Introduction
India and Pakistan are both low income countries and are amongst the poorest and least developed nations of the world. They are also two of the seven countries which have openly undertaken nuclear testing and consider themselves to be nuclear powers. Add to this the fact that the two neighbours have fought at least two full-fledged wars- with Pakistan losing its more populous wing as a consequence- and numerous other battles and skirmishes from as early as a year after independence and as recently as less than five years ago in 1999. They have a history wrought with difficulties and distrust and a future which threatens far worse. The worst fear, not just of residents of the two countries but of the region and the world, is that irresponsible governments in both, or either country, could resort to the extreme measure of using nuclear weapons against one another.

This article proposes a different path to normalisation of ties between India and Pakistan keeping in mind that different and conflicting stands and claims on Kashmir are the biggest, or perhaps the only, stumbling block to normalisation of ties between the two countries. Since it is unlikely that the Kashmir issue is going to be resolved to anyone's liking in the near future, the argument is that, rather than Kashmir hold the 1.4 billion people of India and Pakistan hostage, it is perhaps important to make headway in other directions, which may eventually also have a positive impact on the impasse over Kashmir. Partial normalisation in other areas can still take place despite the continuing disagreements and conflicts over Kashmir.

The route towards better relations between India and Pakistan is open trade between the two countries. The paper argues that there is no economic rationale and justification for either of the two countries not to trade with each other, especially in an era of globalisation and liberalisation and after the setting up of the World Trade Organisation, of which both countries are members. Not only are there large trade-related advantages to governments and consumers in both countries, but positive exogenous factors are also likely to emerge as a result. The most important argument in this paper is that, given Pakistan's relatively weaker economy, especially compared to India's, it is in Pakistan's interest far more than it is India's, to have normal trade relations with each other.

Trade Logic with India¹
Pakistan and India have been trading with each other since 1947 and, in the last 57 years, trade has come to a complete halt for only nine years- between 1965-74. However, despite a largely uninterrupted trade regime since 1974, the extent of trade between India and Pakistan is limited and almost negligible as Table 1 shows. Rajesh Chadha and Devender Pratap- using figures only for legal trade- show that:
While about 4.5 per cent of India's total exports are directed to South Asia, the figure is 3 per cent in the case of Pakistan². Exports to Pakistan constitute about 8 per cent of India's total exports to South Asia. Pakistan's exports to India have a higher average share of about 40 per cent, during 1998-2000, of Pakistan's total exports to South Asia compared with an average share of about 17 per cent during 1995-1997. In the case of imports, 0.8 per cent of India's imports originate from South Asia and the figure is 0.5 per cent for Pakistan. Within India's imports from South Asia, 36 per cent originate from Pakistan. Pakistan sources 69 per cent of its total South Asian imports from India. Clearly, India and Pakistan are two major trading partners among the South Asian countries despite all hurdles³.

However, there is no India-Pakistan trade agreement and Pakistan allows only a handful of commodities to be imported from India, which have, nevertheless, increased over the years. In 1996, 615 items were permissible for trade, although 90 per cent of the trade took place in only 42 items⁴; in April 2003, following the peace initiative by the Indian Prime Minister, the Pakistani Prime Minister increased the number of tradable items⁵. While the South Asian Free Trade Area (SAFTA) agreement will, by 2006, open doors to further trade between the two countries, India-Pakistan trade should take place before the agreement comes into effect, and should go well beyond the guidelines set by the agreement.

There are some curious facts about trade between India and Pakistan which need to be highlighted (see Tables 1 and 2). Firstly, open, formal (legal) trade between the two countries is very small, and in the last decade has varied between a low of US$ 106 million in 1994-95 which was a mere 0.6 percent of Pakistan's total trade that year, to a high of US$ 321 million in 1998-99 or 1.9 percent of Pakistan's total trade. Clearly the volume and scale of trade between the two countries is very small in absolute terms and as a percentage of the total trade of both countries. However, given the political history of the two countries- with many wars and consistently poor diplomatic relations affecting trade and economic cooperation- it is believed that third-country trade and smuggling increase the volume of trade from anywhere between US$ 1-1.5 billion, still a small number, but of somewhat more significance, particularly for Pakistan's smaller economy.

Table 1: India Pakistan Trade 1990-2000 (max and min range, in %)

Share of India's total Exports, 1990-2000:	5.1 to South Asia: 2.7-
	to Pakistan: 0.2 - - 0.4
Share of India's total Imports, 1990-2000:	from South Asia: 0.4-0.8
	from Pakistan: 0.2-0.6
Share of Pakistan's total Exports, 1990-2000:	to South Asia: 2.6 - 4.9
	to India: 0.4 - 2.4
Share of Pakistan's total Imports, 1990-2000:	from South Asia: 0.4 -1.7
	from India: 0.2- 0.6

Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More Butter and Less Guns', unpublished mimeograph, New Delhi, 2003.

