Trade diplomacy: Why this should matter to Pakistan

KARACHI:

Make no mistake: New Delhi’s decision to allow Pakistani individuals and firms to invest in India is far more than just a political gesture. It is a move that has the potential to drastically reshape the Pakistani economy, and mostly for the better.

One might be forgiven for thinking that the move is largely symbolic. After all, Pakistan is not exactly known as a major source of foreign direct investment in any part of the world. Indeed, we are a net recipient country and grateful for every dollar that comes our way. But the move by India nonetheless has important consequences and needs to be understood in its full context.

Put simply, before this law was changed, no Pakistani firm could set up a registered company in India. This may not seem like much, but consider the following example. That Pakistani lawn garments are highly popular in India is by now a well-documented fact. Many commentators have gone on to ask why Pakistani lawn designers and manufacturers do not actively market to Indian consumers. Why, for instance, does Gul Ahmed or Al-Karam or Sana Safinaz not set up retail outlets in Mumbai or Delhi?

The reason they do not is that, in order to have any presence in India, they would first need to register a subsidiary company. However, registering a company requires putting up capital, even if it is for small amounts and does little more than setting up an office or a few shops. In any country other than one’s home country, such an act would technically be classified as “foreign direct investment”, which until now has been illegal for Pakistani firms.

Now that India has legalised foreign direct investment from Pakistan, Gul Ahmed or any other Pakistani company can set up Indian subsidiaries to begin marketing their products to consumers on the other side of the Wagah. Indian companies should really not fear this: Pakistani firms will still likely seek partnerships with their Indian counterparts and create opportunities for commercial collaboration that benefits both sides.

The amounts of capital moving from Pakistan to India will probably not be very big, at least not in the initial decade. But being able to “invest” in India is really a licence to freely to do business in India, or at least as freely as any other foreign investor.

The Indian government, in its announcement, has said that Pakistani companies and individuals will be able to invest in all sectors except “defence, space and atomic energy”. This, however, is likely a slightly misleading statement since the Indian government has all sorts of restrictions on foreign investment in various sectors and it is unlikely that Pakistani companies will be given more favourable treatment in India than, for example, American ones.

The most famous example of this is the retail sector, where foreign companies are still not allowed to sell more than one brand in their retail outlets. This restriction will not matter to Pakistani textile companies seeking to market lawn in branded shops, but those multi-brand clothing outlets now booming across the country will likely not be able to cross the border.

Nonetheless, once Pakistani companies begin selling more to Indian consumers, the direction of Pakistan’s trade is likely to transform. Remember that trade with India was nearly 60% of Pakistan’s total at independence. That figure has dropped to 2.7% in 2011, a level most economists consider unnaturally low. It needs to rise, and Pakistani firms being able to operate normally in India will tremendously boost that phenomenon.

For those of you who are curious as to whether or not Indians are allowed to invest in Pakistan, they have been allowed to invest in Pakistan – with the ability to repatriate 100% of their capital – for about two decades now, when Pakistan first adopted the principal of not discriminating between foreign firms and local ones (with very few exceptions).

Until now, hardly any have taken it up, but once they see Pakistani firms coming into their own backyards, some might consider jumping the border. And once they discover the relative ease of doing business in this country, they may well come to like it.

Published in The Express Tribune, August 2^nd, 2012.