Things have been moving in a positive direction on the India-Pakistan frontier. Pakistan’s military acted with speed to return to the Indian military a helicopter that had inadvertently crossed the Line of Control on October 23. A few days earlier, Pakistani Foreign Minister Hira Rabbani Khar announced that her country was finally considering granting India Most Favoured Nation (MFN) status. India bestowed MFN status on Pakistan in 1996. Under World Trade Organization agreements, the MFN principle is supposed to ensure that WTO members do not discriminate against one another, allowing all countries in the organization to benefit equally from the lowest possible tariffs.

Pakistani Commerce Minister Makhdoom Amin Fahim, who led a high-level business delegation to India last month, had said in Mumbai that there was a strong opinion in his country that India should be given the Most Favoured Nation status. Khar said the India-Pakistan dialogue process had been resumed after a gap of two years. "We want progress on not just one but a number of issues with India on permanent basis besides normalization of overall bilateral relations," she added. The MFN status will allow India to enjoy greater trade flexibilities with Pakistan at lower tariffs and higher import quotas. The products that are likely to benefit the most include textiles, cotton, man-made filaments, vegetables, coffee, tea, and spices. In return Pakistan has asked for the immediate lifting of non-tariff restrictions on its exports to India. The environment to grant MFN status to Indian turned favourable in the wake of the recent tensions in Pakistan’s ties with its top trading partner, the United States. Pakistan’s exports at an estimated $4 billion in 2010-11 make the US the only country with which it enjoy surplus.
This decision has already raised a chorus of objections from some quarters of Pakistan's business and commercial communities, which fear that Indian goods might flood their markets and eat into their markets. The pharmaceutical manufacturers, in particular, have expressed their grave reservations about allowing highly successful Indian companies into Pakistan.

Consequently, it’s far from clear when this long-denied status will finally be offered to India. However, were it to come to fruition, trade between the two fractious neighbours would expand dramatically from the current paltry $2.7 billion (with about an equal amount transacted through illegal channels). India-Pakistan trade was worth $1.85 billion in 2009-10, of which Indian exports accounted for $1.78 billion. In April-December 2010, bilateral trade is estimated to have jumped to a little over $3 billion with India’s exports at $1.7 billion. It is estimated that if the progress continues, trade volume could triple to $10 billion over the next three years. India granted Pakistan MFN status some 15 years ago, the way for Pakistanis wanting to do business in India has remained largely blocked because of a number of non-tariff and tariff barriers. Pakistan has been indecisive for all these years on reciprocating with an MFN status for India, and has been accused of not following the current economic draft as articulated by the World Trade Organization.

Nevertheless, Islamabad has been giving concessions to imports from India by adding ever-newer items to the positive list of trade items from across Wagah over the years. This sets theory apart from practice. Getting more trade moving over the Wagah land border, which is in Punjab state, was agreed to during a meeting between Indian Prime Minister Manmohan Singh and Pakistan President Asif Ali Zardari in 2008.

But the attacks on Mumbai by Pakistani militants in November of that year, which led to the deaths of more than 160 people, put those efforts on hold. In recent months, trade officials from the two nations have been working to push the check-post and other issues, such as making it easier for Indians and Pakistanis to obtain business visas. A more general agreement, though, on changing the trading regime is likely to be harder to achieve.

Each nation has its own well-being to protect. As a result, it was not completely unexpected that Pakistan’s decision to award MFN status to India would coincide with the preparation of a negative list of items by the Commerce Ministry in Islamabad. These items will not be allowed to be imported from India to protect domestic interests, such as the all-important textile sector. The Pakistani Commerce Minister`s recent visit to India after 35 years indicated a readiness to try the alternative to old conflict. However, it is not that Pakistan is not getting anything of immediate value from the MFN decision. New Delhi is willing to not oppose tariff concessions for Pakistani exporters in the European market that we so very much require. This give-and-take is one reasonable reason why local businessmen appear to have softened their old position on the MFN for India. Conversely, their disposition will be defined by the entries on the negative list that is in the making at the Commerce Ministry.

With Pakistan favourably inclined to give the most favoured nation (MFN) status to India, both countries have also agreed to work out modalities to open trade in the petroleum sector, energy and commodities as well as opening up of the banking sector and cross-border investments. Union Commerce and Industry Minister Anand Sharma has accepted the invitation extended by Pakistan's Trade Minister Makhdoom Muhammed Amin Fahim and a high-level business delegation led by him would be visiting Pakistan in November this year to give a fillip to the economic relations and cooperation. This would make it possible for SAFTA to enter into negotiations with ASEAN to create a bigger block, thus having ASEAN as a partner, on the East and ECOTA, which has Turkey and Central Asia, on the West.

The benefits to both countries and especially to Pakistan, of a freer trade regime are apparent. However, it’s intriguing to consider the timing of Khar's announcement. It comes barely weeks after India and Afghanistan signed an agreement that promises to bolster strategic cooperation. Pakistan, which had been hoping to play a major and influential role in shaping Afghanistan's future as the United States starts to draw down its forces, now suddenly fears that India might be in a position to significantly expand its presence in Afghanistan. Accordingly, the Pakistani foreign and security policy establishments probably deemed it politic to make a nod toward India. Even while making this conciliatory gesture, Khar still felt compelled to harp on an age-old Pakistani shibboleth, namely that the Kashmir dispute needs to be resolved through a free and fair plebiscite.

Given the deep distrust of India that pervades much of Pakistan, the initial hostility of some quarters of its business community and the unwillingness of the military to adopt a more pragmatic stance on the Kashmir dispute, one is forced to wonder if the granting of the MFN status to India will help contribute to a more relaxed milieu in the subcontinent. That said, it will bear watching when this first step toward a slightly more cordial relationship actually transpires.