An impending deal between India and Pakistan to liberalize trade between the two traditionally hostile nations has been rightly called historic. The move is part of a broader effort by India to engage commercially with its neighbours, potentially to the benefit of the whole region. But it’s still very early days.
India has been doing the rounds of its South Asian neighbours lately. Pakistan and Afghanistan grabbed the headlines but India has also courted warmer ties with Nepal, Bangladesh, Myanmar and Sri Lanka. Economics usually takes a back seat when it comes to relationships between South Asian governments, and these latest diplomatic efforts remain focused on regional stability. India’s thirst for energy and resources is, however, also a key driver.
Few regions are less integrated or more closed to trade and investment than South Asia. Intra-region trade, currently worth $5-billion (U.S.), accounts for only 5 per cent of its total trade in goods. Trade between Pakistan and India stood at a mere $1.83-billion in 2010, with India accounting for only 1.2 per cent of Pakistan’s exports.
The potential for increased intra-region trade is staggering. A World Bank report published last year estimated it could grow to $20-billion if the restrictions were removed.
Activity levels are so low right now that it will take years for the benefits to register. There are some immediate wins to be had. India in particular needs more oil, gas, and raw materials from west and central Asia, for which Pakistan is the most feasible conduit. India, Pakistan and Bangladesh could co-operate in establishing a gas pipeline for transporting gas from Iran, Qatar, Turkmenistan and Myanmar. Separately, Nepal would double its GDP if it could export hydro-based electricity to India.
A robust regional trading bloc would lead to enhanced stability and long-term prosperity. Cultivating the required diplomatic and economic ties will not be easy. At least the first baby steps have been taken.