Economic cooperation brings India and Pakistan closer

Transcription

1 :: Issue Analyses Economic cooperation brings India and Pakistan closer Kim Mi-su Business Analyst of POSCO Research Institute On April 28, 2011, India and Pakistan made a joint press statement vowing to normalize bilateral trade ties. Since then, Pakistan s Commerce Minister visited India last fall, and India s Commerce Minister visited Pakistan earlier this year. On April 13, 2012, India s Home Minister, P. Chidambaram, and Pakistan s Commerce Minister, Makhdoom Amin Fahim, inaugurated an integrated check post (ICP) at the Attari (India) and Wagah (Pakistan) border. As the first ICP along the India-Pakistan border, the Attari ICP is expected to boost exchanges in trade and human resources between the two countries. In November of last year, Pakistan s Cabinet approved granting Most Favored Nation (MFN) status to India. Fifteen years ago, in 1996, India granted MFN status to Pakistan. In May of this year, Pakistan switched over from a positive list regime to a negative list regime in trade with India. Also, the Indian government has recently allowed foreign direct investment from 095 Summer 2012 POSRI Chindia Quarterly

2 Pakistan by amending the Foreign Exchange Management Act. As these cases show, India-Pakistan relations are improving through economic cooperation. Better economic cooperation to overcome recession Since the partitioning of India and Pakistan in 1947, the two countries have been confrontational with each other. Why have the two countries begun cooperating economically? The first reason is the poor economic conditions of the two countries. Pakistan, which suffered from chronic deficits, formulated supportive policies for its export industries in the mid-2000s in order to boost exports. Experts expect that the Thanks to these policies, Pakistan s liberalization of bilateral GDP growth rates in FY 2004, 2005, trade between India and and 2006 were 9.0%, 6.2%, and 5.7%, Pakistan will boost bilateral trade to USD 12 billion and respectively (Pakistan fiscal year stars bring about significant on July 1st and ends June 30th). economic effects. However, this number dropped to 2.7% in Since Pakistan declared a state of emergency in 2007, and experienced a massive earthquake and the global financial crisis in 2008, its GDP growth rates have not recovered. Pakistan received a bailout loan from the International Monetary Fund (IMF) in 2008, but the IMF later suspended disbursements to Pakistan after the country failed to meet required conditions. Pakistan received economic assistance from the USA thanks to its active support for anti-terrorist measures. However, the relationship of the two countries has recently become icy, and economic assistance from the USA to Pakistan has decreased, hurting Pakistan s economy even more. India has achieved high economic growth rates since 2005, and enjoyed 096 POSRI Chindia Quarterly Summer 2012

3 :: Issue Analyses steady and robust economic growth despite the global financial crisis. However, the economic outlook is becoming increasingly pessimistic due to high double-digit inflation, chronic fiscal deficits, and lack of central government leadership in implementing economic reform. Bilateral trade expected to increase to USD 12 billion India-Pakistan bilateral trade in 2010 was about USD 2.6 billion. Experts expect that the liberalization of bilateral trade between India and Pakistan will boost bilateral trade to USD 12 billion and bring about significant economic effects. Due to high trade barriers, India-Pakistan trade has largely been via third countries, such as the UAE (mainly Dubai), and informal and illegal trade represent a lion s share of bilateral trade. If India-Pakistan bilateral trade is made through official channels after normalization, the two debt-ridden countries will benefit from increased tariff revenues. In order to maximize synergy from economic cooperation, it is imperative for India and Pakistan to expand infrastructure for smooth merchandise trade, and to ease business visa requirements. Also, it is necessary to open bank branch offices in each other s countries, as is requested by many businessmen. Power supply to India and Pakistan in the pipeline As the two countries grow closer through economic cooperation, they are also cooperating in the energy sector. Earlier this year, India and Pakistan vowed to accelerate cooperation in the oil and natural gas sector through joint energy initiatives. This will help restart the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline project, which has been stalled for some time for a number of reasons, such as Afghanistan s terrorism and lack of security, and Pakistan s tribal issues. Supported by the Asian Development Bank (ADB), the goal of this project is to build a 097 Summer 2012 POSRI Chindia Quarterly

4 India-Pakistan trade volume 2500 (USD 1 Mil.) Exports Imports Source: Bank of India 1,680km pipeline to supply gas from the Dauletabad gas field in Turkmenistan, via Afghanistan, to Pakistan and India. In 2010, the project was officially endorsed by the participating countries. With this pipeline, India and Pakistan s dependence on energy imports from Iran is expected to be reduced. Pakistan s Power Minister has recently stated that the country needs 27% more power. In order to address its energy shortage, Pakistan is limiting the duration of power supply in each region, and operating only half of its streetlights. The situation is bad, and public complaints are mounting. The power shortage directly affects industrial development. For example, some textile and fertilizer plants have stopped operating. With the World Bank s support for building infrastructure, the Indian government is expected to supply power to Pakistan in a few months. Bilateral cooperation to reduce political and diplomatic risks Since the partitioning of India and Pakistan, the two countries have had a thorny relationship, going through three rounds of war, political and 098 POSRI Chindia Quarterly Summer 2012

5 :: Issue Analyses 1947 The partition of India and Pakistan, the first Kashmir War 1965 The second Kashmir War 1971 The India-Pakistan War, East Pakistan (now Bangladesh) gains independence, with support from India 1974 India begins nuclear tests 1998 Pakistan s nuclear tests end successfully 1996 India grants MFN status to Pakistan 2001 Pakistani terrorist groups attack Indian Parliament 2004 India-Pakistan peace summit 2008 Pakistani terrorist group attacks Mumbai 2011 Pakistan grants MFN status to India 2011 Pakistan President visits India Source: Author The history of India-Pakistan relations diplomatic conflicts both big and small, and terrorist attacks. If the two countries improve bilateral trust through economic cooperation, they will be able to ease security risks and reduce terrorism by sharing information. Due to active participation in anti-terrorist measures since 9/11, Pakistan has received huge economic and military assistance from the USA. However, as relations between the USA and India have thawed, and as Pakistan had troubles with the USA during the hunt for Osama Bin Laden, Pakistan s relationship with the USA has deteriorated. Moreover, Pakistan is in competition with India over Afghanistan. Therefore, Pakistan was unhappy with the Afghan President s visit to India last year, and with the signing of a strategic partnership between the two countries. In the meantime, China is actively offering economic and military assistance to South Asia, under the banner of its pearl necklace strategy, in 099 Summer 2012 POSRI Chindia Quarterly

6 order to increase its influence over the region. In particular, China is forging close relationships with Pakistan, Bangladesh, Sri Lanka, and other South Asian countries through investment and economic cooperation. China offers economic support for road repairs, redevelopment of obsolete ports, and projects for developing hydrogen power plants. Such moves by China pose a significant threat to India, which had taken the lead in South Asia s economy, politics, and culture. India is determined to maintain its lead in the region by improving relations with South Asian countries. For China, improving relations with Pakistan, the second largest economy in the South Asian region, is important for maintaining hegemony in the region. Economic cooperation between India and Pakistan is expected to have a positive impact on the development of South Asia. The South Asian Free Trade Area (SAFTA) has produced no noticeable results since its effectuation in 2006, and one of its biggest hurdles has been icy relations between India and Pakistan. Therefore, improved bilateral relations will positively influence the development of SAFTA. India and Pakistan are finally seeking shared prosperity through cooperation, after more than 60 years of conflict and confrontation. For their new policies to be implemented successfully, India and Pakistan will have to focus on building trust for each other. 100 POSRI Chindia Quarterly Summer 2012