Trade diplomacy: Why this should matter to Pakistan

Trade with India was nearly 60% of Pakistan’s total at independence. That figure has dropped to 2.7% in 2011.

Farooq Tirmizi August 02, 2012


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 2nd, 2012.


Manoj Joshi, Navi Mumbai, India | 11 years ago | Reply

This is a day to be remembered by the two neighbours India and Pakistan as this is but a victory of both against antipathy, distrust and enmity that has plagued bilateral relations of the two nations since 1947. The beginning of trade will be the beginning of a new era and a new chapter in the history of Indo-Pak relations which should be an example nay one should say a case study for the entire globe to see, study and understand. The real patriotism lies now when the two neighbours trade and there will be a transfer of capital from Pakistan to India and vice versa. Critics will continue to argue against this developments and will take exception to the moves taken by India and Pakistan. That however, shall be the part of the economic show where in cynicism will try disturbing the balance of amity and trust and try undermining the growing friendship between India and Pakistan but they will meet their nemesis. 'Aaj is jung ko dono mulkon nein jitna hai aur GAZI kehlana hai aur yeh do tarfa koshish rahegi dono mulkon ki'. South Asia is changing and we are fortunate enough to be a witness to this change.

Syed Karim | 11 years ago | Reply

India's decision to allow FDI from Pakistan will make it official what has been going on for sometime surreptitiously: Relocation of industries from Pakistan to India. In Pakistan, chronic power outages had a severe effect on factories, specifically in the textile sector, and forced many textile mills in Punjab to close down. Some factories have already moved to Bangladesh and recently India. Frequent attacks by militants, political instability (stemming from jousting between the judiciary and the civilian government), and lack of personal security has jolted many wealthy Pakistanis.

The FDI decision is a tacit approval for the elite in Pakistan to move their assets and cash from their troubled country - tasks conducted in circuitous and complex ways (such as Hundi system) to countries in the West and now can be done with relative ease to India. India bagged a gold medal!

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