Originally Published 2012-12-20 00:00:00 Published on Dec 20, 2012
As a precursor to the wider project of energy cooperation between Central Asia and South Asia, India and Pakistan must take baby steps towards energy trading as part of their ongoing trade liberalisation. Petro-products delivered by Indian refineries in the north and west to Punjab and Sindh regions would save Pakistan at least $14 per barrel of oil.
Indo-Pak ties: From incrementalism to big vision
In spite of the cumulative historical baggage of bitter contests between India and Pakistan over a whole range of issues, economic engagement between the two nations has truly assumed a life of its own, disregarding much of the other negatives. In fact, it will not be surprising if deeper economic engagement and its outcome become significant anchors that positively impact other political aspects of the relationship. Nothing exemplifies this better than the fact that trade between India and Pakistan went up nearly five times from about $600 million in 2004-05 to nearly $2.8 billion in 2010-11. Mind you, this period was marked by some of the bloodiest events which had the potential to permanently derail every aspect of India-Pak relationship. In fact, they almost did after the Samjhauta train blasts in 2007 and the Mumbai terror attacks in 2008.

The question then to ask is if trade between two nations could go up nearly five-fold during a period marked by such negative events in their relationship, what would happen if there is relative peace and more openness in all round engagement. Actually, this is well beyond the imagination of most experts/pundits who sit on both sides of the divide. Experts and state actors alike are often prone to limiting their imagination in the name of realism. State actors are risk-averse and trained for enlightened incrementalism, even if this sounds like an oxymoron. The real dynamism comes from below as shown by the economic agents on the ground who, in spite of myriad restrictions on trade imposed by the suspicious state actors on both sides, have enabled commerce to leap by 400% in five years! And this is achieved with all manner of trade barriers still in place. Ironically, the only other country with whom India is growing its trade at such a rapid pace is China, which too has a historical baggage of disputes with India. It makes one wonder whether there is some odd correlation between heightened political bitterness and greater trade engagement, as also seen between China and Japan over the past decades. Or is there some subtle message coming from the economic agents on the ground telling the State actors to recognise the inflexion point when things have to change.

Insofar as India-Pakistan relations are concerned, we have already arrived at the tipping point, where the bottom-up growth process in trade and commerce is ready to surprise everyone in the years to come. This inflexion point was exemplified by the sheer speed with which trade barriers that had marred normal commercial engagement for decades got removed in a matter of 12 months-from April 2011 to May 2012-in the course of the Commerce Secretary level talks between the two countries.

Pakistan took the big step of granting MFN status to India, something it should have logically done in 1996 itself when India had accorded MFN to Pakistan under the WTO mandate. India will have to now reciprocate by removing myriad non-tariff barriers to trade with Pakistan. Trade procedures are as important as the initial act of opening up the market. The devil often lies in the details of procedures. There needs to be a mindset change where suspicion is replaced by trust in bilateral trade and investment. The possibilities now are immense.

Just to give you an idea of the inflexion point in India-Pak economic engagement, Pakistan only allowed 1,934 items out of a list of 7,800 products to be imported from India until 2009. Apart from the 1,934 products, which were in the positive list open to be imported from India, the remaining 5,800 items were in the banned list. Even out of the 1,934 products in the positive list of imports, less than 200 items were allowed by Pakistan to be actually traded from the Attari-Wagah land border.

It is in these highly restrictive circumstances that trade officially grew 400% in the five years preceding 2010. As per the new free trade agreement to be implemented, Pakistan will open up the entire 7,800 products for imports and increasingly a growing number of these will be from the Wagah border. Already, trade from Attari-Wagah border has surged in the past six months after some initial relaxation of the number of items traded from this transit point.

Pakistan will eventually have a small sensitive list of items-around 600- whose import shall be allowed at high duties in order to protect their local industry. Barring these high duty products, the rest of the 7,000-odd items will be traded at less than 5% duty as per the broad trade agreement. India, too, will have a small list of sensitive items on which it would impose higher duties. These include products in textile, tobacco, etc, where India wants to protect its local employment. Of course, India can be much more generous to Pakistan and offer it the same terms as it does to least developed countries in the SAFTA region, like Bangladesh, Nepal, Maldives, Afghanistan and Bhutan. Eventually, India’s generosity is what will determine the formation of a truly robust South Asia Free Trade Zone with all products flowing across the borders at zero duty and a much freer movement of skilled workers also becoming a reality. The greatest irony today is that South Asian economies are separately striking free trade agreements in goods and services with nations across the Atlantic but not among themselves.

