement (SAFTA) under the
aegis of the South Asian Association for Regional Cooperation or SAARC
(Afghanistan was included as a member in 2007). The members of SAFTA include
five least developed countries (LDCs)—Afghanistan, Bangladesh, Bhutan, the
Maldives and Nepal, and three non-least developed countries (NLDCs)—India,
Pakistan and Sri Lanka.
India is the largest economy in South Asian region accounting for more than
801 per cent of South Asia’s GDP. More than 90 per cent of the regional trade of
Bangladesh, Nepal and Sri Lanka as well as a major part of their global trade is
with India. In 2013–2014, Bangladesh was India’s largest trading partner account-
ing for 35 per cent of India’s total trade with all South Asian countries, followed
by Sri Lanka at 26 per cent, Nepal at 21 per cent and Pakistan at 13 per cent.2
Trade amongst the remaining South Asian countries is much smaller than India’s
trade with any of its South Asian partners. Owing to its central geographical loca-
tion in the region, India is also at the helm of all regional trade facilitation and
transit issues. The pace and direction of economic integration in South Asia,
therefore, is largely a function of India’s bilateral engagements with other econo-
mies of the region.
As a result of its economic prominence in the region, trade balance continues
to lie in India’s favour, with India’s exports to South Asian neighbours being
much larger than imports. However, among all major SAARC partners, Pakistan
International Studies
50(4) 318–342
2017 Jawaharlal Nehru University
SAGE Publications
DOI: 10.1177/0020881717713597
1 Professor, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, India.
2 Research Associate, Indian Council for Research on International Economic Relations (ICRIER),
New Delhi, India.
Corresponding author:
Nisha Taneja, Professor, Indian Council for Research on International Economic Relations (ICRIER),
4th oor, Core 6A, India Habitat Centre Lodhi Road, New Delhi 110003, India.
Taneja et al. 319
has the most favourable trade balance as a proportion of its total trade (trade bal-
ance ratio) with India, at 683 per cent as compared to Bangladesh that has the least
favourable trade balance at 85 per cent.
In recent years, India has taken on the asymmetric responsibility, both bilat-
erally and under the ambit of SAFTA to facilitate trade in the region. India
strengthened its bilateral links with its neighbours by signing free trade agree-
ments (FTAs) with Nepal, Bhutan and Sri Lanka and a preferential trade agree-
ment with Afghanistan. A number of initiatives have been taken to liberalize the
tariff regimes applicable to imports from South Asia, as well as to address non-
tariff barriers (NTBs) and transport impediments. However, intra-SAARC trade
continues to be very low (at about 5 per cent of the region’s total trade), and
India’s imports from South Asia less than 1 per cent of its total imports from rest
of the world.
In this article, we examine the role that India–Pakistan relations can play in
shaping the course of regional integration in South Asia, especially in the areas
tariff liberalization, NTBs, transport, connectivity and transit.
The strained relations between India and Pakistan have played a major role in
preventing fruitful implementation of SAFTA and other regional trade facilitation
measures in the region. Despite SAFTA’s ratification in 2006, a key constraint that
remained in the process of regional integration was that Pakistan did not grant
most favoured nation (MFN) status to India. Like all other regional agreements
under the WTO, SAFTA also requires members to offer MFN treatment to each
other; however, even after SAFTA was ratified, Pakistan did not accord MFN
status to India and continued trading on the positive list allowing limited number
of items to be imported. The positive list was even more restrictive for road-based
trade, as Pakistan allowed only 13 items on the positive list to be imported from
India by road.
However, in a major breakthrough Pakistan decided to grant MFN status to
India following the fifth round of talks between the commerce secretaries of both
countries held in April 2011. A blue print was laid down for normalizing trade
between the two countries; the agenda of which was very detailed covering inter
alia the MFN issue, addressing NTBs, improving border infrastructure, customs
liaison, harmonization of customs procedures, trade in electricity and petroleum
products, cooperation in information technology, visas, bilateral investments and
opening of bank branches. However, the two negotiating points revolved around
Pakistan granting MFN status to India and the latter addressing NTBs faced by
Pakistan in accessing India’s market. The Joint Statement issued in November
2011 laid down the sequencing and timelines for full phasing in of MFN. In the
first stage, Pakistan would graduate from the positive list to a small negative list
specifying banned rather than permitted items. In the second stage, the negative
list would be phased out. This would also apply to the road route on which the
number of permitted items had increased over the years but was still only a frac-
tion of the items on the positive list. Adhering to the Joint Statement, Pakistan
completed the first phase in March 2012 and made a transition from the positive
list approach to a small negative list of 1,209 items which are not permitted
from India. However, it continued to restrict road-based trade by allowing only

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