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.