# **1. INTRODUCTION**

India and Pakistan, the two largest countries in South Asia with nearly 1.4 billion people, are close to a new dawn in history **.** The two neighbors, who had ring-fenced each other for more than six decades, are now progressing towards closer economic relations with a vision to enhancing peace and stability in the region. Both countries had overcome many significant hurdles in normalizing the trade relations in past, of which Pakistan’s recent decision to extend the most favored nation (MFN) status to India is the most significant one.

Trade between the two countries never had a smooth ride in the past. Bilateral trade always faced a series of bottlenecks, cascaded mostly by political tension and rivalry. After partition in 1947, India accounted for about 70 percent of Pakistan’s official trade. However, discordant political relations brought a halt to bilateral official trade between the two countries. During 1965 and 1973, bilateral trade flows were negligible. In 1971, India and Pakistan signed the first trade agreement, which did not last long. Pakistan introduced a first positive list in 1989 (four products originally), and then kept the number increasing almost every year. Soon after establishment of the WTO in 1995, India granted MFN status to Pakistan. From the end of 1990s until the middle of the past decade, political issues continued to affect the bilateral economic relations.

India and Pakistan revived trade talks in 2011. These trade talks with serious acts on both sides have been guiding India and Pakistan towards building closer economic ties. For example, Pakistan decided to extend MFN status to India in 2012, and replaced the restricted positive list with a negative list in February 2012. India reciprocated by allowing FDI from Pakistan. The two countries have also agreed to simplify customs procedures, and facilitate the process of goods certification and visa liberalization.<sup>2</sup> Recent results are a bit more encouraging. For example, Pakistan’s exports to India during April- December 2012 increased by 66 percent to US$ 461 million, whereas some new products of Pakistan have started getting higher market access in India (e.g. US$ 33.24 million export of Styrene<sup>3</sup> (HS code 29025000) and US$ 143.81 million export of brass scrap (HS code 74040022) to India during April to December 2012).<sup>4</sup> India’s exports to Pakistan, on the other hand, witnessed slower growth during April to December 2012. But some Indian products found new markets in Pakistan during the same period, such as skim milk (US$ 8.01 million), biscuits (US$ 3.98 million), bangles and imitation jewelry (US$ 4 million), and some existing products got higher market access such as cotton and polyester fabrics (US$ 278 million).<sup>5</sup> Greater trade with India offers an immediate and rich possibility of economic growth for Pakistan and India will also benefit as it is a positive sum game (Husain, 2013).

So what will be the gains from trade? Which industries will benefit? What needs to be done to realize the maximum benefits from the MFN? This paper presents a set of policy recommendations with a view to strengthening the economic relations between India and Pakistan. It provides estimates on the gains from MFN trade using a global computable general

> 2 Refer, Raihan and De (2013) for a detailed account of bilateral trade relations.

> 3 This is also known as vinyl benzene and phenyl ethane. 4 Sourced from Export – Import Databank, Department of Commerce, Government of India, New Delhi 5 Ibid

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