Barring size, it seems that the economies of India and Pakistan have a lot in common. Indias outsized economic clout is a product of its huge market, indigenous resources, political continuity and judicial strength. Over time, India has marketed itself as a jewel for global MNCs; thanks to being the only democratic country that boasts a billion-strong market. Now Indias $1.9 trillion economy is 7 times Pakistans (FY14:$260bn), but that corresponds to a similar population ratio.
But over time, Pakistan has descended deep into security issues, shooing away potential investors. Its FDI-to-GDP ratio of 0.6 percent was less than half of Indias in 2013, as per World Bank. Ever wondered why Pakistan keeps running to the IMF incubator every now and then while India is a net lender to the fund? Well, even Pakistans current "stellar" forex reserves are less than 5 percent of Indias $315 billion.
After removing dust from the surface, core economic issues and opportunities seem comparable across the two nations. Poverty remains very high while food security is a growing concern.
Both suffer from infrastructure bottlenecks. The two face inflationary pressures while growth remains wanting. Meanwhile, the resource purse on both sides is not good enough to finance large-scale energy projects or to keep up with the growing social welfare needs.
Fiscal woes are arguably the same on both sides. The tax-to-GDP ratio in both the countries is below 10 percent. Economic managers across the border have historically found it hard to curtail their respective fiscal deficit.
The political economy is similar: one can draw governance parallels between socialist leanings of Congress and PPP, and the Capitalism tilt seen in BJP and PML-N.
The latter two, BJP and PML-N, are now in government, after ousting the former.
Both have business-friendly credentials. But, both are also finding it hard to bring millions of retailers into the tax net, for retailers form the core of their respective urban vote bank. Unsurprisingly then, another parallel between them is related to the dual issue of public sector capture and revenue mobilisation. Nawaz Sharif in Islamabad and now Narendra Modi in New Delhi both are championing their privatisation agenda for parasitic state-owned enterprises.
About a fifth of Indian economy comprises of SOEs, of which only a third are reportedly in loss while the rest are only marginally profitable. Similarly, in Pakistan, economic woes emanate mainly from inefficient power producing and distribution companies. Public sector railways and airline companies and the Pakistan Steel Mill have become white elephants and are a constant strain on an already fragile economy
Islamabad has budgeted $2 billion to be raised from privatisation proceeds in FY15. That seems like a conservative estimate as this amount is projected to be raised by just two transactions of the GDRs of OGDCL ($800mn) and HBL ($1.2bn).
Additionally, BR Research has learnt that there is an array of inefficient SOEs including PIA and a couple of DISCOs on privatisation calendar this fiscal year.
Within a month of Modis taking the reins, privatisation is now in fashion in India, too. News reports suggest that the NDA government (comprising BJP and allied parties) are seeking to raise $11.7 billion in assets sale in its maiden budget.
Privatisation proceeds in FY15 alone would equal total amount raised from asset or stake sale in last four years combined. Talk about losing the inertia and jolting into action!
Already commentators are suggesting that this aggressive privatisation plan and the envisaged FDI rule changes will be the second major market embrace after the opening up in 1991. There are even talks of investment in manufacturing weapons and other defense-related items by big players from the west.
Also on the cards is the privatision of the loss-making Air India airline, "once a profitable airline is expected to post a loss of $1 billion in FY15," a news report warned. The Indian government plans to sell 26 percent shares to a strategic private investor and eventually sell 49 percent of the airline.
Over here, the story of PIA is not much different. It is a constant drain on fiscal resources. Pakistans Privatisation Commission Chairman recently told BR Research that the 26 percent strategic sale of the PIA shares will be completed by June 2015.
This is all good news for the bourses in both countries. Pakistans main index, the KSE-100, offered 41 percent return in FY14, while Reuters recently reported that Indian stocks have rallied by 23 percent this year.
The currencies in both countries, after steep deprecation in the previous years, have appreciated significantly in the last few months.
There is a clear euphoria of business-friendly governments coming at helm in both countries. Now with the global economies out of recession, these governments realise that its high time to have clearance sale in South Asia for investors from east to west. Global powers are not far behind. While the United States has long courted India as its regional strategic partner and business market (read 300 million+ Indian middle class), now China has shown great love by committing tens of billions dollar for investment in Pakistans mega transport infrastructure and energy projects.
The thaw in diplomatic relations is visible following PM Nawazs sojourn to New Delhi for PM Modis inauguration late in May. Will that goodwill, which gave rise to the Shawl-Sari diplomacy, lead to opening up of economic borders is not clear yet.
But the respective changes in the economic landscape of both countries are very much in the offing.
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