Mumbai mayhem will have a far
reaching affect on Indo-Pak relations
Attacks on Mumbai likely to affect prospects of expanding Pakistan-India trade
By Kaleem Omar

Much of the trade between India and Pakistan is routed through third countries, due to a host of factors that include the state of relations between the two neighbours at any given moment on time. Whenever the prospect of expanding trade between the two nations opens up, something or the other seems to happen on the political or diplomatic or militancy front to gum up the works – at least in the short-term. Eventually, however, things tend to settle back to normal, which in the case of the two nuclear-armed rivals usually means a sort of uneasy peace. But the whole mechanism tends to remain a high-wire act which any unfriendly whiff of breeze can bring tumbling down.

Last week’s horrific attacks at 10 locations in Bombay, including the high profile Taj and Oberoi hotels, seem to be of a piece with the long history of tension between the two countries. Already, the accusations from the Indian side against Pakistan are flying thick and fast, including thinly veiled references to Pakistan’s so-called ‘involvement’ in an address to the nation by Indian Prime Minister Manmohan Singh. The Indian media, too, which is usually more royalist than the king himself when it comes to such matters, has leaped into the fray with all sorts of bizarre theories about who was behind the attacks. It is another matter that there is no hard evidence so far that Pakistan was in any way involved in the attacks. But the lack of evidence has never stopped India in the past from pointing the finger of blame at Pakistan whenever there is any kind of attack in India by any group of militants.

The political and diplomatic aspects of the current imbroglio aside, what seems pretty certain at this stage is that last week’s events in Mumbai are likely to have an adverse affect on trade between India and Pakistan. To cite only one example, will iron ore from western India mines still find its way to the Pakistan Steel Mills in Karachi, as has been the case for years. Or will all the PSM orders for iron ore now go only to Australia and Brazil? And what about the recent opening up of a trade route between Indian-occupied Kashmir and Azad Kashmir? Will the goods-carrying trucks operating on this route continue to ply, or will these operations be halted?

Trade between India and Pakistan is problematic at the best of times, and is hindered by bureaucratic red tape and other factors. What will happen to this trade against the backdrop of last week’s events in Mumbai? The likely answer is that it will be badly affected and will slow down, at least for a while, until the dust from the Mumbai attacks settles and the climate of Indian recriminations against Pakistan eases off.

The unfortunate consequence of all this is that the expansion of trade between India and Pakistan could benefit the economies of both countries, if trade relations were not periodically bogged down in a political morass.

Back in March 2004, for instance, some four hundred Pakistani entrepreneurs, including a hundred women, opened stalls in New Delhi at the first ever “Made in Pakistan” exhibition to be held in India. Exhibitors said they were confident their products could compete with Indian products and beat them in their own market.

The chief operating officer of the Karachi-based Diwan Group, whose products includes motorcycles manufactured with Chinese collaboration, said the prices of their motorcycles were at par with the prices of motorcycles made by Indian companies, and that his group could lower prices still further and give Indian companies stiff competition once trade barriers were removed.

The Indian market for motorcycles is huge, with sales of millions of motorcycles a year. So if Pakistani manufacturers are able to make significant inroads into this market, they could earn Pakistan a lot of foreign exchange. In order to do so, however, they will have to substantially expand production capacity, which is presently pegged to meeting the demand of the much smaller Pakistani market.

The executive director of General Tyre and Rubber Company, Pakistan’s biggest tyre manufacturer, was equally confident that his company could compete against Indian tyre manufacturers. He said speculation that Indian products would swamp Pakistan’s market had “proved wrong” as Pakistani manufacturers had the ability to hold their own and give Indian companies a run for their money.

Inaugurating the exhibition on March 4, 2004, India’s then - Minister for Communications and Information Technology Arun Shourie said that the potential for trade between India and Pakistan was tremendous, especially in the areas of tourism, energy-exchange and high-end manufactured goods.

“Many of our trade barriers are quite meaningless,” he said. “While the formal trade between our two countries is only $ 200 million to $ 250 million a year, third-country and contraband trade is 10 or 12 times larger than the official trade,” he added.

Shourie suggested a three-pronged strategy to spur economic development in the South Asian region. “Development requires unwavering focus bereft of hostility, as hostility distracts us from our focus on development,” he said.

“Secondly, there is a great benefit in opening up the markets as it would enable our two countries to become more competitive in the global economic environment,” he said.

“Long-term relationships cannot survive by calculating gains and losses on an every-day basis. The relationship between India and Pakistan is accident prone, so we need to have a steadier gaze so as not to get deflected from time to time,” he said.

Shourie said business leaders in both countries needed to “look at the way power got transferred from the state apparatus to outside.” It was not quite clear what he meant by this somewhat ambiguous statement.

India’s then - Minister for Commerce and Trade Arun Jaitley urged the Indian and Pakistani business communities to forge alliances. He said his government would actively facilitate all endeavours in this direction.

“We are in the process of becoming a common market. Entrepreneurs can take advantage of the large market that will open up, whereby the consumers and the trading community will get best quality products and services. In the context of the global economy, it is clear that we cannot manufacture everything ourselves,” Jaitley said. He said the normalisation of relations between India and Pakistan could lead to a major boost in tourism between the two countries. “Today’s visitor will become tomorrow’s investor and trader,” he said.

He said that factors such as geographical proximity, socio-cultural similarities and common economic targets could be leveraged to each other’s advantage.

