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Exclusive: Pakistan "backtracked" on India trade status: source

NEW DELHI (Reuters) - A senior Indian government source accused Pakistan on Friday of backtracking since announcing it had granted its neighbor the trading status of Most Favoured Nation, but Islamabad immediately denied the allegation.

The disagreement exposed potential hurdles in attempts to improve relations between the two traditionally hostile neighbors.

Pakistan announced it was upgrading India to a most favored nation (MFN) on Wednesday, a move that would help normalize commercial ties between the two nuclear-armed rivals by ending heavy restrictions on what India is allowed to export across the border.

Wednesday’s announcement was trumpeted on both sides as a milestone in improving relations shattered by attacks by Pakistan-based militants in Mumbai in 2008. Formal peace talks, known as the “composite dialogue,” resumed in February.

Speaking on condition of anonymity, the source told Reuters business and political lobbies in Pakistan seemed to have forced the trade move to be put on hold, leaving India to “wait and watch” as to when the process would resume.

“From the initial announcement of an unconditional grant of an MFN, there appears to be a clear backtrack,” the source said.

The statement was dismissed by Islamabad.

“Pakistan is not backtracking,” Foreign Office spokeswoman Tehmina Janjua told Reuters. “Pakistan clearly stated that our cabinet gave approval to move forward on MFN status in principle.”

India’s Foreign Ministry spokesman could not immediately be reached for comment.

Trade has long been tied to political issues between the neighbors, who have fought three wars since independence from Britain in 1947.

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Lasting peace between the two countries is seen as key to stability in the South Asian region and to helping a troubled transition in Afghanistan as NATO-led forces plan their military withdrawal from that country.


Wednesday’s announcement had been cheered by Indian policymakers and commentators. Rajiv Kumar, the director-general of the influential business lobby group FICCI, called it “truly momentous news” in a newspaper column on Friday morning.

But what appeared to be confusing statements from Pakistani officials after Wednesday’s cabinet meeting aroused the suspicions of the Indian media, which bristle at any suggestion of duplicity on the part of the country’s arch rival.

Although most editorial comment was positive, The Times of India accused the Pakistan government of a “flip flop.”

Islamabad is under pressure from domestic business groups such as the pharmaceutical industry over liberalizing trade with India, although “political lobbying is the greater concern,” the Indian source said.

And in the buildup to the announcement, some Pakistani industries had expressed alarm at the prospect of being flooded with cheap Indian goods.

Riaz Hussain, secretary general of the Pakistan Pharmaceutical Manufacturing Association, feared that, if allowed, India would dump low-priced drugs on the market.

“If they want to give India MFN status, fine, but all the pharmaceutical finished goods should be put on the negative list,” Hussain said, referring to items which would not be tradable.

“We have taken up that at all levels. We produce products as per the international standards. Now, why is there a need to allow India to export to us? They don’t allow us, as they have put up trade barriers.”

Pakistan’s Trade Secretary Zafar Mehmood reiterated the deal was still on.

“The cabinet has given approval for the complete normalization of the trade relationship, and MFN is fully included in it and it is part of it,” Pakistan’s Trade Secretary Zafar Mehmood said in comments broadcast on state television.

“Rather I will say that it is MFN plus that they have given approval for the entire road map.”

India and Pakistan are together home to 1.4 billion people, but bilateral trade flows are paltry -- a legacy of mistrust.

The hope is that an increase in trade will feed into wider trust between the two countries and help them resolve major flashpoints, like the disputed Kashmir region, although a solution to this problem has proved intractable for decades.

The two sides have also pledged to liberalize restrictions on business visas, curb non-tariff barriers and bolster trade on their land border. Exporters are now forced to route many goods via third parties such as Dubai, slowing delivery times and upping costs.

Less than one percent of India’s merchandise exports are sold to Pakistan, in terms of dollar value, but in September a joint statement pledged to double bilateral trade flows within three years to about $6 billion.

Additional reporting by Chris Allbritton, Zeeshan Haider and Augustine Anthony in ISLAMABAD; editing by Frank Jack Daniel and Ron Popeski