[*Sajad Padder is a doctoral Fellow in the Department of Political Science, University of
Kashmir, Srinagar and presently teaching at the UNESCOMadanjeet Singh Institute of
South Asia has a continuous history of seven thousand years. It has a composite
culture developed through a historical process wherein the emphasis has been on unity in
diversity. South Asia has been the victim of repeated foreign aggressions. The richness of
the region perhaps attracted the aggressors from far and wide. In the successive waves
of invasions since the ancient times, the Aryans, the Greeks, the Shakas, the Huns, the
TurkoAfgans, the Mughals and others came to the region. In the modem period, the
Europeans viz. Portuguese, Dutch, French and the British came to South Asia, though it
was the British who finally established their hold in the region. The British invasion was
qualitatively different from the earlier ones. Whereas the earlier invaders came, settled
down here and got completely assimilated with the indigenous people, the British
integrated the region into their empire and ruled it from London. The region was linked
with the industrially advanced international market in order to exploit its natural resources.
South Asian economy and society became subordinated to the imperialist political
economy and social development. The region was transformed into a market for the
British machine made goods, a source of raw material and foodstuffs, and an important
field of capital investment. The entire structure of economic relations between Europe and
the South Asia involving trade, finance and technology continuously developed the
colonial dependence and underdevelopment of the latter. This new politicoeconomic
system of subordination, called as colonialism, resulted in the emergence of Europe as a
leading capitalist region while the colonies were reduced to backward and
underdeveloped regions of the world. In course of time, the economic and political
domination led to numerous conflicts and contradictions which ultimately resulted in the
growth of nationalism and movements for independence from colonial rule.
Third World Scenario
Like many other less developed countries, the countries of the Indian subcontinent
have suffered exploitation at the hands of their colonial masters. Their economies were
made an appendage to imperialism. Subordination created serious distortions in these
economies and destroyed their internal dynamism considerably. This was a decisive
factor in the development of underdevelopment of the Third World. In the postSecond
World War period, there has been a liquidation of colonial empires. Most of the colonial
countries came to acquire political independence. But these countries continue to
maintain their economic ties with the erstwhile political masters and they are yet to
achieve economic independence. The dependent economies of the Third World are
subjected by the advanced countries to exploitation in the changed conditions within the
These are biased in favour of the advanced, and against the less developed countries.
Developing countries are increasingly finding the markets in the developed countries
inaccessible to them, particularly for their manufactured goods. These goods are facing
high tariff and nontariff barriers.
world market is shrinking. Whatever the level of exports from these countries, their
capacity to buy imports is diminishing. In other words, the developing countries are
confronted with adverse terms of trade. Foreign trade is a tool through which economic
surpluses from the developing countries are siphoned off. The giant multinational
corporations, based in the Western countries, have entered the less developed countries
and control their vital economic segments. These corporations have the capacity to
manipulate their economies and even their polity.
Search for the New Order
Less developed countries have become aware of the unjust nature of the present
international economic system. Since the 1970’s they are pressing for thoroughgoing
international reforms. In the Summit Conference of the Nonaligned countries that was
held at Algiers, the capital of Algeria, from 5th to 9th September 1973, the call for New
International Economic Order (NIEO) was clear and loud. The Third World comprising 70
percent of the world population, subsisted only on three percent of the world income in
Summit, said that economic and social development could not be just a domestic effort,
emphasising the need for cooperation. Mrs Gandhi said: “We the nonaligned countries
do believe that a fight against poverty demands cooperation in which resources and
technology are shared among the nations”.
requested a Special Session of the UN General Assembly to address issues associated
with international trade in raw materials. At the Session held in April 1974 the Group of
775 (G77) secured the adoption of the Declaration and Programme of Action for a NIEO
despite lacking the support of the United States and a small group of advanced industria-
lized countries. This programme emphasised the pressing need for farreaching reforms
in the present international economic order, governing the relationship between the rich
and the poor countries. These proposals received much attention and became a subject
of discussion at many forums and ultimately assumed the name of NorthSouth dialogue.
