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Hard-line Politics in India and Pakistan Stymie Deeper Trade Ties
Earlier this month, Indian Foreign Secretary Subrahmanyam Jaishankar went on a whirlwind tour of all seven nations of the South Asian Association for Regional Cooperation (SAARC). The objective was to discuss the implementation of reforms, ranging from developing infrastructure to combating terrorism and improving governance, which member states agreed to during last year’s SAARC summit in Nepal. Strengthening the SAARC to boost South Asia’s economic integration and development has been a key foreign policy objective of Indian Prime Minister Narendra Modi’s government, but beyond that regional agenda, Jaishankar’s trip to Pakistan was also a chance to restart dialogue on bilateral issues, including closer economic ties, between New Delhi and Islamabad.
The election of Pakistani Prime Minister Nawaz Sharif in May 2013 and Modi a year later had raised hopes for better economic relations between India and Pakistan. Both men lead conservative, business-friendly governments with parliamentary majorities and had promised domestic economic reforms and greater regional trade cooperation. Most importantly, they had strong public support for such efforts. In a 2013 poll, 72 percent of Indians identified trade as key to creating peace with Pakistan. Within Pakistan, too, there is also widespread public support for trade with India, with nearly two-thirds in favor in 2014. This should ostensibly have made the job easier for both governments.
Nevertheless, relations between the two countries soured soon after Modi’s election, and once again trade normalization and, with it, greater economic integration within SAARC have fallen victim to hard-line politics and parochial interests.
Trade within South Asia has traditionally been minimal, making it one of the least economically integrated regions in the world. By 2013 intraregional trade was only 4 percent of South Asian countries’ total global trade. Much of that is a result of the limited trade between India and Pakistan, two of the region’s largest economies, which stands at a paltry $2 billion. This, of course, is official trade. There is also parallel and brisk black-market trade between India and Pakistan—mostly run out of Dubai and dealing largely in consumer goods—worth as much as $10 billion. The potential for official trade, however, is estimated to be anywhere from five to 20 times the current volume by the World Bank and the Peterson Institute, respectively.
According to the State Bank of Pakistan, expanding trade with India could give Pakistan average annual savings of anywhere from $400 million to $900 million. Yet Pakistan has long resisted opening its economy to Indian imports. A lot of opposition stems from Pakistan’s farm lobby, automotive and car parts production industry, and from pharmaceutical and chemical manufacturers. Businesses in these sectors suffer from low levels of development or, in the case of farmers, do not receive subsidies on the scale of their Indian competitors, and therefore fear being driven out of the market by cheaper Indian imports. These groups have lobbied the government to maintain protectionist policies, and in the case of farmers even threatened to violently block Indian imports if their demands are not met.
In addition to special interest groups, Pakistan’s powerful army, which maintains its own business empire in everything from cement to cereal production to pharmaceuticals, has long resisted normalizing trade with India. It has only considered granting most-favored nation status to India as a bargaining chip to be used for larger concessions from New Delhi regarding security concerns in Afghanistan and dialogue over Kashmir.
But the key driver of the impasse now is Sharif’s loss of control over Pakistan’s foreign policy. After facing months of protests last year, his government won a promise from the military to not intervene by bargaining away its decision-making authority over foreign policy matters. With the generals back in the driver’s seat, India-Pakistan rapprochement is suffering setbacks. That’s already evident from rising tensions and skirmishes along the Line of Control in Kashmir.
For all of Sharif’s weakness and the opposition from Pakistan’s various business lobbies, there are factors in India, too, that are impeding closer economic ties. The electoral gains of Modi’s Bharatiya Janata Party (BJP) and members of the ultra-right-wing Rashtriya Swamasevak Samaj (RSS) last year brought Indian hawks with conservative stances on Pakistan—such as National Security Adviser Ajit Doval, External Affairs Minister Sushma Swaraj and Defense Minister Manohar Parrikar—to key positions in Modi’s cabinet.
Last October an Indian Home Ministry official even told the media that instructions from Modi’s office were for Pakistan to suffer “deep and heavy losses” in the event of border clashes.
India illustrated this hardball approach by calling off bilateral talks last August, when Pakistan’s high commissioner to New Delhi decided to meet with Kashmiri separatists ahead of the meeting. At the time, the Kashmir issue, which had momentarily receded in importance with the prospect of rapprochement, was again heating up because of the BJP’s plan to remove the state of Jammu and Kashmir’s autonomous status.
The move has had Pakistani policymakers fearing that India will ask for Kashmir, internationally recognized as disputed territory, to be delinked from any bilateral talks.
All this illustrates that national security concerns now dictate New Delhi’s Pakistan policy. In such a constrained environment within India, trade relations will likely not improve. Progress on certain Indian nontariff barriers that Pakistani businesses have long complained of is not in the cards either. Moreover, while a liberalized visa system is in place between the two countries, renewed tensions will likely also lead to greater scrutiny for business visas, which Pakistanis already find difficult to obtain.
At the same time, the excessive checks and harassment Pakistani traders face in India due to security concerns may not let up anytime soon.
Previous proposals for closer trade ties, including special economic zones along the Punjab border region of both India and Pakistan, look as unlikely as ever in the current climate. For now, politics trumps profits on both sides of the border.
The peace lobbies in India and Pakistan are largely powerless with hard-liners in power, making any progress on trade subject first to a lowering of the political temperature. But the prospects of that are not bright. As ever,
old politics and interests are impeding any new ideas on trade between India and Pakistan and once again blocking the prospect of more regional economic cooperation.
Shehzad Qazi is a fellow at the Institute for Social Policy and Understanding and a pollster working in emerging markets.
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