UPSC MAINS 2020: Putting the skids under Border Trade

Topic : Putting the skids under Border Trade

Topic in Syllabus: General Studies Paper 2: Indian Polity

Context:

Post the abrogation of Article 370 in Jammu and Kashmir, Pakistan cut off diplomatic and economic ties with India and it has expelled the Indian envoy, partially shut down the airspace and has suspended bilateral trade.

Background:

Amidst rising tensions between India and Pakistan since Pulwama attack, Pakistan has once again heightened the tensions by suspending bilateral trade.

  • In February 2019, in the wake of the Pulwama attack, India decided to withdraw the Most Favoured Nation (MFN) status to Pakistan; subsequently, it imposed 200% customs duty on all Pakistani goods coming into India.
  • After the Balakot airstrikes, again in February, India and Pakistan closed their airspace, with Pakistan keeping the ban in place for nearly five months.
  • In April 2019, India suspended trade across the Line of Control in Jammu and Kashmir citing misuse of the trade route by Pakistan-based elements.
  • And more recently, post the Jammu and Kashmir Reorganisation Bill, Pakistan cut off diplomatic and economic ties with India — expelling the Indian envoy, partially shutting airspace and suspending bilateral trade.

Plunging trade

  •    In 2018-19, bilateral trade between India and Pakistan was valued at $2.5 billion.
  • The value of Indian export to Pakistan stood at $2.06 billion and India’s imports from Pakistan were worth $495 million.
  • After withdrawing MFN status and imposing 200% duty, Pakistan exports has decreased to $2.5 million per month from $45 million per month in 2018.
  • These retaliatory announcements have affected the trade relations between both countries.

Impact of suspension of trade ties between India and Pakistan:

The quantum of loss that has been incurred by traders in both India and Pakistan has varied according to the nature of trade and the trade route.

  •  Effect on border states of India:
    • The trade through the Wagah-Attari land route was heavily in favor of Pakistan as India imported 82% of the total trade through the land route.
    • However, after Pulwama attack, only a few of the items like rock salt is being imported in India.
    • The border economies existence totally depends upon the cross-border economic opportunities.
    • These border economies experience trade fluctuations on account of political changes, trade bans, price and exchange rate and tax fluctuations.
    • Amritsar’s major economic activity is largely dependent on border trade with Pakistan.
    • Amritsar is land-locked, is not a metropolis and traditionally has no significant industry. Hence, any decision on India-Pakistan trade has a direct impact on the local economy and the people of Amritsar.
    • Out of total ₹25-30 crore that was being added to the local economy of Amritsar every month, now the three-quarters have been lost in the last six months.
  •  Increased freight rate of trucks
         Gypsum is imported from Pakistan which is used in India as well as in Nepal for the cement

    • To avoid empty truck on the return journey, trucks carrying gypsum brought back specific products such as yarn from mills in Uttar Pradesh to Punjab.
    • In the absence of gypsum trade, the freight rate of trucks from Uttar Pradesh to Punjab has increased from ₹3 to ₹7 per kg.        
    • The prices of goods, checked by such kind of balancing mechanism of international trade, are experiencing fluctuations because of high trade disruptions.
  • Effect on Pakistan:
    • The exports of cotton from India to Pakistan are expected to be affected the most on the complete suspension of bilateral trade which will ultimately hurt Pakistan’s textile industries.
    • The lawn industry will be affected as well which will now have to source pricier cotton from alternative markets in the United States, Australia, Egypt or Central Asia.
    • There is a high possibility that Indian cotton, along with other products, will be routed through third countries such as the United Arab Emirates and Singapore which is estimated to be more than double the direct trade between India and Pakistan.
  • Effect on other Countries:
    • There is concern that economic suspension affects bilateral trade ties with Afghanistan where the transit of goods takes place through Pakistan.

Way forward:

  • In order to strengthen bilateral engagement between India and Pakistan need to employ perfect balance of  soft  and hard power diplomacy.
  • International organizations can be used for building pressure over Pakistan for carrying out anti terrorist activities.

Conclusion

In the spirit of nationalism, the trade fraternity on both sides, by and large, have stood by their respective governments. But locals in border economies on both sides have mouths to feed, which calls for a solution. While the overall economies of the two countries may very well manage to stay afloat despite the suspension of economic ties, it is the local economies that will suffer the most. The only solution to the ongoing problem is to manage the damage, reduce it and try to contain it.

Sample Question:

The India-Pakistan face-off is having more repercussions than intended; In light of this statement discuss the effects on border economies.