As expected, India's announcement about allowing Pakistani investment has received an overwhelming response from large swathes of industrialists, traders and businessmen on both sides of the border particularly those businesspersons in Pakistan who envisage liberal economic relations as the only solution to resolve the political issues by prioritising economics. It may be perceived as a positive mindset change and gesture of goodwill to commence a new era of economic relations, which will have a consequential effect on the investment-to-GDP ratio of Pakistan.
The Indian FDI Policy, permitting investments from Pakistan has come at a time when Pakistan is passing through an adverse phase of its history and faces internal, external and economic uncertainty. It may be a prime attraction for such businessmen in Pakistan who are hesitant to invest their money in their own country because of the non-business friendly climate in Pakistan. Due to non-availability of uninterrupted and affordable energy supply, poor law and order situation and high level of corruption, about 250,000 power looms have been reported relocated to Bangladesh from the province of Punjab only during last three years, resulting in unemployment of several families. In the recent past a considerable outflow of investment from Pakistan has been made from Pakistan to Bangladesh, Sri Lanka and Malaysia.
India has a capacity to provide a better environment for relocation of such Pakistani enterprises. Perceived incentives in the near future like full functioning of the Integrated Check Post at Wagah-Attari Border, movement of natural persons under Mode 4 of GATS, and a liberal Visa regime can be the most attractive package for Pakistani Enterprises particularly from Gujranwala, Gujrat, Sheikhupura, Kasur, Lahore etc; for their relocation in Amritsar, Ludhiana, Chandigarh, Patiala and Jullundur. It may adversely affect the employment in Pakistani cities however it can contribute to the development of Indian Punjab, which is a comparatively less-developed province of India as compared with other provinces.
Showing reaction to the Indian call for Investment, some leading business entities like the Mansha Group, Bareeze etc; have expressed their immediate desire to make hefty investment in India and are now anxiously waiting for the release of the complete the Investment Manual in the wake of the Indian Commerce & Industry's Ministry's notification D/O IPP File No 5/10/2011-FC.1 dated August 2012 which provides the amended version of the Consolidated FDI Policy effective from 10-04-2012 and reads" A non- resident entity can invest in India, subject to the FDI policy. A citizen of Pakistan or an entity incorporated in Pakistan can invest only under the Government route, in sectors/activities other than defence, space and atomic energy". This is also the same for investment in India from Bangladesh. Mansha Group is already in the process to seek approval from the State Bank of Pakistan to open MCB Bank Branch in India, which shows the level of readiness of big enterprises. Naturally speaking, the investors will consider investment from where they will get higher rates of return and more incentives. However, in the absence of the investment manual, it is hard to say whether the investment policy of India is more liberal than that of Pakistan.
In the wake of the global recession, the International Monetary Fund has trimmed its economic growth forecast for India to 7.5 per cent from an earlier level of 7.8 per cent. According to IMF's projection Investment in India is expected to remain sluggish, reflecting, in part, recent corporate sector governance issues and a drag from renewed global uncertainty and less favourable external financing environment. The Economic Outlook report has highlighted that a key challenge for policymakers in India is to bring down inflation, which was running close to double digits and had become more generalised. The IMF has also noted that despite policy tightening the real interest rates are much lower than pre-crisis averages. Keeping in view the perceived decline in the national economy and unfavourable business environment in Pakistan, the announcement of Investment Policy may help improve Pakistan's economic growth. However, India will have to announce a friendlier regulatory framework to attract meaningful investment from the Pakistani business community, which will be expecting a sovereign guarantee from the Government of India to protect their Investment.
A brief comparison of Pak-India Investment policies suggest that Pakistan has a more liberal investment regime which offers 100% equity in almost all sectors while in India FDI is allowed in only 60% of the sectors. In addition to Federal level interventions, inter-state regulations are more active in India with respect to FDI and Joint venture established with foreign investors. For example, the consumers of cellular phones registered in cities other than Delhi have to pay extra charges if used in other states, while in Pakistan only Federal taxes are applied.
The current situation has put economic managers in limbo and they are jittery about the consequential effects particularly at a time when the overall growth rate of Pakistan is hovering at around three to four percent. Not to speak of the FDI, which has been shamelessly reduced to $800 million in 2011-2012 from over $5 billion, even domestic investment has been curtailed to 50% during last five years. The Increase in unemployment rate has added 5 million people in the poverty net. The Investment-to-GDP ratio has reduced considerably from 23% to 13% in the same period of time. Can Pakistan afford more outward flow of investment in such circumstances?
Encountered with enormous economic issues, Pakistan earnestly needs Foreign Direct Investment. The Western World has misinterpreted overall Pakistan's situation and frequent issuance of travel advisory have encouraged other countries to avoid investment in Pakistan despite the fact that the country ranks amongst nations, which offer higher profits. Indian think tanks are quite aware that situation in Pakistan is not as bad as portrayed by Western Media.
We need to see this announcement as a gesture of goodwill and increase our capacity to quantify the real impact. In the current scenario, Pakistan also need to reciprocate this gesture by allowing Indian investment in Pakistan, which can help improve value addition, innovation, and technological advancement while an ensuring increase in productivity and competitiveness, which subsequently will help job creation, poverty alleviation and deepen bilateral economic co-operation.
Avoidance of double taxation and signing of bilateral investment treaty between India and Pakistan is earnestly required to compliment the efforts of the current Governments for deepening socio-economic co-operation between them, which is imperative for regional development as well.
(The writer is Vice President SAACI CCI & Former President FPCCI)