India’s twin deals and their likely impact on Pakistan’s exports

Conniving Modi played a Machiavellian card and played it well. India’s trade developments with Europe and the United States show a recalibration of regional economic dynamics, which will inevitably impact Pakistan’s export competitiveness.

Prime Minister Narendra Modi slyly engaged with the EU through a proposed free trade agreement, presenting the bloc as a counter to US tariffs. Following this, he then also accommodated key US trade conditions, including the restriction of oil imports, which resulted in a substantial reduction in India’s effective tariff rates. Under this framework, India’s tariff burden is expected to fall from approximately 50 per cent to 18 per cent, lower than Pakistan’s effective tariff exposure of around 19 per cent. Valued at an estimated USD 500 billion, this arrangement places India in a comparatively advantageous position within global markets.

The critical question now is how Pakistan can mitigate the structural disadvantage this creates for its exports. India’s ability to sustain export growth despite previously higher tariff barriers, estimated at 12 percent in Europe and nearly 30 percent in the United States, has been supported by strong state support and corporate muscle.

Recent policy decisions by Prime Minister Shehbaz Sharif clearly showcase an intention to target current constraints on exporters. The Prime Minister recently announced initiatives aimed at supporting manufacturing and exports, reflecting a commitment to economic stability and growth. The impact and effectiveness of such measures will depend on the extent to which further reforms can be pursued within a tight fiscal space.

Given recent improvements in diplomacy with the US, through visits by Field Marshal General Asim Munir and Prime Minister Shehbaz Sharif, there is a case for pursuing preferential tariff treatment. The aim should be to mirror the favorable 10 percent tariff rate extended to other countries.

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Beyond external diplomacy, one immediate area of concern is the continuation of the 1% advance tax. Simply put, advance tax assumes that a company will earn income for which it would pay tax. If a company is not earning that income, then the government is required to refund the tax to the company. This approach places undue strain on firms’ cash flows and effectively accelerates tax collection without corresponding guarantees of earnings. The removal of this would provide immediate relief to exporters.

Secondly, mandatory contributions to institutions such as EOBI and SESSI also represent a recurrent cost for businesses, despite the accumulation of money in the accounts of these institutions. The Prime Minister, similar to his approach with EDS, should suspend this requirement, for at least a period of three years, to allow companies the fiscal space to maneuver their cash flows better.

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Additionally, the recently introduced tax system requiring export firms to pay either a 2 percent turnover tax (1 percent as minimum tax and 1 percent as advance tax) or a 29 percent corporate tax, whichever is higher, warrants reconsideration. Given this is the toughest year for Pakistan’s textile and rice exports, we suggest that the government can keep the same regime but remove the additional advance tax (adjustable) of 1 percent to ease pressure without dismantling the broader tax framework.

In an environment where many businesses are shutting down, LSM is struggling, and exports are declining, the government should partner with businesses to resolve issues. An adversarial relationship between the FBR and Pakistan’s industry will exacerbate decline across all fronts. With India’s attempts at dismantling Pakistan’s economy, as a retribution for the defeat it faced at the hands of Pakistan’s military, industry and government need to join hands to ensure we grow exports and our foreign reserves.

Copyright Business Recorder, 2026