Can trade and people-to-people relationships survive prolonged political estrangement is a question worth our consideration?

Since Partition in 1947, India–Pakistan relations have been characterised by a persistent contradiction. Political disagreements, territorial disputes and security concerns have repeatedly interrupted economic and social relationships that geography, history and commercial complementarities would otherwise encourage.

The debate over restoring trade is hardly new. It has resurfaced after successive wars, diplomatic breakdowns and terrorist attacks, only to recede when political relations deteriorate. Yet the underlying economic argument remains relevant: two neighbouring economies, sharing a long border, common commercial traditions and complementary production structures, have never fully explored the possibilities of economic cooperation.

This is not an argument for placing commerce above national security. The wars of 1947–48, 1965 and 1971, the Kargil conflict of 1999, and subsequent terrorist attacks have created genuine and enduring security concerns in India. Mumbai in 2008, Uri in 2016, Pulwama in 2019 and Pahalgam in 2025 have demonstrated how quickly the prospects of normalisation can be reversed.

The question is not whether trade can resolve political disputes. It cannot. It is whether the complete suspension of economic and people-to-people engagement is necessarily the only available response, or whether carefully defined channels of engagement can coexist with legitimate security requirements.

Economic Interdependence to Political Estrangement

At independence, the two economies were considerably more integrated than they are today. Pakistan depended substantially on Indian markets and suppliers, while the subcontinent inherited common commercial networks, transport infrastructure and industrial linkages.

Partition disrupted these arrangements. The Kashmir conflict, disagreements over financial settlements and growing political mistrust progressively weakened commercial relations. The 1965 war brought bilateral trade virtually to a standstill. The 1971 war and the emergence of Bangladesh further complicated the relationship.

Yet successive attempts at reconciliation recognised that political differences need not preclude economic engagement. The 1972 Simla Agreement, the 1999 Lahore Declaration and the Composite Dialogue initiated in 2004 reflected, in different ways, the need to move beyond confrontation.

The 2004–08 period was particularly significant. The ceasefire along the Line of Control, cross-border contacts, trade discussions and the opening of cross-Line of Control trade in 2008 created opportunities for limited cooperation. The Mumbai terrorist attacks in November 2008, however, severely disrupted the process.

The pattern was repeated following the Uri and Pulwama attacks. In 2019, India withdrew Pakistan's MFN status and imposed a 200 per cent customs duty on Pakistani imports. Pakistan subsequently suspended bilateral trade following India's constitutional changes in Jammu and Kashmir.

The Pahalgam attack in April 2025 led to another major deterioration. India closed the Attari Integrated check post to passenger and goods movement and prohibited direct and indirect imports of goods originating in or exported from Pakistan. Pakistan announced reciprocal trade and transit restrictions.

These developments demonstrate the fragility of economic engagement when the political and security environment remains unsettled.

What the Trade Figures Tell Us

The scale of bilateral commerce has remained remarkably small relative to the size of the two economies. Government of India figures, compiled by India's Directorate General of Commercial Intelligence and Statistics (DGCIS), provide the following comparable series:

Financial year   Bilateral merchandise trade (US$ million)

2020–21            329.26

2021–22            516.36

2022–23            647.21

2023–24           1,191.73

2024–25          558.24

Source: Government of India, Ministry of Commerce and Industry, Rajya Sabha, Unstarred Question No. 1487, 1 August 2025.

The recovery between 2020–21 and 2023–24 was followed by a sharp contraction in 2024–25. Pakistan accounted for only 0.05 per cent of India's total merchandise trade in the latter year.

The impact of the restrictions following the Pahalgam attack was visible almost immediately. Bilateral trade in May–June 2025 fell from US$103.45 million in the corresponding period of 2024 to US$13.17 million, a decline of approximately 87 per cent.

The asymmetry is important. India has a much larger and more diversified trading network and is relatively less dependent on Pakistan as a trading partner. Pakistan, with a smaller industrial base and more limited access to neighbouring markets, could potentially gain more from access to Indian suppliers and consumers.

The latest DGCIS database now includes country-wise data through March 2026, but the Pakistan-specific annual export and import totals need to be extracted separately from its interactive tables. 

More importantly, India continues to maintain its prohibition on direct and indirect imports from Pakistan. The WTO's notification of India's restriction, effective from June 2026, records the prohibition as covering all product chapters, subject to government-approved exceptions. Thus, the commercial relationship remains constrained by policy, not merely by declining market demand.

