Pakistan's trade suspension with India has limited impact

  Pakistan downgraded diplomatic relations and suspended bilateral trade with India after New Delhi revoked seven decades of autonomy for the disputed Muslim-majority state of Kashmir.
Pakistan downgraded diplomatic relations and suspended bilateral trade with India after New Delhi revoked seven decades of autonomy for the disputed Muslim-majority state of Kashmir.PHOTO: AFP

NEW DELHI (BLOOMBERG) - Pakistan's decision to suspend trade with India in itself is hardly going to cause economic grief to either of the nuclear-armed rivals.

Pakistan downgraded diplomatic relations and suspended bilateral trade with India after New Delhi revoked seven decades of autonomy for the disputed Muslim-majority state of Kashmir.

Total trade between the neighbours stood at about US$2.5 billion (S$3.46 billion) in the year to March 2019, and has stayed around that level for several years. That's roughly 3 per cent of Pakistan's total trade and about 0.3 per cent that of India.

"The suspension of trade ties will not have a material impact on either economy," said Mr Akhil Bery, an analyst with Eurasia Group in Washington.

He, however, expects a further decline in equity markets "as the confrontation deepens and upon any signs of military confrontation".

Pakistan's key stock index fell for a sixth straight day on Thursday, while Indian stocks have fluctuated between gains and losses in last few days as investors remained concerned about economic growth prospects amid rising trade tensions between the US and China.

Even without the current escalation in tensions, the two neighbours have been battling economic problems.

Pakistan has raised borrowing costs to a record to fight inflation and devalued its currency as part of conditions to win a bailout from the International Monetary Fund. India is trying to find ways to boost domestic consumption to spur a slowing economy.

 
 

India's exports to Pakistan largely consist of textiles and chemical products, while key imports comprise mineral products and vegetable products.

After tensions in February, India withdrew the Most Favoured Nation status accorded to Pakistan and imposed a customs duty of 200 per cent on imports from there.

"The bigger immediate worry from Pakistan's perspective is that the crisis is taking place against a backdrop of a balance of payments crisis," Mr Gareth Leather, Senior Asia Economist, Capital Economics, said in a note.

"A full-blown conflict that spreads beyond Kashmir would obviously have a much bigger impact" on the economies of the two countries.