Unilateral decisions, bilateral losses: India-Pakistan fallout post-Pulwama

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In February 2019, in the wake of a militant attack in the Pulwama district of Jammu and Kashmir (J-K), the Indian government decided to withdraw the status of Most Favored Nation (MFN) for trade granted to Pakistan since 1996. Subsequently, it increased customs duty on all goods imported from Pakistan to 200 percent. Following the airstrikes in the Balakot region later in February, Pakistan and subsequently, India barred each other from their respective airspaces, with Pakistan extending the ban for nearly five months. In April that year, the Indian government suspended the cross-LoC trade, and four months later, it enacted the Jammu and Kashmir Reorganization Bill. Pakistan, thereafter, reduced diplomatic and economic ties with India — expelling the Indian envoy and suspending bilateral trade and postal services.

The year 2019 saw escalating tensions between India and Pakistan leading their governments to each retaliate through successive unilateral decisions. These decisions trickled down to impact the trade community the most. 

It is often argued that India-Pakistan trade has remained hostage to politics. Back in 1948–49, Pakistan’s exports to India accounted for 56 percent of its total exports, while 32 percent of Pakistan’s imports came from India. Today, as per 2018-19 data, these have reduced to two and three percent respectively.  

While the trade between India and Pakistan fluctuated consistently, it did survive the jolts of 1999 (Kargil conflict), 2001 (Indian Parliament attack), 2008 (Mumbai attacks), and the like. In some cases, it was not just about survival; an immediate escalation of tension was followed by efforts to resume normalcy. For example, post the Samjhauta blast in February 2007, modalities to allow trucks to move across this border were chalked out in August that year, and this transit was initiated two months later in October. Later in 2008, when the cross-LoC trade began, advocates of this trade boast, rightfully so, that the Mumbai attacks of 2008 could not derail the then very new and thin lifeline connecting the two sides of J&K, neither could Uri in 2016. Post Pulwama, while LoC trade was not suspended immediately, other measures like MFN withdrawal and 200% duty crippled the economy of Amritsar. 

Be it in Punjab or J-K, the ripples of the India-Pakistan face-off have been felt by stakeholders on both sides of the border/LoC. According to our interactions in Amritsar, more than 9,000 families were directly affected because of their breadwinners’ dependence on bilateral trade; and two-thirds of nearly 30 crore rupees that was being added every month to the local economy was lost. Similarly, in J-K, about 600 merchants and 300 labourers directly involved in the cross-LoC trade were most hit by the trade ban. 

After three wars between India and Pakistan, the opening of the LoC in 2005 came as a step towards freer movement of people across the LoC. It held emotional value for the people of J&K on both sides, particularly for the divided families. The opening of LoC for travel in 2005 was followed by opening for trade-in 2008. The common cultural heritage along with the longing to see one’s ancestral home or place of birth across the LoC was critical in giving the initial impetus to this trade and travel resulting in stronger bonds between the people on both sides. 

The sudden and indefinite suspension of the cross-LoC trade on 18 April 2019 has impacted the trade community, mostly belonging to the border areas of Baramulla and Poonch. Over the last decade, the volume of trade vis-à-vis the two concerning routes, Uri-Muzaffarabad and Poonch-Rawalakot, accounted for more than 7,500 crore rupees and over 170,000 job days, showcasing the economic capital created through this trade.  

On-the-ground interactions with stakeholders reveal that besides the 600 merchants and 300 labourers that were all directly involved in the trade, there has been an indirect impact on: manufacturers and farmers that provided goods for this trade; end consumers, who now have to pay higher prices for same commodities; and shops, restaurants, and mechanics in the border area that depended on this trade and transit. Economic activity—in this case, cross-LoC trade—helped enhance connectivity for the otherwise far and isolated border areas of the districts of Poonch and Baramulla. It connected them not just across the LoC, but also to other local districts such as Jammu and Srinagar. 

Concerns over transparency have plagued cross-LoC trade over the last decade. These apprehensions need to be addressed across the complete trade ecosystem, including enhancing transparency in the standard operating procedure, invoicing, goods and service tax (GST) norms, and trader registration. Clarifications on HS codes to prevent misrepresentation of commodities; setting up rules of origin framework to avoid the import of third-country goods; devising rules pertaining to goods and services tax rates and inter-state taxation to prevent evasion; and trader-registration policies to ensure credibility of the traders involved are immediate steps that need to be taken in order to address long-standing concerns over cross-LoC trade.   

The current suspension of the cross-LoC trade could be seen as a window of opportunity to address these issues and revive this trade in a stronger and more organized manner. 

Afaq Hussain is Director and Nikita Singla is Associate Director at Bureau of Research on Industry and Economic Fundamentals (BRIEF), New Delhi. Views expressed are personal.


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