The official trade between the two countries is small at $2.4 billion. It could have been many times more.
India and Pakistan were once described as ‘natural trade partners’ by The Economist. Indeed, if there were friendly relations between the two neighbours, trade and investment partnership would have flourished and the welfare gains would have benefited the common person on both sides. In agriculture, manufactures and in services, much complementarity exists between the two countries. India is Pakistan’s giant neighbour with 1.3 billion population and huge resources. Pakistan is comparatively much worse-off economically and is currently struggling with high inflation, rising sovereign and domestic debt, a falling currency (138.39 Pakistan rupee to a dollar) and a fiscal deficit of 5.1 per cent.
The official trade between the two countries is small at $2.4 billion. It could have been many times more according to the World Bank and could reach $37 billion if there were no tariff or non-tariff barriers.
Smuggling amounting to another $5 billion takes place along the border. A substantial amount of trade also takes place through third countries like the United Arab Emirates (UAE) and Singapore, amounting to around $5 to $10 billion. After 2012, there have been no further business negotiations between the two countries. A roadmap was worked out between the commerce secretaries from both sides for improving trade and investment in September 2012. There was a meeting between the two prime ministers in 2014 and an attempt was made to normalise trade. Prime Minister Modi promised to look into making visas for business persons from Pakistan easier.
Recently, since the Pulwama attacks, India has revoked the Most Favoured Nation (MFN) clause which it had granted to Pakistan in 1996 in accordance to the WTO rules under which all WTO members have to grant MFN to all their trade partners who are members of WTO. It involves granting them equal tariff treatment. India has granted Pakistan equal tariff treatment for more than two decades. But after the recent conflict, India is set to impose 200 per cent duty on all Pakistani exports.
All these years, Pakistan has backed out from granting MFN to India though its parliament had approved of it. It is possible that many ordinary Pakistanis, especially working in micro, small and medium enterprises, would suffer deeply after the steep increase in custom duties imposed by India and there are reports that Pakistani exports are lying at the Wagah-Attari border because Indian business is failing to lift them on account of the high duty added. These include sports goods, steel instruments like knives, scissors, types of surgical instruments and cement.
In the past, the trade between Pakistan and India never really took off even though from our side we tried our best and reduced the negative list of banned imports under the SAFTA (South Asian Free Trade Agreement) initiated under the SAARC. Pakistan continued to have a long negative list of 1209 items which acted as an effective non-tariff trade barrier. Among the banned goods in Pakistan’s list are textiles, garments, pharmaceuticals, plastic and polymer, cars, trucks and auto parts.
Even though trade is not playing an important part in India-Pakistan relations, Pakistan cannot afford to have a prolonged conflict with India because its economy is in shambles. It is in urgent need for a bailout from the International Monetary Fund (IMF) of around $12 billion. It needs more foreign aid and loans from other sources but its credit rating by international agencies has fallen. Recently, Saudi Arabia and China have given $2 billion each in loans to Pakistan.
Its net forex reserves are at a very low of $7.2 billion which can support imports for just six weeks. Its trade deficit is at $31.2 billion. The foreign investment inflows are not enough to finance the trade deficit.
India is in a more comfortable position with forex reserves of around $405 billion but its economic outlook is not as bright as before because its GDP growth has slowed down to 6.6 per cent recently. The foreign investment inflows have also slowed down and investors are waiting and watching on two counts — the outcome of the forthcoming elections and the fear of escalation of the armed conflict between India and Pakistan. To regain the confidence of investors, a strong signal is needed from both sides that the conflict will be de-escalated. Also clearing the air about the details of the Balakot strike will help because different versions are circulating in the western media. A report by Farhad Manjoo in The New York Times has debunked the claims made by both sides.
The threat of a prolonged conflict may witness a slowdown of FPI (Foreign Portfolio Investment) inflows into India which will have an adverse effect on the rupee. Following the Pulwama attack, FPIs withdrew Rs 3,000 crore from the Indian markets.
The Royal Bank of Canada has predicted that the rupee will decline to Rs 80 to a dollar in 2019. India imports 83 per cent of its oil needs and if there is also a rise in crude prices, the rupee will have a free fall.
The escalation of the conflict will mean diversion of budgetary resources towards buying of arms. India is the second biggest arm purchaser in the world. For two developing countries in which millions are living below the poverty line, it makes little sense to keep buying arms from highly advanced countries like Russia, Israel and the US. Both India and Pakistan are ranked low in the HDI index and are burdened by poor social and physical infrastructure. There is high unemployment in both the countries and both urgently need to increase public expenditure on health and education.
Under such circumstances, any escalation of war will increase the financial burden on both and will only make ordinary people suffer as the governments spend more on arms rather than on improving the quality of life. Dialogue between the two countries is very important for reducing the geopolitical tension in the region at this juncture.
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David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW GermanyRead More +