Indo-Pak Economic Ties: Ground Realities By B. Raman Observer Research Foundation http://www.observerindia.com/analysis/A319.htm Analyses and discussions in matters relating to Indo-Pakistan economic relations continue to be marked by considerable wishful- thinking, superficial analysis and illusions. This article, in the form of questions and answers, tries to project the problem in its proper perspective. Has Pakistan committed any violation of international laws and conventions relating to trade by refusing to reciprocate India's action under the Narasimha Rao Government (1991-96) in granting it the Most Favoured Nation (MFN) status? No. It has not. After the birth of Pakistan in 1947, the GATT (the General Agreement on Trade and Tariffs), the predecessor of the World Trade Organisation (WTO), had, by a special provision, permitted Pakistan to impose reasonable restrictions on its trade with India because the economy of the newly-created state through the partition of India was, in its perception, in a much disadvantageous state as compared to that of India. However, it is now 57 years since Pakistan was born. It is illogical for it to continue to apply discriminatory policies towards India. Why have different Pakistani Governments been opposed to granting the MFN status to India and to normalising the bilateral economic relations? They generally give what they project as the pending dispute over the future of Jammu & Kashmir (J&K) as the reason. They say that unless and until the Kashmir dispute is resolved, there cannot be a normalisation of the economic relations. But, the real reasons are more economic than political. At the time of its birth in 1947, Pakistan's was essentially a three-commodity and one-port economy. It continues to be so. There has been no major diversification of the economy. Textiles, leather goods and sports goods still account for over 75 per cent of its exports and over two-thirds of its tax revenue. Karachi is the only major port available for international trade and will continue to be so until the Gwadar port in Balochistan, now under construction with Chinese assistance, gets going. The Pakistani textile industry is export-dependent. The quality and the cost of its production are determined by the external and not the internal market. As against this, the Indian textile industry is not export-dependent to that extent and domestic demand plays a more important role in determining the quality and the cost of its production. It is said that, consequently, Pakistani textiles are of a much better quality than Indian textiles, but much more expensive and hence not easily affordable by the poorer sections of the Pakistani society. Many of the Indian textiles, though poorer in quality, are within the reach of the poor people. Hence, the Pakistani textile magnates have always been worried that if the Pakistani market is thrown open to Indian industries, the cheaper indian textiles could flood their market affecting them. In Pakistan, while the feudal landlords continue to wield considerable political power and generally align themselves with the military, the textile magnates and traders wield considerable economic power by virtue of the fact that they constitute the largest single group of tax-payers. When she was the Prime Minister between 1993 and 1996, Mrs.Benazir Bhutto had set up a working group to examine the implications of Pakistan granting the MFN status to India. The group had strongly advised against it till its economy was diversified to the same extent as that of India, thereby reducing its dependence on textile exports. It recommended a crash programme to diversify the economy. It drew the attention of the Government to what it described as the economic plight of Bangladesh because of India's alleged economic hegemony there and warned that Pakistan could become another economic Bangladesh if it prematurely opened its market to India. At a meeting convened by her to discuss this report, officials of her Foreign Office advised that she should link the refusal to grant the MFN status to the continuing Kashmir dispute and should not give the economic reasons, though they were valid. She accepted their advice. The Nawaz Sharif and the Pervez Musharraf Governments have also been following this advice. The Benazir Bhutto and the Nawaz Sharif Governments did not take any steps to diversify the economy and reduce the dependence on textile exports. One of the first acts of Musharraf after seizing power in October 1999, was to give a push to the diversification programme with Chinese assistance, with emphasis on information technology (software), development of its untapped mineral resources etc. The programme has made some headway, but it will take some more years before Pakistan feels confident that it will have a level playing field if it normalises economic relations with India. Another reason for Pakistan's reluctance is the fear that it could find it difficult to resist Indian pressure to allow India and Afghanistan to use the land route for their bilateral trade, by granting India transit rights. Presently, while the Government of Pakistan is prepared to concede transit rights to Afghanistan for its exports to India, it is not prepared to grant transit rights to India for its exports to Afghanistan. There are two reasons for it. Firstly, even while accusing India of exercising economic hegemony over its smaller neighbours, Pakistan wants to exercise economic hegemony over Afghanistan and does not want India as a competitor there. Secondly, Afghanistan's transit trade through Pakistan is a lucrative source of revenue for the Karachi port through which most of Afghanistan's