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How Will the Situation in Afghanistan Impact Trade With India

Aug 18, 2021 8:46 AM 5 min read

On August 15th 2021, as India rose to celebrate the 75th year of its independence, one of our neighbours rose to discover the independence of its own social and political structures disintegrating. 

Afghanistan has witnessed a political regime change at a blitzkrieg pace over the last few weeks. While this raises many serious socio-political and humanitarian concerns, another dimension would be its impact in terms of trade and commerce, especially with long-standing partners such as India. 

Let's see how.

The Trade Trajectory

A shared history, geographic proximity and close cultural ties have laid the foundation for decades-long friendly relations which have translated into a sizeable economic presence of India in Afghanistan. The bilateral trade between the countries is valued at $1.5bn currently tilted in favour of exports from India.

In the process of establishing this trade relationship, significant Indian investments have poured into Afghanistan, chiefly in infrastructure - construction and restoration of dams, Parliament complex, irrigation networks, power projects, construction of roads and transmission lines, development of ports etc. 

In the absence of Pakistan's approval to allow land access, India has also established dedicated air corridors to facilitate bilateral trade with the landlocked Afghanistan. The size of total Indian investments in Afghanistan is more than $3bn achieved through 400 projects that span across 34 provinces. 

There is a standing preferential trade agreement (PTA) between India and Afghanistan (since 2003) which basically indicates a free-tariff regime. Note that PTAs are comparatively more liberalising vs. FTAs (Free Trade Agreements) because the latter merely reduces trade barriers while the former eliminates them.

Our largest exports - textiles, sugar, transmission towers, tobacco and medicines. Largest imports - dried figs, asafoetida, raisin, saffron caraway fennel and onion.

Suffice it to say that India has a deepened trade interest in Afghanistan for over decades now. In fact, the overall trade intensity of India with Afghanistan is higher as compared to the rest of the SAARC nations. 

As of July 2021, the bilateral stakes were entrenched enough for Indian authorities to explore further into Afghan-based business opportunities. Stronger trade ties were being contemplated with increased private participation and investment from state governments (like Andhra Pradesh) despite the uncertainty of the ongoing peace process in Afghanistan. 

The fate of all these projects is now uncertain.


Post-Taliban Trade Implications

The first impediment to bilateral trade emerges in light of the ongoing socio-political crisis caused due to the rapid onset of the Taliban regime. With military and diplomatic evacuations occurring on an emergency scale and the airspace over Afghanistan being almost shut, transit of goods to and from destinations bypassing the Central Asian region for India remains difficult.  

Assuming that the existing standstill would eventually give way to normalcy, the terms and conditions for any resumption still remains unclear. 

For instance, the Integrated Check Post (ICP) at Attari, which facilitates trade between India, Pakistan and Afghanistan, has seen an imminent fallback in trade volumes owing to the situation in Afghanistan. With the Taliban controlling most of the land borders in Afghanistan now, the rules that govern passage through this corridor remain unclear. 

One solution would be to rely on third-party countries to facilitate exchange of goods and payments. But this seems unlikely too considering that the Taliban has occupied most of the border towns (Spin Baldak - Pakistan, Islam Qala - Iran, Kunduz - Tajikistan) precisely due to their economic importance. Control of borders enables them to impose economic restrictions on imports, giving them further political leverage. 

Moreover, it is expected that the new security and economic architecture in Afghanistan is going to be remarkably different from the one followed in the last 20 years. China, Pakistan, Russia and Iran would be happy to see the decline of US influence. China and Pakistan, in particular, would try to minimise Indian engagement. 

Most unfortunately, all the investments made by India into strengthening infrastructure and logistics inside Afghanistan to support bilateral trade have now ceased to bear fruit. The much-hyped Chabahar Port project between India, Iran and Afghanistan started flailing with rising American sanctions against Iran. Although India conspicuously delayed commercialising the project, the port was still helpful in sending goods and necessities into Afghanistan, especially during the pandemic. 

But with the Taliban firmly expanding their presence now, the state of these trade routes and projects is hanging in the balance. The Federation of Indian Export Organisations (FIEO) has cautioned against the political developments in Afghanistan and advised restraint in trade operations by domestic exporters, particularly with regard to payments which have become highly uncertain. 

Pic: Dr. Abdullah Abdullah, a prominent Afghan politician and statesman, at the India-Afghanistan Trade and Investment Show, New Delhi


Need For Diplomatic Leave

A set of well-defined directives from the Government is what is needed to address the concerns of Indian traders impacted by the ongoing volatility. But as far as executive clearance is concerned, Indian authorities seem to remain in a "wait and watch" mode. 

Although India has been a strong advocate and actor towards strengthening democratic institutions and development in Afghanistan, it would be interesting to see what course of action it takes with regard to restoring de facto ties with its neighbour. Especially when one considers India's stand at the recent peace talks held in Doha where the Ministry of External Affairs insisted on "not recognising any regime taking over the country by force". 

Ironically, the largely "bloodless" expansion of Taliban to capture Kabul on Sunday and the rest of the provinces over the course of last week, has left India tongue-tied with regard to the above declaration. Even if the trade relationship with the new Afghan "government" is resumed, the question of extending duty-free privileges to a tyrannical regime with a proven record of human rights violations begs reevaluation ((but to be fair, that hasn't stopped us from trading with China). 

In any case, until the dust settles and a new diplomatic framework vis-a-vis Afghanistan becomes known, a trade impasse seems likely.


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