As MehboobulHaque observes ‘the demand for NIEO is to be viewed as a part of
historical process rather than a set of specific proposals. Its important facets are the
emergence of non aligned movement, the politicisation of the development issue and the
increased assertiveness of the Third World countries’.
discussion of the programme, implementation remains very limited and results of
negotiations are far from encouraging. Given the present balance of international
economic power, there is little hope of reforming the international economic relations.
Under such circumstances, the less developed countries are left with no option but to
develop mutual economic relations and build up their collective strength to fight against
the unjust international relations. Their mutual cooperation is a guarantee and the only
way to end their unequal status. In this process the fear of exploitation and domination
are minimal. The development of IndoPak trade fits in well with this perspective because
both are developing and neighbouring countries. Both have been the victims of colonial
exploitation in the past. The British transformed the Indian economy into a supplier of raw
materials and primary commodities, a market for the British manufactures and a field of
investment for foreign capital.
3 The Indian Premier, Mrs Indira Gandhi, while addressing the Algiers
India Pakistan: Historical context
Until India and Pakistan became independent in 1947 from the British, they not only
formed one political entity but also one integrated economy. Greater Punjab was one
economic entity for centuries before partition bifurcated it between India and Pakistan in
1947. Karachi and Bombay (now Mumbai) were tightly knit sister cities on the sea under
the same administrative unit (Bombay Presidency) of the British Raj. Today these regions
are all but severed. Before 1947, regions specialized in the production of various goods
and commodities on the basis of comparative advantage. Cotton grown in Pakistan was
processed in the mills of Bombay and Ahmedabad. Raw wool produced in the cold
regions of North West Frontier Province (NWFP) and West Punjab went to woolen mills of
East Punjab, Uttar Pradesh (UP) and Bombay for processing and manufacture of woolen
cloth. Mineral oil and antimony mixed in the hilly tracts of Chitral in the NWFP went to
Bombay and gypsum from Sind and Punjab was used by cement and fertilizer factories all
parts of India. Large quantities of rawhides suitable for the production of chrome leather
went to tanneries situated in Madras and Kanpur. Barley grown in West Punjab was
supplied to distilleries in Uttar Pradesh. Joginder Nagar power station in East Punjab
supplied more than 70 million KW of electric energy every year to industrial and domestic
units in West Punjab. Similar interdependence existed in the eastern sector, particularly in
A salient feature of this interdependence was that Pakistan produced raw materials
while India processed them thus earning a much higher rate of return. The regions that
came to Pakistan were industrially among the most backward parts of the undivided
country. Out of 14,677 industrial establishments in undivided India in 1945 only 1414 or
9.6 % of the total fell to Pakistan’s share. Of the total 3.14 million industrial workers in
undivided India, Pakistan’s share was a quarter million or 6.3 % of the total.
Because of this interdependent structure, IndoPak trade soon after independence
remained at Rs 185 crore in 194849. About two third of it was with Eastern Pakistan.
Therefore, India’s trade with West Pakistan was Rs 63 crores. The trade could have
continued at that level but the trauma of partition created a psychosis where the leaders
of the two countries held each other in suspicion and sought to establish a different
identity from each other. The first major economic repercussion of these attitudes was
reflected in a commercial war over jute. Pakistan imposed export duty on raw jute
considerably increasing the cost of raw material for the Indian jute industry. India
retaliated and declared Pakistan to be a foreign territory from 23 December 1947 for the
purpose of levy of customs duty on the export of jute manufactures from India to Pakistan.
The action of both the governments was in the breach of Standstill Agreement signed by
them (before the two governments came into existence formally)in 1947 compelling them not to impose
new customs duties. They had also accepted, in Standstill Agreement, not to change existing customs,
tariffs, excise duties and cesses and not to levy any transit duties orfresh controls. The two governments
were also prevented from imposing any restriction on the free movement of goods and remittances
including capital equipment and capital.
