Trade and terror cannot coexist if discussions and fear are incompatible.

Pakistan may want to normalise relations by bifurcating their “India policy” from their “Kashmir policy”, but this is no longer acceptable to India

Pakistan Foreign Minister Ishaq Dar’s press conference in London on 23 March created a bit of a flutter in the frozen India-Pakistan relationship. Dar was asked whether relations with India would improve under the new dispensation in Islamabad; Dar’s reply was interesting. He said that the government would sit with all “stakeholders” (read Pakistan Army) and seriously consider and examine if “at least to the extent of trade and economic activities something can be done”. Note that he was asked about relations between the two countries but he spoke of only some kind of economic interaction. He admitted that there was a lot of pressure from the Pakistani business community to open up to India. He accepted that trade was still taking place, albeit through third countries which increased transaction and transportation costs for Pakistani businesses. But he was very careful and clear in prefacing his remarks by underscoring the ‘dispute’ over Jammu and Kashmir which, he said, will continue simultaneously.

As is their wont, the usual suspects in India got all excited about a possible thaw in the making. In Pakistan, some well-known drumbeaters of the Pakistan Army propaganda machine welcomed Ishaq Dar’s statement. But the Ministry of External Affairs in India has seen this script play out before and refused to take the bait. For his part, External Affairs Minister Dr Jaishankar did not allow any wavering of focus from Pakistan’s “industrial-level assembly line” of Jihadist terrorists. He declared that India was no longer in a mood to overlook terrorism just because “there was so much else at stake”. The Indian EAM was disabusing the Pakistanis of any notion that they could have a beneficial commercial relationship with India even as they maintained their hostility and inimical approach to India by exporting and inciting Jihadist terrorism and facilitating separatist forces like the Khalistanis. As far as India is concerned, the bottom line is that if talks and terror cannot move parallelly, then neither can trade and terror.

The fact that trade between countries, especially neighbours, is a good thing is indisputable. That when trade takes place, both sides stand to gain is also a no-brainer. But in the real world, trade cannot entirely be divorced from politics, especially when it involves enemy countries. Between India and Pakistan, there can be three broad arguments around which the issue of economic relations revolves: one, economic dimension; two, political ties; and three, strategic aspects. On all these three fronts, there is very little to commend trade with Pakistan for India.

What’s in it for India?
Even if trade was to re-open between the two countries, Pakistan would remain a less than marginal player for India. While Pakistan desperately needs trade with India to improve efficiency, gain some markets, address supply chain problems, and moderate inflation, particularly in food items, the benefits for India are not commensurate. If anything, there are political costs that outweigh any economic benefits which in any case are infinitesimally small. In the financial year 2022-23, India’s total foreign trade was US$1.6 trillion or approximately 48 percent of GDP. Under the extremely restricted trade that is currently taking place, India’s exports to Pakistan in 2022-23 were US$627 million (0.1 percent of total exports) and imports were US$20 million (0.003 percent of total imports). The last year when both countries had somewhat normal trade was 2018-19. India’s exports to Pakistan were US$2 billion (0.6 percent of the total exports) and imports were US$495 million (0.096 percent of total imports). Pakistan is irrelevant to India in an economic sense. It brings nothing to the table in terms of any worthwhile economic gain.

While Pakistan desperately needs trade with India to improve efficiency, gain some markets, address supply chain problems, and moderate inflation, particularly in food items, the benefits for India are not commensurate.

While for India, there is no economic incentive to open trade with Pakistan, the converse is not true. A 2018 World Bank report has projected that Pakistan has a lot more to gain with regional trade, especially with India. According to this report, the trade potential between India and Pakistan was around US$37 billion. For a Pakistan economy which is surviving on doles and handouts, deeply mired in a debt trap, with falling living standards and extremely high inflation, failing industry, and rising unemployment, to miss out on trade with neighbouring India, the fastest growing large economy in the world, the fifth-largest global economy and likely to be the third-largest by the end of the decade, is proving to be ruinous. But addicted as it is to jihadist terrorism, a corrupt sense of Islamist supremacism, and irredentism, Pakistan is incapable of reconciling to the reality of India.

Breakdown of trade ties
Trade between India and Pakistan came to a grinding halt in 2019. In February 2019, after Pakistani involvement in the Pulwama suicide bombing attack, India withdrew the Most-Favoured Nation (MFN) status and imposed a 200-percent import duty on all Pakistani products. A couple of months later, India suspended the cross-LoC trade in Jammu and Kashmir because it was being misused by Pakistan to smuggle narcotics, weapons, and counterfeit Indian currency. It had also become a major conduit for terror finance and money laundering in Jammu and Kashmir. In August of the same year, in response to constitutional reforms in Jammu and Kashmir, the Imran Khan regime suspended all trade with India. Within weeks, however, the Pakistanis were forced to walk back a little and lift the ban on trade in medicines because prices skyrocketed and there was a huge shortage of critical medicines. In 2021, a tentative move was made to reopen limited trade with India but the initiative was shot down by Imran Khan who feared the political repercussions of making a U-turn on relations with India. Subsequently, there have been trial balloons floated through media inside Pakistan to restore economic ties with India. But there has been no official approach made to the Indian government, which has not bothered to give any response to the noise from inside Pakistan.