Economic Case for Engagement

The potential gains extend beyond the conventional argument that neighbouring countries should trade with one another. Pakistan's textile and pharmaceutical industries could benefit from access to competitively priced Indian cotton, chemicals, pharmaceutical ingredients and industrial inputs. Indian producers could find additional markets for pharmaceuticals, machinery, chemicals, agricultural products and other manufactured goods.

Agriculture offers seasonal complementarities in vegetables, fruits and other commodities. Shorter transport distances could reduce freight costs, delivery times and wastage. Industrial producers could benefit from more efficient sourcing and lower inventory costs.

When direct trade becomes difficult, commercial transactions do not necessarily disappear. Some are diverted through third countries such as the UAE and Singapore, adding intermediary, handling and transport costs.

An ICRIER study by Nisha Taneja and Samridhi Bimal estimated informal India–Pakistan trade at US$4.71 billion, including trade routed through third countries. This is a historical research estimate, not a measure of current trade or economic losses. Nevertheless, it illustrates how restrictions can redirect rather than entirely eliminate commercial demand.

The recently reported US$40 billion loss claimed by the Pakistan–India Business Council should also be treated cautiously. Its methodology has not been independently established. It is better understood as a business representative's estimate of the costs of prolonged disengagement than as a verified measure of foregone national income.

The Larger South Asian Opportunity

The India–Pakistan relationship cannot be viewed in isolation from the economic future of South Asia. According to the World Bank, intraregional trade in South Asia is approximately US$23 billion, against an estimated potential of at least US$67 billion. It accounts for barely 5 per cent of the region's total trade, compared with around 25 per cent in ASEAN.

These figures reveal a structural weakness. South Asia has large consumer markets, substantial labour resources and complementary agricultural and industrial production; yet it has struggled to build integrated regional supply chains.

The consequences extend beyond bilateral commerce. Better connectivity between India and Pakistan could eventually facilitate trade with Afghanistan and Central Asia. Restrictions also weaken the practical relevance of SAFTA and the possibility of developing regional production networks.

At a time when global companies are diversifying supply chains and exploring alternative manufacturing destinations, South Asia cannot fully capitalise on these opportunities while its economies remain commercially fragmented.

People-to-People Relationships

Perhaps the most important dimension of the debate is the relationship between governments and societies. Partition created political borders but did not erase shared languages, cultural traditions, literature, music, food and family relationships. The continued interest in each other's cultural traditions demonstrates that social connections can survive even when diplomatic relations deteriorate.

The Kartarpur Corridor, inaugurated in 2019, offered an example of how carefully negotiated arrangements could facilitate religious access despite wider political disagreements. Cross-Line of Control trade and travel, introduced in 2008, similarly enabled divided communities to re-establish commercial and social contacts.

The suspension of cross-LoC trade in 2019, following concerns raised by India about its alleged misuse for illicit activities, also offers an important lesson: social and commercial initiatives require credible security, monitoring and enforcement arrangements.

Trade has a value beyond its monetary contribution. It creates recurring relationships between businesses, suppliers, workers and consumers. Academic exchanges, professional associations, cultural interaction, religious pilgrimages and humanitarian contacts can preserve relationships across political boundaries.

Such connections do not guarantee peace. But they can sustain constituencies that recognise the costs of prolonged disengagement.

Disagreement Without Disengagement?

The immediate restoration of unrestricted trade is neither realistic nor necessarily desirable under the prevailing security circumstances. But the choice need not be between complete political normalisation and complete social and economic disengagement.

A more differentiated approach deserves consideration when security conditions permit. Humanitarian and consular arrangements, religious pilgrimages, academic and cultural contacts and professional exchanges could be maintained through transparent institutional mechanisms.

Business associations could continue dialogue and document the costs of restrictions. Any eventual resumption of trade could be phased, beginning with carefully selected products and supported by digital customs documentation, transparent payment channels, end-use verification and effective border enforcement.

This would not require either country to abandon its stated political positions. Nor would it mean overlooking terrorism or other security threats. It would simply recognise that different forms of engagement have different purposes and can be assessed separately.

Moving Beyond Disengagement

Ultimately, India–Pakistan relations are not merely a bilateral diplomatic question. They are also a test of whether South Asia can move beyond the political divisions imposed by its history and realise more of its economic and human potential.

Trade cannot substitute for peace, and people-to-people relationships cannot resolve territorial disputes. But preserving economic and social channels of communication can prevent political disagreements from becoming a permanent condition of societal separation.

The challenge is not to choose between security and economic engagement. It is to manage security concerns without making disengagement the only instrument of policy.

(The writer is a retired Special Secretary, Government of India, and a commentator on financial, geoeconomic and regional issues. The views expressed are personal. He can be reached at ppmitra56@gmail.com.)