Table 2: Pakistan's Total Trade + Trade with India 1992-2002 (in US$ million

	1992-93	1993-94	1994-95	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01	2001-02
Total
Export	6819	6812	8141	8707	8323	8627	7779	8568	9201	9134
Import	9963	8561	10401	11804	11894	10118	9431	10309	10728	10339
India
Export	83	42	42	41	36	89	175	54	55	49
Import	67	70	64	95	197	153	146	127	235	187

Source: State Bank of Pakistan, Annual Report, various years, Karachi.

Although much is made of the rather limited volume of trade between India and Pakistan, a number of points, especially from the Pakistani angle, have been overlooked. Firstly, the quantum of official trade between the two countries of between US$ 200-300 million needs to be supplemented with illicit trade between the two countries and the trade of goods which originate in either country but are imported through a third country. This recalculation increases the total trade between the countries by a factor of four or five. This is a significant increase, especially when one considers the fact that already, for Pakistan at least and using the official bilateral trade figures alone, India is the main trading partner in the SAARC region. A new set of figures would further enhance that dominance. Compared to Pakistan's neighbours- Afghanistan, Iran, and China- trade with India is far greater than the former two, and with the new set of figures, India comes a close second to China. Clearly, despite an unfavourable trade, economic and political environment, there is already substantial trade between Pakistan and India which has even greater economic possibilities.

Perhaps the most curious fact about Pakistan's trade with India is this assumption that it is so low. Certainly official figures, as we show in Table 2 above, do enforce that perception, but even if we limit ourselves to these official figures, some rather interesting observations emerge. For example, in recent years, when imports from India have ranged from US$ 145 million in 1998-99 to US$ 235 million in 2000-01 and to US$ 187 million in 2001-02, India emerges as Pakistan's 16th biggest trading partner in terms of imports. This figure is more interesting since the four largest importers into Pakistan are oil-exporting countries (Saudi Arabia, UAE and Kuwait) and Malaysia which exports mainly palm oil to Pakistan. Despite hostilities, wars and diplomatic breakdown, Pakistan imports (based only on official figures, which are perhaps a third of actual volume) more from India than it does from France, Canada, Switzerland, the Netherlands, Turkey, Iran or even Thailand!- most interesting given the political relations between the two countries. In terms of total trade, exports and imports based on the under-reported 'official' trade between the two countries, India ranks 21st as Pakistan's trading partner. Clearly the possibilities of gains from opening trade are tremendous, especially if we look at the nature of trade between the two countries.

In the decade 1990-2000, Pakistan has had a trade surplus with India in only three of these ten years, importing far more than it exports. Most of Pakistan's exports to India have been in the 'food and related' category, rather than in raw materials, manufactured goods or intermediate products. India's exports to Pakistan (Pakistan's imports) have been distributed over the categories 'agricultural and allied products', manufactured goods, and chemical and chemical related products⁶ (see Tables 3 and 4). Pakistan's and India's imports have both been heavily influenced by single commodity (usually food), items as the tables show, although Pakistan does import chemicals and tyre related products. Moreover, the tables also show considerable inconsistency and annual variability between the types of commodities imported by both countries, and other than food items, there is no consistent pattern of traded commodities. This shows that both countries, despite having had poor political and diplomatic relations, do turn to each other in times of need.

Table 3: Pakistan's Imports from India: 2000-02 (thousands of rupees)

	2001-02	2000-01
Total Imports	Rs 11,471,155	Rs 13,928,480
	%	%
Agriculture and Food (Sugar)	16 (10)	53 (39)
Iron and manganese ore	9	6
Chemicals (Pure Xylenes)	38 (17)	21 (1)
Medicinal inputs	4	2
Plastics	8	4
Tyres and Rubber	7	4

Note: Agriculture and food includes 'residue of soybeans oil-cake', and Chemicals includes dyes, paint and ink. Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of Pakistan, Islamabad, 2003.

Table 4: Pakistan's Exports to India 2000-02 (in thousands of rupees)

	2001-02	2000-01
Total Exports	Rs 3,246,436	Rs 2,777,405
	%	%
Agriculture and Food (Dates) (Rice)	66 (42)	66 (35) (23)
Asafoetida	5	-
Crude Petroleum	-	8
Cotton staple	-	10
Cotton yarn and related (Cotton tents)	18 (12)	5 (-)

Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of Pakistan, Islamabad, 2003.

