India’s remarkable macro-economic turnaround since the early 1990s has put it on the pat to global recognition. Yet several incisive commentators have noted in recent times that the country continues to be held back from realising its true potential because of unresolved political tensions with its neighbours, especially with Pakistan, the second largest player in the region. Indeed, India’s relationship with Pakistan has largely come to shape the geopolitics of the region as a whole. Given the overbearing size of the two economies and their military strengths, these two countries alone largely dictate the extent of integration possible within the region as a whole. It is therefore no surprise that persistent hostilities between New Delhi and Islamabad over nearly six decades have left Southasia as economically one of the least integrated regions across the globe.
That the future of the Southasian region largely depends on the course India-Pakistan relations end up taking is a given. The utmost importance being accorded to the ongoing peace process is therefore warranted; but there is also the suggestion that a successful end to the peace bid would automatically lead to complete ‘normalisation’ of relations. The two ‘automatic’ outcomes suggested are a move away from high military expenditures and enhanced economic ties, with the latter also providing ready means for enhancing people-to-people contact.
This premise is incorrect. The peace process will lead to no more than an opening to continue on the path to normalisation. Before the latter can be achieved, two major concerns will have to be addressed: the ever-increasing disparity in military balance vis-à-vis India, and India’s potential to flood Pakistani markets economically when trade ties are liberalised. While both of these are long-term concerns, and their outcome could well decide whether Pakistan and India manage to co-exist as peaceful neighbours, by no means will they be direct results of the peace process. A distinct, equally elaborate process will have to be followed to achieve these ends.
Let us begin by considering the issue of disparity in military strengths. In absolute terms, India’s conventional military spending and capability is substantially greater than Pakistan’s. Ignoring the tactical elements of warfare, an objective macro analysis of the two sides’ military capabilities leaves no doubt that India could overwhelm Pakistani defences with little difficulty. The nuclear option then acts as a potent deterrent for Pakistani military planners, to some extent thwarting the possibility of Indian adventurism. Notwithstanding the liberal view that the presence of nuclear weapons ought to lessen the pressure for conventional military expenditure (and that, if not, they should go), an outright emphasis on nuclear weapons is virtually impossible – and dangerous – given the geographical contiguity between the two sides. In essence, Pakistan cannot divorce its nuclear capability from the excessive disparity vis-à-vis India in the conventional realm.
But will the conventional military imbalance decrease if the peace process delivers tangible progress in terms of improved bilateral relations? Clearly not. Consider that India today faces a ‘vision-capability’ dilemma. India’s national elite views the country as deserving a global power status. Nonetheless, India’s present military capability by no means conforms to that of a global power. That capability may qualify India as a strong regional entity, but its might is not remotely comparable to that of the US, Russia or even China. The result has been an elite consensus to push aggressively for a military modernisation plan.
With regard to the equation vis-à-vis Pakistan, what this implies is that India will continue to upgrade on an accelerated path, thus putting more pressure on Islamabad to increase its own spending. The already resource-constrained Pakistan is unlikely to keep pace even in its quest to maintain a semblance of parity within a clearly asymmetric relationship. This in turn would imply that the military equation between India and Pakistan could become just as lopsided as the current military equations between India and its other Southasian neighbours. While other regional countries have come to terms with such disparity, there are several factors that will not allow Islamabad to accept this outcome, including India-Pakistan’s history of conflict and mutual suspicion, and Pakistan’s own vision of itself as a pivotal state within the Muslim world.
Add to this the fact that, despite India’s global ambitions and its emphasis on tying its military modernisation to a quest for ‘global power’ status, much of its war-fighting machine remains Pakistan-specific. Measures in recent years to enhance air superiority and artillery capability, for example, are targeted towards active fighting with Pakistan. India’s new war doctrine, ‘Cold Start’, is also highly Pakistan-specific, and openly hints towards the possibility of conducting surgical strikes within Pakistani territory. Moreover, India’s current military formations – for example, the approximately 150 Prithvi missiles deployed along the western border – could only be used against Pakistan.
The initiative to translate progress during the ongoing peace process into lasting peaceful co-existence will have to be taken by New Delhi. A welcome start towards reassuring Islamabad would be for India to move all of its Pakistan-specific military arsenal and formations away from active deployment, and shelve controversial plans such as Cold Start. A complete dismantling of its Pakistan-specific capability would be the ultimate objective.
For its part, Pakistan ought to reciprocate the Indian initiative, first by moving its actively deployed arsenal away from the eastern lines, and then by dismantling part of its war-fighting machinery. (Pakistan would still not be able to eliminate most of its capability, given its largely India-centric outlook and its smaller size.) Some prominent Indian academics, such as Bharat Karnad, have already argued for the need to provide Pakistan with increased confidence in Indian thinking, by employing unilateral military concessions. Without such a show of magnanimity from India, suspicions in Islamabad on the strategic front cannot be expected simply to disappear.
In fact, were India to continue on its modernisation plan without altering its Pakistan-specific designs, the end result could be a renewed arms race or a further lowering of the nuclear threshold – both of which would bode ill for stability in bilateral relations. Again, this could take place despite progress in the peace process.
The second major issue is that of economic interdependence between Pakistan and India. Interestingly, economic interdependence in the Southasian case is not being portrayed as merely a means for economic gains. Rather, the contention is premised on the liberal economic theory of interdependence, which argues that economic interdependence is likely to ameliorate bilateral tensions. In the context of this discussion, then, this would imply that enhanced trade ties would in turn ensure peaceful co-existence. But is that really so?
