Pakistan Foreign Minister Ishaq Dar, also a former finance minister, stressed the issue of India-Pakistan trade in a late March press conference while highlighting the concerns of Pakistan’s business community. Dar also shared with reporters that he had already started in-house talks with the relevant stakeholders in the Foreign Ministry. He explained the eagerness of his decision by stating that many businessmen in Pakistan are already importing goods from Pakistan’s eastern neighbors via third countries, which increases the cost of those goods.
However, India on the other hand, doesn’t see many incentives to trade with Pakistan. Therefore Pakistan has to offer India much more than trade incentives to resume bilateral trade.
How did India-Pakistan trade reach its current nadir, and what are the prospects for future trade relations?
Background
From time to time, New Delhi has stated that it will not engage with Pakistan until or unless Pakistan curbs cross-border terrorism. India took this stance after the Pulwama suicide bombing attack in 2019.
After the Pulwama episode, India accused Pakistan and revoked its Most Favored Nation (MFN) status. For Pakistani products, India imposed a 200 percent import duty. In the same year, India accused Pakistan of smuggling narcotics and weapons, terror financing, and money laundering in Jammu and Kashmir and suspended cross-Line of Control (LoC) trade.
Since 2019, Pakistan and India have observed a relationship at the charge d’affaires level, a stage below the ambassadorial level. When the Indian government revoked Articles 370 and 35-A of its constitution, eliminating the limited autonomy if India-administered Kashmir, the Pakistani government halted trade with India and downgraded its diplomatic ties and vice versa.
But Islamabad couldn’t maintain its stance and lifted the ban on Indian medicines because of price hikes and the shortage of critical pharmaceuticals. In 2021, the former Imran Khan government in Pakistan tried to normalize trade relations with India, but due to the Kashmir issue and domestic pressures, the attempt never materialized.
Pakistan’s Pursuit of Regional Connectivity
Pakistan aims for westward connectivity, according to the 2022-2026 Pakistani National Security Policy (NSP). However, Islamabad’s relationship with the Taliban regime in Kabul is deteriorating due to the resurgence of the Tehreek-e-Taliban Pakistan (TTP) and the Afghan Taliban’s lack of willingness to stop the TTP from using Afghan soil for terrorist attacks in Pakistan.
In the case of another western neighbor, Iran, both states pledged to increase bilateral trade to $10 billion during the recent visit of Iranian Prime Minister Ebrahim Raisi to Pakistan. However, this trade deal faces complications, as Washington has warned Islamabad that it could face sanctions for deepening economic engagement with Iran.
Considering the challenges in the neighborhood, the only option left for Pakistan is China. Pakistan is already engaged in the China-Pakistan Economic Corridor (CPEC). However, CPEC has slowed down over the years and is not contributing to the economy of Pakistan as of now. Pakistan has to explore more options in the neighborhood, and trade with India seems to be the only one left.
Lack of Incentives for India
In fiscal year 2022-2023, India’s foreign trade reached $1.6 trillion. However, India’s exports to Pakistan were only $627 million (0.1 percent of total exports) and imports were $20 million, which is only 0.003 percent of total imports to India. Even before the trade bans, in the fiscal year 2018-19, India exported $2 billion in goods to Pakistan, which was only 0.6 percent of all Indian exports. Similarly, in terms of imports, India took in $495 million worth of goods from Pakistan, 0.096 percent of total imports.
For India, Pakistan has only ever held a minor share in its trade, and therefore New Delhi can overlook Pakistan if deemed necessary.
Furthermore, a lack of political stability, fewer foreign reserves in U.S. dollars, strict visa policies, and Pakistan’s small market compared to the Indian market makes trade with Pakistan come with numerous risks.
Beyond its economic value, trade is considered a great confidence building measure (CBM). Pakistan and India have a history of military hostility, but some voices in India believe that it is not relevant anymore. Shashi Tharoor is of the view that Pakistan’s military is preoccupied with its western borders so it cannot engage with India as well. As there is minimal threat there is no need to invest in CBMs.
Potential for Trade Negotiations
Historically, successful negotiations between India and Pakistan have occurred in private settings. As India is undergoing elections, this provides room for quiet diplomacy. Former Indian High Commissioner to Pakistan Ajay Bisaria suggested that both states should relocate their high commissioners when the new government is in office in India.
Besaria provided reasons for optimism. First, Imran Khan was anti-India when he was in power; now the Sharifs are in control again and are less critical toward India. Besari argued that both states are looking for a fresh start and a post-election environment in both states will allow it.
Most likely, the Bharatiya Janata Party (BJP) will win its third term in the 2024 India general elections. Prime Minister Narendra Modi and Pakistan Muslim League- Nawaz (PMLN) supremo Nawaz Sharif have been said to have good ties. Modi visited Pakistan on Nawaz’s birthday in 2015. Moreover, Modi’s BJP predecessor, Atal Bihari Vajpayee, also visited Pakistan when he was the prime minister of India in 1999 for the historic Lahore Summit. At that time Sharif was the prime minister of Pakistan. Thus, PML-N and the BJP always have some potential to cooperate.
In addition, both states have held to the 2021 ceasefire, which is rare in India-Pakistan relations. Finally, since Pulwama, there have been no spectacular acts of terrorism, which is a strong premise for restarting India-Pakistan relations.
The challenge for Pakistan is that it has to internally resolve the issue of its pledge not to engage with India due to the revocation of Article 370. India’s position on the issue has not changed.
Many nations set their political differences aside when it comes to trade. We can see the examples of China-U.S., India-China and China-Taiwan trade. Pakistan’s government has to embrace this thought internally.
Furthermore, business-to-business links can be another advocate for Pakistan and India trade. Pakistani businesspeople can convince the profit-seeking private sector of India to lobby for bilateral trade. Pakistan can also facilitate Indian trade to Afghanistan and Central Asia through its territory, an interplay of geoeconomics. According to experts Moeed Yusuf and Rabia Akhtar, normal trade relations between both states will materialize along the east-west axis. Pakistan will be able to access East Asian markets under its “Vision East Asia Policy” and India will have a route to Central Asian republics, with which India has friendly relations.
Lastly, although India is set to become a global power, its regional influence is declining, predominantly for two reasons: China’s increasing influence in South Asia and India’s tilting focus toward the Indo-Pacific. Through engagement with Pakistan, India will increase its presence in the South Asian region. While Islamabad will not allow New Delhi to become a regional policeman, good relations between the two will boost the connectivity and trade throughout the region.
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