Explaining Pakistan’s flip-flop on trade with India

The shadow of politics still looms over trade, which runs contrary to Islamabad’s statements on the need for better ties

April 09, 2021 12:02 am | Updated 12:46 am IST

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 normalisation 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). The Dawn quoted Mr. Qureshi as saying, “A perception was emerging that relations with India have moved towards normalization and trade has been opened… there was a unanimous opinion …as long as India does not review the unilateral steps it took on August 5, 2019, normalising relations with India will not be possible.”

Mr. Hammad Azhar, whose Ministry proposed the idea, accepted the cabinet’s decision as the working of “economic and political interface in a democracy”, and it was left with the Prime Minister and the cabinet to “endorse, reject or modify” the ECC’s proposals. 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.

Three takeaways can be identified from the above. The first 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 and not designed as a political confidence-building measure to normalise relations with India.

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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 , though the agriculture sector witnessed a growth of 2.67% (with an increase in rice and maize production), 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, bedwear 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 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. Besides the decline in the area of cotton cultivation, 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. In 2019-20, Pakistan produced around nine billion bales; this year, the ginning industry estimates only around seven million bales. This would mean, Pakistan’s cotton export would reduce, creating a domino effect on what goes into Pakistan’s garment industry. 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.

Another industry in crisis

The sugar industry in Pakistan is also in crisis. When compared to cotton, the sugar industry’s problem stem from different issues — the availability for local consumption and the steep price increase. The sugar industry has prioritised 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.

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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 price within Pakistan. In short, the subsidies, cheap bank loans, a few administrative decisions, manipulation and greed, especially by the sugar mill owners, mean high cost paid by the consumers.

As a result, importing sugar from India would be cheaper for the consumer market in Pakistan. Clearly, the crises in 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 supreme over trade and economy. The meagre 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.

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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 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. Gen. Bajwa even talked about “burying the past” and moving forward. 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.

The latest statement by Pakistan’s cabinet that unless India rescinds the decision of August 5, 2019 in Jammu and Kashmir , there would be no forward movement, goes against what Mr. Imran Khan and Gen. Bajwa have been stating in public. This position also hints at Pakistan’s precondition (revoking the August 2019 decision on Jammu and Kashmir) to engage with India.

Pakistan has been saying that the onus is on India to normalise 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.

D. Suba Chandran is a professor and dean at the School of Conflict and Security Studies, National Institute of Advanced Studies (NIAS), Bengaluru

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