MFN and beyond: Getting a foothold in the Indian market

Market access is only part of the solution in kick-starting export growth.

Since the government’s decision to grant MFN status to India, considerable debate has abounded over the benefits the decision is likely to accrue for Pakistan. With potential access to the world’s second largest market in sight, a new dawn in economic relations with our neighbour is being heralded.

The theoretical benefits of trading with a regional partner notwithstanding, the MFN decision is likely to be of little tangible value for Pakistan beyond political posturing. Firstly, Pakistan’s economic and in particular, export stagnation has more to do with deep rooted structural deficiencies in the economy and misplaced policy objectives than the issue of market access to India. Secondly, MFN has done little in terms of enhancing Pakistan’s access to the India market – it has rather done the opposite. The latter fact actually carries potential damage for Pakistan’s frail industrial base. Even politically, the decision has not been valuable in improving our international image or garnering support in international forums.

Contrary to popular perception, mostly created by international experts, Pakistan’s denial of MFN has not been the main reason for a low volume of trade, and therefore of the sustained economic hiatus between the countries. India has been equally culpable, if not more, by maintaining a long list of non-tariff barriers to block imports which, in effect, target products from Pakistan.

The MFN decision has, however, guaranteed open access to the Pakistani market for India. Whatever increase in trade that takes place as a result will most likely be unidirectional, ie exports from India to Pakistan. Even without the MFN, recent trends indicate a worsening trade balance for Pakistan with India to the tune of $1 billion in the last five years. Conversely, Pakistan’s exports to India have remained static around $330 million since 2006-7 despite MFN access granted by India. According to bullish Indian estimates, the immediate impact of the MFN decision could worsen this trade balance by a further $7 - 8 billion.

Regardless of MFN status, Pakistan can and must look towards rapid expansion of exports, including those to India, but for that our economic priorities need to be set straight. Owing to its much higher productivity and substantial returns on investment, manufacturing growth is the key to economic expansion and a rise in exports. The history of all advanced countries, from Britain’s industrial revolution in the 18th century, the East Asian Miracle in the 20th century, to the recent rise of China and India, bears witness to this fact. In all these countries, market access was only part of a larger strategy of industrial targeting where manufacturing growth fuelled export growth.

Sadly, Pakistan’s strategy has been more akin to putting the proverbial cart before the horse. While the government’s recent market access initiatives have been noteworthy, industrial performance to make use of the increased access has been poor. Both public and private investments in manufacturing have nosedived since 2006-7, with 11% shrinkage only over the last one year. Resultantly, the manufacturing sector has been on a considerable decline recording 4% or less growth since 2005. The textile sector which forms almost 50% of Pakistan’s exports and is considered the country’s growth engine has remained virtually static and our share in global textile exports has actually diminished.

Besides the improbability of export expansion to India as a result of the MFN decision, the other potential economic benefits are only as good as textbook theories. Surely, analysts drooling over the possibility of importing cheaper raw materials from India must also see that unless there is a fast growing industry that can put them to use, the raw materials will only give competition to our local suppliers of the same product. Also, the potential advantage to the Pakistani consumers from cheaper Indian products may be miniscule compared to the economic deprivation caused by unemployment when domestic producers are displaced by Indian imports.

However, now that the MFN decision has been taken, there must be ways to restrict the impending damage while taking some advantage of the lopsided situation. For export expansion to the world in general and to India in particular, overall economic restructuring is required, through a well coordinated industrial policy. Higher value added industries must be targeted after careful analyses, and they should be given adequate protection. The government should not be afraid to use the WTO compliant trade remedy laws including anti-dumping, countervailing and safeguard duties to counter import surges, if the need arises.

The writer is a PhD candidate in Political Economy at the University of Cambridge.

Published in The Express Tribune, March 5^th, 2012.