Number of Downlaods: 15
Published Date: May 6, 2014
FDI in India : Prospects for Pakistan(W – 140)
Introduction & Background
Despite usual political frictions, the trade normalization process between India and Pakistan progressed at an encouraging pace during the recent past. Foreign and commerce ministers and secretaries from both sides have met several times to facilitate the process. The government of India, through an executive order, allowed Foreign Direct Investment (FDI) from Pakistan in August 2012. Earlier, according to the policy effective from 10th April 2012 (FDI Consolidated Policy, s. 3.1.1)
A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy.
The government of India revisited its consolidated FDI policy in August 2012, and decided to permit a citizen of Pakistan or an entity incorporated in Pakistan to make investment in India under the government route. The amended part, s. 3.1.1 of the FDI Consolidated Policy 2012, now reads:
A non-resident entity can invest in India, subject to the FDI Policy. A citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space and atomic energy.
The present study aims to highlight Pakistan-specific investment opportunities in India in the backdrop of Pakistani investors’ concerns regarding FDI in India. It also focuses on the preparedness of Pakistan’s private sector to take benefit of this opportunity. We have taken a sectoral approach whereby we inquire from the business community already engaged in outward investments in leather, sports, surgical, engineering, auto, education, textile and steel sectors regarding their willingness to invest in India.
We split our research exercise into the following key questions:
- What are the key sectors available to Pakistani investors in India?
- Willingness of Pakistani investors towards investment opportunities in India?
- How well the key sectors offered by India compare with potential of Pakistani Investors?
- What are the general barriers regarding investment in India?
- What extent of investment-specific dispute resolution mechanism is needed?
- What is the level of cooperation between government investment bodies in India and Pakistan towards investment cooperation?
- How will the liberalized trade between India and Pakistan help improve FDI prospects?
While one finds some recent robust work on India-Pakistan trade potential and opportunities, there is very little on the investment potential, which both the countries offer to each other.
Comparing FDI inflows to India with its neighbouring country China, Agrawal and Khan (2011) find the effects of FDI on economic growth of India and China and estimates that 1% increase in FDI would result in 0.02% increase in Gross Domestic Product (GDP) of India and 0.07% in GDP of China. About investment opportunities, the study finds that foreign investors give preference to China over India mainly because China has a bigger market size, greater policy certainty, and developed infrastructure. Similar analysis may be seen in Sinha et al. (2007).
Devajit (2012) considers FDI in India to be an important ingredient if the country is to sustain economic growth and keep pace with rest of the BRICS (Brazil, Russia, India, China and South Africa) countries. His focus on FDI as a creator of employment in India particularly through services sectors such as education and health care is important. Ranga and Ansari (2010) acknowledge that while central and state-level governments have been making efforts to better their investment climate, however, India’s competitors have done a lot more and India needs to learn from them on expedient basis.
At South Asian level, Alam and Aowrangzab (2006) talk about deeper reforms if intra-regional FDI in South Asia has to be promoted. They hint at harmonization of fiscal policies, investment policies, tax and customs laws. They believe that this is possible by strengthened implementation of already agreed upon articles under South Asia Free Trade Agreement (SAFTA).
Regarding India’s decision to allow FDI from Pakistan, Malik (2012) believes that Pakistani investors have done well in other regional countries such as Bangladesh and Sri Lanka. It will be an opportunity to reap benefits of proximity if both countries liberalize their investment regime. He, however, is of the view that bilateral investment flows will be in favour of India given its larger market size and sectoral diversification. Ahmed (2012) considers it a long-awaited decision from India as Pakistan had allowed this since its first investment policy. He also identifies four key steps for future that can strengthen the investment cooperation between the two countries.
First, the cooperation for liberalizing visa regime at the level of Home/Interior Ministries of both countries should include: a) non reporting multiple visas for business community, b) extending jurisdiction of visas to multiple cities, and c) allowing longer duration visas (for enabling physical presence of an investor certain). Second, mutual recognition of product standards will be important if both countries intend to bring their raw material and related inputs for production processes across the border. Third, both countries need to make a gradual progress towards a bilateral investment treaty so that foreign investment is treated at par with foreign investors and finally in the short-term there may be a need to think about a sovereign guarantees framework whereby investors from both countries know that any political upheaval will not impact the security of their assets and profits.
Shukla (2012) reports on Pakistan’s keen interests of investing in India as a leading businessman of Pakistan, Mian Muhammad Mansha, is interested in opening a branch of Muslim Commercial Bank (MCB) in India, and his spouse in the textile business also wants to open some stores in Ludhiana, Amritsar, Delhi and Mumbai. Similar intent by SEFAM, a private limited company as well as Lucky Cement is cited in MoC (2013). Both entities have done substantial homework in their sectors and see a wider market in their neighbourhood.
The next section undertakes a descriptive analysis of FDI trends in India. This is followed by a discussion on Pakistan-specific investment regime in India. We elaborate the processes under FDI via government route as required for Pakistani investors wishing to enter in to Indian markets. Using a perception-based methodology and through key informant interviews, we try to provide sector-specific estimates of potential FDI flows from Pakistan to India. This is supplemented with a qualitative analysis of sector-specific barriers to FDI in India. Finally, we’ll provide some policy recommendations to take the process of investment cooperation forwarded at the bilateral and SAARC level.