Some observations give India-Pakistan trade a rather ironic twist. It was in 1977-78, when Pakistan was under General Zia-ul-Haq's martial law, that trade between the two countries got an impetus following the 1974 protocol for the restoration of commercial relations on a government to government basis, signed by the two countries after the 1971 war. Again, still under a military government in 1987, Pakistan increased the number of permitted traded goods with India nearly six-fold, from 42 to 249, a measure which led to a three-fold increase in the following three years⁷. Although both countries avoid improving their mutual trading status, they turn to each other at times of crises and shortfalls of eatables. In 1990, India helped Pakistan tide over an onion and potato crisis, and again Pakistan imported 50,000 tons of sugar from India on an emergency basis in 1997. Likewise, India has also depended on Pakistan for sugar, potatoes, onions and chillies, at a time of a shortage. The fact that the largest amount of trade between the two countries ever- of US$ 320 million- was during Pakistan's fiscal year 1998-99 is extremely interesting. Pakistan's fiscal year runs from July to June, which means that this was the fiscal year which followed the May 1998 nuclear tests by both countries, included the Lahore Declaration of February 1999 as well as the Kargil war of May and June, 1999. By any measure, this was a rather eventful year in South Asia, and yet, registered the largest volume of trade. Moreover, in 2000-01- General Musharraf's first full year- imports from India were US$ 235 million, the highest ever. This suggests two things: India and Pakistan, despite huge differences, trade with each other at times of shortfalls and crises; and, if need be, even a military ruler can improve (trade) relations with India.

E. Sridharan argues that 'India does not import any of Pakistan's major exports. Nor does Pakistan import any of India's major exports'⁸- as shown in the tables above. He explains this fact in terms of trade-related and economic (rather than political) arguments, and says that this is because of the competitive, rather than complementary, nature of the two economies exporting similar products, and argues, that there is the 'general tendency for poor countries to trade with developed ones rather than with their neighbours until a certain level of development has been achieved'.⁹ This explains the reasons why trade did not take place between the two countries, and he thinks that 'the real scope for trade and investment is in the future and begins now.'¹⁰ For Sridharan, however, rather than the trade of goods and commodities, 'the real potential for economic cooperation today is in energy, for example, a gas pipeline and the export of electricity ...'.¹¹ Not denying the fact that past and existing patterns and trade between the two neighbours have been rather limited, we still see far greater opportunities than does Sridharan.

This point of view is also propagated by the Ministry of Commerce of the Government of Pakistan, which conducted an extensive study on the prospects and implications of trade with India. The study published by the Ministry had, as part of its team, a number of very prominent businessmen, all who advocated increased and fair trade with India. It is worth looking at some of the ideas which form this report.

The Ministry of Commerce study argues that there are numerous advantages of trade between neighbour, as there are low transportation costs, cultural similarities which influence taste and cause profitable complementaries to emerge. In addition, transaction costs are also lowered and such trade 'facilitates the flow of ideas and knowledge that strengthen international competitiveness'.¹² The study looks at a number of sectors in the Pakistan economy and concludes that 'the economic benefits of liberalising trade with India outweigh costs'.¹³ Consumers in Pakistan will benefit 'unambiguously' because of lower prices, and the government will get far greater revenue from legalising the existing illicit border trade. Moreover, 'important segments of producers would also benefit because of increased competitiveness and market access to a much larger Indian economy'.¹⁴

A study by the Karachi Chamber of Commerce and Industry endorses the idea of trade with India on the grounds that now, having signed the agreements which have led to the setting up of the World Trade Organisation, all signatory members have to be treated equally, and understands that giving the Most Favoured Nation (MFN) status to India 'is not a special favour to India, but an obligation under WTO and an economic and geopolitical imperative'.¹⁵ In this new world order, Pakistan has to face competition from all countries, including India, and hence 'instead of shying away, we should be well prepared to face the eventuality. In any case, salvation lies in streamlining of operations and upgrading of technology which was long overdue'.¹⁶ This study presents a sector-wise analysis of trade with India and shows the impact on each sector, looking at numerous aspects including what it calls 'silver linings'. For example, it feels that while the opening up of trade with India is likely to affect the engineering sector, cheaper steel and iron ore imports from India, will have a positive impact overall and 'will result in the reduction of very high inventory costs of the engineering sector'.¹⁷ However, the main argument which this report seems to be making is that Pakistan trades with almost every country in the world, so why not with India?

