India and Pakistan saw a major breakthrough for their fragile relationship in November 2011 when Pakistan announced it would grant India most favoured nation (MFN) status.
India offered Pakistan MFN status back in 1996, but Pakistan was hesitant to reciprocate. So, what is behind Pakistan’s recent move and what are the likely implications?
The biggest factor is Pakistan’s economic predicament. The country has long been troubled by fiscal problems, with its annual economic growth stalling at 2.4 per cent in the 2010–11 fiscal year. Financial assistance from Washington is expected to significantly drop when American forces withdraw from Afghanistan in 2014. The current US-Pakistan relationship can already be likened to a loveless marriage sustained by mutual needs: Islamabad provides Washington with a supply route to Afghanistan while Washington delivers economic aid in return. Granting MFN status to India might well be Pakistan’s attempt to offset the expected drop in aid from Washington.
Trade between India and Pakistan stood at US$1.4 billion in the 2010–11 fiscal year, although trade barriers between the two countries have spawned contraband trade whose total volume is estimated to be two or three times that of official trade. If this is properly incorporated into formal trade, Pakistan could increase its tariff revenues and, above all, stimulate its economy. Pakistan, whose GDP stands at US$0.16 trillion, would greatly benefit from increased trade with its neighbour:
India is the world’s ninth-largest economy, boasts a GDP of US$1.73 trillion and an annual growth rate of around 7 per cent in 2010–11. Following Pakistan’s decision to grant India MFN status, the two countries have also agreed to work on a preferential trade agreement.
The Kashmir dispute and terrorist attacks in India have long been stumbling blocks to closer relations between India and Pakistan. Bilateral relations deteriorated almost to the point of war after a terrorist attack on the Indian parliament in 2001. But the two countries began a strategic dialogue in 2004 with the assistance of US mediation. Washington wanted to direct Pakistan’s focus toward Afghanistan rather than India. But the 2008 Mumbai terrorist attacks, killing some 160 people, jeopardised efforts to improve relations. In a repeat of earlier occasions, India blamed the Pakistani army — particularly its main intelligence agency, the Inter-Services Intelligence — for assisting extremist groups, while Pakistan denied India’s allegation.
Fearing the growing power next door, Pakistan formerly tried to maintain the geopolitical balance by threatening India from the east and the west. After East Pakistan gained its independence as Bangladesh, the separation movement in the disputed region of Kashmir and extremist activities supporting the movement took over as the best counterbalance against India. The Pakistani armed forces have been promoting this balancing policy — countering India is their raison d’être — and have maintained a strong influence on Pakistan’s India policy.
The Pakistani military will likely revert to its traditional counter-India policy when American forces withdraw from Afghanistan, which may see the establishment of a pro-Pakistani Taliban regime in Afghanistan. Civil–military relations are deteriorating in Pakistan to the point where a military coup could happen at any moment. If the military takes over Pakistan’s regime again, the prospects for improving relations with India will become even more uncertain.
That Pakistan granted India MFN status despite all this suggests the chief reason behind Islamabad’s recent move lies in Pakistan’s deteriorating economy. Initially, the military was reportedly reluctant to grant MFN status to India. Information and Broadcasting Minister Firdous Ashiq Awan emphasised the need to obtain the military’s agreement, telling reporters that ‘this was a decision taken in the national interest and all stakeholders, including our military and defence institutions, were on board’. The MFN agreement may mark a political development driven by economic conditions, a familiar phenomenon observed in many parts of the world. If economic relations between India and Pakistan expand, Pakistan’s business community may come to have a stronger say and demand that greater emphasis be placed on economic policies rather than politics, terrorism and the Kashmir dispute.
Given the mutual distrust between India and Pakistan — which have fought three wars in the past six decades — it is unlikely that granting MFN status will instantly improve bilateral relations. There will be a lot of twists and turns, but Pakistan’s decision might well have triggered a metamorphosis of the bilateral relationship.
Takenori Horimoto is Professor of Contemporary South Asian Politics at Shobi University.
An earlier version of this article was first published here on the Association of Japanese Institutes of Strategic Studies website.
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