Explaining Pakistan’s flip-flop on trade with India
- Pakistan’s double U-turn on resuming trade with India highlights the internal differences within Ministries, between business and political communities, and the emphasis on politics over economy and trade.
- It also signifies Pakistan cabinet’s grandstanding, linking normalization of ties with India to Jammu and Kashmir.
- On March 31, Pakistan’s new Finance Minister Hammad Azhar, announced Pakistan’s Economic Coordination Committee (ECC)’s decision to import cotton, yarn, and 500,000 metric tons of sugar from India.
- The media dubbed it as a political breakthrough but the ECC’s decision was not on bilateral trade; it was about importing only three items — cotton, yarn and sugar.
- A day later, Pakistan’s cabinet overruled the decision; the meeting was chaired by Prime Minister Imran Khan and which included Shah Mohammad Qureshi (Foreign Affairs Minister), Fawad Chaudhry (Science and Technology Minister) and Shireen M. Mazari (Human Rights Minister).
- However, Pakistan’s textile industry has not taken the cabinet’s decision kindly; for them, importing cotton yarn from India is an immediate need; else, it would impact their export potential.
- There are three takeaways that can be identified from the above.
- It relates to the ECC’s decision to import only three items from India, namely cotton, yarn and sugar.
- It was based on Pakistan’s immediate economic needs
- It was not designed as a political confidence-building measure to normalize relations with India.
Practical and economic
- For the textile and sugar industries in Pakistan, importing from India is imperative, practical and is the most economic.
- According to the latest Pakistan Economic Survey, 2019-20:
- The agriculture sector witnessed a growth of 2.67%
- Cotton and sugarcane production declined by 6.9% and 0.4%, respectively.
- Sugar exports came down substantially last year, by over 50% in 2019-20, when compared to 2018-19.
- Yarn, cotton cloth, knitwear, bed-wear and readymade garments form the core of Pakistan’s textile basket in the export sector.
- By February 2020, there was a steep decline in the textile sector due to disruptions in supply and domestic production.
- When compared to the last fiscal year (2019-20), there has been a 30% decline (2020-21) in cotton production.
- According to the State Bank of Pakistan’s latest quarterly report,
- The decline in cotton production is also due to fewer areas (the lowest since 1982) of cotton cultivation.
- By the end of 2020, there was a sharp decline (around 40%) in cotton production.
- There was also a decline in yield per acre.
- The ginning industry estimates that in 2021, it would receive less than half of what was projected, around 7 billion bales.
- In 2019-20, Pakistan produced around 9 billion bales.
- Pakistan’s cotton export would reduce, creating a domino effect on what goes into Pakistan’s garment industry in 2019-20.
- Pakistan is the fifth-largest exporter of cotton globally, and the cotton-related products (raw and value-added) earn close to half of the country’s foreign exchange.
Industries in Crisis
- The sugar industry in Pakistan is also in crisis.
- When compared to cotton, the sugar industry’s problem stems from different issues:
- The availability for local consumption and the steep price increase.
- The sugar industry has prioritized exports over local distribution.
- Increased government subsidy and a few related administrative decisions resulted in the sugar industry attempting to make a considerable profit by exporting it.
- By early 2019, the sugar prices started increasing, and in 2020, there was a crisis due to shortage and cost.
- In February 2020, Mr. Imran Khan announced an investigation and constituted a commission of inquiry into Pakistan’s sugar crisis, 2019-20.
- According to the report, sugarcane was purchased off-the-books by the sugar mills, and sugar sold off-the-books.
- The report also noticed market manipulation and hoarding resulting in increased sugar prices within Pakistan.
- In short, the subsidies, cheap bank loans, a few administrative decisions, manipulation, and greed, especially by the sugar mill owners, mean high costs paid by the consumers.
- As a result, importing sugar from India would be cheaper for the consumer market in Pakistan.
- Clearly, the crises in the cotton and sugar industries played a role in the ECC’s decision to import cotton, yarn, and sugar from India.
- It would not only be cheaper but also help Pakistan’s exports. This is also imperative for Pakistan to earn foreign exchange.
Politics first
- The second takeaway from the two U-turns — is the supremacy of politics over trade and economy, even if the latter is beneficial to the importing country.
- For the cabinet, the interests of its own business community and its export potential have become secondary.
- However, Pakistan need not be singled out; this is a curse in South Asia, where politics play a supreme over trade and economy.
- The meager percentage of intra-South Asian Association for Regional Cooperation (SAARC) trade and the success (or the failure) of SAARC engaging in bilateral or regional trade would underline the above.
- Trade is unlikely to triumph over politics in South Asia; especially in India-Pakistan relations.
The Kashmir link
- The third takeaway is the emphasis on Jammu and Kashmir by Pakistan to make any meaningful start in bilateral relations.
- This goes against what it has been telling the rest of the world that India should begin a dialogue with Pakistan.
- Recently, both Pakistan’s Prime Minister and the Chief of Army Staff, Qamar Javed Bajwa, were on record stating the need to build peace in the region.
- There were also reports that Pakistan agreeing to re-establish the ceasefire along the Line of Control (LoC) was a part of this new strategy.
- Pakistan has been saying that the onus is on India to normalize the process.
- Perhaps, it is New Delhi’s turn to tell Islamabad that it is willing, but without any preconditions, and start with trade.
- It may even allow New Delhi to inform Pakistan’s stakeholders about who is willing to trade and who is reluctant.