That South Asia is one of the world’s least integrated regions has been well chronicled. Historical tensions and regional rivalries have hampered intra-regional trade, with prime responsibility lying squarely on regional heavyweights India and Pakistan, which have fought three wars since their independence from Britain in 1947.
Proposals for a South Asia Free Trade Agreement (SAFTA) to boost intra-regional trade from U.S. $11 billion in 2007 to U.S. $40 billion by 2015 seem like a pipedream. Intra-regional trade has languished for decades as only about 5 percent of the region’s total trade occurs between its nations, despite their geographical proximity and shared history. This contrasts with intra-regional trade in Africa and East Asia where the corresponding figures are 15 percent and 50 percent, respectively.
However, the latest trade figures indicate that two-way trade between India and Pakistan may have turned a corner. India’s exports to Pakistan increased 15 percent between April 2012 and February 2013 to U.S. $1.6 billion, up from U.S. $1.4 billion in the corresponding period last year. Meanwhile, Indian imports from Pakistan registered a 30 percent increase from U.S. $375 million to U.S. $488 million during the same period.
According to a report in the Indian Express, this expansion showed that India-Pakistan trade was approaching the levels of New Delhi’s economic relations with other neighbors, such as Sri Lanka and Bangladesh.
While still modest, these figures are also the highest ever between the two countries, indicating that a recent thaw in diplomatic ties between the two South Asian rivals could be bearing fruit. The thaw comes after the fledgling India-Pakistan peace process, which began in 2004, but was suspended by India in 2008 when Pakistan-based militants carried out a terror attack on India’s financial hub, Mumbai, leaving 166 people dead.
A slew of high-level engagements between the two sides last year brought the dialogue process back on track. In April 2012, Pakistani President Asif Ali Zardari visited India on a day-long private visit during which he held talks with Indian Prime Minister Manmohan Singh. The visit was followed by reciprocal visits by Pakistani and Indian foreign ministers in July and September, leading to the signing of a landmark visa agreement that eased travel restrictions between the two sides.
The South Asian Association for Regional Cooperation (SAARC) Chamber of Commerce and Industry, a regional trade body, welcomed the agreement, saying that the new liberalized visa regime would significantly boost bilateral trade.
Further, last year the Pakistan Peoples Party (PPP) government announced its intention to grant New Delhi’s long-standing demand for Most Favored Nation (MFN) status, but has since balked on the issue amid strong opposition at home. The chances that India will be granted MFN status will likely depend on the outcome of Pakistan’s elections in May.
Still, these tentative steps towards normalizing economic ties have wider implications for the region. For one, strengthening trade ties can help prevent deterioration in political relations between the nuclear-armed neighbors. Further, stronger economic ties can significantly increase the cost of conflict.
While it is too early to judge the extent of the positive influence of trade, these facts could potentially serve as catalysts for better ties between India and Pakistan, possibly paving the way for the resolution of more contentious issues such as the Kashmir dispute.