The economic cooperation scenario
in South Asia is looking
up with a flurry of high-profile
visits and consequent decision-making
by policymakers and framers of three
major economies of the region – India,
Pakistan and Sri Lanka—in recent
weeks.
At the top of the list of initiatives is
India’s unilateral decision to allow foreign
direct investment from Pakistan,
excluding in the defence, space and
atomic energy sectors.
This was followed up quickly by another
important decision of New Delhi
to help set up special economic zones
for manufacturing auto components in
Sri Lanka to cater for the Indian market,
establish a pharmaceutical hub and
modernize textile mills in the island nation.
Besides, India and Pakistan have
also begun moving, apparently in
earnest, towards cooperation in crossborder
trade in electricity and petroleum
products.
The decision to permit Pakistani residents
and entities to invest in India is
undoubtedly a political one, intended to
signal New Delhi’s willingness to go the
extra mile to deepen economic engagement
with its neighbour and infuse momentum
into the peace process.
Although the investment window has
been opened, Indian officials do not expect
any rush of money from Pakistan
which itself faces a financial crunch.
Secondly, the FDI from Pakistan will not
be through the automatic route, but be
subject to approval by Foreign Investment
Promotion Board (FIPB).
India’s move does indicate thawing of
ties between the two nuclear-powered
South Asian neighbours after the freeze
that had set in after the deadly terror attacks
on Mumbai on November 26,
2008. India seems determined to not
allow the peace process be hampered by
the Mumbai terror attacks, and it in fact
renewed dialogue with Pakistan two
years ago.
True, the resumption of the peace
process in 2010 has not produced the
desired results on the political front in
terms of forward movement in resolution
of contentious bilateral issues, the
commercial ties have seen noteworthy
progress. The Pakistan government
headed by President Asif Ali Zardari appears
to have decided that normal trade
relations with India cannot be held
hostage, as so often in the past, to the
resolution of outstanding political problems
like Kashmir.
In November last year, Islamabad had
promised to implement the Most
Favoured Nation status to India by the
end of 2012 – and in March this year, it
scrapped the system of positive list of
goods for bilateral trade and switched to
negative list, which means barring a list
of 1,209 products, imports from India
would be allowed.
This paved the way for imports of a
wider range of goods from India which
can now export around 6,000 items to
Pakistan. Of the total, 137 items will be
imported through the land route across
divided Punjab. India, of course, plans
to persuade Pakistan to allow export of
all goods through the land route, as
against the present cumbersome and
time-consuming sea route, so that bilateral
trade can pick up meaningfully following
Islamabad’s decision to move
from positive list to negative list of
goods.
In this context, India is also reportedly
planning to assuage Pakistan’s concern
over its market being swamped by Indian
goods if the land route is allowed
for import of all goods by suggesting
short-term additional import duties
(over and above usual import duties) in
case import of a particular product increases
beyond a reasonable limit.
India-Pakistan trade value is estimated
to be a little over US$2 billion and both
sides have agreed to push it up to US$6
billion within another two years, a target
that clearly requires both sides to open
up more to each other for business.
Besides, the two countries have
worked out a more liberalized visa for
businessmen from both sides and are
discussing setting up more checkpoints
at Wagah for enhanced trade and opening
of bank branches. In fact, Pakistani
authorities have given the green signal
to the National Bank of Pakistan and the
United Bank Limited to open branches
in India.
On cross-border electricity trade, a
delegation of Indian Power Ministry had
visited Islamabad in August this year to
negotiate export of 500 MW from India
and work out modalities for supply to
power-starved Pakistan. Earlier, a Pakistani
official team had come to New
Delhi to explore the opportunity of import
of liquefied natural gas from India.
An Indian delegation was in Pakistan to
discuss export of petroleum products to
Pakistan and import of naphtha from
that country.
However, one should always guard
against optimism during upswings in
India-Pakistan ties given the fact that
they are so easily vulnerable to other
threats of derailment, including terror
attacks from Pakistan.
Commerce and Industry Minister
Anand Sharma’s visit to Sri Lanka in August
has given a new dimension to the
commercial links between New Delhi
and Colombo by doing the groundwork
beyond simple trade, as India agreed to
enhance the island nation’s narrow
manufacturing base with trade linkages
to India. India will help Sri Lanka set up
a special economic zone in Trincomalee
to manufacture engineering and auto
components, which will promote exports
to India with a vibrant auto industry.
It will help Sri Lanka export valueadded
products not only to India but
also to other countries. India will also
help Sri Lanka in setting up a pharmaceutical
hub and modernizing two
closed textile mills in the island nation.
Displaying a sense of urgency towards
setting up the two manufacturing hubs,
the two countries agreed that a joint task
force would submit its report in three
months and a delegation of India’s pharmaceutical
industry would visit Sri
Lanka in September.
Indian companies are believed to be
keen to invest in a resurgent economy of
Sri Lanka which has been growing at 8%
per annum in the past two years after
overcoming the crippling effects of the
ethnic conflict. According to Sharma, Indian
companies have proposed US$5
billion worth of investment in Sri Lanka
and Indian government will make available
line of credit and other facilities to
boost bilateral trade from US$5 billion
annually at present to US$10 billion by
2015. India is among the top investors in
Sri Lanka and the largest trading partner
of the island nation.
To do that, India and Sri Lanka must
upgrade their commercial ties from the
existing free trade agreement, first
signed in 1998, to a Comprehensive Economic
Partnership Agreement (CEPA)
that includes more services and investment,
an issue on which Sharma emphasized
during his visit.
The CEPA, Indian industry sources
feel, will help not only further liberalize
trade in goods but also include services
and investments and update the existing
agreements on investment protection
and avoidance of double taxation.
Sri Lanka, however, would like India
to be a little more accommodating in
addressing some outstanding issues relating
to FTA before moving on to CEPA,
which has been under consideration for
more than five years.
During his visit to Sri Lanka, Sharma
rightly took the opportunity of outlining
India’s neighbourhood policy based on
non-reciprocity because of asymmetry
in economic status of countries in South
Asia.
He underlined the need for economic
integration in South Asia, which could
be part of larger Asian trade and economic
architecture and made it clear
that India was not seeking reciprocity in
trade and economic relationship with
Sri Lanka and assured Sri Lanka of preferential
access to the large Indian market.
“Accepting the principle of asymmetry,
that India has always done as the
leading economy of South Asia, we are
not seeking reciprocity”, he added. In
reaching out to Pakistan and Sri Lanka,
India has clearly signalled its leadership
status in economic development of
South Asia.
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