The Standstill Agreement expired on February 29. 1948. Because of the differences
over jute duties, neither government was in a mood to renew it. Normal licensing and tariff
8 Potassium nitrates of West Punjab went to glass factories in several other
restrictions came into force on March1, 1948. New complications arose on the payments
front. India devalued her rupee in September 1949 following the devaluation of the
sterling with which the Indian rupee had long been linked. It was assumed that Pakistan
would do the same but it did not.
currency (100 Pakistan rupees = 144 Indian rupees).
devalue her currency made imports into India far dearer, thereby drastically reducing
imports of jute and cotton that were principal items of imports from Pakistan into India.
The value of India’s trade with West Pakistan came down from Rs. 63 crores in 194849
to Rs. 24 crores in 194950 and Rs. 16 crores in 195051.
These developments shattered the hopes wellmeaning economists had earlier
entertained, that despite the political division of the subcontinent, economic cooperation
and close trading relations between the two dominions would continue. By 1950, the
economists were noting ruefully that each country is trying to be selfsufficient and in
trying to be so deny itself the products of other. Questions of cost have been disregarded
largely due to the considerations of nationalism.
evolved over a period of centuries has been shattered and new economic patterns and
relationships were evolved in the two countries. Politics based on communal hatred and
suspicion has systematically undone the work of generations, by defying the factors of
economic geography and laws of economic science.
It needs to be stated here that the forces set into motion by separatism that defied
economic rationality have continued to operate till today. Economic policies of the two
countries in the last six decades have been shaped, among other things, by a strong urge
to be independent of each other in respect of trading their produce and products.
Pakistan, from the outset, tried to develop cotton textile, jute (in the Eastern Wing) and
leather industries that would use the surplus raw materials which earlier went to India to
feed its industries. The latter, on the other hand, went all out from the start, to secure self-
sufficiency in raw cotton and jute apart from food grains, to protect its own major
industries against the threat of stoppage of raw material supplies from the traditional
source viz., Pakistan. As the two economies preceded on their divergent development
paths, the earlier complementaries between them gave way to competition.
The IndoPak war of 1965 brought to a halt even the limited amount of trade that was
there at the time. This was followed by the Bangladesh War in 1971. Trade between the
two countries thus remained disrupted from 1965 to 1972. Article 3 of the Simla
Agreement signed in July 1972 provided for negotiating of a trade protocol which would
normalise trade relations between the two countries. It took over two years for the
protocol to be signed, which was done on 30 November 1974.
embargo and listed cotton, engineering goods, jute manufactures, iron ore, railway
equipment, rice and tea as thrust areas for bilateral trade. Another protocol signed in
January 1975 provided for resumption of shipping services between two.
The private sector was allowed to enter the trade in July 1976. This led to substantial
increase in trade volume during the next two years, as it rose from Rs. 10 crores in 1976
77 to Rs. 66 crores in 197778.
when delegations from the Federations of Pakistani Chambers of Commerce and Industry
and Lahore Chamber of Commerce and Industry visited India. An agreement was arrived at to make
all efforts towards expansion in trade. As a result of this visit, Pakistan announced a list of 40 items in
which the private sectors of both countries could trade through the Trading Corporation of Pakistan and,
subsequently, a joint committee was set up to discuss and evaluate the scope and opportunities for
bilateral economic cooperation. This was followed by a visit of a 21 member delegation of Punjab,
Haryana and Delhi Chamber of Commerce and Industry to Pakistan in November 1982. This was the
first ever visit by a private Indian delegation to Pakistan. In 1983, an IndoPakistani Joint Business
Commission was set up whose first meeting was held in June 1983. As a result of this meeting eight
industries were identified in respect of which India could extend technical cooperation. These industries
and dyes, particularly for the tanning and textile industries, (4) Drugs and pharmaceuticals industry for producing basic
ingredients, (5) Diary production and equipment, (6) Medium and heavy electrical equipment, (7) Material testing and
processcontrol equipment, and (8) Compressors.