The theory of economic interdependence in no way suggests that peace will be an inevitable outcome of enhancing trade. There are three prerequisites for this theory to work. First, the trade volume has to cross an unspecified ‘critical’ point. Second, trade in terms of volume is not enough. Instead, production factors or interaction that ensures integration of the two economies, and thus increases inter-dependability, is an imperative. Finally, both countries should be viewing trade ties from the liberal perspective – ie, focusing on the macro benefits of trade, rather than narrowly on the relative gains between the two sides (which is what the international-relations theory of economic interdependence predicts countries would do). The absence of even one of these conditions would cause the economic interdependence-to-peace link to fail.
In the India-Pakistan context, the literature overwhelmingly points to a huge trade potential between the two sides, with estimates ranging from USD 5-15 billion per annum. A supporting point often presented to highlight potential is the enormous value of informal trade, which is believed to be three to four times that of formal trade. None of the studies, however, has actually conducted a careful analysis to realise the strong structural similarities in production patterns and consumer preferences on both sides. In essence, most analyses simply toe the popular line without approaching the issue holistically. Only a handful of relatively visionary undertakings confess that, while gains are theoretically possible, they will not be forthcoming unless production structures are altered, and in some cases overhauled. Moreover, a recent unpublished analysis of the potential for formal trade (conducted by this writer) under the South Asia Free Trade Agreement (SAFTA) suggests that trade volume would be no greater than USD 3-4 billion.
The more important question, then, is whether this volume is enough to cross the critical point. In large part, this depends on the type of integration trade ties allow for. Here again, the outlook is pessimistic, as current patterns of trade would lead to primary or manufactured goods being transferred from both sides, but not necessarily integration of production – in the sense that a single product is produced with inputs from both the Pakistani and Indian industries.
The third condition for the economic-interdependence theory – a balanced trade equation – is also missing from the India-Pakistan context, since the balance will likely be skewed in India’s favour. First, the list of items that could potentially be exported to India is much smaller than the corresponding import list. This implies that, in the near future, Indian exports to Pakistan are likely to be significantly higher than Pakistani exports to India. A good measure of this is informal trade: very few Pakistani items are being traded informally with India, compared to the huge influx of smuggled Indian products.
Next, some of the sectors that could potentially export products to India may only be able to do so in the long run. This is because Pakistan’s manufacturing industry is set up to cater to small markets, and in most sectors is functioning near full capacity – although there are some important exceptions. Therefore, for some time to come, Pakistan would be unable to utilise its advantage in products in which it has a competitive edge. To the contrary, Indian exports to Pakistan could begin almost instantly. This implies a huge short-term impact on some of Pakistan’s less-competitive industries. Notwithstanding vested interests, this is the ultimate fear of those opposed to trading with India.
Another factor acting against the possibility of trade is the high hidden barriers to trade and the domestic subsidies that exist in India, which make certain sectors artificially competitive. According to a study by the International Monetary Fund, India’s ‘closeness of economy’ rating is extremely high, at eight out of ten. A 2004 World Bank report also ranks India as one of the ten most closed economies in the world. What this means is that Pakistan as a less-closed economy would be losing more in a liberalised trade regime, unless correctives are put in place ab initio. A comparison of the relative ‘closeness’ of the Pakistani and Indian economies is provided by their non-tariff measures-coverage ratios. In India’s case, this ratio is estimated at a staggering 72 percent for primary products and 59 percent for manufactured goods. In comparison, Pakistan’s ratios stand at seven and 17 percent for primary and manufactured goods respectively.
Looking strictly at Southasia, where India’s market leverage is astronomically higher than that of any of its neighbours, it is self-defeating for New Delhi to maintain barriers to trade at such a level, since they naturally evoke reluctance on the part of the other sides even to allow Indian imports. Consider that although India accorded Pakistan most-favoured nation status in 1995-96, Pakistan has not yet been able to experience tangible gains in terms of exports, even in commodities for which it has a comparative advantage. This is largely due to hidden barriers on the Indian side. (The only other reason could be lack of exportable surplus in Pakistan, which also undermines the contention about high trade potential.)
In reality, issues of hidden barriers and domestic subsidies are underpinned by deep structural problems, and thus cannot be addressed immediately. It is equally unrealistic to expect India to overhaul its subsidy structure in the short term, given the political ramifications. In the long term, however, India will have to address these issues – if for no other reason, due to increasing pressure from trading partners whose access to the Indian market is currently hampered.
On the trade front, the real possibility of a breakthrough lies over the long run. Over time, Pakistan could develop niches for certain products in the Indian market and consequently increase its export potential, something it is unlikely to be able to do in the short term. Similarly, in the long run Pakistan could increase its production capacity multi-fold, if it is able to invest wisely in line with its created niches. Finally, once India manages to lower its barriers, Pakistani exports can be expected to gain from increased market access, especially in the agriculture sector where Indian competitiveness vis-à-vis Pakistan, in large part, stems from domestic subsidies.
In short, the balance of trade may become comparable over time, a fact that would instil confidence in Islamabad and perhaps allow trade to surpass the threshold required for the liberal theory of economic interdependence to be realised on the ground. Whether economic interaction is allowed to flow without any consequential gains in terms of positive spin-offs for bilateral peace in the interim, however, depends on how confident both sides feel with the progress made during the peace process.
~ Moeed Yusuf is a consultant on economic policy at the Sustainable Development Policy Institute in Islamabad, and is a regular commentator for The Friday Times.
Image: Penguin India
Penguin India withdraws The Hindus
On 11 February 2014, Penguin India decided to recall and destroy all remaining copies of Wendy Doniger’s book The Hindus: An Alternative History. The decision was part of an agreement between them and Shiksha Bachao Andolan, a Hindu campaign group that filed a case against the publishers in 2010, arguing that the book was insulting to Hindus and contained “heresies”.
From our archive:
Diwas Kc reviews The Hindus: An Alternative History. (March 2010)