India has allowed investment from Pakistan in what is being hailed as a landmark decision to further improve trade ties between the two long-time nuclear rivals. A statement from the Indian Commerce Ministry announced that "the government of India has reviewed the policy...and decided to permit a citizen of Pakistan or an entity incorporated in Pakistan to make investments in India, under the government route, in sectors/activities other than defence, space and atomic energy." Pakistan has no India-specific restriction. But India always had. And this was taken up by the Pakistan side just four months ago and India has now removed this barrier. Analysts maintain that this step is in the right direction and would go a long way in silencing the critics of the agreement to grant India the Most Favoured Nation status by Pakistan by the end of this calendar year which would allow India to export 7,500 tariff lines to Pakistan - a marked increase from the current 2,000. The immediate response to this announcement therefore was extremely positive from both sides of the border. Two facts need to be noted before assessing the pros and cons of this decision. Pakistan was the only country in the world that faced such curbs to investment in India. The notification allowing investment by Pakistan was issued by the department of industrial policy and promotion equivalent to the Board of Investment in Pakistan - the mandate to provide approval to all foreign investment after due clearance from other government department. It has been reported in the Indian media that this approval would be forthcoming only after the Foreign Investment Promotion Board has received inputs from defence as well as home ministries. Given these two factors one is compelled to dampen one's enthusiasm a bit till this policy decision brings some positive results as the prospect of refusal to grant a no-objection certification to any prospective Pakistani investor may become yet another non-tariff barrier that India has in place for Pakistan. The single most obvious question doing the rounds is whether the decision is a one-way street or in other words will the Indian government allow an Indian citizen or entity incorporated in India to also invest in Pakistan. There are no India-specific restrictions imposed by the Pakistan government on Indian investment and Pakistan allows 100 percent repatriation of capital. However, this does not mean that there will not be foot dragging by other departments such as Ministry of Interior and its security agencies in allowing India investment. Universities are not allowed to have Indian visiting professors. There is no clarity whether the Indian government allows its citizens to invest in Pakistan or vice-versa. One would hope that any restrictions, written or otherwise, must be removed by the both sides including the mental block from a security angle. There is also the valid argument that Indian investors at this point may not be keen to invest in Pakistan because of the same problems that are facing our local investors. However, an Indian investor may be interested in portfolio investment as P.E ratio of Pakistan corporates are enticing. Due to poor forex reserves, Pakistan entities require State Bank approval to invest up to 5 million dollars abroad; and ECC approval if the investment amount is over this threshold. India with its comfortable forex reserves position may not have such restrictions but formal approval from Reserve Bank of India would still be needed to remit dollars abroad for investment. It is not clear whether RBI has Pakistan-specific barrier. While Pakistan-India's legal trade is estimated at around 2.7 billion dollars only, and heavily tilted in favour of India to boot, yet unofficial trade through third countries is estimated at 10 billion dollars. This, of course, does not include smuggling across the border, which is considered to be significant despite the heavily militarised border. If the unofficial trade figures are translated into official trade then it would not only benefit the people of India and Pakistan through cheaper available products, due to lower transport costs, but also promote related economic activity including transport sector between the two countries as well as raise revenue of the two governments in terms of higher sales tax collections. However, to create the right environment, officials on both sides need to be convinced that it is a win-win for both sides when regional trade expands and regional trade bloc becomes stronger. Although, no match for China's manufacturing base, India's is quite big as compared to Pakistan's. Moreover, India has a 350 million-strong middle-class. A significant part of Pakistan's population too has a strong purchasing power. Pakistanis can learn a lot from their Indian counterparts. Both sides need to make progress on minimising political differences to place growth of economic relations on a more sustainable basis. Perhaps, the forthcoming visit of the Indian Prime Minister Manmohan Singh to Pakistan will give a further boost to better relations between the two South Asian neighbours.
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