"The Peace Dividend"
By SYED M. ASLAM
June 02 - 08, 2003
The ice has started to melt. And what a melting it is — there seems to be an unmatched eagerness to talk, discuss and negotiate the issues backed by warm-up measures such as re-opening of road and air links and re-establishment of diplomatic contacts severed 17 months ago. The names of the High Commissioners have already been formally announced and the respective governments already approve them. Of course, we are talking about the sudden, and welcomed, signs of cordial relations between two arch nuclear rivals in Asia who collectively represent almost 20 per cent of the humanity.
As the cross-border buses are being lubed, greased and oiled to restart plying Delhi-Lahore route and railway stations on both sides of the border are spick-and-spanned in expectation of the resumption of Samjhota, contract in English, Express train service, the Pakistani businessmen wait anxiously to reap what the former chairman of SITE Association of Industry Majyd Aziz calls, 'the peace dividend.'
The phrase is coined by Majyd to highlight the importance of free flow of goods and services between the two countries. "It is imperative to let the warming up of the relations turn into peace dividend, the ultimate barometer of which is the free trade between India and Pakistan, the two top members of ineffectual SAARC trading bloc. Trade is the ultimate 'peace dividend' and its volume is regarded as the most important barometer of bilateral relations anywhere. Let's not miss the opportunity to reap the peace dividend this time around."
The thawing of the ice, welcomed as it is, should only be seen as a beginning. An encouraging beginning indeed for countries whose armies remained on red alert for most of 16 months ended April last when the melting of the ice begun. However, the road to normal, and friendly relations is pitched with potholes over one major issue: One of the major flashpoints in the world — the Kashmir.
Pakistan has never shied to hide its moral, diplomatic and political support to the Kashmiris' right of self-determination allowed to them by a United Nations, 55 years ago. Pakistan insists that Kashmir is the single biggest hurdle to develop cordial relations with its neighbour and overshadows all other bilateral issues. Any progress towards improved bilateral relations, thus, depends heavily on the solving of the core issue of Kashmir without which there would be no peace in the region and beyond.
Without solving the core human issue of Kashmir, revolving primary round, the Indian denial of giving the right of self-determination to the Kashmiris, the bilateral relations between the two countries can hardly be expect to make any genuine good will necessary for trade. As earlier said, the road to real peace has large potholes.
However, there are signs of goodwill allover, including announcement by the Indian Prime Minister Atal Behari Vajpayee that he would resign if he fails to make peace with Pakistan this time around, has raised expectations all over. On the other hand, militant Hindus burned of an effigy of the bus expected to ply the Delhi-Lahore route in the Indian capital. What remains to be seen is whether the desire for peace would be matched by the political will and concrete actions to realize the objective.
PAGE talked to members of business community in the financial, industrial and trade hub of the country, Karachi. If the feedback is any indication, and it well be, the opinion of the Pakistani businessmen tilts heavily in favour of trade with India. There is an all-pervasive optimism that the melting of the ice this time around would translate into meaningful negotiations leading up to widening of trade between the two countries.
Talking to PAGE, the Vice President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Engr. M. Abdul Jabbar Memon; President of Karachi Chamber of Commerce & Industry (KCCI), Mian Nasser Hyatt Maggo; and former chairman of SITE industrial area Karachi, Majyd Aziz. All of them mince no words to say that they favour trade with India due primary to the geographical proximity resulting in convenience and costs associated and easy access to a big market necessary to reactivate the trade in the SAARC region, a preferential trade agreement left ineffectual due to the incessant bad relations between two of the most important partners.
The President of KCCI Nasser Hyatt Maggo said that opening up of trade between Pakistan and India would help the former to have greater official access to a billion plus market. "Besides the tangible benefits the prevalence of peace and the opening up of trade would also offer intangibles benefits to the peoples of the two countries as it would ultimately result in cut in defence spending. The substantial savings can be spent on the economic uplift of the peoples reeling from widespread poverty, receding purchasing power, unemployment and many other economic and social ills the primary cause of which is financial."
Asked who would be the benefit more from the free trade, if and when the ongoing peace overtones translate into opening of the trade barriers, Nasser said that though India is definitely poised to gain more from the bilateral trade due mainly to a far advanced engineering and technical base, Pakistani industry can derive intangible benefits. "Trade between the two countries already tilts heavily in favour of India. Last year officials trade between Pakistan and India totaled around 226 million — Pakistan exported $ 40 million worth of goods to India while imports from India totaled $ 186 million. In addition, the Indian goods are also finding their way into the Pakistani shops through unofficial channels and though their value is much lower than the official imports, this highlights the need for encouraging the legal trade because the government is losing substantial revenues. The official trade is already favourable to India in the ratio of 1 to four-and-half and opening up of the borders encouraging official trade would result in further widening it."
