In light of the latest Kashmir border clashes, Deepanshu Mohan asks whether India’s growing preference for economic diplomacy and a pragmatic foreign policy can be applied to Indo-Pakistan relations. This would require a decisive break from India’s mindset to date, which defines national security and trade policy in separate and narrow terms when it comes to Pakistan.
For generations, the begging bowl has been an important symbol of Indian diplomacy. Now, a new trend, economic diplomacy seems to be quietly transforming India’s foreign policy. India’s new role as an economic donor , and the focus on mega projects such as natural gas pipelines cutting across her borders are significantly transforming the foreign policy template. But can this trend include India’s relations with Pakistan too?
In the last week Indo-Pakistan tensions have soared to a decade high amidst escalating ceasefire violations. New Delhi has accused Pakistan of persistent firing across the border to distract Indian forces and help militants infiltrate into Kashmir. At least five villagers in the Arnia sector of the Jammu district were killed and over 25 injured in one of the worst attacks by Pakistan in years. The Pakistan media have similarly highlighted instances of civilian deaths near the border as a result of attacks from the Indian side. So is it time for the Modi-led Indian government to consider wielding economic diplomacy through sanctions in order to resolve the dispute and restore faith in the 2003 Ceasefire agreement ? And, more broadly, where does the conflict leave aspirations to promote economic relations between the two countries?
At the moment, it seems India has reverted to its more traditional method of dealing with conflict in Kashmir by fighting fire with fire. Narendra Modi initially continued campaigning in Maharashtra as the main face of BJP in the state’s upcoming elections. It was only on 10th of October that the Prime Minister took a tough stand on the situation and warned Pakistan that it would pay an “unaffordable price for its adventurism ”. India’s massive retaliation to the ceasefire violations has resulted in at least 35 deathsacross the border. The Indian government seems unwilling to hold any discussion with Pakistan until the firing stops as it wants to send a clear message that Islamabad cannot dictate the terms of dialogue.
As the stronger economic power, can ‘talking economics’ or imposing sanctions against Pakistan be considered as an alternative to a military response by India? In the past we have seen how the US has employed such sanctions. After the 1979 Iranian Revolution, for example, the USA imposed economic sanctions on Iran . Initially it targeted investments in oil, gas and petrochemicals, selecting Iranian government-sponsored groups who it believed were working against US interests. The sanctions have had a catastrophic impact on the economy of Iran and its global image. In the last few months, the USA and Europe have also imposed sanctions on Russia and Syria in protest against the actions of these governments.
Yet, on a further scrutiny there is inconsistent evidence on how effective economic diplomacy and crippling sanctions are when used in response to national security threats (see Nazia Malik here). India has never used economic sanctions against Pakistan. This may be explained by the low level of bilateral trade between India and Pakistan, and its composition.
The two-way commerce between India and Pakistan has traditionally been very limited. India’s total trade volume in 2013-14 to Pakistan was around USD 764,606 million, with a total trade share of 0.35%. The formal trade between the two countries has only recently begun to increase significantly, from USD 144 million in 2001 to USD 2.8 billion in 2012-13. The trade figures between the two countries have also seemed to improve in periods of relative peace (e.g. since the 2003-04 Ceasefire agreement). But the fact remains that Pakistan is not ‘dependent’ on trade with India, limiting the potential impact on economic sanctions.
India’s Trade with Pakistan: 1948-2010
Source: Direction of Trade Statistics (IMF)
What should be noted, however, is that the bulk of trade between the two countries has been conducted through informal channels, the estimated value of which gives us some indication of just how much potential there is for improving bilateral trade relations if both countries were willing to cooperate. Informal trade between India and Pakistan is estimated to be around USD 10 billion. This branch of trade has flourished because Pakistan only allows imports from India based on a positive list of 1938 items, even though India granted Pakistan “Most Favoured Nation” status to Pakistan in 1996 and imposes no equivalent restrictions.
Narendra Modi has positioned himself as a pro-FDI leader and his recently-launched ‘Make in India’ campaign highlights his attempts to facilitate foreign firms operating in India and attract investment. Yet despite the high magnitude of the untapped business and investment potential, diplomatic incidents like the current ceasefire violations have previously obstructed progress in the economic partnership. The question now is how the current Indian leadership will approach the conflicting interests in the long run. The estimated value of informal trade channels and Modi’s pragmatic, business-orientated approach suggests there could be potential India adopt its own economic ‘carrot and stick’ approach, where aggression leads to the curtailment of informal trade but economic incentives are attached to cooperation.
It remains to be seen if the Indian government will be willing to change the rules of the game when it comes to Pakistan. Instead of the mantra of “no dialogue”, a new strategy will be required to respond to security threats in the north without suspending interactions between the two neighbours . The Indian leadership would need to act decisively and break the old mindset, which has continued to define national security and trade policy in separate and narrow terms when it comes to Pakistan. Nawaz Sharif’s civilian government initially seemed well-disposed to the new administration. Modi and his government should seek to sustain and maximise on that political capital.
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