The perils of (not) doing business with Pakistan

After the Pulwama attack, one of the worst terror attacks ever on Indian soil, that perennial question has emerged – what can the world’s largest democracy and sixth largest economy do with its 70-year warring with small nuclear-armed neighbour which shelters and fuels terrorists of all shapes and kinds in its territory to be used against India?

There are many solutions offered – instant revenge, tit-for-tat attacks, diplomatic freeze – but trade as a weapon is little considered.

First, contrarian though it might seem, the problem is that India does too little business or trade with Pakistan, and not too much. The total quantum of trade between the two countries is $3 billion, and, says the World Bank, could be $37 billion, if restrictions are removed. The trade is skewed towards the Indian side – we sell around four times more than we buy.

Even though India gave Pakistan the Most Favoured Nation (MFN) status, allowing the country to get lower tariff rates, since 1996, this was never reciprocated, and now, after the Pulwama attacks, India has withdrawn it.

The truth is India does not need trade with Pakistan for any economic reason. As the sixth largest economy in the world, and one of the fastest growing, there is little that Pakistan could offer in terms of markets or goods that India cannot do without.

But Pakistan stands on the edge of bankruptcy. It has a financing gap of around $12 billion, and foreign reserves at barely $8 billion, which doesn’t even cover two months of imports. Its long-term credit rating has been downgraded to B- by rating agency Standard & Poor’s.

While the country has raised some money from usual backers like Saudi Arabia and the United Arab Emirates (UAE), its biggest supporter China isn’t signing fat cheques easily. If Pakistan defaults, it puts China’s $62 billion China Pakistan Economic Corridor (CPEC) at risk.

The strategic thing for India to do at this point is to use every resource to deprive Pakistan of money. The hard truth is that there are only two things that have usually united the extremists in Pakistani government and, the real power centre, the Pakistani army – hatred towards India, and money. The Pakistani army is really, in many ways, a conglomerate. It runs, by some counts, around 50 companies spanning everything from sugar and fertiliser mills to insurance and aviation companies, through its welfare foundations, or pensions funds.

Many Pakistanis readily accept that support for terrorists really comes from the army, and that’s why every government initiative, for instance the latest opening of the Kartarpur Corridor pilgrimage between the two countries, is immediately scuttled by a devastating attack on India by Pakistan army-backed terrorists which sink every hope of peace.

This is exactly what happened after the historic talks between Prime Minister Atal Bihari Vajpayee of India and his Pakistani counterpart Nawaz Sharif – soon afterwards, Pakistan-backed guerillas attacked Indian posts in the Himalayan heights of Kargil leading to an armed conflict between the two countries. Early bonhomie between Indian Prime Minister Narendra Modi and the then Pakistani prime minister Nawaz Sharif in 2015 led to the terrorist attack on an Indian army base in Uri in late 2016. Now current Pakistani Prime Minister Imran Khan’s peace manoeuvre has led to the same conclusion – the attack at Pulwama.

The nature of nuclear deterrence in South Asia makes outright war difficult in South Asia, as does China’s backing of Pakistan, for instance in vetoing the United Nations declaration of Masood Azhar, whose Jaish-e-Mohammed has claimed responsibility for the Pulwama attack, as a global terrorist because Mohammed is a prime Pakistani asset.

But what China is reluctant to provide is an endless well of funds. It expects Saudi Arabia and the UAE to do a lot of the heavy lifting in this regard – especially since it is already paying for CPEC. In fact, as Saudi Crown Prince Mohammed bin Salman starts a two-day tour of Pakistan even as I write this column, Pakistan is expecting financial assistance of up to $20 billion.

Saudi Arabia, though, is not China. Its main leverage is oil, and as the U.S. has arrived as a major oil producer, the desert kingdom’s power is weaker than before. Especially after the scandal with the murder of a Saudi Arabian journalist Jamal Khashoggi inside its embassy in Turkey. It is hoping for a new economic dawn with India – the prince is coming to India too, not least because he is one of two main investors in a $44 billion oil refinery in Maharashtra. MBS, as he is known, needs India. This might be the moment when it might be possible to arm twist Pakistan via Saudi Arabia on money.

This might be even easier with the other investor in that oil refinery – the UAE, whose ties with India are at perhaps an all-time high including with the creation of a joint India-UAE $75 billion fund.

Cooperation and assistance on fighting terror is a cornerstone of India’s new bonhomie with Saudi Arabia and the UAE, which also happen to the two key trading partners of Pakistan, apart from China and the European Union, both weary of their own terror-related troubles.

There is a fatigue around the world on Islamist terrorism of the kind that killed scores of people at Pulwama – which now plagues every major country in the world. But just lobbying against it and trying to make it a global pariah will not work if Pakistan has Chinese backing. Also, the generals in Pakistan care less about global opinion than they care about cash.

India needs to find every source of cash to Pakistan that it can close. The less cash the generals have, the less they will divert into terror operations.

India must remember that China’s troubles with Islamism has only just begun as seen in its Uighur regions and the kind of concentration-style ‘re-education’ camps that it has created will only cause more trouble ahead. In Pakistan, already CPEC has come under attack from Baloch separatists who have created yet another fissure that is open to strategic use.

The more the money is squeezed, Pakistan’s already low credit rating will fall, and if at some point India could ensure that Pakistan defaults on its payments, there would be a crisis in CPEC. With the Chinese economy slowing, this could have grave ripple effects in this supposedly all-weather friendship.

Without the CPEC, whose success is debatable at best (there is considerable murmurings in Pakistan that the project might be a debt trap), the Pakistan economy is unlikely is regain a firm footing. Add to all this the spark of information coming in steadily about what China is doing to the Uighurs. Already this is causing unease in Muslim countries in central Asia, so how long before it spreads to at least some radicals in Pakistan?

If at all, the money taps shut for Pakistan in other places, the Indian strategy should be to embrace the country deep into economic ties. The more we trade, the more the Pakistani economy is vulnerable to India.

The MFN status may have been withdrawn but the age of using trade as a weapon towards eventual peace may yet appear.