So how bilateral trade which already tilts heavy in favour of India, and is expected to benefit it more strongly if and when a free trade regime is established, benefit Pakistan? Nasser said that Pakistan could derive a number of tangible and intangible benefits by widening the list of items allowed to be imported from India. "The tangible benefits revolve round the similarity of the two markets one of the most prominent feature of which is the low purchasing power in both the countries. Thus, Pakistan would be able to find a welcome market in India for low-priced products which has little or no market elsewhere. India, like Pakistan is also a price conscious market.
"On the other hand, Pakistani industries and engineering sector can benefit from the import of machinery and basic and intermediary raw materials to reduce the costs of capital goods and machinery as well as the finished goods. Pakistani textile industry can be the single biggest beneficiary because Pakistan leads India in course count (India leads Pakistan in fine count) because we can find a big market for our textiles in India.
"The intangible benefits include import of capital goods and machinery from India which has a much advanced engineering sector. The price of major Indian capital machinery from India is 30-35 per cent lower than its European counterparts and between 15-20 per cent less than its counterparts in the Far East. In addition, allowing the import of capital goods and machinery from India offer substantial savings in freight costs and time due to the geographical proximity. "
However, machinery and many other necessary raw materials and intermediary goods do not make the positive list of items allowed to be imported from India despite the inclusion of 78 new items recently bringing the total to 678. The list primary comprises everyday use consumer items, eatables, spices, watches, precious stones, etc., with no industrial or manufacturing value.
"Capital machinery is not the only item of industrial value excluded from the positive list of imports from India. Import of petrochemicals; polyester yarn, fibre and chips; and pharmaceutical raw materials are also banned. The demand for petrochemicals is growing steadily and so is its import. At present the country is importing around 350,000 of petrochemicals raw materials annually. However, despite the growing demand the import of only petrochemical raw material, polypropylene is allowed from India. Polypropylene is used in the manufacture of plastic goods — auto and electronics parts, PVC pipes, furniture, household goods and utensils — the demand for which is growing steadily in the country. The similar is the case with polyester yarn, fibre and chips the annual demand of which at present is around 400,000 ton."
IMPACT OF THE IMPORT BAN
Pakistani industries can immensely benefit from the lifting of the ban on the import of textile machinery, petrochemicals and pharmaceutical raw materials from India. There is an absence of high-tech textile machinery manufacturing in Pakistan and the country is heavily dependent on imports. Though there are some two hundred manufacturing units of textile machinery in the country they are basically copying old imported designs thus unable to meet the growing use of high-tech machines by the manufacturers. On the other hand, indigenous but quality manufacturers, the majority of whom have collaboration with leading textile machinery manufacturers of the world meet the bulk of needs of Indian textile mills. Many of these manufacturers are exporting machinery and related accessories under buy-back arrangement or as a part of their principal's global export strategy. Some of the textile machinery imported in Pakistan is reportedly made under license in India at much lower costs. The opening up of the trade would help Pakistani textile industry buy the capital machinery directly from India at much lower prices and shipment costs.
Similarly, Pakistan can also benefit greatly from import of petrochemicals use in the manufacture of a large number of goods including synthetic fibres, dyestuffs, drugs, pesticides, plastic products and artificial rubber. Buying directly from India would mean lower prices and reduced shipment costs to improve competitiveness particularly such leading exports as textile and leather. As stated earlier, even if the opening of the bilateral trade tilts heavily in favour of India it offers many intangible benefits to many Pakistani industries.
'LEGALISING' THE CROSS-BORDER TRADE
Indian market, due to its sheer number alone, offers an unmatched trading potential for Pakistan. The former chairman of SITE Association of Industry, Majyd Aziz is a strong proponent of trade with India. Like Nasser, he too, however, advocates for a meaningful trade. "We don't want Indian consumer products and eatables many of which are making us sick anyway, for instance pan parag which every second man is chewing in Pakistan indifferent to the health hazard that it poses. We don't want Indian soaps and chewing tobaccos.
"We need to import capital machinery, dyes, chemicals, gray cloth, finished yarn officially for the benefit of the industry in particular and the national economy at large. We need to save monies as these goods are available in India in abundance at lower prices than elsewhere and the proximity helps us save substantial monies in freight and time.
