FDI — a major milestone in Indo-Pak ties

The announcement by the Indian Government on August 1 to allow FDI from Pakistan has given yet another fillip to Indo-Pak economic relations — that too in a somewhat uncertain political environment.

There are still some unanswered questions. Once these are addressed, India and Pakistan would have covered yet another, milestone in their journey towards normalising trade and economic relations.

Until recently, India had Sri Lanka, Bangladesh and Pakistan on the negative list, but in 2006 and 2007, India permitted FDI from Sri Lanka and Bangladesh respectively, leaving Pakistan as the only country from which India did not permit any FDI inflows.

The recent announcement to allow FDI from Pakistan marks a significant change on two counts; first, in its FDI policy, India no longer has any country on its negative list of foreign investors and, second, it has restored the confidence among many who perceived a slowdown in the momentum of economic ties between the two countries.

Inhibiting factors

This was following a series of events starting May 2012, when a widely expected liberalised visa agreement between India and Pakistan was postponed at the Home Secretary level talks in Islamabad, after Pakistan insisted on “political participation”.

After this, there was a change in the portfolios of the Commerce Secretary of India Rahul Khullar and the Commerce Secretary of Pakistan Zafar Mehmood, who had steered the talks successfully and then left for different tasks that their countries had assigned to them. The biggest doubt arose when there was a delay in following up on the promise by the Commerce Minister Anand Sharma in April this year, just a few hours before opening of the new integrated check post at Attari, to allow FDI from Pakistan.

Another dampening factor was the “inconclusiveness” of bilateral energy talks which had started in March this year. Trade in energy can bring about a quantum jump in bilateral trade.

The $4-billion plant on the northern border with Pakistan at Bhatinda —a venture of Mittal Energy investments and Hindustan Petroleum, which went on stream in April — was expected to gain significantly from the energy talks.

The slowdown in the process was reversed on August 1 when the Department of Industrial Policy and Promotion notified changes in the consolidated FDI policy to allow investment from Pakistan in sectors/activities apart from Defence, space and atomic energy, through government route, and made the requisite amendment.

However, what still remains to be done is an amendment to the Foreign Exchange Management Act, which bans investment from Pakistan into India.

FEMA amendment

It is now time to seek answers on India’s policy on outward investment from India to Pakistan. Indian data on outward FDI flows confirms that so far there has been no outward FDI from India to Pakistan. The inhibiting factor is FEMA regulation, which also restricts outward investment from India to Pakistan under automatic route. In fact, it is not too clear if investments can be made with prior approval. This policy has been applicable to Pakistan alone. It is hoped that the amendment in FEMA regulation would remove the restriction on inward and outward investment flows — thus furthering the bilateral economic agenda. The private sector will soon step in to assess bilateral investment possibilities. It appears that the investment possibilities for Pakistani investors are limited. In 2011, Pakistan’s outward FDI flow was only $62 million while India’s was $14,752 million.

Even though the country-wise break-up of FDI outflows from Pakistan are not available, data from Board of Investment in Bangladesh indicates that Pakistan has invested in telecom towers, table fans, readymade garments, textile weaving, switch gears and voltage stabilisers in Bangladesh.

The Chambers of Commerce in the two countries have identified clothing, clothing accessories, fabric, surgical instrument, and cutlery as some of the possible sectors for Pakistani investment. There are larger possibilities for Indian investors in Pakistan in sectors such as chemicals, pharmaceuticals, automobile components, and information technology.

Institutional mechanism

An enabling business environment between the two countries will promote joint ventures and allow firms to access technologies, which in turn will lead to improvements in productivity, generating growth and employment opportunities.

The next obvious step of the governments of India and Pakistan should be to set up an institutional mechanism that would guarantee each other’s investments. The countries should work towards signing a bilateral investment treaty which protects and promotes investments on a reciprocal basis and includes provisions on fair and equitable treatment, protection from expropriation and national treatment.

As India moves towards completing the important task of liberalising investment flows, it should reinforce its commitment to the trade and investment agenda laid down by the two countries in April 2011.

Stronger and deeper economic ties will not only benefit the two countries but also serve as a powerful means of confidence-building and eventually a peaceful bilateral relation.

(The authors are researchers at ICRIER. The views are personal.)

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