“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war”-Mark McKinnon
Early this week the Indian government decided to withdraw the ‘Most Favoured Nation’ status given to Pakistan with a view to facilitate robust and economically favourable trade between the nations. This status was revoked in light of Pakistan’s alleged support to terrorism and infiltration activities against India.
Also, condemning Pakistan’s support to such national threats, the Indian government imposed an import duty of 200%. This essentially implies that anyone buying goods from Pakistan into India would have to pay 200% of the product’s value as import tax. This has effectively result in a steep drop in imports from Pakistan and consequently withdraws meaningful economic support the country received in form of revenues.
Is this economically feasible for India?
Pretty much, yes. A HBL article stated India imports ~$500 million worth of goods every year from Pakistan while India exports goods worth ~$2 billion to Pakistan. This reflects the fact that India makes a net revenue from this bilateral trade that is almost 3x the value of what is paid to Pakistan.
Now, considering that India is on track to minimise imports from Pakistan while there is no similar counter-policy by Pakistan, India stands to benefit from higher exports & lower imports from the neighbour.
Given that India exports more than it imports from Pakistan, how will it affect India if Pakistan retaliates with a similar policy?
India is a robust export economy with an export book worth ~$292 billion (as on YE’2017). Out of this, exports to Pakistan accounts for a measly ~0.7% in the same period. Also, we did not find Pakistan featured even among the top 25 import destinations for India.
At the same time, Pakistan depends on India for almost 5% of its total imports and India is among the top 7 import destinations for the country. Hence, India seems to be sufficiently insulated against such a counter-policy.
How is the market placed right now?
While worries around India’s geopolitical & consequent economic stability led to a meaningful outflow of foreign investments initially, a fraction of it flowed right back in by the weekend. The inflow of foreign money & recovery in indices were majorly led by clarity offered by RBI’s monetary policy report and realisation of India’s firm positioning even during geopolitical disturbances.
This is how the markets moved vis-a-vis foreign inflows in the past week:
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Thanks,
Nirav (Head of Research)
Fisdom
