Is India’s Financial Onslaught on Pakistan Really Effective?

The Indian subcontinent is in the middle of war hysteria once again.

India and Pakistan who have been at loggerheads over the Kashmir issue since 1947 are once again having a go at each other. The tensions mounted as a result of a cowardly terrorist attack by an organization called Jaish-e-Mohammed. This attack was an ambush on Indian soldiers as they were moving from one city to another. The attack led to the martyrdom of 44 Indian soldiers.

The Indian population is tired of Pakistan’s policies. It is alleged that Pakistan supports anti-India terror outfits and provides them with the money and the equipment required to carry out such attacks. Once these attacks are executed, Pakistan claims to know nothing about them. If India still decides to pursue military action, the threat of nuclear war looms large.

Given that conventional war is not really the answer here, the Indian government is trying to financially isolate Pakistan this time. As a result, it has undertaken some steps to hurt the financial interests of Pakistan. In this article, we will have a closer look at some of the measures being taken by India and analyse them for effectiveness.

Step #1: Withdrawing the Most Favoured Nation Status

India has provided the Most Favoured Nation status to Pakistan. Under the GATT agreement, this means that India will not levy any tariffs on imports from Pakistan. However, Indian has cancelled this agreement and has decided to levy a 200% tariff on imports from Pakistan.

The question that really needs to be asked is whether this move will have a significant economic effect on the economy of Pakistan. Firstly, it needs to be understood that the economy of India is much bigger and much more developed as compared to that of Pakistan. This is the reason why India exports goods and services worth $1.5 billion to Pakistan every year.

On the other hand, Pakistan exports goods and services worth less than $500 million back to India. This $500 million represents only about 2% of the total Pakistani exports. Hence, even if India’s policies were to stop the trade completely, Pakistan would not be largely affected.

Firstly, Pakistan exports basic goods to India. These goods include fruits, vegetables, cloth, and cement. If India doesn’t buy these products, Pakistan can still find another buyer. On the other hand, India exports services such as entertainment to Pakistan. The Indian film industry and daily soaps have a huge fan following in Pakistan. This is because of the common culture which is shared between both countries. Hence, finding a newer market will be more difficult for Indians. However, the revenues from Pakistan are minuscule given the scale of India’s film industry. Hence, both sides are likely to be unaffected.

Secondly, it also needs to be understood that there is a pretty simple roundabout way to circumvent these trade restrictions. Pakistan can export its products to the UAE which is a duty-free port.

Later, these goods can be exported from the UAE to India. Since India does not levy huge tariffs on the UAE, this round-tripping would simply enable Pakistani exporters to bypass the restrictions and continue to trade with India.

Most economists would agree that removal of the Most Favoured Nation (MFN) is merely a symbolic move with very little economic impact.

Step #2: Financial Action Task Force Blacklisting

India’s second move was to try to get Pakistan blacklisted at the Financial Action Task Force (FATF). The FATF is an international financial body which aims to prevent money laundering and terrorism financing all across the world.

Once a country gets blacklisted by FATF, its access to foreign funding becomes severely limited.

North Korea serves as a good example of a country blacklisted by FATF. If Pakistan were to be put on this list, it would severely hamper the country’s finances.

Pakistan is dependent upon foreign aid for its survival. Being blacklisted by the FATF means that most countries would refuse to undertake any transactions with Pakistan. Also, Pakistan plans to take an IMF bailout package to save its failing economy. This package would also be jeopardized by such blacklisting.

However, until now, India has not been able to get Pakistan blacklisted. The FATF has placed Pakistan on its grey list till September 2019. Being of the grey list is not too much of a problem for Pakistan given the fact that it has already been there from 2012 to 2015.

The financial activities of Pakistan were not really impacted during this period. Pakistan’s exports and imports were completely stable during this period. Also, the country raised a $5 billion loan from the global markets during this period. Hence, neither financing nor day to day operations were significantly affected by the grey-listing.

Step #3: Water Diplomacy

The Indian government has vowed to stop excess water flow from its three rivers into Pakistan. Now, it needs to be understood that water flow cannot be easily diverted. It needs multi-million dollar dam projects which require time to build. Given the treacherous terrain of the Kashmir region, India may not be able to completely stop the flow of water into Pakistan. However, even if that is accomplished, that will happen many years from now and will cost India a lot of money.

The bottom line is that India needs to up its ante if it really wants to levy any sort of economic punishment on Pakistan. The current measures do not seem to be as effective as they need to be.

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