India Afghanistan Trade- Past, Present and Future

This post has been authored by Pratibha Saha and Shrutika Joshi, Economic Analyst Interns at Arthashatra Intelligence

Afghanistan is in the news. Afghanistan is in a crisis. It is only fitting that we direct our attention to  India-Afghanistan ties this week. Precisely, our trade ties with the country.

India and Afghanistan have been natural trading partners for a long time owing to geographical proximity and our historical linkages. The export commodities from Afghanistan are dominated by dried figs, asafoetida, raisin, saffron, caraway fennel and onion whereas the top five items that  Indian exports to Afghanistan are textile, sugar, transmission, tobacco and medicines. India has remained its largest trading partner in South Asia. Majority of the trade that takes place between these countries happens through two channels : one through the Air Freight Corridor and the other through the relatively new Chabahar Port.

The former Afghan government, in collaboration with the Government of India, launched a dedicated Air freight Corridor, operational since June 2017, to bypass and overcome its dependency on Pakistan. The Corridor connects Kabul, Kandahar, Herat with New Delhi, Mumbai and Chennai. This has led to a significant boost to their economy and benefited the small scale players like Afghan farmers and small traders.

The Chabahar seaport located in South-Eastern Iran (Gulf of Oman) became operational in December 2017. The origin of the Port can be found in the Trilateral transit agreement signed by India, Iran and Afghanistan for ease of transport of Indian goods to Afghanistan through Iran.  The Port is of great geographical significance because it links the Western ports of India with the Afghan border. It has so far handled over 5000 containers ferrying over 110,000 tons of wheat and over 2000 tons of pulses sent by India to Afghanistan.

As a strategic ally, India has invested and helped Afghanistan build Salma Dam, in western Afghanistan, the Delaram-Zaranj highway, and Afghanistan’s—Parliament building. Another noteworthy investment is the power infrastructure overhaul including the 220 KV DC-transmission line from Pul-e-Khumri, capital of Baghlan province to the north of Kabul, for increasing power supply capacity. Reconstruction of hospitals, donating ambulances and building Sulabh toilets has also been part of that agenda.

Talking in terms of trade, the following visuals give a detailed view.

Figure 1 demonstrates the growing proportion of import and export volume between the two countries for the past 5-6 years. Indian exports to Afghanistan witnessed a growth of over 89% between 2015-16 and 2019-20. India’s imports also grew by 72% during the same period. In 2019-20, the export value increased by 39% and imports over 21% compared to 2018-19. Bilateral trade between India and Afghanistan crossed the US$1.5 billion mark in the previous financial year 2019-2020 with India’s exports to Afghanistan almost touching US$ 1 billion (US$ 997.58 million) and imports from Afghanistan being around US$530 million.

Focusing on commodity wise trade between the two nations, around 45.1% exports from India are of textiles followed by staples like grains, pulses, processed food etc. Vegetable oil has a 7.36% share and various other commodities like paper goods, metals, transportations, instruments etc are traded.

When it comes to imports from Afghanistan, 98.9% vegetable and related products are imported which includes insect resins, spice seed, fruits, dry fruits, food grains/pulses etc. Perfume plants, perfume and essence are considered as a special commodity being imported to India. Due to the ongoing war, the entire bilateral trade figure has seen a disturbance and India is about to face severe consequences especially price hikes in dry fruits and pulses. With the festivals starting soon, Indian households are expected to be prepared for such price hikes.

India and Afghanistan have always engaged in a flourishing trade business involving significant import and export of specialty goods like dry fruits, textiles, perfume, spices and condiments etc. Trade agreements help nations practice trade without major constraints like geographical barriers, currency fluctuations etc. One such trade agreement has been the Preferential Trade Agreement between India and Afghanistan(PTA), in effect since 2003 , which highlighted the motive of economic development through trade and economic integration between the countries.

With the Taliban making military strides into the country, leading to the fall of Kabul, significant questions have been raised pertaining to trade ties and investments i.e. the economic impact of the war in Afghanistan. India is recognized as the “most cherished partner of Afghanistan”  providing $3 billion in aid assistance. Even though the country holds significant amounts of metal ores and rare earth minerals (Lithium being used in smartphone batteries), it is anybody’s guess whether all these plans would come to fruition in the light of recent events. In addition to it, two major concerning questions from India’s point of view are risk assessment with its neighbors along with an unstable government and ongoing developmental projects by India. Preferential Trade Agreement and its existence is also another apprehension.

References

• Data Retrieved from Observatory of Economic Complexity and Indian Department of Commerce.
• D, K. (2021, August 17). Decoded | India’s investments in Afghanistan as Taliban return. Retrieved from India Today: https://www.indiatoday.in/business/story/decoding-india-investments-in-afghanistan-return-of-taliban-impact-1841897-2021-08-17
• Department of Commerce Ministry of commerce and Industry. Government of India, Retrieved from India Trade Portal: https://www.indiantradeportal.in/vs.jsp?lang=0&id=0,1,63,70
• Subramanian, N. (2021, August 21). Explained: A look at India’s investments in Afghanistan. Retrieved from The Indian Express: https://indianexpress.com/article/explained/explained-indias-afghan-investment-7406795/
• Taliban victory in Afghanistan: What’s at stake for India. (n.d.). The Economic Times. Retrieved August 21, 2021, from The Economic Times : https://economictimes.indiatimes.com/news/international/world-news/taliban-victory-in-afghanistan-whats-at-stake-for-india/videoshow/85401373.cms
• Indo-Afghan Relations. (2020, August). Embassy of India Kabul, Afghanistan. https://eoi.gov.in/kabul/?0354?000