In 1996, India and Pakistan both were signatories to South Asia Preferential Trade
Agreement. India granted to Pakistan the Most Favoured Nation19 (MFN) status and
Pakistan decided to expand its positive list (imports from India) to include 596 items. The
bilateral trade stood at US$ 180 million. By 2005 trade between the two countries had
increased to US$ 602 million and the number of commodities traded increased to 770
items. The number of commodities in Pakistan’s positive list was increased to 1075 by
2006. By 200708 trade had increased to US$ 2.2 billion.
following the subprime crises impacted IndoPak trade as well. However, the bilateral
trade picked up in 200910. Pakistan’s positive list for trade with India was further
increased to 1938 items and the total trade recovered from US$ 1.8 billion in 200809 to
US$ 2.7 billion by 201011. The bilateral trade balance is heavily in favour of India.
Rapprochement on the trade front gained momentum since 2010. The Joint Statement
issued in November 2011 laid down the sequencing and timelines for full phasing in of
MFN status for India.
a small negative list specifying banned rather than permitted items. In the second stage,
the negative list would be phased out; overall as well as for the road route on which trade
takes place for only a fraction of the items on the positive list. These changes would usher
in the full phasing in of MFN that forms an essential part of the trade normalization
Adhering to the Joint Statement, in March 2012 Pakistan made a transition from the
positive list approach to a small negative list of 1,209 items.
restrict roadbased trade by allowing only 137 items to be imported from India via road;
while India took a number of steps to address NonTariff Barriers (NTB’s). In a major step,
India pruned its sensitive list to 614 items. The current status as of December 2013 is that
India would bring down its SAFTA Sensitive List to 100 tariff lines (from the existing 614
items); and Pakistan simultaneously granting MFN status to India, including the phasing
out of negative lists and removal of restrictions on items traded by road.
The existing trade between India and Pakistan is conducted via three different ways:
official trade which is dismal, nonofficial trade and illegal trade. Since the bilateral trade is
marred by multiple issues, the official trade between the two countries has not been able
to cross the limited volume. The potential of trade is estimated to lie between US$10.9
billion and US$19.8 billion.
considerably as there are certain items which are not on the positive list of the two
countries. These items are traded through third countries such as United Arab Emirates,
Singapore and the Central Asian Republics. The nonofficial/informal trade is estimated at
some US$ 10 billion.
across the border which only serve the vested interests of the illegal traders.
Over the years, much has changed in the approach of India and Pakistan towards each
other on the trade front. In 2012 New Delhi had argued against Pakistan on the issue of
concessions on Pakistan’s textiles products by the European Union (EU), such as those
given to leastdeveloped countries (LDCs). The EU wanted to give concessions to
Pakistan’s products by reducing tariffs because of the severe floods there. This would
allow the EU to remove tariffs on a list of more than 70 items, mainly textile products.
This was seen as discriminatory by major textile exporters in India, Bangladesh, Brazil
and Indonesia. However, India graciously back tracked on its opposition considering the
current progress on bilateral trade relations.
Another positive development was the visit of Indian Commerce Minister Anand Sharma
to Pakistan in February 2012, the first in 30 years and at the head of an 80strong
business delegation. It seems that India and Pakistan are trying to emulate the China
Model in their bilateral relationship.
as a CBM would lead the two countries developing a stake in each other’s security, and,
thus, to ultimate conflict resolution. Currently, Pakistan is fraught with severe electricity
shortages. It intends to import 500 MW of electricity from India to meet the increasing
demand. Not that India has surplus power, but it is considering the supply seriously so as
to build closer relations. Pakistan is also facing a huge shortage of natural gas, while
India badly wants to buy natural gas from Central Asia, and the pipelines will have to
transit through Pakistan. Thus, it will be a winwin situation for both countries.
25 Moreover, there are a number of goods that are traded illegally
1. Ghuman, R. S. (1986). IndoPakistan Trade Relations, New Delhi: Deep and Deep
Publications, 1986, p. 9.