However, it is my conviction that the big shift in the axis of economic power to the east will force South Asian economies to naturally look at institutionalising SAFTA in a win-win framework. The larger global dynamic will make this happen faster even if state actors are slow in recognising this. Data collected post the global economic crises of 2008 shows a marked increase in the pace of trade and investment engagement among the Asian economies as opposed to between Asia and the West. These are historically driven materialist forces which State actors typically recognise and understand after a lag. However, even wisdom dawning with the benefit of hindsight is good enough to make SAFTA a more robust project in the years to come.

Clearly, Pakistan is a very important piece in SAFTA and once it resolves all outstanding issues with India, the South Asia Free Trade Zone encompassing goods and services, with energy and food security as fundamental building blocks must happen in the natural course. Indeed, it is an idea whose time has come.

The immediate impact of freeing of trade between India and Pakistan will be an explosion of direct trade volumes. At present, about $3 billion is official two-way trade but experts say another $3 to $4 billion is traded via Dubai, Singapore and other third countries, thus raising transaction costs immensely. For instance, a standard sea container taken through the Wagah border has a total transport cost of $391 but the same done through Mumbai-Dubai-Karachi costs close to $1,000 per container. So, one can imagine what will happen once the Wagah border becomes open to transporting items on a wider basis.

A study by ICRIER, an Indian think tank, shows that if India and Pakistan started trading in all items based on actual demand and supply dynamics in the two countries, the real trade potential is about $25 billion! At present, both countries trade in items such as chemicals, sugar, woven fabrics, dates and cement. Trade is skewed in favour of India with India’s exports to Pakistan at $2.2 billion in 2010 and imports at $300 million. India needs to be far more generous in the new trade arrangement and must ensure that Pakistan has greater access to India’s textile market. Pakistan has competitiveness in textiles and is demanding much lower duties for its textile exports to India. It is entirely in India’s interest to give its South Asian neighbours a generous deal so that SAFTA eventually moves towards a European Union type arrangement over the next decade or so. Sharing of resources such as coal and steel led to the idea of the EU in the early 20th century. The 21st century must bring populous South Asian neighbours together around the idea of creating a common pool of energy, water and food. A robust SAFTA, built around such an enlightened principle, is also the best way to deal with China’s instrumental economic diplomacy with South Asian neighbours. In this context, the best way to address the Sir Creek dispute is not to fight over some big marshland and indulge in a futile exercise of drawing some complicated boundary there. Sir Creek is all about oil and gas resources and the most rational solution could be an oil and gas exploration venture formed by oil companies on both sides with an appropriate sharing arrangement. This will cement long-term interdependence between the two nations. History shows such out-of-the-box ideas work. Similarly, India and Pakistan have to think together and come up with durable solutions to tap Central Asian gas reserves carried through secured pipelines running across Afghanistan and Pakistan into India. One of SAFTA’s critical projects will be carving out Afghanistan’s role as a transit country for gas from Central Asia. Given our growing energy needs, Islamabad and New Delhi will at some time be forced to consider using the Trans-Afghanistan Pipline (TAPI) and Central Asia South Asia Regional Electricity Project (CASA) to access Turkmen gas and Central Asian electricity. Both projects run through Afghanistan.

As a precursor to this wider project of energy cooperation between Central Asia and South Asia, India and Pakistan must take baby steps towards energy trading as part of their ongoing trade liberalisation. Petro-products delivered by Indian refineries in the north and west to Punjab and Sindh regions, respectively, would save Pakistan at least $14 per barrel of oil. There are massive coal deposits in Pakistan which could be exploited in joint venture investments by companies from both sides. These are opportunities of the 21st century that must be seized. There is a need to move to big vision from the incrementalism of the past.

Courtesy : The Financial Express
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