"We want to import capital goods and machinery to enhance our productivity and improve our cost efficiency to better compete in the international markets. We need pharmaceutical raw materials to help reduce price of drugs. And India can provide us with these goods because it has economies of scale not only at lower prices but also savings in shipment costs and time.
"Why have a positive list — let's come up with a negative list to simplify the paperwork and to cut the red tape. Lets talk about pure economics, as prosperity is the answer to all problems and issues. Why resort to trade through third countries neutralizing all and any price, cost and time benefits — a trade, which continued despite the military standoff between the two countries for the last 17 months.
"Despite the stand-off there was no slow-down of the flow of Indian goods into the country — the bulk of which comprised unofficial exports depriving the government of substantial revenue in duties and taxes. Opening up the trade would help discourage unscrupulous elements and middlemen to mint money at the expense of the government. The value of unofficial trade with India far exceeds the official counterpart — $ 1.5 billion compared to official $ 350 million.
"The 9 dry ports in many cities of the country are really 'princely estates' that defraud the government immense funds in lost revenues. Elsewhere across the globe, the dry ports are used to facilitate exports but only here they are used to facilitate imports. Let's legalise cross-border trade in contrast to accusations of cross-border terrorism leveled against Pakistan by India. Let's get rid of the myopic thinking that advocating freer official trade relations with India is unpatriotic.
"We are working in isolation and we need to get of the cocoon. We have no free trade bloc. Americas, Europe and South Asia all have a free trade bloc to protect their interests — America has NAFTA, Europe has EU, Asia Pacific has ASEAN. We have SAARC rendered useless due to conflict between the two top members. This has taken a toll on SAPTA. India can play a vital role to the export-led growth that we are looking for.
"Opening up of trade with India would help instill economies of scale, make our products more competitive in the international markets, lower production costs for the benefit of the consumers, increased productivity and production to absorb increased manpower. Trade is a two-way street and opening up trade with India could benefit us immensely due to the sheer numerical strength of the market.
Majyd says that opening up trade with India offers both the countries numerous benefits. "The textile manufacturers in Pakistan are interested in buying new materials, dyes and chemicals, machinery, and finished goods. They are keen to introduce their fabrics, textile made-ups, and expertise for the vast Indian market. The opportunities are also in plastics, packaging, automobile parts, electrical equipment and many other products. The liberalization of trade between the two countries would reduce the undocumented trade, which is increasing alarmingly to help government earn substantial revenues.
"The MFN concept has been misunderstood because the clause simply stipulates that any advantage, favour, privilege or immunity granted by any contracting party to any product originating in, or destined for, any other country shall be accorded immediately and conditionally to the similar product originating in, or destined for, the territories for all the contracting party."
Majyd said that granting the MFN status to India would become a must with the implementation of WTO conditionalities from January 2002, which is mere 19 months away. "Opening up of the Indian market is also essential for Pakistan because Pakistan's trade with major trading partner in the developed world time and again comes under pressure on the pretext of such issues as child labour, labour laws, environment, etc., etc."
VALUE OF TECHNOLOGY
Engr. M. Abdul Jabbar Memon is the Vice President of Federation of Pakistan Chambers of Commerce and Industry (FPCCI). Strongly favouring the opening up of trade with India, he stressed that Pakistan stands to benefit immensely from the bilateral trade. "Indian engineering sector offers Pakistani industry the best value in technology by offering immense savings to import capital goods and machinery, the prices of which are much lower in India. We can also benefit from consultancy services to enhance our productivity to cut out capital and production costs, which in turn would result in cheaper transfer of knowledge and technical know-how. Indian IT industry is the premium example where we can benefit.
"Trade with India will not only mean lower costs of shipments, speedy access and delivery. It would cut the time between booking and actual delivery of imports, particularly the costly capital goods and machineries from 8 months at present to 2 months max. India has a developed engineering industry, which is already exporting machineries. The prices of Indian engineering goods and products are much lower than their European and Far Eastern counterparts."
Asked who would benefit more from the trade, he claimed that Pakistan stands more to benefit from the free trade because "it will help us cut down the share of the existing resources, produce similar goods at lower costs and divert some of the share of our imports to India, a big market with immense potential and diversified patterns of demands and needs.
