Economic costs of strained India-Pakistan ties


By Dr. Vaqar Ahmed

The deteriorating relations between India and Pakistan have unfortunately resulted in the freezing of cross-border economic activities. There are some very poor farmers, traders, small and medium enterprises and, more importantly, consumers on both sides who have begun to suffer immensely due to the decisions taken by both countries.
It doesn’t seem naive to policy makers that — as a result of diplomatic differences which are not new — they should stop the flow of food items, medicines, and other essentials across the border and via land and sea routes.
Right after the Pulwama incident in February this year, India had suspended its normal trading ties with Pakistan and imposed 200 per cent duties on goods exported from the country.
Islamabad remained equally oblivious to how such decisions could impact people’s livelihoods; and – in reaction to India’s decision to do away with the special status accorded to Indian-administered Kashmir on August 5 – decided to suspend all trade ties with New Delhi.
Both the business community and consumers on either side have no idea how the Pulwama incident or India’s decision to revoke Article 370 of its constitution could result in the closure of businesses and trade of eatables and life-saving drugs.

What role have the farmers in both Punjabs and on either side of Kashmir played to pay such a price?
One hasn’t seen such adverse reactions to even worse diplomatic crises as have been witnessed between South and North Korea, Germany and France, China and Taiwan, and Argentina and Brazil. What is worse is that policy makers in India and Pakistan justified their moves to suspend trade by citing that the trade volumes with each other are minimal.
In fact, trade volumes remain subdued because neither of the two nations removed the tariff and non-tariff barriers to trade in the first place – a fact demonstrated in rigorous research produced by the World Bank Group, Sustainable Development Policy Institute (SDPI) in Islamabad, Lahore University of Management Sciences, Research Information Systems in Delhi, Consumer Unity and Trust Society in Jaipur, and the Indian Council for Research on International Economic Relations (ICRIER) in New Delhi, to name a few.
Besides, the potential was never limited to trade. In fact, the SDPI’s research had indicated in 2013 how both countries and the region were set to gain if both liberalized cross-border investment in infrastructure and energy.

This is why numerous scientific studies argue that it is wrong to limit Pakistanis who were previously importing agriculture and pharmaceutical raw material from India; and, Indians who were importing cement, animal hides, dates, traditional medicine, gypsum, fruits and horticulture items from Pakistan. Both groups will now have to find alternate suppliers.
Another dimension highlighted in the SDPI and ICRIER’s work shows how: curbs on trade flows on both sides resulted in the smuggling and informal flow of goods which is harder to prevent through administrative measures, and both governments stood to gain in terms of tax and customs revenues if informal trade between the two countries was formalized.
Goods easily flow from the long land border shared by the two countries and also through a third country. In times of trade restrictions, there is evidence of an informal flow of Indian fruits and vegetables, textile, automobile parts, jewellery, cosmetics, medicine, tobacco, herbal products, paper and paper products, and crockery into Pakistan through routes which include Bangkok, Dubai, Kabul, Kandahar, and Bander Abbas.
Likewise, India’s informal imports from Pakistan included at one point textiles, spices, dry fruits, electronic parts of Chinese origin, cement and other horticulture items. The trade-in-services is another casualty of the deteriorating India-Pakistan relations.
Additionally, despite informational, financial and visa problems, there was a steady flow of patients from Pakistan to India, while benefits of herbal medicine and advice on usage was also available from Pakistan to India.
In both countries, health sector professionals were starting to find ways to cooperate and provide emergency and relief services to Afghan patients and possibly create health sector value chains which could extend to Central Asia.
At one point, it was proposed that the South Asian University – an International University sponsored by the eight Member States of the South Asian Association for Regional Cooperation (SAARC) were mulling looking into setting up a joint Center of Excellence in Medical Education & Research – an initiative which could easily lead South Asia to becoming a hub of medical tourism.
Finally, it is concerning that Afghan consumers are at the recieving end of end up inflation due to India and Pakistan’s suspended trade ties.
While the Ministry of Commerce in Pakistan has clarified that Afghanistan’s transit goods from India will not suffer, it is clear that Pakistan will not allow Indian goods for Afghanistan to pass through land routes for the foreseeable future – a desire repeatedly expressed by President Ashraf Ghani in the recent past.
(Dr. Vaqar Ahmed is an Economist and author of ‘Pakistan’s Agenda for Economic Reforms’ published by the Oxford University Press. Twitter: @vaqarahmed)