India, Pakistan boost trade
ties By Robert M Cutler
MONTREAL
- India's decision last week to lift its ban on
foreign direct investment (FDI) from Pakistan, the
only country from which it had barred such
investment, is unlikely to create a rush of
cross-border spending but will create the
circumstances for Pakistani businessmen to begin
investigating possibilities.
The ban was
imposed under India's 1999 Foreign Exchange
Management Act, which now requires amendment for
the announced intention to be implemented. The
flow of Indian FDI into Pakistan, meanwhile, will
likely be slowed by uncertainty over the political
situation there.
A Pakistani trade fair
was recently held in New Delhi, and
Indian
industrialists and government circles are
discussing the possibility of energy exports
(electricity and oil) across the border. Also, the
Reserve Bank of India and State Bank of Pakistan
have been talking to one another and exploring the
possibility of opening branches in each others'
countries.
This
week, India's External Affairs Minister S M
Krishna said that a "liberalized visa agreement"
was likely to be signed between the two countries
next month. It would provide for easier travel and
visa procedures for businessmen, such as a
one-year multiple-entry visa, as well as
facilitate resolving humanitarian issues, such as
divided families and attendance at weddings and
funerals. Pakistan, for its part, is now ready to
give India most-favored-nation (MFN) trade status.
This means that the trading partner so designated
receives treatment no worse than the best
treatment received by any other trading partner.
Pakistan will implement this as soon as India
completes the dismantling of non-tariff barriers
that restrict imports from Pakistan.
The
developments follow Pakistani Commerce Minister
Makhdoom Amin Fahim's trip to India last
September, the first such visit in 35 years. Anand
Sharma reciprocated, becoming the first Indian
commerce minister in 64 years to visit Pakistan;
120 top Indian businessmen accompanied him.
Agreements reached during the exchange of visits
are now in the process of being implemented. The
possibility of setting up a bilateral co-chaired
business council has been bruited.
Current
bilateral trade is only US$2.7 billion per year,
mainly in the base metals, chemicals, electronics
and machinery sectors. The sides have engaged to
double this figure in the next two years.
According to one study, it could more than triple
by 2015 if all non-tariff barriers were removed
along with tariff barriers.
As much as $10
billion of trade, however, is conducted between
them illegally, routed mostly through Dubai in the
United Arab Emirates but also through Singapore.
It is expected that this commerce will now be
legally routinized, as the decline of
transportation costs will outweigh any tariff
advantages offered by the black and grey markets.
The only crossing-point for trade between
the two countries, at the Wagah-Attari border for
the Amritsar-Lahore road (a 54-kilometer trip that
takes over an hour by car), will soon open a new
gate dedicated for commercial traffic. A
Mumbai-Karachi sea route is a long-term option for
increasing trade if funding can be found for
investment in the significant modernization and
development of facilities that would be required.
The potential long-term results of the
improvement in bilateral trade relations could be
nothing less than transformational. Commerce
Minister Sharma has mentioned favorably a proposal
for a South Asia-wide power grid for sharing
electricity. This would further boost trade in
what is the least-integrated region in the world
in intra-regional terms: trade among the members
of the South Asian Association for Regional
Cooperation (SAARC, including also Afghanistan,
Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka)
accounts for less than 5% of their total
international trade.
By contrast, that
percentage is over five times greater among the 10
members of the Association of Southeast Asian
Nations, flung out over the map from Myanmar to
Indonesia and the Philippines and with less than
half SAARC's total population but over two-thirds
its gross domestic product.
Afghanistan
and Pakistan already have a transit trade
agreement, while Afghanistan and India have a
strategic partnership and both sides have
advocated that Afghanistan become a trade hub
between South Asia and Central Asia.
The
Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas
pipeline project is a potential element in such a
stabilization. A rail link over the border between
Turkmenistan and Afghanistan is already being
modestly expanded.
The facilitation of
India-Pakistan trade could further regional
stabilization in the longer term, again if funds
can be found for transnational infrastructure
investment and the security situation in both
Afghanistan and Pakistan is stabilized.
Elite opinion in India and Pakistan is
favorable to continued improvement of economic
relations and recognizes fully how this might
contribute to the resolution of outstanding
political problems, not excluding Kashmir.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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