Progress will be arduous but is worth striving for.
The devastation to life and property caused by last fortnight’s flash floods and landslides in Pakistan has rekindled the idea of resuming trade between India and Pakistan. About a third of Pakistan’s geographical area, and 15% of its population of 200 mn, has been impacted by the heavy rainfall, estimated to be three times the national average over the last 30 years. Reportedly, 1,400 human lives have been lost and the cost of reconstruction is estimated in the region of US$10 bn. Calls for urgent humanitarian aid and the opening of borders to permit the import of vegetables and essential food from India ,have come from Pakistan’s Finance Minister Miftah Ismail. Previously, Bilawal Bhutto Zardari, the young Foreign Minister in the new government, had also urged the normalization of trade relations between Pakistan and India, as well as its other immediate neighbours.
It is worth recalling that it was in reaction to India’s abrogation of Article 370 of its Constitution about Jammu & Kashmir, that Pakistan decided to put a complete stop to bilateral trade in late 2019. Prior to that in 2018, India had actually become its 8th largest exporter with a 3.2% share in Pakistan’s imports; India accounted for 64% of its meat imports, 42% of cotton, and 15% of milling industry products (wheat and cereal flour). Sugar, dairy and vegetables imports were also considerable. With the restrictions, these numbers came down drastically to a virtually unnoticeable 0.5% of the share of imports. That said, even in best of times, the overall bilateral trade between the two neighbours was not significant, seldom reaching US$3bn. This number remained paltry despite there being obvious complementarities and economic benefits in intensifying bilateral trade.
The frequent ups and downs in political relations—which for the most part have remained adversarial for the last 75 years—have not permitted the full attainment of bilateral economic potential. A mutual trade framework has not been evolved and there is no trade or investment agreement. In fact, the only worthwhile understandings entered into between the two neighbours are the Indus Water Sharing Agreement, brokered by the World Bank in 1960, and the 1972 Simla Pact for the exchange of prisoners of war and the withdrawal of the troops across the international border. That was post Pakistan’s defeat in East Pakistan, by then newly christened Bangladesh.
When both India and Pakistan entered the World Trade Organisation (WTO) in 1996, their trade was supposed to be covered by its rules and procedures. An important provision of these rules was the Most Favoured Nation (MFN) status, a jargon for giving equal treatment to all trading partners. Pakistan, however, has ab initio not honoured this stipulation vis-a-vis India; in turn, India withdrew this position from Pakistan in February 2019 after the Pulwama attack. Through this chequered history, bilateral trade has been restricted with arbitrary impositions—for instance, Pakistan had a negative list of 1,209 products before February 2019 and India a somewhat shorter one, customs duties on imports and exports have been imposed at will by both nations, and the mode of transport for specific exports and the points of entry are mandated. With such constraints, it is little wonder that even at its peak, India’s total trade with Pakistan has been under 1% of its aggregate global trade.
Interestingly, a substantial amount of trade, especially Indian exports to Pakistan, takes place through Dubai. For the last decade, UAE has been the second largest exporter to Pakistan, with its share in total Pakistan import ranging between 10% and 14% (China has remained at the top with its share soaring from 20% to 28%). With its various intermediaries involved, such entrepot trade through the Gulf undoubtedly reduces the inherent advantages of free and direct transactions. In fact, now that India and the UAE have put a free trade agreement in place, the temptation of pursuing such trade will only grow. Additionally, with the Iranian government permitting India to complete the Chabahar port close to their border with Pakistan, yet another convenient location will become available for indirect trade.
Ever since the two nations were created in 1947, the unfortunate reality of economic relationship between India and Pakistan is that it has been extraneous considerations and not ground level economic or business considerations that have determined the pace of growth. The Pakistani military leadership has directly ruled the country for 33 years, and heavily influenced it for the rest by determining the complexion and policies of civilian governments. Not being accountable to anyone, it has seldom put public interest ahead of its own. By repeatedly taking myopic views on the imperative of human development, it has pushed the hard working and talented citizens in the country into impoverishment rather than ushering in welfare and prosperity. Severe inequalities in wealth and income between a handful of civilian-families and army generals on the one hand, and the suffering citizen facing utter hopelessness on the other, have been perpetuated one generation after another. The all-pervasive dominance of the military has been described well by G. Parthasarathy, a former Indian High Commissioner to Pakistan, when he quotes a post, “while every country has an army, in Pakistan, the army has a country.” For decades together, the army has taken over all critical functions of governance, ruling the politics of the nation through the notorious ISI. Let alone the executive, it has even able to have its sway on the judiciary as well.
Conventional Pakistani thinking about India is a product of convoluted circumstances. In many ways, it stems from the constant portrayal to its citizens that India’s occupation of Jammu and Kashmir is totally illegal. Evicting India from there and otherwise in check by whatever means required, has been the bedrock of the Pakistan Army’s strategy of ingratiating itself with the general public and thereby perpetuating its control of the dysfunctional state. So far, the military has succeeded with this approach of living by the sword, and there is little evidence that things will change any time soon. Despite this, the nation has also succeeded in getting international recognition and acceptance, besides considerable military and financial support. For the first few decades, this came from Western nations led by the US and UK who found Pakistan geographically well situated as a strategic ally in their handling of the Cold War with Russia. For the last two decades, the Chinese, in pursuit of their ambition of dominance over South Asia, have come in handy. Given its large population, and genuine need for effecting noticeable improvements in their living standards, multilateral aid agencies through their munificence have also ended up helping keep the military afloat.
