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Pakistan faces dilemma on trade ties with India

Haroon Janjua Islamabad
April 5, 2021

The Pakistani government's recent flip-flop on the partial resumption of trade with India highlights how geopolitical considerations — rather than economic or rational — drive policymaking.

Narendra Modi and Imran Khan
In a sign of rapprochment between the two sides, Indian PM Modi (L) and Pakistani PM Khan (R) recently exchanged letters

Pakistan's government last week put a hold on restarting limited imports of sugar, cotton and wheat from India until New Delhi reviews its 2019 decision to revoke the Kashmir region's special status.  

It reversed the decision made earlier by Pakistan's Economic Coordination Committee (ECC) to give the green light for imports from India, which would have ended nearly 20 months of trade suspension between the rivals.

The government's decision came after sharp criticism from opposition parties. They slammed Prime Minister Imran Khan's administration for not consulting the parliament and trying to mend ties with New Delhi without first resolving the Kashmir dispute.

After the reversal, Khan stressed that trade with India would not be normalized until New Delhi resumed Kashmir's special constitutional status.

Tensions over Kashmir remain high

Kashmir is a territory that is claimed by both India and Pakistan and partly controlled by each, with China also controlling the most remote segment of the region. India and Pakistan fought two of their three full-fledged wars over the Kashmir region.

Pakistan halted trade and diplomatic ties with India in 2019 after New Delhi imposed direct rule on the part of Kashmir it administers and imposed strict security controls there in anticipation of unrest at the decision.

Fawad Chaudhry on Conflict Zone

There has been a frosty standoff since, but signs of rapprochement recently have included Indian Prime Minister Narendra Modi's excahnging letters with his Pakistani counterpart, Khan, as well as a resumption of talks last week on the use of resources from their shared Indus River.

In February, Pakistan and India also agreed to continue a ceasefire at the often-tense Kashmir border.

Distrust and animosity cloud policymaking

Anti-India sentiment runs deep in Pakistan, but experts say it does not help the struggling Pakistani economy.

"Anti-India sentiments have always been there in Pakistan, and those in power have successfully exploited them for their benefits," Amit Ranjan, a research fellow at the Institute of South Asian Studies at the National University of Singapore, told DW.

He pointed out that New Delhi's moves affecting Kashmir over the past two years have further strengthened anti-India forces in Pakistan, resulting in a total breakdown in trade and diplomatic ties.

"Cutting off such relations has been far from being practical as it puts a tremendous burden on the economically struggling Pakistan. Goods from India are always cheaper than from anywhere else," he said.

Khurram Husain, a Pakistani business journalist, told DW that anti-India sentiment is rooted in geopolitics, nothing else. "It grows and diminishes with the requirements of Pakistan's foreign policy," Husain said.

Observers say the deep-seated animosity between the nuclear-armed neighbors is clouding rational policymaking on the part of some political leaders.

"It's also being exploited by the opportunistic Pakistani opposition to try to make Imran Khan look soft on India. Throw in the mix Kashmir, and the government's options to try to open up a dialogue with India become very limited," Claude Rakisits, honorary associate professor in the Department of International Relations at the Australian National University, told DW.

Pakistan's struggling economy needs help

Pakistan's economy is currently in the doldrums, a position made worse by a third wave of the coronavirus pandemic, which has seen the reintroduction of partial lockdowns across the country.

The economy of the Muslim nation, with a population of 220 million people, has slid deeper into crisis since Khan took over as PM in 2018. In the 2 1/2 years of Khan's tenure, GDP growth fell from 5.6% to -0.4%.

The country is in debt to the tune of nearly $114 billion (€96.85 billion) — more than 85% of its gross domestic product.

To boost growth and control spiraling inflation, Khan removed his finance minister last week and appointed a new one as part of a government shake-up.

Given the fragile economic situation, Pakistan cannot afford hostility with India, experts say.

"Even limited trade with India will certainly help Pakistan's sluggish economy," Ranjan said.

"By resuming economic ties, for instance, Pakistan can benefit from India-produced COVID vaccines, which are relatively cheaper but effective in the fight against the pandemic," he added.

Husain, the journalist, has a similar view. "Opening up trade with India in specific commodities, like some food items and cotton, can help control food inflation pressures," he argued.

Rakisits said the nations' difficult relationship meant that too many potential economic benefits are being squandered. "But it will take two to tango to fix this nonproductive relationship," the expert noted. 

"Having normal trade relations, including the lowering of tariff and nontariff barriers and granting the Most Favorite Nation status to each other, would be a good start but it would need much more than that in the long run," Rakisits said.

Geopolitical considerations trump economy

Observers say Islamabad should reverse the decision and resume trade with India.

The countries do not have to be too ambitious to start with, Rakisits said.

"A few easy, small steps like a cricket bilateral series, a successful meeting of the Indus Water Commission and easing of visa restrictions to facilitate family visits, could help set the tone," Rakisits added.

Before Pakistan and India cut ties in August 2019, their two-way trade amounted to a negligible $2 billion. Some estimates suggest that bilateral commerce could rise to $35 billion a year if restrictions were completely lifted.

Nevertheless, Rakisits said, a normal bilateral trade relationship could only be established after a permanent resolution to the Kashmir dispute.

Husain said relations were being driven by geopolitical considerations.

"So long as this remains the case, no measures on the Pakistani side will help restart political and economic ties with India," Husain said.

Haroon Janjua
Haroon Janjua Journalist based in Islamabad, focusing on Pakistani politics and societyJanjuaHaroon