India and Pakistan have been in a state of covert and overt aggression against each other since their partition in 1947. There have been sporadic efforts at peace, but Pakistan remains ideologically and irreconcilably hostile to India's growth and prosperity. With conventional war no longer an option between the nuclear-armed rivals, India needs to explore more effective methods of neutralising this threat. In his classic treatise The Art of War, Sun Tzu had argued that the perfect strategy would be to subdue the enemy without fighting. Novel strategies need to be explored to make the cost of Pakistan's unrelenting hostility literally unaffordable.
In a recent report on the state of Pakistan's economy, the International Monetary Fund (IMF) questioned its macroeconomic stability. Surging imports have led to a widening current account deficit and a significant decline in international reserves despite higher external financing. Pakistan's net international reserves in mid-February 2018 were in the negative by $ 7 million. The report highlighted the high likelihood of the country defaulting on its loans from the IMF. On several occasions over the past three decades the agency has issued similar warnings, but Pakistan has averted complete disaster. However, the situation that Pakistan finds itself in today is particularly grave, and even the slightest setback could plunge it into full-blown economic crisis.
Pakistan's economy has a historical vulnerability in the form of current account deficit. It has a burgeoning import bill for petroleum, consumer products and capital goods while 57 percent of its exports mainly comprise of textiles and cotton. The country bridges this deficit through foreign remittances, foreign aid and loans. Pakistan's current account deficit, which stood at $2.5 billion in 2015-16 has ballooned to $12.4 billion in 2016-17. Its exports that year stood at $20.45 billion while its imports were two and half times that figure at $53 billion. Remittances of $19.3 billion from Pakistanis working abroad helped close the gap.
Historically, the United States has been Pakistan's biggest donor and the IMF has been extending the country loans to tide over dollar shortages. Some estimate that Pakistan has received between $30 billion and $35 billion in aid from the US since the 1950s. A major part of this has been in the form of military aid. But, more recently as the US has begun to withdraw its support, Pakistan has been looking to China to fill its coffers. Their flagship joint venture, the China-Pakistan Economic Corridor (CPEC) is a $60 billion programme to construct ports, roads, power plants, telecoms and railway infrastructure. These fund flows are helping to boost the economy and, in the short term, ease its balance-of-payments problem. But these are loans bearing an interest of 6 percent-7 percent or assured high-return equity. Servicing them is going to put increased pressure on its balance-of-payments situation if CPEC investments do not generate commensurate exports. Thus, the CPEC could become another economic vulnerability.
Given its economic frailties, Pakistan is an extremely vulnerable situation. Being largely an agrarian economy, with its exports dominated by cotton, textiles, and apparel, a hostile country needs only to increase the supply of textiles in international markets to make Pakistani exports non-competitive and shake its macroeconomic stability. Squeezing the flow of remittances from its workers in the Gulf states would completely undermine Pakistan's economy.
The key question is: can India resort to such peacetime economic combat without expending too many resources? The first leg of this strategy is to increase competition for Pakistan's textile exports in international markets. India's textile sector contributes to about 13% of its exports. The Indian textile industry is diversified, with hand-woven textiles at one end of the spectrum and production through capital intensive mills at the other. Pakistan's textile exports are low value-added products. India does have the ability to undercut Pakistan's textile export prices by pumping in targeted subsidies to its textile-export sector.
India can pump cheap capital into textile companies and create conducive environment to encourage Indian exporters to follow a predatory-pricing model. For instance, if Pakistan exports a textile product at $1 per piece to Europe, Indian companies can be encouraged to sell the same product at $0.95 per piece. European markets would prefer the cheaper product. This will reduce forex earnings of Pakistan and put an additional strain on its balance of payments. Over time, Indian companies could develop the economies of scale and efficiencies to sustain sales at $0.95, but initially the government must make up for lost profits through subsidies and credit.
