Is the largest market in the making?
Just seven months prior to the summit meeting of the South Asian Association for Regional Cooperation (SAARC) member states, a Pakistan National Assembly member, Saleem Jan Mazari, asserted at a conference at the Indian Merchants Chamber (an apex body for trade, commerce and industry in the western region of India) that, "if the three countries, namely India, Pakistan and Bangladesh, came together they would be the biggest consumer market in the world". In the light of the January 2004 SAARC summit in Islamabad, the thaw in the relations between neighbours and arch rivals India and Pakistan is expected to give a tremendous boost to bilateral trade activities. The resulting environment is projected to be cut-throat in terms of the competition between the producers of the two countries in the long run, while trade balance is expected to be in India's favour in the short to medium term.
Based on the idea of a unified 'South Asian market', a businessman of Indian origin based in Singapore, AR Jumabhoy, prepared a document a month before the SAARC summit in which he claimed that India, Pakistan and Bangladesh, with a total population of close to 1.5 billion people and with a fairly impressive combined GDP, can offer larger sized markets for trade and industry. The SAARC meet also endorsed the observations and finalised the South Asian Free Trade Agreement (SAFTA). This treaty binds all seven nations to reduce their tariffs in phases. Many analysts and business people feel that the two main economies which can make the treaty successful are India and Pakistan. "The two countries enjoy a fairly large amount of informal trade, and also face smuggling", says Rais Ashraf Tar Mohmmad, a Pakistani commodity trader. He cites the example of a very popular tobacco based product, Pan Parag, which he says can be found at almost any pan shop in Pakistan even though it is among the banned items in the country.
Businessmen in Pakistan say that the demand and supply equations compel them to find extra-legal routes to bring in com-modities which can be profitable. Like Pan Parag, many other products find their way into Pakistan via a third country. The products are first shipped to Colombo or Dubai, a favoured conduit for traders from both countries, and are then brought to Pakistan. "Third country trade is estimated to be nearly USD 1.5 billion per annum", says Siraj Qasim Teli, president of the Karachi Chamber of Commerce and Industry. Interestingly, animal trade makes up a large proportion of the smuggling. It is estimated that more than INR 200 million worth of animals (largely cattle) make it across the Indian border to Pakistan each year. The volume might be several times more than this figure due to the undocumented nature of the trade.
Ironically, in contrast to the robust illegal trade, official trade between the two nations remains nominal. According to official figures, Pakistan exported goods worth USD 70.7 million during the fiscal year 2002-03, while it spent foreign exchange worth USD 166.6 million for importing goods from India. Besides the relatively low volume of this above-ground trade, the balance clearly was in India's favour. The official list of items exported to India consists of vegetables and fruits, poppy seeds, raw cotton, wool, waste wool, fine animal hair, textile yarn and fabrics, leather and leather manufactures, petroleum crude, plants for perfumes, pharmaceuticals, copper waste and scrap, articles of apparel, cloth accessories, rock salt and rice.
Commodities officially imported from India are ginger, tea, cardamom, soybean meal, carbon electrodes, iron ore, tendu (bidi) leaves, vegetable seeds, zinc, magnesia, refined lead, manganese ores and concentrates, books, betel leaves, sports goods, phthalic anhydride, tamarind, dyeing and tanning materials, cement, sewing machine, oil-cakes, residue of soybean, onion, organic chemicals and sugar-cane.
The trade balance in favour of India has prompted fears among certain members of the Pakistani business community, especially industrialists, of losing the domestic market to Indian manufactures resulting in a process of deindustrialisation. Cement manufacturers were the first to raise concerns. "The Indian cement industry will make a major dent in our business because they have an edge over their Pakistani counterparts due to differences in the tax structures of the two countries", maintains Tariq Saigol, chairman of the All Pakistan Cement Manufacturers Association. According to him, tax per tonne of cement in India is INR 500 while in Pakistan the government collects PKR 1600 for the same quantity. Pakistani researchers are also of the view that Indian pharmaceutical goods will develop a major market presence in Pakistan because drugs are priced low in India.
