On its own India cannot unleash an economic warfare against Pakistan but it can definitely ensure through diplomatic interventions that Pakistan is isolated internationally.
Economic warfare cannot be an effective strategy to rein in Pakistan. Here is why.
The Pulwama attack has generated anguish among Indians. The Narendra Modi government has also reacted quickly to address the situation through various measures. The Cabinet Committee on Security (CCS) met the very next day of the attack to work out a befitting response to Pakistan. One of the key decisions taken was to withdraw the Most Favoured Nation (MFN) status provided to Pakistan.
The idea behind this move is to unleash an economic warfare against the country such that it is deterred from indulging in any anti-India activities in future. However, the bad news is that such economic warfare cannot be an effective strategy to rein in Pakistan. Here is why.
In the case of Pakistan, we can analyse the impact of revoking the MFN status by assessing how far the Pakistani economy is dependent on us. India-Pakistan trade accounts for just $2 billion. If we try to put this in perspective, then Bangladesh, which is a much smaller economy than Pakistan, has trade worth $9 billion with India. Even within this minuscule trade, exports dominate Pakistan’s trade relationship with India where it has a consistent trade deficit.
According to the Department of Commerce (India), Pakistan’s trade deficit with India stood at $1,435.72 in 2017-18. Thus, firstly the two neighbours are trading only a small portion of their actual potential. A report by World Bank predicts that there is a potential of $39 billion trade between the two. And even within that, India exports much more than what it imports from Pakistan. Hence, revoking the MFN status will not impact Pakistan’s traders significantly enough, for them to lobby with their government to consider a policy shift towards India.
India and Pakistan also do not have a bilateral trade agreement with each other. This is quite an exception since India’s growth story has attracted other small neighbours towards seeking a free trade agreement with India. This is also ironical since India and Pakistan enjoy the most complementary economies in the region where both can forge win-win partnerships in areas such as automobiles, textiles, surgical instruments etc.
Both share a large land boundary and are natural trading partners. But despite this, even under the regional trading arrangement known as the South Asian Free Trade Agreement, Pakistan continues to take a protectionist position towards trade with India.
If we take the example of only the automobile industry, Pakistan’s own auto industry is suffering from a protectionist attitude. It will be much cheaper for Pakistan to import automobiles from India but it continues to rely on expensive imports from non-regional actors in order to avoid any dependence on India. In a seminal book, Professor Amita Batra of JNU notes that Pakistan’s consumers pay a heavy price for its conflict with India.
If we look at this economic relationship strategically, we will find that the deep state in Pakistan has carefully ensured that it does not develop a trade relationship where it ends up being in a position of dependence. India granted MFN status to Pakistan in 1996. But Pakistan did not reciprocate the gesture.
Similarly, when the SAARC Motors vehicles agreement was floated during the last SAARC summit, Pakistan chickened out by saying that it needs time to consult its provinces. Pakistan’s insecurity towards India extends to transit trade as well. During the framing of the Afghanistan-Pakistan Transit Trade Agreement, Pakistan vetoed any attempt by Afghanistan to involve India. It foresaw Afghanistan’s dependence on Indian economy as a threat to its own influence in the country.
The issue of India-Pakistan economic relations can be understood from the perspective of mainly three actors - the civilian leadership, the military leadership including the intelligence service and the businessmen of the country. India’s growth story has caught the attention of the civilian leadership with a series of leaders such as Asif Ali Zardari and Nawaz Sharif pleading the delinking of Kashmir from trade. On the other hand, the Pakistani military continues to see India as a threat and refuses to delink Kashmir from trade.
According to Pakistani economists, whom I interviewed for my doctoral project, since the time of General Zia-ul-Haq, military was very clear about not letting a pro-India lobby develop among the Pakistani business community. This required Pakistan to deter any meaningful economic relationship with India. This policy continues till date. In a series of interviews that I conducted with Pakistani businessmen (whose name have been protected for obvious reasons), they confessed that though the representatives of the deep state agree with the benefits of opening trade with India in private, in public, they play to the gallery.
A good example of Pakistani military’s reservations with respect to opening trade with India is the meeting between Sajjan Jindal and Nawaz Sharif that took place in Pakistan in 2016. Jindal was keen on furthering his business interests in Afghanistan by getting permission from Pakistan to use its territory. The military was quick to show its displeasure with the buzz being that Sharif found time to meet an Indian businessman but not Kashmiri separatists.
Kashmir might be a security problem for the Indian dispensation but for the Pakistani state, it is a project and definitely an opportunity. The refusal to delink trade from Kashmir is a part of a larger policy to protect the security establishment’s interest in the economy of the country. The political economy of the country is such that the military has its own commercial interests to fulfil.
The security establishment survives by painting India as an enemy and by selling everything from cement to biscuits by monopolising the country’s decision-making process. The average Pakistani businessmen who are enterprising and are looking for opportunities in India do try to lobby with their leadership. Unfortunately, the image of Pakistan as a sponsor of terror leads to their visa applications getting disapproved even from India.
In a situation where the state in Pakistan has categorically ensured that the trade relationship between the two countries does not mature to a level where dependence on India is created, it is anybody’s guess that the revoking of the MFN status will not have any impact on ground. However, the good news is that the economy of Pakistan is faltering. It has become an IMF addict and has approached the institution more than 12 times for help. The crony capitalism and support to terrorism is so rampant in Pakistan, that it does not have many friends left who are interested in doing business with it.
Once, ex-interior minister Ahsan Iqbal himself noted that no country was interested in investing in Pakistan after 9/11, however China proved to be a “real friend” and initiated the China-Pakistan Economic Corridor. The point though is that China cannot continue to play the saviour forever. FDI continues to fall in Pakistan and so do exports. On its own, India cannot unleash economic warfare against Pakistan but it can definitely ensure through diplomatic interventions that Pakistan is isolated internationally.