Pakistan-India Trade:

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Pakistan’s Trade with India: Thinking Strategically KeY issues To Be addressed Post-Liberalization Trade and Investment Volumes Gravity models predict that with the resumption of normal trade, the 2009 Pakistan-India trade volume of $2 billion could be 5 to 10 times larger. 4 However, gravity models do not adequately capture the complex relationship between Pakistan and India that would come into play with the resumption of normal trade. On the one hand, there is historical and cultural similarity and, on the other, there are grievances and grudges. Recently, the Pakistan Business Council’s (PBC) regional trade group (comprised of businessmen, academics, and civil servants) conducted a survey of perceptions within the group. The range of perceived trade flows following liberalization is reported in Table 3. 5 The longer term perceived impact (after about 10 years of liberalization) is significant. However, in order for trade flows to realize their full potential, investment flows must also be on the normalization agenda. An influx of investment will be good news for Pakistan, as it currently needs capital inflows to Table 3: Pakistan Business Council (regional Trade Group Members) Perceptions on likely Trade and investment flows following india-Pakistan liberalization Trade Volume Short-term $1–5 billion Medium-term $10–20 billion Long-term $15–50 billion | 41 | investment flows into Pakistan By Pakistanis By indians Substantial increase Sustained increase of more than $1 billion a year
Ijaz Nabi move to a higher growth trajectory. India, being right next door and with a large pool of savings, would be a promising source of investment. Threefourths of the PBC panelists agreed that investment flows by both Indians and Pakistanis, following trade liberalization, will increase in volume. Hence it is not only the Pakistani economy that would benefit from bilateral investment flows; India also stands to gain. As compared to their home country, Indian investors will find in Pakistan an environment much more conducive to economic activity (see Table 2). The assumption, of course, is that law and order in Pakistan will have improved significantly. Joint ventures of Pakistani and Indian investors can be visualized in the old trading centers of Peshawar, Lahore, and Sindh, taking advantage of plentiful Pakistani labor, lower transportation costs (from Peshawar to the Central Asian markets, and from Karachi and Gwadar to the Gulf and Middle East markets), and Pakistan’s extensive infrastructure along the North-South Corridor (linking Peshawar, Lahore, and Karachi). Tapping into India’s Knowledge Economy India is now reaping the benefit of shrewd investment in higher technical education and is positioning itself as a knowledge economy. This is best evidenced in its phenomenal success in the IT sector. India now figure 5: international Competitiveness of Manufactures exports High Technology Exports as % of Manufactured Exports 40 35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 | 42 | 2002 2003 2004 2005 2006 India Pakistan China Indonesia Korea, Rep. Thailand
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Non-Trade-Related Stakes of the Pak
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