external trade passes and for the Pakistani road transport companies, many of which are owned by the Pakistan army and retired Pakistani Army officers. For example, it is said that Lt.Gen. (retd) Hamid Gul, former Director-General of the Inter-Services Intelligence (ISI), has minted millions since his retirement by handling part of Afghanistan's transit trade. There are many others who have similarly profited. They are worried that if a two-way transit trade between India and Afghanistan is allowed, Kabul might start using the Mumbai port for part of its external trade, thereby affecting their profits. They are, therefore, in the forefront of those opposing the normalisation of economic relations with India. Instead of admitting the real reason, they cite the so-called Kashmir dispute as the reason. What is the present state of trade between India and Pakistan? Pakistan has a restricted approved list of commodities in respect of which it allows bilateral trade. The total value of this legitimate trade is estimated at US $ 400 million. There is a much larger bilateral trade estimated at over US $ one billion either through trans-border smuggling or through third countries such as Singapore and the United Arab Emirates. Goods smuggled across the border include items such as cheap textiles, audio and video cassettes, pan leaves etc. Third country exports to Pakistan are mainly in respect of machinery and spare parts, particularly for their textile industry and even for Government-owned port installations. Before 9/11, the Government itself turned a blind eye to or even encouraged third-country imports of Indian machinery and spare parts because of Pakistan's precarious foreign exchange reserves. Pakistani industrialists could not afford to import them from the West or Japan or South Korea. After 9/11, Pakistan's foreign exchange reserves have increased nearly seven-fold and, consequently, the same dependence on third-country imports from India is not there. What is the position regarding the gas pipeline from Iran to India via Pakistan? The proposal for a gas pipeline was first mooted by Iran when Benazir Bhutto was the Prime Minister between 1993 and 1996. It was taken up with the Nawaz Sharif Government also. At that time, the Inter- Services Intelligence (ISI) had advised them that they should not agree to the extension of the pipeline to India since the availability of gas from Iran could strengthen India's economic and industrial capability. Benazir and Nawaz told Iran that while the pipeline could connect Iran and Pakistan, it could not be extended to India. A few months after seizing power in October 1999, Musharraf had been to Teheran on his first visit. The Iranian authorities urged him to re-consider the decision of his predecessors and allow the extension of the pipeline to India. On his return to Islamabad, he ordered a re-examination of the case and lifted Pakistan's objection to its extension to India. In reply to criticism by the Islamic fundamentalist parties, he said that while Pakistan would continue to reject proposals for the normalisation of the economic relations with India, it would treat the pipeline issue as a stand-alone issue without linking it to the Kashmir dispute. He justified his decision on the following grounds. First, Pakistan would need additional energy for diversifying its industrial capability and for stepping up production. Second, a gas pipeline required huge investment and no foreign company would be prepared to make that kind of investment for selling gas in Pakistan alone which would not bring adequate returns on the investment. Only its extension to India would make it profitable for the investors. Third, at a time when Pakistan's economy was in a state of collapse, it badly needed the US $ 800 million per annum offered by Iran as transit fee for the gas. The project did not take off due to India's security concerns which arose from the following factors. First, the pipeline would have to pass through the Sunni majority areas of Balochistan where there is considerable anti-Teheran and anti-Islamabad feelings. Balochistan itself is an important source of gas. The gas pipelines connecting Balochistan with industries and towns in Punjab are already subject to frequent attacks by Baloch nationalist groups fighting for the independence of Balochistan. Second, the Islamic fundamentalist and jihadi organisations, which are opposed to the extension of the pipeline to India till the Kashmir issue is resolved, might disrupt the gas supply through sabotage even if the Baloch nationalists do not do so to express their anger against Islamabad. Another security-related aspect is the possibility of the Government of Pakistan itself stopping the supplies in the event of a military conflict with India. Pakistani authorities counter this by pointing out that whenever there was any conflict or danger of a conflict, it was India, which tried to punish Pakistan economically and not vice versa. In this connection, they refer to India's suspension of the over flight rights of its airlines in 1971 and 2000. They also refer to the demand by Indian hawks in 2000 for the suspension of the Indus Waters Treaty in order to deprive the Pakistani farmers of water. While there were no direct talks between India and Pakistan on the security issue, in its discussions with Teheran, Islamabad was repeatedly holding out the assurance that it would ensure the security of the supplies to India. One of the suggestions reportedly under consideration was that if there was any sabotage of the pipeline in Pakistani territory, Iran would shut off the supply to Pakistan too till the damaged pipeline was