By: Dr Kamal Monnoo
January 04, 2012

The announcement by the Government of Pakistan to grant the Most Favoured Nation (MFN) status to India continues to draw mixed reaction from all quarters, industrialists, business community at large, agriculturists and security analysts. While, on the one hand, there is this lobby, which argues that by doing so not only do we get access to a robust market of more than a billion people, but, more importantly, the free trade dynamics will unleash a future of mutual dependence, in turn, minimising cross-border security concerns; on the other hand, is a large cross section of nervous manufacturers, struggling farmers and sceptical security personnel, who all remain equally fearful of India’s regional designs in particular, and its poor track record on bilateral trade in general.

Amidst these conflicting views, the average Pakistanis stand quite confused, whether their government is doing the right thing by granting the MFN status to its arch rival or else, given the growing global free trade dynamics, what the correct policy on this should really be. To answer this properly, perhaps a good approach would be to first analyse the existing realities in each of the areas of concern and then try to determine the effects once MFN becomes a reality post-February 2012.

i The total trade volume between Pakistan and India in 2009-10 was about $1.45 billion, out of which Pakistan’s exports to India accounted for only $275 million (19 percent of the total bilateral trade); whereas, the Indian exports to Pakistan stood at more than $1.20 billion (81percent). In the current year, the trade is said to have crossed the $2 billion mark, but the balance of trade has tilted further in favour of India. In addition, experts believe that Pakistan absorbs about $3 to 4 billion of Indian imports through unofficial channels, like smuggling and routing through countries like Dubai, Singapore, Thailand, etc. The pro-MFN lobby argues that not only can the Government of Pakistan earn crucial revenue by bringing the illegal trade into the official fold, but also reduce its import burden by sourcing cheaper Indian products closer to home and tapping into the huge trade potential of up to $42 billion (KCCI estimates) that exists between the two neighbouring countries. However, the reality is that although India granted the MFN status to Pakistan way back in 1996, the gesture did not help Pakistan in any way, because it was followed by the imposition of a number of non-tariff barriers by the Indian side, which ironically further crippled the access of the Pakistani products to the Indian market. Now with such a significant existing imbalance of trade between the two countries and this despite not having granted India the MFN status, no rocket science is required to gauge the gravity of the impact if the anticipated status is bestowed.

i The number of importable products, which India allows from Pakistan, consists of 850 items, while Pakistan already allows non-MFN India 1,945 items. According to a World Bank report, by allowing India the MFN status, Pakistan will be restricted to the following three options: Gradually expanding the positive list, replacing a positive list with a short negative list, or completely eliminating the positive list. However, from our perspective, this liberalisation of imports couldn’t have come at a worst possible time. As March 2012 nears so does the testing time when Pakistan’s repayments to the IMF start kicking in. The current account balance has become a serious concern in recent months, Foreign Direct Investment (FDI) reduced to a mere $359 million (six months ending November 2011) from $7 billion in 2006-07 and exports, which only a few months back were nearly 75 percent of imports have been reduced to virtually half that of the total import bill. Under the circumstances, the first measures the policymakers would be contemplating is to review and somehow restrict the import regime. So the question then that one may dare ask here is: Wouldn’t at this stage granting the MFN status to India be in effect counterproductive to our needs and that should not the move for the time being be postponed?

i The Pakistan Pharmaceutical Manufacturers Association (PPMA) has expressed serious concern on granting the MFN to India. According to them, the move will significantly affect the home industry, possibly forcing it to close down altogether. It strongly feels that all medicines should be on the negative list, as the industry forms the second line of defence in case of war, natural disasters, or epidemics – the PPMA meets around 90 percent of the country’s demand of finished medicine. According to them, the Indians already have very solid non-tariff barriers in place to protect their home industry and the size of the Indian pharmaceutical market is 10 times larger than the Pakistani market, which has allowed the Indians by now to become global players, and therefore the Pakistani pharmaceutical industry will stand no chance, unless it can either compete on a level playing field or get similar State support and protection.

i If one makes a comparative analysis of the agriculture sectors of both the countries, one can assess the huge difference between both sides due to the asymmetry of subsidies extended to the farmers and the unequal availability of water resources. Further, Pakistan is far behind India when it comes to supporting its farmers by way of comparative prices of fertilisers, availability of modern machinery, energy resources for electric tube wells and the sheer allocation of budgetary funds for the agriculture sector. The existing scarcity of water and an alarming pace at which its availability continues to shrink further compounds the disadvantage for the Pakistani farmer. Regrettably, India continues to play games on this vital issue of concern to Pakistan by blaming environmental developments for the reduction of water flows in the Indus Basin, but we all know that the main reason for this are new water diversions created by India through construction of dams on the rivers in Pakistan’s share.

i Finally, as a consequence of the MFN, aside from the concerns on an absence of or a rather compromised Pakistan’s internal defence mechanism in the spheres of health, seed development, yields and export competitiveness, there prevails a sense of scepticism over the Indian double game. We hear about the underlying potential of the flow of goods across the borders, but not a word is said about the necessity of creating long-term important linkages, such as technology transfer, joint resource management mechanism, cross-border investments, financial connectivity, regional anti-trust treaties, equal opportunity amongst SAARC nations, and devising joint regional legislations on rules of doing business. Also, on the one side India talks about cementing mutual ties through the instrument of trade, while on the other their political moves tend to exacerbate the longstanding security issues between the two countries. Bilateral issues continue to be viewed by them under a unilateral light and recently, the Indo-Afghan Agreement, which covers a wide ambit from humanitarian assistance to education to capacity development to the development of natural resources to security, can easily be interpreted to portray an India that still remains more focused on isolating or encircling Pakistan than to become its vibrant economic partner. As always, we see an India eager to gain direct access to Central Asia and Europe, but not willing to offer any such reciprocal accessibility to Pakistan on its eastern and northern sides.

There is no denying the fact that bilateral trade on equal terms will surely be very beneficial to both Pakistan and India. The dynamics of smooth bilateral trade cannot only play a pivotal role in strengthening the economies of both the countries, but also unleash a soft process, which over time can be the key to resolving longstanding sticky issues between the two sides. However, Pakistan needs to be careful and do its homework properly before granting such a status. In doing so, it needs to grapple with the elements of reciprocity and fair play to provide a level playing field to its own people. Only a carefully thought-out process of negotiations and a comprehensive package of agreements addressing the concerns on both sides, can be a win-win for both countries and, in all likelihood, the window between now and February 2012 presents too short a time to do all that is required!

The writer is an entrepreneur and economic analyst.