CMER WORKING PAPER No. 06-44
This paper asks how opening up of wheat and sugar trade between two nuclear neighbours, India and Pakistan, would affect welfare in the two countries. We conduct a partial equilibrium analysis to simulate welfare implications of trade between the two countries under three alternative trade regimes: a) under an FTA between India and Pakistan, b) under SAFTA, and c) under a grant of mostfavoured nation (MFN) to India by Pakistan. We conduct simple welfare analysis for wheat, on the basis of real world data of FY2005, and for sugar, based on data for FY 2000-01. In both these years, India had a net surplus and Pakistan had a net deficit for both wheat and sugar. We show that among other things, favourable weather conditions play a critical role in generating these surpluses, which are most likely to get reversed in years when weather conditions become more favourable to Pakistan. While we find there would be net gains to both countries, in case trade happens, the highest welfare gains accrue to both countries under free trade agreement. Further analysis reveals that if subsidies to Indian wheat farmers are removed, their competitive edge disappears in favour of wheat farmers in Pakistan.