Pakistan-India Trade:

Arvind Virmani
would have to go out of production. He came every year for five years,
and then suddenly stopped coming. So I started wondering whether his
business had disappeared. Well, some years later I read in the newspapers
that dead-burned magnesia is still being produced in India and the business
continues to thrive.
The moral of that story is that it turns out that all those who thought
that a reduction in QRs and tariffs would wipe out Indian industry were
wrong. People like me who were pushing for liberalization inside the
government were right. We expected industry to adapt, adjust, and survive—and
it did, contrary to the fears of 99 percent of the elites, academics,
and economists and other people in India who thought Indian
industry would die. Eventually Indian industry realized that it could not
only compete with the best but also thrive. So that is one of the main
reasons why Indian industry today is not apprehensive about the prospect
of expanding trade with Pakistan.
The second reason for the attitude of Indian industry is that in the
states bordering Pakistan—for example, Punjab—there is a kind of
historical memory (at least among older people) about the 1950s and
early 1960s. Before 1965 and the outbreak of war between India and
Pakistan that year, there was normal cross-border trade and economic
relations for mutual benefit. There was no border before 1947, and
so the issue of local—what one might call local and provincial comparative
advantage—was experienced by people on both sides of the
current border. Those of us who think of national issues often tend to
forget that local economies also exist. There is local interaction, and
there are still people in the Indian Punjab at least and hopefully in
Pakistani Punjab who remember these earlier interactions. One way
to put this more starkly is that even though Punjab is the agricultural
heartland of India, the state also is home to small industry, which has
been competing with large industry for decades. So again, there is this
feeling that yes, there will be adjustments, but if you are not complacent,
you can find your comparative advantage.
So that is my perception of why Indian business, by and large, is not
apprehensive about trade and greater economic interaction with Pakistan.
The second point I want to touch on briefly relates to the global
experience. There is now convincing research from Latin America and
other places about the effect of growth poles that shows that a high
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