A tentative move was made to reopen limited trade with India but the initiative was shot down by Imran Khan who feared the political repercussions of making a U-turn on relations with India.

Warped thinking
The Pakistanis are under the impression that India is waiting with bated breath for trade to reopen. The old Islamist supremacist stereotype of “Hindu Baniya” seems to continue guiding Pakistani thinking about India. They continue to delude themselves of their importance for India, the criticality of their geographical location and how India will jump at the opportunity to get connectivity through Pakistan to Iran, Afghanistan Central Asia, and beyond. That the land route is uneconomical escapes the Pakistani mind. What they also don’t seem to get is that India has access to Iran via the sea route, and through Iran to Afghanistan and Central Asian states. Besides, neither of these are such huge markets that India would be ready to give any concession to Pakistan. There is no question of India ever risking its economic security by trusting an implacable, unreformed enemy country like Pakistan.

Indian officials are well aware of the Pakistani quest to gain solid leverage by controlling India’s energy security and economic connectivity. In their public discourse, Pakistani analysts salivate at the thought that they will be able to force concessions out of India once she starts depending on the Pakistani land route. This is why India will never go either for the Iran-Pakistan-India pipeline or the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Without India, these are not viable projects, which means that it is not India which is dependent on Pakistani routes but Pakistan which is dependent on access to Indian markets.

Indian officials are well aware of the Pakistani quest to gain solid leverage by controlling India’s energy security and economic connectivity.

The warped thinking is also reflected in the kind of incongruous logic that Pakistan came up with on the trade issue. Clearly, it needs trade more than India. Ishaq Dar admitted Pakistan stands to gain far more than India. The simple fact of the matter is that trade through third countries like Dubai or Singapore doesn’t hurt India; it hurts Pakistan which pays a premium in terms of higher transaction and transport costs which affects its profitability and in some cases even viability. Asking India to make political concessions (on Kashmir in particular) so that Pakistani businesses can improve their bottom-lines is plain bizarre. Pakistanis also think that they can bifurcate their India policy from their Kashmir policy. This is no longer acceptable to India and is something that has still not sunk in the Pakistani minds.

Politics and strategic aspects of trade
The Pakistanis like to give the example of China to justify a twin-track approach —keep the hostility alive even as they develop economic ties that benefit them. That this template is under severe strain even between India and China hasn’t quite registered with the Pakistanis. Despite a lucrative bilateral trade of over US$100 billion, China still tried to encroach on and grab Indian territory leading to clashes and a tense border stand-off. And here we are talking of Pakistan which has not hesitated even shafting its most important trading partner and biggest benefactor—the United States. What are the odds that they will treat India any differently?

For India to reopen trade, even of a very limited kind, would mean a reversal of a policy and releasing the pressure that has proved effective in keeping Pakistan on the tenterhooks. The old policy of trying to buy peace in the subcontinent by using trade as a sweetener has run its course. In 1999, India imported sugar from the Pakistan Army’s business enterprises like the Army Welfare Trust. The aim was to develop the economic stakes of the military establishment in moving towards normalisation. What followed was Kargil. Between 2004-2008, India invested big time in building people-to-people ties through cricket, movies, travel, student and civil society exchanges, and medical diplomacy. What followed was 26/11 attacks.

The aim was to develop the economic stakes of the military establishment in moving towards normalisation.

Even in a strategic sense, it would be counter-productive for India to open economic relations with an enemy country. A weak, tottering, politically unstable, economically bankrupt Pakistan is ideal for India. It buys India valuable time to increase the power differential and build the necessary military and security capabilities to make it prohibitively expensive for Pakistan to get into any kind of tussle with India. Anything that helps Pakistan climb out of the hole it has dug for itself is just not in India’s interest.

Terms and conditions apply
The Pakistanis are convinced that there is a chance of some forward movement once India’s general elections are over in June. They are hopeful that even if Prime Minister Narendra Modi wins a third term, he will be open to bringing some kind of normalcy to bilateral ties. The restoration of statehood in J&K by October 2024 will give them a face-saver to restore full diplomatic relations. This will pave the way to start the process of economic engagement by first opening a few product lines for trade. But trade should be made contingent on Pakistan meeting certain basic terms and conditions.

The old formulation of a Non-Discriminatory Market Access (NDMA)—a bilateral agreement that Pakistan would be free to rescind whenever it wanted—should no longer be acceptable.

These terms and conditions (T&Cs) could include an insistence by India that Pakistan grant MFN status. The old formulation of a Non-Discriminatory Market Access (NDMA)—a bilateral agreement that Pakistan would be free to rescind whenever it wanted—should no longer be acceptable. India should also insist on land transit rights to Afghanistan. This is more for the benefit of Afghans than for India. In addition, India should demand guarantees that the trade route will not be used for nefarious activities like money laundering, terror finance, narcotics trafficking, and gun-running. Pakistan will be expected to cease support for Kashmiri separatists and will have to take verifiable action against jihadist terror groups still active inside Pakistan. Hostile propaganda driven by the Pakistani state, especially the military’s publicity wing Inter-Services Public Relations (ISPR) will have to stop. Finally, Pakistan will need to start the process of reversing the radical Islamism that has been promoted by the state as its guiding ideology. This pernicious ideology is at the root of Pakistan’s inability to live in peace with its neighbours.