Speaking at the March 4, 2004 inauguration ceremony, Sheikh Maqbool Ahmed, vice-president of the Federation of Pakistan Chambers of Commerce and Industry, said that the SAFTA (SAARC Free Trade Agreement), if effectively implemented, would bring about revolutionary changes in the economies of the member-states through development, employment generation and poverty alleviation.

Similar optimism was expressed by Krishan Kaira, additional secretary-general of the Federation of Indian Chambers of Commerce and Industry. In an interview with the Reuters news agency, Kaira said that improved relations between India and Pakistan would have “a tremendous impact on trading activity.”

He said he sees bilateral trade between the two countries growing to $10 billion a year by 2010, five times its current level – most of which is channelled through third countries like Singapore and Hong Kong. Direct official trade between India and Pakistan is only about $250 million a year, a fraction of the two countries’ total global trade.

“There are no direct banking and telecom (cellular roaming) links between the two countries. Shipping, road and railway links are inadequate, and getting a visa takes a long time. These are major irritants to doing business,” said Ajay Khanna, deputy director-general of the Confederation of Indian Industries.

“All this can change if peace grows, reducing the cost of doing business between the two countries and oiling the trade in pharmaceuticals, steel, auto parts, cotton, tea and other goods,” Khanna said.

Senator Ilyas Ahmed Bilour, then-co-president of the India-Pakistan Chamber of Commerce and Industry, said in an interview with Reuters that the transportation costs on $2 billion a year worth of indirect trade could be drastically cut once direct trade between the two countries is permitted.

India buys pulses, dried fruit, leather, cotton, and semi-precious and precious stones from Pakistan, which buys iron ore, chemicals, engineering goods and some pharmaceutical products from India.

Pakistan is a big importer of tea. It imports 150 million kg of tea a year, making it the world’s third biggest importer. But less than 4 million kg a year (three per cent) comes from India, the world’s biggest producer.

Anil Goel, vice-president finance at Tata Tea Limited, India’s biggest tea exporter, said that “Pakistan presents a huge opportunity for Indian tea exports.” He said, “India could displace Kenya and Sri Lanka as the primary source (of Pakistan’s tea imports), but this could take time as consumers gradually adjust their palates.”

Pakistan is one of the world’s largest cotton growers and exporters, while India is a traditional importer. India could cut freight costs by importing cotton from Pakistan. Pakistani cotton is among the best in the world, which would be another factor in attracting buyers from India.

Sunil Tandon, president of Apollo International, an Indian tyre manufacturer, said in an interview with Reuters that “rationalisation of duties and provision of facilities could see growth of 25 to 100 per cent in chemicals, pharmaceuticals and auto components.”

Under the SAARC Free Trade Trading Agreement, which come into effect in 2006, Pakistan, India and Sri Lanka are required to cut tariffs to between zero and five per cent by 2010, while the other four member states – Bangladesh, Nepal, Bhutan and the Maldives – will have until 2013 to do so.

Pakistan started preparing for tariff cuts under the WTO global trade regime much earlier than India and has already slashed tariffs on most imports to well below 25 per cent. So it is in a relatively better position than India to withstand the impact of reduced tariffs on its domestic industry.

According to Shivshankar Menon, India’s then-high commissioner to Pakistan, trade between India and Pakistan could grow to an annual level of $6 billion in the next year or so if trade barriers between the two countries were removed.

 Menon said, “The simplest and most direct way would be for Pakistan to reciprocate the MFN (most favoured nation) treatment that India now extends to Pakistan.”

Pakistan’s imports from India are currently restricted to a list of 712 items, mainly raw materials. India has no formal restrictions on imports from Pakistan.

In 2003, direct bilateral trade between Pakistan and India was just $234 million, while unofficial trade between the two countries in the same year was nearly 10 times higher, at over $2 billion, Menon said.

“This shows that the potential for much greater trade volumes exists and has already been identified by businessmen,” he said, adding that according to a study, the opening of direct bilateral trade on an MFN basis was likely to boost it to an annual level of about $ 6 billion within a year or so.

Many Pakistani businesses fear that their market would be swamped by Indian goods if MFN status was given to India, hitting local industry hard. But Menon claimed that such fears were groundless.

“While Pakistan could see a rapid surge in exports to India by supplying bulk commodities and energy that the Indian economy needs, Indian exports to Pakistan would be mainly in sectors like consumer and light engineering goods where competition from other international suppliers is fierce,” he said.

India’s fastest growing exports were not in Pakistan’s export basket, he said.

“Pakistani consumers would benefit from the more competitive prices, while Pakistani producers would benefit from access to the large and rapidly growing Indian market,” he said.

In an interview posted on the Pakissan.com web site in September last year, S. M. Inam, the founder president of the SAARC Chamber of Commerce and Industry, brushed aside the notion that trade with India would eliminate Pakistan’s industry and said it would “actually be beneficial for both countries and their people.”

Ever since the SAPTA was signed, however, Pakistan has consistently run up trade deficits with India. The deficit was $168.47 million in 1996-97, $63.98 million in 1997-98, 28.81 million in 1998-99, $73.74 million in 1999-2000 and $182.92 million in 2000-2001. This skewed pattern of trade has continued to the present day.

These figures suggest that the prospects of greater trade with India may not be quite as rosy as they are being made out to be. Pakistan will need to improve product quality, expand the range of its manufactured goods and make prices more competitive if it wants to boost exports to India, while India, for its part, will have to stop blaming Pakistan far every militancy episode in India, many of which have, in fact, turned out to be the handiwork of India’s indigenous militant groups. The group that carried out last week’s attacks in Mumbai called itself the “Deccan Mujahideen.” Indians hardly need reminding that Deccan is part of India.