Linking India-Pakistan Trade to Intractable Issues Does No One Any Good

A few days ago, Mian Mohammad Mansha, the chairman of Pakistan’s largest business conglomerate, said in an interview that it was time for India and Pakistan to resume trade, which can, in turn, create other openings for better relations.

Trade between the two countries was virtually suspended in 2019, following the Pulwama terrorist attack and the Jammu and Kashmir Reorganisation Bill, creating hardships for thousands of families on both sides of the border.

The recent change of government in Pakistan provides yet another opening for resuming a dialogue between the two countries.

Pakistan’s new Prime Minister has already laid the ground by writing a letter to Prime Minister Modi in response to the latter’s good wishes, in which he wrote that “…peaceful and cooperative ties between Pakistan and India are imperative for the progress and socioeconomic uplift of our people and for the region”.

This follows other positive messaging from Pakistan in recent weeks and months, including the former Advisor on Commerce, Razak Dawood, saying that trade with India is the need of the hour and is mutually beneficial; and General Bajwa, Pakistan’s army chief, talking of trade and connectivity with India, and the need for both sides to sit down and resolve differences.

Also read: The Hidden Human Costs of Suspending India-Pakistan Trade

Rationale for international trade

Such messaging comes against the backdrop of a peaceful border, where the ceasefire has held for over a year.

We often hear the argument that trade cannot be conducted with hostile neighbours who have malicious intent. “We cannot be doing favours to those who want to want to destabilise us” is the refrain.

But such arguments miss the point that trade is not a reward or favour to anyone. Trade is a mutually beneficial exchange. You go to your neighbourhood grocery store even if you don’t like the shop owner, because it is the most convenient way for you to buy your groceries.

Similarly, you trade with your neighbouring country because you can find attractive prices for a wide range of products. This is the essence of international trade, where the government role is to provide a safe and unencumbered environment for the private sector that, in the process of trading and making profits, also provides better quality jobs (compared to domestically oriented firms) and benefits for consumers.

Benefits of resuming trade

Pakistan’s economy is of course struggling. Its new leadership is heading straight back to the IMF for talks on resuming its now on–now off Extended Fund Facility, which was conceived as a 39-month programme, approved in July 2019 for about $6 billion. Pakistan is in the midst of a balance of payments crisis, with its exchange rate under pressure, reserves at precarious levels, and a widening current account deficit, projected by the IMF to increase from 0.6% of GDP in 2020-21 to 5.3% of GDP in 2021/22.

India’s economy is also stressed in some respects. While it is forecast to continue its COVID recovery and grow at 8% in 2022/23 (down from an estimated growth in 2021-22 of 8.3%), its unemployment rate remains elevated at 7.9% in April 2022, according to estimates from CMIE.

More importantly, people seem to be leaving the labour market, perhaps not very optimistic about getting jobs: in March 2022, the number of people in the labour force shrank by 3.8 million.

Whichever way one interprets the employment/unemployment data, it is clear that India has a jobs crisis, with low levels of youth and female employment a major concern for policymakers. This becomes even more worrisome as growth is projected to slow down in future years (including by the IMF and the World Bank), implying still lower job creation than at present.

Both Pakistan and India are facing elevated inflationary pressures. This is also true for the rest of the world, with the Russian invasion of Ukraine exacerbating existing supply chain bottlenecks. However, that the rest of the world is also suffering from inflation is cold comfort for the millions of poor and unemployed in Pakistan and India.

A Gallup poll in January 2022 found that most people considered inflation to be the biggest problem for Pakistan; inflation was a major proximate reason for the successful no-confidence motion against the government of former prime minister Imran Khan.

Also read: As Imran Khan Roots for India-Pakistan Trade, How Can It Actually Begin?

Data from the Pakistan Bureau of Statistics shows March 2022 retail inflation at 12.7% (year on year), with perishable food items as high as 30%. Meanwhile, in India, retail inflation in March 2022 reached almost 7% (the highest in 17 months), and wholesale price inflation rose to 14.5%. The spike in wholesale prices is also likely to be reflected in retail prices in subsequent months.

Trade thrives when prices escalate and diverge across geographies. In the case of India and Pakistan, commodity trade in the past was often a means to stabilise domestic market prices. Pakistan’s exports to India have included dates, leather, hides and skins and woven fabrics. India’s exports to Pakistan included tomatoes, onions, cane sugar, fresh vegetables, coarse cereals, etc.

The somewhat different crop harvesting times in India and Pakistan mean that there are many agriculture products that can be traded to offset seasonal shortages. In the current context, trade between the two countries would surely have helped to keep some critical prices in check, including those for cotton in Pakistan and potatoes in India.

Besides agriculture and commodities, there is enormous scope for mutually beneficial trade between the two countries in a range of products and services.

Mansha spoke of exporting cement to India and buying cotton and car parts from India. Overall, even the pre-2019 trade between the two countries was just the tip of the iceberg.

In my work with Nadeem Rizwan and Priya Mathur in a World Bank study (A Glass Half Full: The Promise of Regional Trade in South Asia), we showed that potential trade between India and Pakistan could be as high as $37 billion, instead of the $2 billion in 2015. Both India and Pakistan could export products worth about $18 billion to each other, and even this figure is an underestimate since it does not include services. Such large volumes of trade could have highly beneficial impacts on employment and inflation in both countries.

In sum, there’s never a good time to cut off trade with a big neighbour, since trade is a vital source for economic development, but when your economy is in trouble, the timing can be especially poor, and is equivalent to driving with one hand tied behind your back. This applies not only to Pakistan, given its dire economic situation, but to an extent also to an Indian economy struggling to provide gainful employment and contain inflation.

Resuming trade and discussing economic cooperation does not mean that India and Pakistan have to give up on their core negotiating issues. All it means is that these issues can be taken up separately, even as trade is put on the fast track.

How might the future unfold if India and Pakistan return to their pre-2019 trading system, itself highly constrained?

One, this resumption can impart some momentum to start discussing a more “normal” trading arrangement, based on non-discriminatory tariffs and without artificial port restrictions. Two, it could allow examination of other economic opportunities, including investment and tourism. Three, and further down the line, it could open up space to discuss broader South Asian issues that have been constrained by India-Pakistan frictions.

For the sake of the people of India and Pakistan, let us hope that Mansha’s wishes on trade resumption are realised sooner rather than later.

Sanjay Kathuria is a Senior Visiting Fellow at the Centre for Policy Research, India; Fellow at the Wilson Center, Washington, D.C; Non-Resident Senior Fellow at the Institute of South Asian Studies, Singapore, and Visiting Professor at Georgetown University and Ashoka University. Twitter: Sanjay_1818.