Indo-Pak hostilities end economic engagement

India recently withdrew its Most Favoured Nation (MFN) status accorded to Pakistan, following the Pulwama terrorist attack on a CRPF convoy, and aerial combat engagements. This literally halts bilateral trade between these troubled South Asian neighbours. Now, New Delhi with this move plans to wage economic warfare against Islamabad to bring it to its knees -- in much the same manner that the latter has hit the former through cross-border terrorism.

This decision to curtail trade may not adversely impact Pakistan’s economy, because its largest trade partner is China, but will certainly impact some sectors badly.

Two commodities namely cotton, tea, besides tomatoes would affect Pakistani consumers most. Cotton is the most exported commodity from India to Pakistan. It constitutes 25% of the total export value. Pakistan, which has one of the largest textile industries in the world, faces a cotton crisis. Cotton production in Pakistan has lately fallen 35% and imports from India turn out to be much cheaper than from Australia and Africa.

Incidentally, Pakistan was the largest buyer of Indian cotton in the 2015-16 season (October-September). It bought 2.5 million bales (one bale is 170 kg); India’s total cotton exports were 6.5 million bales.

In 2018, India had exported 15.83 million kg tea to Pakistan, 7.43% more than the previous year. Pakistan had recorded a massive 35.8% increase in per capita consumption of tea between 2007 and 2016, according to the Food and Agriculture Organisation (FAO) United Nations Organisation.

Currently, Pakistanis consume 172,911 tonnes of black tea and it is expected to rise to 250,755 tonnes by 2027, as per FAO estimates. Usually, Pakistan buys average quality tea from India, which comprises largely dust and fanning, priced around $1.45 a kilo. Besides, tea is also routed to Pakistan via Dubai.

Pakistan would perhaps now suffer from a shortage of tomatoes because farmers from Kolar district in Karnataka who exported around 200 tonnes to Pakistan have now ceased to trade with this hostile western neighbour. Tomatoes are grown over 1,500 hectares in the district.

India granted MFN status in 1994 to Pakistan which implies concessions, privileges and immunity in trade agreements. Under World Trade Organisation (WTO) rules, a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, therefore the country is required to extend it to all WTO members. Pakistan reciprocated MFN status to India with Non-Discriminatory Market Access -- similar to MFN which in effect amounts to non-discriminatory trade policy.

Three components of trade

India-Pakistan trade ties have three components, namely: ‘black’ or illegal trade transacted through the land borders; circular or ‘informal’ trade which is carried out through ‘third’ countries and re-exported from there to Pakistan; finally, formal trade through imports/exports of merchandise through all recognised seaports, airports, land customs stations and inland container depots.

The illegal trade channels are smugglers who operate along the 675-km unfenced stretch of the Rajasthan sector along the contiguous Indo-Pakistan border; besides, carriers misuse personal baggage through the “green channel” facilities at international airports. Circular trade is conducted through agents who are stationed in free ports like Singapore or Dubai and is estimated to be $1 billion. Thus, the combined volumes of illegal and circular trade are much larger than formal levels of trade which in reality, therefore, amounts to ‘pseudo’ trade between the two countries. Bilateral trade includes a positive list with 1,934 items and the negative list of 1,209 items. However, informal trade is supposed to be three times the formal India-Pakistan trade. Even during peaceful political relations, bilateral trade is a challenge due to the lack of telecommunication and banking channels.

Clearly, therefore with political relations poised against this bilateral trade, the chances for effective economic engagement are diluted barring informal trade. These channels are not dependent on state/institutional support but are emblematic of political economy which disregards political constraints and driven by market forces.

Range of exports

India’s exports include organic chemicals, plastic articles, dyeing extracts, textile products, powdered milk, coconuts, polypropylene, polyester staple yarn, synthetic woven fabric, vegetables, especially peas, chemical products and imitation jewellery, among others. India has also traditionally supplied meat, artefacts and medicines to Pakistan. There has been a surge in demand for Indian cotton, dairy products and sugar, too.

Just as Pakistan faces a cotton crisis, India has lately been unable to produce sufficient cement due to the shortage of fly ash supplied by thermal power units.

This has triggered a surge in cement imports from Pakistan. Cement from Pakistan turns out to be cheaper. The average price of a sack of an Indian brand is around Rs 550 but Pakistani supplies are sold at Rs 480-500. Cement imports do not attract basic Customs duty but all major inputs such as limestone, gypsum and pet coke do. Indian cement makers have been pushing for additional duties on imported cement.

India imports from Pakistan edible oils and nuts, salt, sulphur, mineral fuels, mineral oils, cotton, raw hides and skins, other than fur skins and leather. India buys fruit, leather products, carpets, chemicals and rare earth materials from Pakistan.

For instance, traders in Agra have halted the import of Pakistani dates and pistachios after the latest round of subcontinental hostilities.

Moreover, the Indian government has also increased the import tax on products from Pakistan to 200% which is a step to discourage bilateral trade between these hostile South Asian neighbours.

India-Pakistan trade has been punctuated by several political-military downturns in the past but always bounced back with thaws in the political relationship. At what point this is likely to happen remains to be seen.

(The writer is a Professor who teaches International Relations and Strategic Studies at Christ Deemed to be University, Bengaluru)