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If connectivity improves, India can become the leading trading partner of Pakistan because of proximity and centuries-old business networks that had lived, worked and shared the gains together, Dr Vaqar Ahmed and Muhammad Adnan

In 2008-09, when Pakistani firms started to invest in Bangladesh for taking advantage of latter’s duty-free access to European Union and North America, several analysts termed it capital flight and denounced the government for not regulating such capital outflows. However, we know from actual data now that the investment that has actually gone in Bangladesh’s textile sector from Pakistan is around USD29 million, hence this has in turn implied an increase in Pakistan’s exports to Bangladesh which is over 33 per cent.

When Pakistani firms operate in places such as Chittagong, they tend to take textile raw material from their source in Pakistan. Given that this material is being imported from the country of origin, therefore Pakistani firms do not have to pay customs duty at Chittagong. Such trade creation impacts of investment outflows are not often explained in our popular media. There are several other examples such as the one explained above and include trade-creating investments in Sri Lanka, Malaysia and Jordan.

In August 2012, India through an executive order allowed FDI from Pakistan. While this has only been allowed through the government route, however, we already see that some research work has already started on the preparedness of Pakistani investors wishing to undertake ventures in India.

In the recent research conducted by Sustainable Development Policy Institute on this subject, there seems to be two different views on this subject. One is the high-end business community in Pakistan that is already an established investor in various parts of the world. For such businessmen, India is just another destination where they will go if, in economic terms, they see long-term expansion of their conglomerate. The other, however, is medium scale production or trading concerns who feel that with India there still remains high risk in return for payoffs which they can certainly get from operations in other countries (most cited example was UAE).

In the rest of this piece, we focus on the latter group and their concerns regarding investment in India. A leading leather industrialist in Sialkot reported that he first wanted to ensure that he will get the same skill set to produce quality products in India as the one he currently has in Sialkot. According to him, the hand stitching is a niche that is not always available in large numbers and given the visa restrictions between both countries, labour mobility is hardly possible.

A textile firm owner in Lahore is thinking to start business in India, but he will start homework only after it is ensured through a framework of sovereign guarantees on both sides that his venture will not be affected by political upheavals between the two neighbours.

In services sector, an eminent private school’s chain has indicated its interest. They are already operating in countries like China and UAE. However, their key concern is that there are still restrictions in India on petty things like opening up of a corporate bank account by a Pakistani firm. It was also reported that the South Asia University in New Delhi, under its mandate, allows admission applications from the eight Saarc countries. However, Pakistani students face difficulty given the lack of bank account. Their visa is also specific to New Delhi and they cannot move to any other city in India.

In case of surgical industry, several businessmen were afraid of investing given the weak intellectual property framework and its implementation in India. They were of the view that surgical equipment has global demand and they have faced violation of intellectual property when such ventures were initiated in China. Some also cited the sour experience of Mittal in steel sector and the way state-specific red-tape hindered them from bringing such mega investment in India.

Pakistan is bound to have more trade creation if connectivity between India and Pakistan improves through all channels. Currently, even cellular communication is not possible as roaming is not allowed in either of the countries. The land routes are subject to heavy political interference. Currently, only Wagah-Attari is open for tradable goods. However, the demand for trade on both sides is so colossal that check posts on both sides have reached their full capacity. The solution now is to think towards containerization via railways. This is the only land option that can allow movement of mass cargo on both sides.

In the pre-1965 era, Pakistani investors were involved in direct and portfolio investments in India despite some capital controls. India, at that point, was the leading trading partner of Pakistan because of proximity and centuries old business networks that had lived, worked and shared the gains together. Today, South Asia remains far more disconnected than sub-Saharan Africa and both India and Pakistan must share the blame for this.

The authors are economists at Sustainable Development Policy Institute. Islamabad: &

This article was originally published at: The News

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.