India-Pakistan relations: Suspending trade a typically Pakistani self-goal

• Pakistan has suspended trade ties with India after the latter’s decision to scrap Article 370 for Jammu & Kashmir.
• However, the move has little practical impact, as Pakistan accounted for just around 0.3% of India’s total trade in 2018-19.
• Despite attempts to liberalise trade in 2012, formal trade between the two countries has hardly grown over the years.
• Rather than raising the bogey of Kashmir, which is India’s internal matter, Pakistan should work to de-escalate tensions and look to enhance the trade relationship in its own interest.

Shocked and stunned by India’s decision to scrap article 370 in Jammu & Kashmir, Pakistan has been looking desperately at ways to express its displeasure and gain popular support. Some of the measures announced as a mark of protest include spending Pakistan’s Independence Day August 14 ‘in solidarity with Kashmiris’ and recognizing August 15 as Black Day. Furthermore, it has decided to downgrade bilateral relations and suspend India-Pakistan trade ties.

The decision is yet another example of Pakistan’s short-sightedness and poor economic prudence. Pakistan has repeatedly tried to push its Kashmir agenda into talks with India and exported terror in its bid to keep the cauldron boiling. But the fact is that Jammu & Kashmir is purely India’s internal matter. Moreover, India had already removed Pakistan’s MFN status in February after the dastardly Pulwama attack and increased import duties by 200%. 

On the question of trade, the decision by Pakistan impacts its own economy more than India. From India’s perspective, Pakistan ranks 48^th on its list of trading partners with total trade of US$ 2.56 billion in 2018-19, around 0.3% of India’s total trade (Department of Commerce). Pakistan’s imports from India in 2018 on the other hand take a relatively much higher share of 3.9% of its imports from the world.

India has a significant trade surplus of US$ 1.57 billion vis-à-vis the trade equation, with top exports being cotton, organic chemicals, plastics, tanning or dyeing extracts, machinery, pharma, iron & steel and coffee, tea, mate and spices. Top items imported from Pakistan are mineral fuels, fruits & nuts, salt, Sulphur, etc, ores, raw hides and skins, and oilseeds.

India-Pakistan trade has remained erratic over the past few years, due to the political issues. Mohit Singla, Chairman, TPCI comments, “We will not be losing much as Pakistan had not even granted us MFN status. Pakistan is an important export destination for India but not vice-a-versa. This is despite the fact that Pakistan imposes a large number of NTMs (143) on Indian exports, the major ones b1eing export related measures (25.2%); technical barriers to trade (24.5%); and sanitary and phytosanitary measures (22.4%). These are ‘concentrated on agriculture, plants, and food-related products.” On the other hand, India had granted Pakistan MFN status way back in 1996.

The two countries had made substantial progress towards liberalization of India-Pakistan trade in 2012, when Pakistan moved from the positive list approach (allowing a small number of items to be imported) to a negative list approach (restricting trade in a small number of items) for the first time. India also made attempts to address non-tariff barriers. But this has hardly brought any significant gains, with trade fluctuating from US$ 1.94 billion to US$ 2.61 billion from 2011-12 to 2018-19. A study by ICRIER finds that besides the size of the trade pie, the post-liberalisation phase has also seen a moderate increase in the composition of India-Pakistan trade through rise in exports of products like organic chemicals, oilseeds, nuclear reactors and coffee, tea, mate and spices.

Tea itself is an example of unmet trade potential. Pakistan is the second largest tea importer in the world, and largely imports Kenyan tea despite neighbourly relations with India. Sujit Patra, Secretary, India Tea Association (ITA), comments, “From less than 1 million kg in the 90s, tea exports reached a peak of 25 million kg at one point due to consistent efforts by ITA, exchange of delegations and education of Pakistani importers/blenders on the quality and varieties of Indian tea.” However, in the last few years delegations have stopped due to various reasons, and exports have fallen. In 2018, tea exports to Pakistan from India reached 15.83 million kg. India exported 5 million kg in January-June, 2019, a significant decline compared to 7.4 million kg in January-June, 2018.

On the other hand, informal trade continues to garner a significant share. According to a study, the informal India-Pakistan trade was estimated at US$ 4.71 billion in 2012-13, much higher than the formal trade. This included items like jewellery (24%), textiles (20%), machinery and machine parts (8%), electronic appliances (6%) and chemicals (5%). India’s informal exports to Pakistan were estimated at US$ 3.9 billion in 2012-13, while imports stood at US$ 721 million. Some shift from informal to formal trade was taking place, but after the suspension of ties, informal trade is expected to grow again. The study by ICRIER makes a few policy recommendations like improving information sharing, having exhibitions and fairs for each other’s exporters, addressing impediments impacting exports by rail, and having an institutional framework to address issues.

From a pragmatic perspective, Pakistan would have done itself a world of good if it discussed ways to improve its trade and business relations with India. It is no secret that the Pakistani economy is in dire straits and there are other ‘downgrades’ to worry about. Pakistan’s long-term credit rating was downgraded to ‘B-Negative’ from ‘B’ by Standard & Poor’s (S&P) in February this year amid structural weaknesses and heavy external borrowing, particularly from China.

S&P admitted that Pakistan’s economic outlook and external position had “deteriorated beyond expectations). It is clear that Pakistan needs a positive political and economic relationship with India to a much greater degree than the other way around. Rather than persistently crying itself hoarse over the Kashmir bogey and supporting terrorism to escalate tensions, Pakistan would be better off working to enhance ties with India and working for the prosperity of the region.