Lahore University of Management Sciences Lahore University of Management Sciences

LUMS Faculty Helps Develop Pak-India Trade Policy

March 27, 2012

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Do both countries stand to gain from greater trade liberalisation?

The faculty of the School of Humanities, Social Sciences and Law (MGSHSS) is constantly attracting domestic and international research projects and helping government and private organisations formulate and develop policies on pertinent issues. Currently the faculty is engaged in a LUMS Development Policy Research Centre (DPRC) and ASI (Adam Smith International) project, collaborating with Dr. Mohsin Khan (Senior Fellow at the Peterson Institute of International Economics), to facilitate the Pakistan Business Council (PBC) and government to develop evidence based policy notes on the decision of granting India the Most Favoured Nation (MFN) status and moving towards liberalised trade. The LUMS team working on this project comprises of Usman Khan (PI); Dr. Syed Turab Hussain (Co-PI); Abid Hussain, Nadia Mukhtar, Tareena Musaddiq and Abid Hussain Imam.

The project involves analysis of key issues and identification of major obstacles in this process such as Non-Tariff Barriers, probable winners and losers from trade with India and the legal/trade law aspects of trade liberalisation. The project also requires engagement and discussion on the subject with the major stakeholders i.e., business players, traders, associations and chambers of commerce and industry. As part of this stakeholder analysis, members of the LUMS team have had meetings with the Lahore Chamber, Faisalabad Chamber, Sialkot Chamber and more recently the Karachi and the Federal Chamber of Commerce and Industry.

This project has raised many interesting issues and questions, one of the most valid being why India and Pakistan trade so little with each other despite the existence of common history, language, culture and long borders. Theory would predict that trade between the two largest economies in South Asia would be at least five to ten times greater than its current level of USD 2 billion. While both sides are aware of the merits of trade, a variety of political and infrastructural (physical, legal, and regulatory) impediments have paralysed bilateral trade relations between the two neighbours. Facing diminishing marginal returns to traditionally growth-leading sectors, Pakistan is in serious need of larger and growing markets to export to in order to tap the potential of industrial hubs in the south and west (Baluchistan coastline and Karachi in Sindh), in the central belt (Multan, Lahore, Gujarat, Gujranwala and Sialkot in Punjab) and in the north (Peshawar in Khyber Pakhtunkhwa). Trade with India is not only advantageous in itself to Pakistan, but would also facilitate trade with China, Iran and Central Asia.

“If Pakistan wishes to achieve the government’s goal of doubling the standard of living of its citizens every ten years and providing jobs for the rapidly expanding labour force, it must sustain long-term annual growth rates of at least seven per cent. Pakistan’s economic development will not only depend on promoting equitable growth within all provinces and regions of the country, but also on normalising relations with India that will in turn pave the way for South Asian regional economic integration,” says Usman Khan.

After many false starts, it seems that the time may finally be right for India-Pakistan trade talks to begin in earnest. While territorial disputes have precluded dialogue on other matters, most importantly over Kashmir, it is time for distrust between the two countries to give way to meaningful discussions that are well-crafted to ensure that neither side feels disadvantaged.  Trade between the two countries seems a natural fit, with their shared borders and cultures. This has become even more consequential since the announcement of Pakistan to grant MFN to India and the approval of the negative list by Cabinet on February 29, 2012.

LUMS through DPRC has been working to facilitate Pakistan Business Council (PBC) and government to develop evidence based policy notes to facilitate transition to MFN. Input from DPRC, LUMS played a critical role in the Ministry of Finance and Ministry of Commerce jointly pushing and winning the bid on the negative list in the Cabinet. More specifically, the DPRC team is working closely with Pakistan Business Council and the relevant Chambers of Commerce and Industry across Pakistan to develop material and lobbying positions to support policy formulation and preparation for bilateral discussions by the Government of Pakistan (GoP). Moreover, supporting GoP in implementing Pakistan’s MFN decision, and particularly in finalising a negative list to govern imports from India. Thirdly, based on the outputs and evidence built, formulate a media strategy to highlight the potential benefits of normalised trade with India for different groups (e.g. consumers, companies engaged in production for domestic use and exports, traders and government).

In order to better comprehend the concerns of the stakeholders regarding the potential gains and threats from trade with India, Non-Tariff Barriers (NTBs) and Most Favored Nation status (MFN) for India, LUMS faculty is holding discussions with chambers of commerce and trade associations throughout the country. This exercise would enable them to suggest better policy responses for the Government of Pakistan on the issue. Following this exercise, two members of the team, Dr. Syed Turab Hussain, Chair of the Department of Economics at LUMS, and Usman Khan, faculty member, LUMS recently visited the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Head Office in Karachi to discuss recent developments in Indo-Pak trade. The team met with S.M. Muneer, President of the India Pakistan Chambers of Commerce and Industry (IPCCI), Khalid Tawab, Acting President-FPCCI, Abdul Shakoor Khatri and Syed Masood Alam Rizvi, Secretary General-FPCCI. The FPCCI recently hosted a delegation of over 90 leading Indian businessmen headed by Anand Sharma, the Indian Commerce Minister, in Karachi.

At the meeting, the FPCCI delegates and the LUMS team discussed the recent developments that have taken place between the business community and the Ministries of Commerce of both countries, including progress on visa policy, banking channels, reopening of the Sindh route and the negative list. Participants suggested that the Ministry of Commerce should proceed with caution in phasing out the negative list, and this should only be done after consultation with the business community to ensure that there was no negative fallout on local industry, which was already facing difficulties in the face of power cuts, rising costs, and the security situation in the country.

In the near future, the LUMS team will continue working in strong collaboration with the various business associations and chambers of the country to formulate and identify the best policies and practices to facilitate trade between India and Pakistan.