Chinmay Deshmukh
Recognising the Urgency of maintaining the Stability
The Kashmir conflict between India and Pakistan has undoubtedly developed into one of the most intractable and complicated disputes in the world so far, resulting in four wars, continuing skirmishes and ceasefire violations, consuming countless lives and tremendous amount of resources from both sides. Incidents such as Mumbai attacks, mutilation and beheading of an Indian soldier have further strained the relations between the two countries in the recent past. Moreover, withdrawal of the US troops from Afghanistan, brings along the possibility of undermining the already fragile stability of the region. Various approaches were adopted in order to improve the relations from cricket diplomacy to Samjhauta Express, but none of them have succeeded in finding a breakthrough, calling for fresh ideas to maintain peace and harmony in the region.
Against this background, if one examines the possible solutions and strategies to tackle the problems of such vast magnitude, one solution stands out above the rest: An India-Pakistan FTA. Such a Free Trade Agreement between India and Pakistan would lead to their enhanced economic interdependence, and therefore, can act as an effective mechanism for mitigating tension and promoting economic and trade activity between the two countries, leading to stability in the South Asian region.
What can an FTA do?
A free-trade agreement is an instrument facilitating liberalisation of trade and investment between the parties. It is a pact between two or more countries to eliminate tariff and non-tariff barriers affecting trade in goods and services among them. Due to the size of both countries economies, their geographical proximity, cultural links, and the complementarity of their trading baskets, one would think prudent leaders and bureaucrats from both India and Pakistan would push for an FTA negotiation, keeping aside their political interests. However, as it stands today, India and Pakistan have no formal trade agreement.
Under the current trading regime, India, unlike Pakistan, has granted Most Favoured Nation (MFN) Status to Pakistan, whereas Pakistan has adopted a negative list approach since 2012, which prohibits around 500 listed items from importation, replacing the earlier positive list approach which allowed for the import of 2000 items from India.
Total trade between the two countries was barely US$ 2 billion in the financial year 2012-13, against the estimated potential of $15-20 billion. Exports to Pakistan constituted only 0.56 percent of Indias total exports, while imports accounted for 0.11 percent. The reason for such abysmally low quantum of bilateral trade could be attributed to substantial tariff and non-tariff barriers between the countries. A substantial proportion of Indias export potential 58 percent is in products that are on Pakistans negative list for India or on Pakistans sensitive list applicable to India under the South Asian Free Trade Area (SAFTA) agreement, prohibiting imports of such items. Similarly, 32 percent of Indias import potential from Pakistan is in items on the sensitive list for Pakistan applicable under SAFTA (ICRIER: 2013). In the light of these restrictive trade practices, at present, most of the trade between the businessmen of the two countries occurs via Dubai.
If the India-Pakistan FTA with the grant of Most Favoured Nation-status to India along with abolition of a negative trade list regime, and other tariff and non-tariff barriers – is materialised, businessmen from India and Pakistan will get access to huge collective market of over 1.4 billion consumers. Abolition of negative trade list regime would certainly realize the untapped trade potential between the two countries, leading to increased economic activity, and consequently, more employment opportunities and greater incentive for both countries in maintaining a good and stable political relationship. The FTA will boost Pakistans export in textiles, jewellery, precious metals, and base metals, comprising 45 percent of their export potential, while India can expand its exports to Pakistan in three categories machinery, mechanical appliances and electrical equipment, which account for 54 percent of Indias export potential. (ICRIER: 2013).
Treading a new path: An FTA long overdue
A Free Trade Agreement wont solve all the problems in the region, but it will certainly be an important catalysts in reducing the tensions and fostering growth in two countries. Just as the strong economic relation between China and Japan helped stabilising their fluctuating political relations, this Free Trade Agreement would unleash massive trade opportunities for both India and Pakistan, leading to increased investment opportunities and tourism for both countries, low prices and more options for consumers, and more revenue for businesses. Such improvement in the business environment will contribute to the economic development of not only India and Pakistan but of the whole South Asian region. This would also play a critical role in the Asian resurgence, would increase their relative political and economic power, placing them in a more favourable position against the collective bargaining power of the U.S. and the European Union. But there is much work to be done, and several physical and regulatory impediments need to be addressed, before this goal becomes a reality.
Chinmay Deshmukh is a fourth year student at the National Law University, Jodhpur. He is pursuing B.P.Sc. (Hons.) LL.B. (International Trade and Investment Law Hons.) in the University. He is an associate editor at NLUJ Law Review. After completing the LL.B., he plans to pursue Masters of Public Policy. His interests includes International Relations, International Trade Law, Public Policy and Economics. He can be reached at chinmaydeshmukh1@gmail.com.