Economic Dimension of Indo-Pak Relations


The antagonistic relationship between India and Pakistan has resulted in the lack of constructive economic engagement. Dr Mohammad Samir Hussain insists that both India and Pakistan must reduce the trust deficit that continues to serve as a key roadblock to constructive bilateral engagement and must devise ways to cooperate on areas of mutual interests

India and Pakistan are the two largest economies in South Asia which account for 90 percent of the gross domestic product (GDP) and 85 percent of the population of the region. Despite this fact, Indo-Pak economic and trade relations have remained very limited so far with neither country featuring in the category of top trading partners of each other. The abysmally low level of bilateral trade can be attributed to border disputes and political tensions, but also to inward-looking, import-substitution growth strategies.1 The antagonistic relationship between India and Pakistan has resulted in lack of constructive economic engagement. Despite sharing the 11th longest international border in the world, bilateral trade between India and Pakistan remained as low as $2.6 billion in 2013. The longest international border of 8893 km is shared by the US and Canada, and bilateral trade between them is $632 billion (refer Table 1).

Economic Ties: The Story So Far

Two-way merchandise trade between India and Pakistan witnessed a leap from a paltry $250.86 million in 2000-01 to $2666.13 million in 2010-11 (refer Table 2).

The main items of export from India to Pakistan are cotton, organic chemicals, food products including prepared animal fodder, vegetables, plastic articles, man-made filament, coffee, tea and spices, dyes, oil seeds etc. The main items of import by India from Pakistan include copper and copper articles, fruits and nuts, cotton, salt, sulphur and earths and stones, organic chemicals, mineral fuels, rubber, plastic products, wool etc. The share of top five export items from India to Pakistan accounted for 70 percent of the total exports (as shown in Table 3), while the share of top five import items from Pakistan to India accounted for 65 percent of the total exports (as shown in Table 4).

India’s share of Pakistan’s total export has been less than one percent during the last one decade, since the turn of 21st century. While Pakistan’s share of India’s total export has also remained the same, except during the financial years 2006-07 and 2007-08 when it was a little over one percent. This negligible trade volume, especially when the combined population of India and Pakistan exceeds that of China, is a result of the Pakistan government’s insistence that expanded economic and trade ties would be conditional upon the resolution of the Kashmir issue. There is no denying that closer cooperation would be mutually beneficial to both countries.

According to a study carried out by Peterson Institute for International Economics (PIIE) using the gravity model, the potential of formal trade between India and Pakistan is roughly 20 times greater than the recorded trade. This means that at 2008 trade levels, total trade (exports plus imports) between India and Pakistan could expand from its current level of a little over $2 billion to as much $42 billion, if ‘normal’ relations estimated by the PIIE gravity model for trading partners were to hold for both countries. However, achieving a formidable trade volume would require increased political understanding and a need for both nations to discuss trade barriers, such as high tariff and non-tariff barriers, inadequate infrastructure and transportation facilities. Political understanding and the removal of trade barriers create tremendous scope for economic and trade progress.2

Facilitating Close Economic Engagement

In an era of reforms-led economic liberalisation, India and Pakistan still use tariff and non-tariff barriers to protect their domestic producers. The other barriers include poor trade logistics and inadequate infrastructure. Besides, there persists a problem of restrictive visa regime.3 Scholars and industry experts from both sides have put forth several recommendations to ease trade. These include easing travel/visa restrictions and a regulatory framework to facilitate investments across both countries. In addition, there is also a need for both countries to open more points of trade through the land route.4 Pakistan, in particular, would benefit significantly from close economic engagement as India offers a lucrative market for Pakistan’s products. This has been pointed out time and again by various experts and officials from Pakistan. Former foreign minister Hina Rabbani Khar, in a speech at the Lahore University of Management Sciences (LUMS), insisted that more trade with India would enhance Pakistan’s prospects for peace and prosperity, and “put in place the conditions that will enable Pakistan to better pursue its principled positions” on territorial issues.5

Both India and Pakistan must realise the need to reduce the trust deficit that continues to serve as a key roadblock to constructive bilateral engagement. From the geo-strategic, political and economic point of view, it is imperative for both countries to have close and cordial relations. Establishing cordial relations between India and Pakistan can contribute towards making this strategically important region very prosperous. But, for bilateral relations to improve, it is imperative that India and Pakistan first change the perception about each other as strategic rivals. Both sides will need to find ways to cooperate on areas of mutual interests.

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Dr Mohammad Samir Hussain

Dr Mohammad Samir Hussain is a post-doctoral fellow of Indian Council of Social Science Research, New Delhi.

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    1 Zareen F. Naqvi, “Pakistan-India Trade Potential and Issues”, The Lahore Journal of Economics, September 2009, pp. 171-72.

    2 Mohsin S. Khan, Improving India-Pakistan Relations through Trade”, East Asia Forum, available at .

    3 Zareen F. Naqvi, n. 1, pp. 187-89.

    4 Chandrani Sarma, “Indo-Pak Trade and Political Balance”, ISAS Insights, National University of Singapore, No. 271, 21 November 2014, pp. 7-8.

    5 This statement has been quoted from Michael Kugelman, “The Pakistan-India Trade Relationship: Prospects, Profits and Pitfalls”, in Michael Kugelman and Robert M. Hathaway (eds.), Pakistan-India Trade: What Needs to be Done? What Does it Matter? (Washington, D.C.: Woodrow Wilson International Center for Scholars’ Asia Program and the Fellowship Fund for Pakistan, 2013), p. 2.

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