There is also the important issue of the impact of globalisation. All countries of the world are affected by it, some favourably and others not so favourably. To take further advantages or to protect themselves from the negative impacts of globalisation, many neighbouring countries have established trading blocs and currently around 60 per cent of world trade takes place through regional trading arrangements. There are huge advantages and benefits to such regional trading arrangements, yet, 'South Asia is the only major world region not to move towards regional cooperation and integration'.¹⁸ Clearly, normalisation of trading ties between India and Pakistan should be seen as a first step to such trading arrangements. As Burki argues, 'our policy-makers must be cognisant of the fact that the world is organising itself into a number of regional arrangements and we in Pakistan cannot afford to be left out of them'.¹⁹

All discussion on trade between India and Pakistan is limited by a host of factors which makes conclusive analysis difficult. Firstly, no one really knows how much of unofficial (smuggled) and third-country trade actually takes place, so even figures of US$ 1-1.5 billion are open to debate; we really don't know. Secondly, and perhaps more importantly, much of the analysis on improving trade relations between the two countries is based on a static analysis which is based on the very limited existing trade patterns. No one really knows the true potential of trade between India and Pakistan because so far most of the trade takes place in a very small handful of commodities. Free 'normal' trade between India and Pakistan allows thousands of goods, which have so far not been traded, to come into the market of both countries. For example, the talk about two pipe and gas lines from Turkmenistan and Iran to India resulting in gains to both Pakistan and India, may materialise once talks resume and political conditions improve. Although it is difficult to say how much Pakistan will gain from royalties and by laying the pipelines- royalty figures, though unreliable, are being quoted at US$ 500 million each year for each of the pipelines- if true, they could eventually be equivalent to as much as 5 percent of Pakistan's export earnings, no mean figure to scoff at. Moreover, with lower transportation costs, there is likely to be some import 'switching' as well, where goods previously imported from other countries may now be imported from India. Trade between India and Pakistan will bring down the cost of business (particularly for Pakistan), enhance the purchasing power of consumers and increase government revenue. The volume and variety of tradable goods, given a period of time, can be extraordinary.

Trade with India might not radically alter Pakistan's economy for the better (and the fears that Pakistan's India will be swamped by cheap Indian goods are also unwarranted), but there are likely to be numerous positive externalities which can accrue from opening up trade by Pakistan with India.

Numerous small industries are likely to benefit from cheaper raw materials from India and may help address the problem of some of our sick industries. This is likely to have an employment-enhancing effect. Moreover, many of Pakistan's industries will benefit from increased competitiveness and will have to become more efficient in light of international and Indian imports. Also, greater market access of Pakistani exports should be beneficial. As we have argued above, consumers in Pakistan are going to benefit by cheaper Indian imports as well. As the Ministry of Commerce study argues, 'exposure to competition from a neighbour would encourage policy makers as well as the private sector in Pakistan to focus more sharply on the investments needed to strengthen Pakistan's international competitiveness'²⁰. Moreover, the report continues, 'the fear of a deluge of Indian products in the Pakistan market after liberalising trade is much exaggerated. This has not happened in the past when trade has been liberalised and is unlikely to happen in the future, given Pakistan's global orientation in trade and the quality conscious Pakistani consumers'²¹. Also, the arguments by E. Sridharan and by the Government of Pakistan that 'it is unrealistic to visualise either country, particularly India, having a large impact on the total trade of the other'²², do not examine the possibilities for presently non-tradables coming into the trade orbit.

While trade can be a component of broader Confidence Building Measures (CBMs) and an improvement in the overall atmosphere between these two neighbours, micro level linkages and opportunities, particularly in Pakistan's Punjab and the NWFP, may pay higher dividends. In terms of the broader political economy factors, trade normalisation is likely to improve the overall atmosphere in which India and Pakistan address all contentious issues. Even if there are no substantive improvements in Confidence Building Measures between the two countries on account of trade, improved trade is unlikely to make matters much worse. Trade with India, in this regard, is a win-win situation.

(S. Akbar Zaidi is the Executive Editor, South Asian Journal and an independent Karachi-based social scientist).

End Notes

1.

Much of this paper draws from the following sources: E. Sridharan, 'Economic Cooperation and Security Spill-Overs: The Case of India and Pakistan', in Michael Krepon and Chris Gagne (eds.), Economic Confidence-Building and Regional Security, The Henry L Stimson Centre, Report No 36, Washington, October 2000; S. Akbar Zaidi, 'Economic Confidence Building measures in South Asia: Trade as a Precursor to Peace with India', in Moonis Ahmar, (ed.), The Challenge of Confidence Building in South Asia, (New Delhi: Haranand Publications,