2. Nontariff barriers include, in principle, all measures other than tariffs used to protect a
domestic industry. The nontariff methods used include the imposition of rigid safety
standards, strict administrative standards, global and bilateral quotas, orderly marketing
arrangements and voluntary export restraints.
3. Ali, W. (2004). India and the Nonaligned Movement, New Delhi: Adam Publishers,
2004, p. 127.
5. The Group of 77 is a coalition of the developing nations designed to promote the
collective economic interests of its member states and create an enhanced joint
negotiating capacity at the UN. There were 77 founding members of the group but
presently its membership has raised upto 132.
6. Haq, M. (1980). “The Third World Challenge: Negotiating the Future”, Foreign Affairs,
December 1980, pp. 398417.
7. Chandra, B. (1966). Rise and Growth of Economic Nationalism in India, New Delhi:
People’s Publishing House, pp. 55170.
8. Waslekar, S. (1988). India Pakistan Commercial Relations: Problems and Prospects,
New Delhi: Centre for Policy Research, p. 1.
9. Ibid., p. 2.
10. Ibid., p. 3.
11. Pakistan has not felt the necessity of devaluing her rupee. The problem of an
adverse balance of payment facing other countries was nonexistent in her case.
Moreover, her exports consisted mainly of raw materials and if she had devalued her
rupee she would not have been able to expand her markets in the hard currency areas.
The dollar area was an important source of capital goods and with devaluation, these
goods would have been costlier and less easy to obtain. This would have inevitably
retarded the pace of Pakistan’s industrial advance.
12. Begum, N. S. (1999). IndoPakistan Trade Relations. In Verinder Grover and
Ranjana Arora, World Community and IndoPak Relations, New Delhi: Deep & Deep
Publications, p. 160.
13. Bhatia, B. M. (1990). IndoPak Economic Relations: A Perspective. In Jasjit Singh
(Eds), India and Pakistan: Crisis of Relationship, New Delhi: Lancer Publishers, p. 74.
14. Vakil, C.N. (1950). (Eds). Economic Consequences of Divided India: A Study of the
Economy of India and Pakistan, Bombay: Vora & Co. p. 355.
15. See “IndiaPakistan Bilateral Trade: Past, Present & Future”. (2013). A report by
PHD Chamber of Commerce and Industry, New Delhi, p. 05, February 2013. Retrieved
16. See Protocol between the government of India and the government of the Islamic
Republic of Pakistan regarding shipping services. Retrieved from:
17. Waslekar S. op.cit., p. 7.
18. Ibid., p. 10.
19. In international economic relations and international politics, most favoured nation
(MFN) is a status or level of treatment accorded by one state to another in international
trade. The term means the country which is the recipient of this treatment must receive
equal trade advantages as the ‘most favoured nation’ by the country granting such
treatment. In effect, a country that has been accorded MFN status may not be treated
less advantageously than any other country with MFN status by the promising country.
All members of the WTO (Pakistan & India being members) agree to accord MFN status
to each other.
20. Acharya, L. and Marwaha, A. (2012). “IndiaPakistan Economic Relations”, Status
Paper, Federation of Indian Chambers of Commerce and Industry, February 2012, p. 8.
21.Ibid., p. 9.
22. The joint statement of the 6th round of talks on “Commercial and Economic
Cooperation” between Commerce Secretaries of India and Pakistan is available at:
23. Taneja, N. et al, (2013). “Normalizing India Pakistan Trade”, Working Paper No. 267,
Indian Council for Research on International Economic Relations, September 2013, p.
24. Ibid., p. 9.
25. Acharya, L. op.cit., p. 3.
26. Mehta,p. and Suleri, A. Q. (2012). “IndoPak engagement needs strategic depth”,
Financial Express, April 10, 2012.
27. Dikshit, S. (2012). “Zardari for emulating IndiaChina model for better ties”, The
Hindu, April 9, 2012.