India - India-Pakistan Thaw Continues

Rapidly warming relations may now allow for cross-border FDI

Relations between India and Pakistan, which began to thaw with Pakistani President Asif Ali Zardari’s recent visit to India, appear to be warming faster than almost anybody thought possible prior to the visit. New Delhi earlier this week announced it has thrown open the gates for foreign direct investment to its western neighbor with immediate effect.

The question as always is whether the liberalization will stick. There have been previous thaws, including proposals to open additional transport corridors between the two countries, in the early part of the 2000 decade, only to see tensions return.

Pakistan has been the only country in the negative list under the Foreign Exchange Management Act, which prohibits investing in India. The Act specifically bars transactions from Pakistan by stating that “A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI policy.” The ruling UPA took Sri Lanka of the banned list in 2006 and Bangladesh in 2007.

Liberalizing heavily restricted trade and investment flows, it is hoped, will spur peace efforts between the two nations, which have been embroiled in two major wars since Partition in 1949 and a variety of border skirmishes. The neighbors’ tenuous ties were strained to the breaking point when Pakistani terrorists attacked Mumbai in 2008, killing 260 people and destroying millions of dollars of worth of property.

The FDI decision follows a series of high-level meetings between the commerce ministers of India and Pakistan – Anand Sharma and Makhdoom Amin Fahim respectively -- who have met three times in the past seven months. It is now hoped that with capacity to handle about 600 trucks a day, the Attari-Wagah border crossing between India and Pakistan will help trade surge from the current abysmal $2.6 billion to US$8 billion, the industry chamber ASSOCHAM said in a study published this week.

Pakistan made the first gesture to deepen economic engagement with India last month. In the face of some domestic opposition, the government of Pakistan President Asif Ali Zardari vowed to grant India most favored nation status, which ends restrictions that require most products to move via a third country. The move was hailed by India and led to optimism that the two countries will focus on resolving economic issues before moving on to trickier political issues including the disputed region of Kashmir which both countries claim as theirs.

Pakistan replaced its restrictive positive list of 2,000 items allowed to be imported from India with a negative list of 1,209 banned items. This led to a three-fold upward spiral in the number of exportable items from India. In a highly skewed trade ratio, India exported goods worth US$2.33 billion to Pakistan last year, while imports from there were worth US$330 million. Trade through third countries such as Dubai is estimated at US$10 billion per year, which would now be expected to plummet.

Potential sectors for trade after India gets MFN status are petroleum products, iron and steel, pharmaceuticals, chemicals, heavy industries, energy, small and medium enterprises, information technology and IT enabled services, telecommunications, transportation and financial services.

Deepening the economic engagement, many feel, is a smart way forward as India and Pakistan have thousands of years of shared history and culture. It would also help to lay to rest the legacy of poisonous relations that have preempted friendly ties post-Partition apart from assuaging the hurt of Pakistani businessmen who feel that India places too many restrictions on them. More than 600 Pakistani businesses were in New Delhi last week at a trade fair to promote their products to the Indian market.

However, under a new regime currently in the works, businessmen from either country could now receive one-year visas and would also be allowed travel to up to 10 cities in the respective country they visit, without having to report to police. Old rules allowed businessmen only to stay in the place of work they visit. The two countries are also expected to establish an India-Pakistan Business Council apart from allowing banks from both countries to open cross-border branches.

Ministry officials say that all business proposals will be routed through the Foreign Investment Promotion Board (FIPB), which would help to address security concerns.

Analysts say that despite strained ties, India and Pakistan cannot be isolated from the globalization process and economic integration among them is the need of the hour.

“Allowing FDI from Pakistan on a case-to-case basis will not only address the security concerns but also bolster confidence between the neighbors. This may well facilitate disentangling the trickier political issues,” a Secretary at the Ministry of Commerce told Asia Sentinel.

Expectedly, India’s opposition parties have reservations. According to the right-wing Bhartiya Janata Party, the country’s largest opposition party, when it comes to Pakistan and China, trading is better than allowing FDI, as it could be misused by those wanting to harm India. "The government has to be concerned about the threats of open channels being used by some undeserving elements," BJP spokesperson Prakash Javadekar said.

However, the Congress has countered this by stating that there will be “no compromise on security.” The department of industrial policy and promotion has proposed that investments from Pakistan be examined on a case-to-case basis by the Foreign Investment Promotion Board (FIPB) to verify the source and end use of funds. Investment proposals from Bangladesh, too, are subjected to similar FIPB scrutiny.

Security clearance from the Home Ministry for FDI proposals will also depend on factors like who the directors of the company are and its background; whether it has been involved in anti-India activity and the area in which the companies want to invest. Telecoms will apparently be a no-go for investments for some more time due to the sensitive nature of the sector.

The Congress leaders are optimistic that progress will have a domino effect in instilling greater confidence between Delhi and Islamabad which, in turn, will lay the foundation for some solid political breakthrough in bilateral relations. "Economic cooperation and mutual gain are often the basis for building political trust. If there's a stake in the ties, no one wants to rupture them," a senior official told the media.

Following India’s FDI decision, Pakistan army chief Ashfaq Parvez Kayani Wednesday called for “peaceful coexistence and the resolution of all issues between the two countries.” Coming soon after Zardari's visit to India and the FDI move, Kayani's comments are significant.

However, although India has taken note of Kayani's statement, the UPA government is not expecting sudden positive leaps in bilateral ties with the trust deficit post-Kargil war and Mumbai blasts still to be erased. New Delhi’s strategy is to focus instead on cross-border growth of business and people-to-people ties through a liberalized visa mechanism. Boosted trade between the two countries, and an easing of tension along the border, can be the emollient for solving other less intractable problems.

Before Prime Minister Manmohan Singh embarks on a possible one-day trip to Pakistan this autumn, New Delhi is looking for a credible positive development in bilateral ties with Pakistan on key outstanding issues. A big breakthrough in economic ties may well be that impetus.

Neeta Lal

Asian Sentinel

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