The following article originally appeared in The Print on February 18, 2019.
In the aftermath of the Pulwama tragedy – the worst
Islamist terror attack in India since 2008 – what can and should India do? In
this instance, Pakistan’s role is certain, with its continued support to the
Jaish-e-Mohammed to recruit, expand its financial network and training
infrastructure. There are a number of kinetic options for retaliation, through
military force or covert action, and these are undoubtedly being contemplated.
Such retaliation may or may not deter Pakistan from future attacks, but they
will certainly be retributive. In the meantime, what are the economic costs
that India can bring to bear?
At Friday’s Cabinet Committee on Security meeting, India
announced that it would withdraw the Most Favoured Nation trading status, in
place since 1996 despite Pakistan’s lack of reciprocity. This imposes high customs
duty on Pakistani imports to India and, as a targeted discriminatory economic
measure, represents the formalisation of Indian sanctions against Pakistan.
But perhaps, there is little appreciation for how India
has been making a sustained effort for many years to isolate Pakistan
economically, in a bid to compel it to stop its state support for terrorism.
For a variety of reasons – largely due to Pakistan’s own behaviour – these
efforts have only recently become effective. But mostly due to the pathologies
of Pakistan’s security state, these have not had the effect of compelling
Pakistan to overturn its support for terrorism – yet.
Indian attempts at isolating Pakistan date back to the
Cold War, even when India had a much weaker hand. In the 1980s, for example,
India successfully lobbied the United States to refrain from extending certain
military assistance to Pakistan. Efforts at isolating Pakistan continued after
the 9/11 attacks in 2001, when India felt the international mood shift against
cross-border terrorism.
But as during the early Cold War years and the Afghan War
of the 1980s, the post-9/11 climate found Pakistan proving itself useful to the
United States and others. India found commiseration, even sympathy, in many
international capitals, but its concerns about Pakistan’s sponsorship of
terrorism were ultimately ignored in favour of larger political considerations,
namely: paranoia about Pakistan’s nuclear programme, ground lines of
communication to Afghanistan, and limited counter-terrorism support that
Pakistan provided under duress.
Indian efforts finally began to bear fruit only after
2007-2012. These years saw a number of developments – the Lal Masjid raid in
Islamabad at China’s insistence, the 26/11 attacks in Mumbai, the 2009 attack
on the Sri Lankan cricket team in Lahore, the Raymond Davis incident, the 2011
Salala skirmish between NATO and Pakistani forces, the killing of Osama bin
Laden in Abbottabad, and the Haqqani Network siege of the US Embassy compound
in Kabul – that collectively tarnished Pakistan’s reputation. Subsequently,
India was able to include condemnation of Pakistan-based terrorist groups –
from Lashkar-e-Taiba to D-Company – in joint statements with foreign leaders.
And such steps started having real economic implications, as they filtered into
economic, trade, and financial policy.
Last year’s downgrading of Pakistan by the Financial
Action Task Force (FATF) – an intergovernmental body that coordinates efforts
against money laundering, terrorist financing, and financial crimes – is a good
example. Pakistan’s ‘grey listing’ was being pushed by India and the United
States, among others, but was being blocked by China. India supported China’s
elevation to the Vice Presidency of FATF in exchange for Beijing lifting its
hold on Pakistan. This move is not simply a rhetorical rap on the knuckles: it
has raised the costs of financial transactions involving Pakistan, with
repercussions for its credit rating, stock market, banking sector, and currency
inflows.
Another good example is US aid to Pakistan. For many
years, the United States provided military and economic support to Pakistan to
buy logistic cooperation for the war in Afghanistan, get information about its
nuclear programme, and receive occasional counter-terrorism intelligence. In
2009-2010, the US Congress – in a misguided attempt at buying long-term
goodwill from the Pakistani people – passed the Kerry-Lugar-Berman Act to boost
non-military aid over five years.
But sustained efforts to present India’s case to the US
lawmakers coupled with growing frustration in Washington meant that such
financing was not renewed, in contrast to consistent long-term US aid packages
to the likes of Egypt. Total US aid to Pakistan, including military
reimbursements, fell from $2.6 billion in 2012 to $345 million in 2018. There
were many reasons for this, primarily US anger with Pakistan’s duplicity. But
as attested to by the overwhelming support for India from the US Congress,
India’s advocacy also played an important role.
If Pakistan believes that none of this will matter
because of continued economic assistance from China, it is somewhat mistaken.
The China-Pakistan Economic Corridor – a major prong of China’s Belt and Road
Initiative – is certainly underway, with a host of port, road, rail, and power
projects. But its economic value is grossly overstated. Chinese officials have
privately admitted that they do not expect it to cross $19 billion in total
investment, rather than the $60 billion or more pronounced by Pakistan. They
also believe that “China’s maximum annual direct investment in Pakistan should
be around US$1 billion.” Moreover, these investments are not necessary
productive. Many projects have been beset with problems – including imported
Chinese labour – and the one area of some success, power generation, has not
been accompanied by necessary reforms to make them sustainable. This means that
Pakistan will be slammed with debt to China when repayments of these loans are
due in the coming few years. By contrast, despite latent security concerns and
India’s boycott of the Belt and Road Initiative, Chinese direct and portfolio
investment in India has continued. It may well be that total Chinese investment
into Pakistan will only be marginally more, and possibly even less, than total
Chinese investment into India.
India is still a long way from economically isolating
Pakistan. In addition to Chinese support, financing from the Gulf Arab states
is ongoing, and Pakistan continues to derive trading benefits from the European
Union and the United States. But India’s efforts, coupled with Pakistan’s own
disastrous policies, have already had a major impact on Pakistan’s economy. In
2008, when the 26/11 attacks took place in Mumbai, the per capita GDPs of India
($1049) and Pakistan ($1038) were almost identical in dollar terms. In the
decade since, India’s has almost doubled ($2016) while Pakistan’s has grown
only by about 50 per cent ($1527) and has been surpassed by Bangladesh ($1736).
As another point of comparison, Pakistan’s GDP today ($307 billion) is less than
that of Maharashtra, a single Indian state (about $390-$400 billion). The
instability of Pakistan’s economic situation is best represented by its paltry
foreign exchange reserves – $8 billion – which when combined with its overall
debt, put it on the brink of defaulting.
If India’s efforts, combined with growing international
frustrations and Pakistan’s misguided policies, have put Pakistan in such an economically
precarious situation, why has that not stopped its support for terrorism
against India? The answer lies, in large part, with the strategic culture of
the Pakistan Army, best captured in American scholar Christine Fair’s book
Fighting to the End. After assessing the Pakistan Army’s own literature, Fair
argues that the army will see itself victorious as long as it continues to
resist a supposedly belligerent India. Its revisionist policies – including
cross-border terrorism – will therefore endure even at the cost of weakening
the fundamentals of the country, including its economy. “Pakistan will suffer
any number of military defeats… but it will not acquiesce to India,” Fair
concludes. “This, for the Pakistan Army, is genuine and total defeat.”