Trade between India and Pakistan can increase to a phenomenal level of $6.6 billion if barriers are removed and the neighbouring country implements the South Asia Free Trade Area agreement, an ICRIER report has said.
India's exports increased by 157 per cent to $428.1 million and imports by 143 per cent to $82.1 million in the first quarter of 2006-07 as against the corresponding period last year, according to official figures.
"Trade between the two nations is very small as compared to trade between India and its other large partners in South Asia," Indian Council for Research on International Economic Relations said in a report on 'India-Pakistan trade'.
On the other hand, informal trade through a third country is estimated to be in the range of $2 billion, the report said.
"With several regions integrating further through the Free Trade Agreements, it is imperative for the South Asian countries to enhance the pace of their liberalisation," it added.
In a larger context, South Asia is the least integrated region compared to other regions, namely East Asia, Europe and Central Asia, Latin America, Middle East, North Africa and Sub-Sahara Africa.
Regional liberalisation within Asia indicates that SAFTA would ultimately lead to integration with a larger community within the continent through BIMSTEC and ASEAN, the paper said. However, success of SAFTA in turn would depend on trade relations between India and Pakistan.
The 'positive list' approach followed by Pakistan to allow Indian imports is a key factor constraining growth in trade. The approach in its present form inhibits trade, lacks transparency and leads to high transaction costs, the paper said.
"India and Pakistan need to conduct trade with each other on a Most Favoured Nation basis. It is important for the two countries to have a common harmonised system of codes and greater transparency," it said.
Opening up new rail and road routes would also be instrumental in increasing trade.
"The positive list approach needs to be abandoned to allow goods to move freely on the direct routes thereby lowering transaction costs," the paper said.
Measures such as simplifying border procedures and introduction of Electronic Data Interchange should be introduced at the land borders. By amending the shipping protocol, third country and non-national flagships would be able to ply on the Mumbai-Dubai sea route, thereby lowering shipping costs, it said.
With several Indian companies interested in forming joint ventures in Pakistan, governments of the two nations need to put an institutional mechanism in place that would guarantee protection to investments and provide timely facilitation.
Sectors identified for both export and import are textiles, agriculture, engineering, chemicals, pharmaceuticals, electronics, metals and minerals, rubber and plastic. In addition, there is scope for trade in several services such as health, entertainment, IT, energy and tourism.
Investment possibilities in Pakistan exist in sectors such as fish processing, chemicals and pharmaceuticals, automobile components and information technology.
Currently, the payments system is formalised through the Asian Clearing Union, which is inefficient as payments are often delayed.
"The two countries need to have an institutional arrangement so that the state, private and foreign banks can participate freely in trade transactions," the paper said.
Besides, visa restrictions should be eased by eliminating city specific entry and police reporting on arrival. Uninterrupted telecommunication links would facilitate trade, the report said.