Such a strategy will have its own cost for India. Pakistan's textile manufacturing is dominated by labour-intensive processes. Labour is much cheaper in Pakistan than in India. Hence, unless India acquires economies of scale, it does not have a natural competitive advantage viz-a-viz Pakistan in the segments of textile goods that Pakistan specializes in. Pakistan also enjoys 'GSP+' preferential tariff treatment in its exports to the Europe which India does not. But Bangladesh enjoys the same preferential tariff treatment in the Europe. Wages in Bangladesh are low, and the country is already a global textile-export hub. So, any increase in Bangladeshi textiles exports also directly undercuts Pakistani exports to the Europe. Thus, in addition to boosting its own textile industry, India should promote Bangladeshi textiles by providing cheap credit and equity to it.
The second leg of the strategy is to create substitutes for manpower exported by Pakistan to the Gulf Cooperation Council countries. GCC countries have a longstanding relationship with Pakistan and they have encouraged the import of labour from Pakistan. But this relationship is fraying. The views of Lt. Gen. Dhahi Khalfan Tamim, head of Dubai's General Security, is a case in point. On 1 April 2018, in a series of tweets, he disparaged Pakistanis living in the United Arab Emirates as "smugglers, drug peddlers and criminals" and called upon Dubai authorities to stop hiring Pakistanis. By comparison, he said that Indians are disciplined.
As India also exports a significant number of skilled and semi-skilled workers to GCC countries, this presents a significant opening. While increasing its manpower exports to the Gulf countries, India should also try to promote Bangladeshi workers in GCC countries using its diplomatic resources. As Pakistan manpower exports to the Gulf are in the lower end of the skillset spectrum, Bangladeshi manpower will directly undercut it. India and Bangladesh working in tandem will also work as a bulwark against Pakistan using the religion card against India with the Gulf countries.
Such measures will have other benefits for India. Promoting Bangladesh's economy has direct consequences for India's national interest: it will reduce the distress migration of Bangla citizens to Assam and West Bengal through the long, porous border. It will also increase cooperation and goodwill with a neighbour that does not have any major strategic misalignment with us.
There are other factors in play currently which are likely to facilitate this strategy. The surge in global oil prices has put increased pressure on Pakistani reserves. The US has, in a major policy reversal, not just turned off the aid tap but is making it difficult for Pakistan to borrow in international markets. Due to violations of money-laundering and counter terror financing laws, the Financial Action Task Force has also put Pakistan on its 'grey' list, making its international financial transactions costlier, time consuming and difficult. In the meanwhile, Pakistani rupee has been devalued by nearly 20% in the last 6 months. Pakistan hopes that currency devaluation will boost its exports by making them cheaper, but its structural inefficiencies and growing dependence on China will increase its import bill and lead to inflation. Pakistan is facing a general election and is under a caretaker government. Its internal security and political situation remains fragile.
But even if India has the capacity to ravage Pakistan's economy, how wise would such a course of action be? What are the likely risks and benefits associated with it? No hostile action is devoid of risks and neither is this. Destabilising Pakistan's economy, and the resulting chaos, could increase support for extremist organisations and increase their ability to recruit. The military establishment in Pakistan may become desperate enough to sell nukes to the biggest bidder. This argument plays to the madman fiction created by Pakistan's propaganda machinery, that promotes fears that the Pakistani state does not behave rationally and can act unpredictably and recklessly when facing an existential threat.
The second unintended consequence is that an economic crisis of such a magnitude will push Pakistan deeper into China's embrace and create a more formidable enemy on our western borders. But, the benefits of waging an economic war is that an economic crisis will deepen conflicts and fissures within the subject society. The resultant anarchy and political dissonance will put pressure on the Pakistani establishment to reorient its India-centric focus to a more development-centred one. That could spur faster economic growth in South Asia and bring peace to the subcontinent.
The authors are officers of the Indian Revenue Service. Views are personal.
Updated Date: Jun 27, 2018 13:13 PM