He said that the concerns of the engineering and auto industries are unfounded. "Auto industry is accorded a most preferential treatment in Pakistan. It is provided an extra-legal protection over and beyond 100 per cent duty on imports. Even the imports of two-wheelers are subjected to a discouragingly high import duty of 90 per cent. This has developed monopolistic tendencies on the part of the local car assemblers and motorcycle manufacturers. The auto industry should have no fear about trade with India because it is well protected through fiscal measures as well as other non-tariff barriers.
"However, if the growing demand for lower priced Chinese motorcycles is any indication it means that competition does benefit the consumers evident from significant slashing of prices by the local manufacturers."
AGRICULTURE PRODUCTS: POTENTIAL OF EXPORTS TO INDIA
Pakistani exporters have sent 15,000 tons of chickpeas worth $ 4.3 million to India for the first time in 5 years in April alone this year. It was for the first time in 5 years that Pakistan has exported chickpeas riding on a bumper crop of 750,000 tons compared to 475,000 tons last year, 125,000 tons short of the local demand. Pakistan had to import 148,000 tons of chickpeas last year to supplement the demand. Pakistani exporters have been able to find a welcome niche for chickpeas in India and expect it to absorb 100,000 tons of it during next five months. Indian importers are also attracted by lower prices — around $ 300 per ton compared to $ 350 per ton by Australia and Canada, none of whose products match the quality of their Pakistani counterpart. Enquiries are coming from British, Sri Lanka and Bangladeshi importers and it is expected that Pakistan would be able to sell its entire surplus of 150,000 tons this season.
The particular example is mentioned here to highlight the importance of unrestricted trade between the two countries and to show that opening up of a billion plus market does offer many tangible as well as intangible benefits to the national economy.
The mood of the Pakistani business community seems to tilts heavily in favour of opening up of meaningful, unrestricted, barrier-free trade with India. They feel that the billion plus Indian market offers not only immense potential for exports but also for imports of engineering products, capital goods and machinery, as well as services to enhance productivity, lessen production costs and improve the quality of products.
Let's see if the thawing of the ice and the peace initiative this time around translates into a warm relationship resulting in opening up of trade between the two nuclear-armed neighbours, which collectively represent almost 20 per cent of the humanity.
There are many loose ends and the settling of the core issue of Kashmir is a must for beginning of a warm trade relationship between the two countries. The softening of the trade barriers heavily depends on the outcome of the negotiations for which the environment is already in the making.
Table 1PAKISTAN'S BALANCE OF TRADE WITH INDIA (IN MILLION US $)
*The trade balance has tilted in favours of India with exceptions in 1991-93 and 1998-99, the later due mainly to increased sugar exports worth $142.2 million. The above figures represent the formal trade and in import of Indian goods into Pakistani markets through the informal channels is much bigger, it is estimated at over a billion dollars annually.
MAJOR ITEMS OF EXPORT TO INDIA (MILLION $)
Vegetables & Fruits
Textile Yarn & Fabrics
Plants for perfume, pharma
Leather & manufacture
MAJOR ITEMS OF IMPORTS FROM INDIA (MILLION $)
Sugar, cane, refined
Oil-cake residue of soybeans
Iron ore agglomerated
Dyeing, tanning materials
Plastic in primary form
Transport vehicles & equipments
Iron and steel
Special machinery for particular industry
Manganese ores and concentrates
Ginger, not dried
INDIAN MARKET: THE FACTS
Indian is the second most populous country of the world. Home to over a billion people it is second only to China in term of population. It has a literacy rate of 54 per cent and houses a huge workforce of over 416 million the biggest employer of which is the agriculture sector (63 per cent) followed by 22 per cent by industry and commerce, 11 per cent by service and government while transport and communication sector employs 4 per cent of the workforce.
In 2001 its GDP was $ 477.6 billion and a per capita income of $ 460 and growth in average GDP was healthy 5.9 per cent. The major agriculture and related products are wheat, rice, coarse grains, oil seeds, sugar, cotton, jute and tea. It also has substantial deposits of minerals including coal, iron ore, manganese, mica, bauxite, chromate, thorium, lime, barite, titanium, diamonds and crude oil.
India's principal industries comprise textiles, processed food, steel, machinery, engineering, transport equipments, cement, aluminum, fertilizers, mining, petroleum, chemicals and computer software.
India's external trade totaled $ 93.7 billion in 2001 — imports $ 50.4 billion, exports $ 43.3 billion. EU, USA, Russia, Japan, Iraq, Iran and Central and Eastern European countries are India's top trading partners.
Though over one-third of the population is living below the poverty line, India has a large middle class of 150-200 million, which is still growing. The cumulative disposable income of the huge middle class in India makes it an extremely attractive market.