Such “success” in attracting international and bilateral assistance has also enabled the Pakistani military (and the numerous puppet governments propped up by it) to maintain its hostile stance towards India. As Sharat Sabharwal, another well regarded Indian High Commissioner to Pakistan, puts it in his recent book “India’s Pakistan Conundrum: Managing a Complex Relationship,” it is Pakistan’s fragile self-identity of being “not India” that comes in the way of rational decision-making. He quotes a former Minister Aitzaz Hussain when he says that Pakistanis “have been told that their very identity was their un-Indianness: banish this thought from their mind and the country will collapse.” His suggestion is to build mutual trust to reach out to the general public of Pakistan through “the information revolution which has made it difficult for the state and the security establishment to control the national narrative.” Despite the deep entrenchment of the Kashmir dispute in Pakistan’s social consciousness, and the challenges emanating from the military’s intransigence in letting relations between the neighbours improve, India must invariably demonstrate its readiness to explore ways and means to change the status quo.
For this to truly happen, it would need to put aside the persisting differences (whatever their background might be) and instead build on the commonalities of interest, howsoever small these might appear at the moment. Only then, rational choices would emerge from the consistent Indian recognition that political parties in Pakistan are permitted very little leeway to push peace keeping efforts with India. Consequently, any overtures and discreet proposals for improving the state of affairs have to originate in India. The suggestion by the sagacious Premier Vajpayee that the basis of the relationship with Pakistan should be “Insaniyat,” or on humanly considerations, carries much gravitas. A vision of mutual prosperity in the region can lower the perception in the average Pakistani’s mind that India is an eternal enemy or an existential threat.
It is in the light of these constraints in governance, that India needs to view Finance Minister Miftah Ismail’s suggestion to open up trade borders for importing essential foods, as well as the blunt but well-meaning earlier appeal to normalize trade by its Foreign Minister Bilawal Zardari. Not unexpectedly, a few days later, Premier Shehbaz Sharif had diluted the earnestness of this proposal when he stated in an interaction with the Australian High Commissioner: “While Pakistan desires peaceful ties with India based on the principles of equity, justice and mutual respect, a just and peaceful resolution of the Jammu & Kashmir dispute in accordance with the relevant UNSC resolution and the Kashmiri people, was indispensable.” Under such political compulsions, trade-normalisation will inevitably proceed in flips and flops. Yet, it is worthwhile to keep up the endeavours. Trade has the proven potential to bring about greater prosperity, and can ultimately bring the whole region greater stability with the lessening of hostilities.
In pursuance of the message of sympathy sent out by Prime Minister Narendra Modi to his counterpart in Pakistan, India would meanwhile do well to be ready to immediately send out large quantities of relief material such as tents, medicines, rubber boots and ready-to-eat food packages. Such relief would be in a similar vein to what it did when the civilian government in Afghanistan had fallen to the Taliban in mid 2021. After the 2006 earthquake in Pakistan and similar floods in 2010, India had sent out such essentials; conversely, during the 2003 earthquake in Gujarat, India had accepted relief-aid from Pakistan. If Pakistan’s internal politics are making it difficult to accept such emergency relief today, India could consider offering it to the India based UN relief agencies for distribution under their banner. Soon after the floods, the UN launched a campaign for assistance to Pakistan and sought $160 mn to support government relief efforts. The international aid agencies have also called for the opening of borders with India to allow emergency supplies to enter.
The opportunity to offer food and other essential aid in a time of widespread distress might by itself end up facilitating the re-initiation of the process of normalising trade. However, given the numerous known roadblocks, the expectations at every stage should be moderate. An initial goal could be the restoration of status quo ante to what prevailed before February 2019. Prior to Pakistan putting a complete halt to trade, and India hiking up duties on certain imports to 200% and withdrawing MFN status, the aggregate bilateral trade was worth $2.6bn. This dwindled to under half a billion dollars (during the pandemic, as an exception to its total ban, Pakistan had allowed the import of pharmaceuticals and related raw materials from India). Without raw cotton imports from India, the exports of cotton textiles from Pakistan, its biggest foreign exchange earner, have halved. Similarly, without Indian imports, sugar prices have sharply escalated and there is an acute domestic shortage.
After the initial steps, a second stage of normalisation could include expanding the list of items that can be exported, with the negative lists on both sides being sharply reduced along with the applicable duties on allowable exports. Alongside, India could seriously consider whether Pakistan could be facilitated by being permitted to pay for its imports from India by partially paying in its own currency rather than all in a hard currency. A sort of counter trade arrangement rather than plain trade in which Pakistan, given its precarious foreign exchange situation, is required to pay virtually through its nose for the imports, should be the goal. (Under a countertrade regime, exchange of goods and services takes place in whole or part, with other goods and services as payment, rather than with any acceptable currency). Such accommodating moves would also help reduce the entrepot trade through Dubai and other ports. Finally, perhaps sometime in the not-too-distant future, a trade pact (not necessarily a free trade agreement to start with) can be endeavoured. A broad agreed draft of 2013-14 is available to be built upon. Undoubtedly, reaching that stage will be a protracted process, and at times even a frustrating exercise. Yet, it is worth striving for.
Dr Ajay Dua, a development economist, is a former Secretary of the Union Ministry of Commerce & Industry.