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Indo-Pak Economic Relations with Reference to MFN Withdrawal and Its Implications
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Dr Jyoti M Pathania | Date:24 Feb , 2019 0 Comments
Dr Jyoti M Pathania
Senior Fellow at CLAWS.

In the globalised world, economy and security are two sides of the same coin. Economies are driving the nations today. When we talk about the economies; we inadvertently refer to the Gross Domestic Product (GDP) status. The GDP determines how powerful a nation is. National power in the world today is defined by the strength of the economy. South Asian, however is   economically the least integrated region of the world, even though it is geographically contiguous making it a natural trading zone.  But the trade in this region is even lower than that of the sub Saharan Africa.

 Within 24 hours of the Pulwama attack, the finance Minister of India, Mr. Arun Jaitley withdrew the MFN status, which was accorded to Pakistan in the year 1996 and this was later followed by an  increase in import duty of 200%.What implications will this have on Pakistan, is this a stringent measure at all? Given the fact that Indo-Pak trade is miniscule.

Most Favoured Nation (MFN) Status

 It means “non discriminatory”.  Article 1.1 of GATT, MFN is accorded in aspects of trade and tariff which actually means that the concessions you extend to one trading partner, you have to extend to the other countries as well. This means granting the same status to all. It follows from the GATT principles of “multilateral reciprocity”.

Pakistan has not granted India MFN Status, and no reason has been specified in the WTO all these years for the same. Withdrawal of MFN is a trade sanction. Trade sanctions are visible form of displeasure and less expensive alternative to perhaps a military intervention. Though sanctions alone are unlikely to bring the desired results, they are merely used as a signs of displeasure; basically used as signaling instruments, when the offence is mild, conveying displeasure to the other nation. It doesn’t go beyond that; until and unless the trading countries have high bilateral trade with each other.

Unilateral sanctions on the other hand are not very effective; since it may incur a higher cost for the country imposing these; especially in terms of their own firms and producers, and the country which has received sanctions tend to suffer more or equally so if they are unilaterally imposed. Sanction would bring about increasing scarcity in the subject economy. Sometimes scarcity leads to heightened hostilities between the subject and the imposing economy, especially when the state polity is of dictatorial or authoritarian in nature.

Impact of Trade Sanctions

There is a sense of uncertainty with regard to the impact of sanctions. India and Pakistan trade will be diverted to a third country which will lead to incurring some additional costs.  Trade sanctions might lead to reduced economic activity. So the question arises whether it is the Govt. that benefits or the civilians that suffer? But one thing is clear that the trade sanctions don’t have a long lasting effect.

Argument Against Imposition of Trade sanctions

Does it lead to lessons being learnt by the country on whom the sanctions have been imposed? It’s hard to decipher especially when the alternatives are   available. United States is violating the IMF principles unabashedly and perhaps is even a threat to the very existence of World Trade Organisation as a body. As a consequence of what U.S. is doing to China, there is loss to multi- national corporations, which are also impacting the U.S. firms as well.

India – Pak Trade Relations

Both India and Pakistan are founding members of original GATT and subsequently WTO as well. Pakistan has not granted MFN status to India.  The logic given by their political establishment was that if one translates the word MFN to the local Urdu language, it means “Mera Pyara dost”. This reason is mind boggling and defies all logic. Extending this logic further was a change that was brought about when Pakistan granted India the non discriminatory market access (NDMA) in 2012. Before 2012 India and Pak trade was being dictated by positive list. Pak along with other seven trading partners have been signatory to the agreement   based on negative list i.e. not to be granted tariff liberalisation.  Pakistan has violated this agreement because it was operating on the basis of positive list. It continues to have highest number of items on negative list vis-a- via India, which is over 1200 commodities.

Another argument from Pakistan is that there is a huge trade deficit with India. Though the trade deficit with China is also huge and growing. What will be impacted after IMF status withdrawal? It will only be the formal trade that will be impacted, and this is very meager. Pak imports from India are only 2-2% (2003) to 2.95% in (2019). Pakistan imports very little from India in comparison to China. Its import is about 27% from China. A forth of its imports comes from China particularly since 2007. Chinese goods are flooded in Pakistan markets. Indian exports to Pakistan is also less than 0 .6% of its total exports and it have remained roughly the same. This is insignificant trade and this is going to be subjected by India to 200% import duty.

The top five sectors that India imports from Pakistan are; edible fruits and nuts which is just about 3% share of India total imports, then lime and cement, raw hide and leather, mineral fuels and textiles.   Pakistan is about 4th or the 5th largest source country for India. Hence Pakistan is not a significant export source for India as well.

Pakistan is the third largest partner in terms of cotton trade with India. The commodities that Pak imports from India is Cotton and Organic Chemicals. Pak imports 35% of its total imports from India. But it has alternatives U.S., Saudi Arabia and China it’s all – weather friend, so substitution possibilities are available in terms of friendly ties.

Next aspect of impact of MFN is that Pakistan is a weak economy and highly indebted economy. If one looks at Pakistan’s economic profile, it has plus 5 rate of growth, but the base of the growth is weak, since it is a highly indebted economy. 5.8% growth rest to a large extent with the help of China under the CPEC.  The public debt is over 72% of their GDP.  3/4th of the Pakistan GDP is as debt.  Defence and debt spending together is 66% of the total current expenses. Hence more than half the budget goes for debt repayments; leaving very little for other economic or welfare activities.

Pakistan foreign exchange reserves is sufficient to cover only for 2 months, whereas as per International norms a country must have 3 months of cover at least. Time is running out for Pakistan. Overall tax revenue is also weak hence the economy is weak and fragile; if imports are impacted it might end up crushing the economy. But this is not the first time that Pak has come under such a situation. It has never been able to evolve a sustainable growth since its independence and every time its economy has been fragile it has gone to the IMF, and the other friendly allies for an economic bailout.

This is the 13th bail out that the Pakistan is seeking from IMF. This time around the IMF is seeking a decisive action from Pakistan.  In addition to seeking transparency in its deals with China, stricter norms, reform in the economy in terms of reduced tariff, deregulation of economy, move to privatization, free floating of the currency etc. Pakistan has the highest fall in its currency, in comparison to other South Asian countries and it is going to be a difficult task for Pakistan to allow its currency to freely float.

Pakistan has sustained its fragile economy through its all-weather alliances, be it Saudi Arabia or China. But the question that Pakistan must ask is, how judicious is it to always rely completely on the assistance and packages from other countries and not build one’s own sustainable economy. 


(Synoptic of the talk delivered by Prof. Amita Batra, South Asian Centre, JNU on the 19th Feb, at CLAWS)


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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

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