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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.

Also read: After Pulwama-like attack, Iran warns Pakistan that it ‘will pay a heavy price’

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.

Also read: Ready to cooperate if India shares evidence of Pakistan’s hand in Pulwama attack: Qureshi

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.

Also read: India won’t find it easy to isolate Pakistan diplomatically, at least not at the moment

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.”

The author is Fellow in Foreign Policy Studies at Brookings India in New Delhi and the Brookings Institution in Washington DC, and a Non-Resident Fellow with the Lowy Institute in Australia.

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