Normalizing India-Pakistan Trade

With the trade normalization process between India and Pakistan gathering momentum from November 2011, new opportunities for enhancing bilateral trade have opened up between the two countries. This study estimates the trade potential between India and Pakistan and examines how this potential can be realized. Using the Trade Possibility Approach for all items traded, followed by selecting only those items in which the countries have a revealed comparative advantage (RCA) to export, the trade potential between India and Pakistan is estimated to lie between US$10.9 billion and US$19.8 billion. Of the US$10.9 billion trade potential, India’s export potential accounts for US$7.9 billion and import potential for US$3 billion. With a large number of items belonging to the negative or sensitive lists, the study estimates the trade potential accounted for by these items. A sector-wise analysis shows that bilateral trade will receive a boost if the textile sector is liberalized in both countries, with Pakistan liberalizing its automobile sector too. In the service sector, trade possibilities have been identified in information technology (IT), Business Process Outsourcing (BPO), health, and entertainment services. The study finds that this trade potential remains unrealized largely due to impediments in transport and transit facilities, a restrictive visa regime, the continuation of large informal trade flows, and the presence of “perceived” nontariff barriers to trade between India and Pakistan. As the foreign direct investment (FDI) regime between the two countries is liberalized in 2012, the study identifies sectors that hold potential for investments and are likely to deepen the trade linkages between India and Pakistan.