Trade between Pakistan and India has been severely affected by political tensions and conflicts, with the Kashmir issue being a primary obstacle for seven decades. The Indian government’s decision to revoke Kashmir’s special status in August 2019 led to a suspension of bilateral trade. Recently, Pakistan’s new government has shown a willingness to resume trade with India, a move that could significantly benefit Pakistan’s economy by tapping into a previously inaccessible market.
The History and Potential of Pakistan-India Trade
Historically, South Asia was a large, integrated market with free mobility of goods, services, skilled labor, and capital investments. However, despite common cultural, historical, and administrative backgrounds, the region remains one of the least integrated globally due to the political rivalry between India and Pakistan. In contrast, East Asia, with its diverse historical backgrounds, has emerged as one of the most integrated regions worldwide, second only to the European Union.
According to the World Bank, bilateral trade between India and Pakistan has the potential to reach $37 billion. However, the current trade volume is a mere $1.35 billion, far below its potential. Currently, trade occurs mainly through third countries, such as the UAE. Empirical evidence suggests that trade between these two nations would be mutually beneficial. India has a growing middle class of approximately 340 million individuals, while Pakistan’s middle class is estimated at 84 million. Even capturing a 10% share of the Indian middle-class market could double the size of Pakistani corporations.
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Economic Benefits of Resuming Trade
Embracing trade with India could significantly boost Pakistan’s economic growth. Pakistan’s exports could increase by 80%, positively impacting GDP and employment. The World Bank estimates that India accounts for 80% of Pakistan’s unrealized trade potential. Pakistan’s exports stood at $12.2 billion in the first five months of FY24. If trade with India were occurring, this could be $25 billion higher, reflecting the substantial positive impacts of such trade.
Additionally, trade with India could enhance productivity through competitive pressure in Pakistan’s domestic market. By accessing the Indian market, Pakistani entrepreneurs could drive innovation and flourish. India, being a top wheat exporter, could help Pakistan mitigate the impact of inflation on its lower-income population.
Energy Sector Collaboration
Pakistan is currently facing a severe energy crisis, which significantly impacts its economy. India, already exporting surplus energy to Bangladesh and Nepal, has the world’s cheapest solar power. With its easy geographical terrain with India, Pakistan could alleviate its power crisis through cross-border trade of energy and refined petroleum products. This collaboration could foster regional cooperation and positively impact Pakistan’s economy.
Historical Context and Future Prospects
Despite the historical rivalry with India, Pakistan has maintained trade relations in the past, with India once being the largest market for Pakistani exports. To resume trade, Pakistan needs to view India as a potential market for its goods and industries, separating trade ties from political differences. China’s extensive trade with India, despite border tensions, serves as an example. Amid ongoing disputes, China has surpassed the USA in trade volume with India.
Economic growth
Reigniting trade between Pakistan and India holds immense potential for economic growth and regional integration. By overcoming political differences and focusing on mutual economic benefits, both countries could transform their economies and foster a more cooperative South Asia. As Pakistan’s new government shows a willingness to resume trade, the future looks promising for enhanced economic ties between these two neighboring nations.