However, optimistic voices are not totally absent in Pakistan. Where fear prevails amongst a section of the business community about the possibility of Indian goods driving them out of business, a large number of businessmen and people in government see the opening-up of borders as a good opportunity for Pakistani goods to capture a market share in India. "The opening up of the border will provide us access to the largest market of Southasia", says Zubair Motiwala, an industrialist. Likewise, Tariq Ikram, minister of state and chairman of Pakistan's Export Promotion Bureau, feels that the country's exports to India could reach USD 3 billion after the freeing of trade from current restrictions. According to him, Pakistan could get a reasonable share in the Indian market for value-added goods, besides diversifying the current export portfolio vis-à-vis India by adding commodities like cotton, sugar and rice to the existing list. Members of the business community and researchers alike believe that the short term may see a flooding of Indian goods into the Pakistani market but in the long run Pakistani goods will be able to penetrate India, turning into a mutually beneficial situation for both countries. According to them, the trade pattern in normal times will, in all likelihood, remain in favour of Pakistan as in the 1979-1980 period when the overall trade balance was INR 940 million in Pakistan's favour. Even more recently, in 1988-89, the balance was INR 326 million rupees in favour of Pakistan.
Energy Game
The interests for both countries are not just confined to exporting commodities and other goods, but also in sectors such as oil and gas. Islamabad is already working on the Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline project. At a December 2003 meeting of the steering committee, comprising members from all three countries, a Asian Development Bank funded feasibility study of the USD 3.2 billion TAP project was presented, in which India was earmarked as the end-user of the gas. The project also envisaged gas storage facilities in Pakistan and the establishment of an independent security agency to take care of the 1,700 kilometre-long gas pipeline.
India currently requires five to six billion cubic feet (Bcf) of gas per day and the demand is expected to grow. This indicates that perhaps India will need gas intake not only from Turkmenistan, but also another one from Iran that is under consideration. The tri-nation ministerial steering committee on the TAP gas pipeline project had ultimately to reject the feasibility study conducted by the project consultants because the report was prepared viewing India as the buyer, but the steering committee had not received any formal reply from the Indian side. The committee decided to go ahead with the project sans India, and the project consultant, Penspen Consulting of the United Kingdom, was directed to revise the feasibility report. The TAP project cost is estimated at USD 2.6 billion with the exclusion of India and USD 3.2 billion if the pipeline services New Delhi as well.
Pakistan is keen on acting as a gas conduit to India, for the money which it plans to charge from India for the privilege of transit. The estimated charge varies from four to six cents per cubic feet. India, on the other hand has been reluctant on political grounds, as well because of the cost factor. Some industry analysts see the present positive economic development between the two countries in SAFTA as a "levelling of the terrain" for the TAP gas pipeline. To the surprise of many in Pakistan, M Abdullah Yusuf, Member Secretary, Ministry of Petroleum and Natural Resources began visits to New Delhi just a week after the conclusion of the SAARC summit to discuss Pakistan's purchase of diesel from India. Many oil sector analysts believe that Pakistan's move is aimed at softening the Indian side into progress on the gas pipeline project. Speaking to newspersons in New Delhi, Abdullah went on to add that, "Diesel imports to Pakistan from India are on our negative list, but we are willing to review this".
Pakistan, which currently imports 4.5-5 million tonnes of diesel annually, mostly from Kuwait, has initiated talks with the state-run Indian Oil Corporation which has surplus refining capacity and is keen to export diesel to Pakistan from pipelines that run close to Pakistan's border. Indian officials say diesel exports will help India utilise this surplus refining capacity, while Pakistan will benefit from the lower cost of fuel imports. Oil and gas sector observers believe that India may join in the TAP gas pipeline project, if not immediately then at least by the middle of this year, when the steering committee of the project meets again.
Many businessmen are of the view that though the new phase of SAARC, SAFTA and the India-Pakistan romance has just started, in the past good relations have soured on issues ranging from terrorism, the hawkish rhetoric in the media of both countries, to insidious speech-campaigns at multilateral fora. Indian-origin businessmen like Jumabhoy have acknowledged that political factors have tended to dominate the economic agenda in Southasia and that trade generally is often held hostage to the improvement in the relations between India and Pakistan, particularly on the resolution of the Kashmir issue. The events in the coming months, especially with elections to the lower house of parliament in India on the cards, will reveal the nature of progress made on the trade front. For now, businesses on both sides of the border are keeping their fingers crossed.