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India, Pakistan and economic realism

Ashish Vachhani

AT A recent conference in Islamabad, Gen Pervez Musharraf chided his audience for talking of hoisting the green flag at Red Fort at a time when Pakistan's economy is in real bad shape. Thus, he tacitly admitted that Pakistan's overstretched economy may n o longer be able to bear the costs of perpetuating hostility and sustaining the war-machine so assiduously built to tackle the `enemy' across the border. But normalisation of relations with India and a consequent cap, if not reduction, in Defence spendin g, may only be a partial panacea to the country's economic ills.

A lagging GDP growth rate and mounting fiscal deficit -- a fallout of the burgeoning foreign and domestic interest payment liabilities and Defence expenditure -- have had a perilous impact on the country's finances. There is an urgent need to revive dome stic demand, accelerate industrial production and tap foreign markets to boost export earnings. In this context, Pakistan's external economic relations, particularly with India, come into sharp focus.

Since the mid-1990s, the annual Budget in Pakistan has been a zero-sum game for the political establishment -- a futile attempt to bring the spiralling state expenditure in line with the revenue receipts. The economy runs a chronic fiscal deficit and the government borrows heavily to service its domestic/foreign debt and to meet its Defence expenditure commitments. As a result, there is practically very little that is left for development expenditure. The losers have been the people of Pakistan. Accordi ng to the statistics of the State Bank of Pakistan, out of a total federal expenditure of Rs 77,000 crore in 1999-2000, Rs 31,360 crore was used to service domestic and foreign debt, Rs 15,250 crore was spent on the Defence establishment and in maintenan ce of internal law and order. Development-related activities received a paltry Rs 1,900 crore. A new detente in Indo-Pak relations might pave the way for restricting the Defence expenditure (provided the military establishment allows it), but Pakistan wi ll still have to look at other time-tested methods for rejuvenating the economy -- revival of the domestic industry and foreign trade.

The overall economic interaction between India and Pakistan is restricted to small-time merchandise trade. There are three components to the bilateral trade: Formal import and export of merchandise, circular or informal trade through `third' countries, a nd the illegal, or suppressed, trade transacted unofficially across the borders.

The issue of fostering greater ``economic and trade interactions with India'' has been a controversial political issue in Pakistan. For nearly two decades after Independence, India was a major trading partner for Pakistan -- over 40 per cent of exports a nd 20 per cent of imports were to and from India. But since the 1960s, there has been a steady decline in India's official share in Pakistan's total trade and is now less than one per cent. This happened despite the increase in the list of freely importa ble items from 42 in 1975 to 601 in 1998. Pakistan attributes the declining commercial interactions between the two countries to the non-resolution of the Kashmir dispute. But there is more than what meets the eye.

The Kashmir dispute, despite being unresolved, has not stopped large-scale unauthorised and circular trade taking place between the two counties. A study by the Benazir Bhutto Government indicated the money value of the illegal trade across the border to be as high as Rs 2 crore annually for both countries. Pakistan's apprehension that improved trade relations with India could prove to be inimical to its domestic industry does not hold much water -- the country trades freely with China, but the domestic economy is yet to be swamped by cheap foreign imports. These facts hint at the existence of vested political and business interest groups in Pakistan, for whom it is financially advantageous to continue with the present system of illegal trade, notwiths tanding the loss of revenue to their government.

The scope and potential for increased bilateral trade is phenomenal especially in terms of the real and tangible benefits that would accrue to the two sides. Before 1947, in undivided India, there was a high degree of trade interaction between the region s now in India and Pakistan. Surpluses in foodgrains, jute, cotton, spices, dry fruits and condiments were important exports from Pakistan. The Indian side, on the other hand, exported raw materials such as iron and coal and finished consumer products. B ut after Partition, the economic compulsions and domestic political exigencies in Pakistan resulted in diversion of Pakistani trade from India.

The complementarities in the structure of the two economies, price advantages, low freight costs on account contiguous land borders and cultural and linguistic similarities, provide the rationale for enhanced trade and commerce between the two sides. The agriculture sector, which constitutes the most important component of GDP and is the single largest source of employment in both countries, provides numerous avenues for extensive cooperation. Increased business in food and agro-products has a very posi tive ripple effect on other sectors of the economy. Similarly, Pakistan has distinct advantages in electric power, cotton and textile production, while India can make a positive contribution in engineering industries and supply of household goods.

India has already accorded the Most-Favoured Nation status to Pakistan. The MFN status stipulates that the contracting parties should accord the same tariff restrictions and concessions to their respective exports and imports as is being given to other t rading nations. But Pakistan has not yet reciprocated. Ironically, while other countries can export all products to Pakistan except those specified in its negative list, exports from India are restricted to only 600-odd items with the rest falling in the negative list.

The cost of `suppressing' dynamic trade between the two countries has made Pakistan an artificially high-cost economy and deprived the consumers an access to competitively priced commodities. Pakistan imports tea, coffee, pharmaceutical products, consume r durables and liquor from Kenya, Brazil and Australia at a higher per unit import cost. India, for instance, is the largest tea producer, and Pakistan is the second largest tea consumer in the world. Ironically, 60 per cent of tea imports to Pakistan is from Kenya, while less than one per cent is imported from India. The clamour for good quality or lower unit price of tea cannot be the real reason for Pakistan to go all the way to Kenya to purchase tea. The fact is that the ruling establishment in the country is yet to recognise the imperatives of placing greater premium on `economics' than on the ``domestic political compulsions,'' while framing the national trade policy.

Economics has assumed a pivotal role in the foreign policy exercise among nations since the end of the Second World War. History bears testimony to the fact that even countries of the war-ravaged Europe displayed a vision by deciding to set aside their m utual political and security problems for widening their bilateral and multi-lateral economic interactions. This led to the establishment of the European Union, which stands as a vanguard for military and economic security of the Continent. It appears th at the theory of functionalism and neo-functionalism (propounded by economists David Mitrany and Ernst B. Haas), which provided the conceptual framework for the process of regional integration the world over, has very little appeal in the sub-continent. South Asia's experiment with regionalism -- through the South Asian Free Trade Area (SAFTA) -- has remained a non-starter because two of its important member-countries cannot trade on account of ``insurmountable historical problems''.

There has been considerable speculation in the media on the stakes, agenda and the likely outcome of the Vajpayee-Musharraf summit meeting in Agra. The stakes are high for both the countries: For India, this is an opportunity for constructively engaging Pakistan and preventing it from joining the category of ``failed and rogue states''. It also provides a chance for moving away from the traditional Pak-centric foreign policy in order to play a more meaningful role in international affairs. For Pakistan, the summit diplomacy offers a unique opportunity for convincing the world of its intentions to ensure durable peace and stability in the sub-continent. And, as a bonus, Gen Musharraf may also get some international legitimacy for holding three official positions -- that of the President, the Chief Executive Officer and the Chief of Army Staff.It is still unclear whether bilateral economic issues will receive the same priority and importance as the Kashmir tangle during the summit. Even the most incurab le optimist would agree that a long-term and mutually acceptable solution to the outstanding security issues will take time to come and would rely heavily on the levels of mutual confidence between India and Pakistan. Economic realism demands that the tw o countries come out of the archaic time warp and insulate their economic relations from the impediments called the ``political compulsions''. But it needs to be seen whether Gen Musharraf will be able to defy the conventional myopic vision that pleads a gainst resumption of normal economic relations between the two countries pending resolution of the Kashmir dispute.

(The author is Deputy Secretary -- Finance Department -- Government of Tamil Nadu. The views are personal and do not reflect the policies of the Government.)