repaired. This would ensure that Pakistan took effective measures for the security of the pipeline and that if , despite these measures, there was a disruption of the supplies, stoppage of supplies to its own consumers would make it repair the damage fast. As a result of the post-9/11 improvement in the Pakistani economy and the seven-fold increase in its foreign exchange reserves, it is no longer as dependent on the transit fee as it was in the past for preventing an economic break-down. Despite this, it is as keen as it was in the past for an early implementation of the project without linking it to the Kashmir issue because its expanding economy badly needs additional energy supplies. The pipelines for bringing gas and oil from Turkmenistan, which have been under discussion since 1994, are unlikely to materialise in the near future till the security situation improves in Afghanistan. Even in respect of oil and gas from Turkmenistan, foreign investors are not prepared to invest heavily unless there is a possibility of the pipelines being extended to India. There has recently been a change in the policy of the Government of India of not discussing the issue directly with Pakistan. Negotiations are already on on this subject. The statements made by Mr.Shaukat Aziz, the Pakistani Prime Minister, during his visit to New Delhi on November 23 and 24, 2004 underline Pakistan's continuing keenness to go ahead with this project despite the lack of progress in the talks on Kashmir. Mr.Aziz has described the pipeline project as an important confidence-building measure. According to media reports, the Government of India is now trying to link progress on this issue to Pakistan's granting the MFN status to India. Mr.Aziz has warned that if there is continued delay, Pakistan might be constrained to go ahead with the project on its own in order to meet its pressing requirements. He has also pointed out that to meet Pakistani requirements only, a pipeline with a smaller diameter would be sufficient. Once such a pipeline has been laid, according to him, there would be no possibility of extending it to India, which would require a larger diameter. An unknown and inadequately discussed aspect of the pipeline issue is the likely attitude of the USA. The economic sanctions imposed by the USA against Iran in 1979 continue and there is no prospect of an improvement in the US-Iran relations in the near future. On the contrary, relations have further worsened because of US suspicions of Iran embarking on a clandestine military nuclear project. If Iran continues to resist US demands for abandoning this project, there is a possibility of the US engineering multilateral economic sanctions against it through the UN Security Council. The present US sanctions against Iran prevent not only US companies from having normal business relations with Iran, but also foreign companies which use American licenses, patents, equipment and spare parts. Though there are no sanctions of the European Union against Iran, there were reported instances in the past of the US pressurising European companies not to supply to Iran equipment and technologies which, in the US perception, would be of strategic significance. Neither Iran nor Pakistan nor India would have the kind of money, equipment and technology required for laying the pipeline. Iran will have to raise money abroad to make the project a reality. At present, multilateral institutions such as the Asian Development Bank seem to be inclined to financially support the project, but unless and until there is an improvement in the USA's relations with Iran and it gives satisfaction to Washington DC on the nuclear issue, it is doubtful whether the US would let the project go through. The fact that the US has not come in the way of an Australian company doing a feasibility study of the project does not necessarily mean that it would not try to stand inn the way of the project. What then are the options before India? Keep up the psychological pressure on Pakistan for the grant of the MFN status. Heavens have not fallen as a result of Pakistan not granting the status so far. Heavens would not shine on India, if it does. But it is a psychological weapon which India has for projecting Pakistan to the international community as an unreasonable power. Intensify the interactions with those sections of the Pakistani business community which are in favour of an early normalisation of the economic relations in order to step up pressure on Islamabad from its own business class. Keep the talks going on the pipeline issue without any illusions regarding its early and smooth implementation. ******* Identify other areas of co-operation which could be projected to Pakistan as stand-alone areas. In one of his statements in India, Mr.Aziz has been quoted as referring to co-operation in the field of agriculture between Indian and Pakistani Punjabs as another possible stand-alone area which Pakistan would be prepared to take up without linking it to the Kashmir issue. Pakistan's agriculture has not been doing as well as that of India, forcing it to import wheat periodically. This is an area which needs to be explored intensively. The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute for Topical Studies, Chennai, and Distinguished Fellow and Convenor, Observer Research Foundation (ORF), Chennai Chapter. E-Mail: [EMAIL PROTECTED] Courtesy: South Asia Analysis Group, New Delhi, Paper No. 1173, November 26. * Views expressed in this article are those of the author and do not necessarily reflect those of Observer Research Foundation. ------------------------ Yahoo! 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