Escalating economic divide with India

The following is the first part of a two-part series of articles highlighting the differences between the economies of India and Pakistan.

India’s emergence on the world stage, hosting the G20 summit to landing on the moon, with the international community blatantly disregarding significant human rights violations by the Modi administration should compel Pakistani officialdom to serious introspection.

The recent Canada-India spat on allegations of Indian official involvement in the murder of a Canadian - a prominent Sikh separatist - has not led the West to denounce Modi as it did the Saudi crown prince in the aftermath of the murder of Saudi journalist Kashoggi in Turkey; the UK has already intimated that trade talks with India would proceed as scheduled.

Had such a charge been levelled against Pakistan, Western governments would have been quick in their unequivocal denouncements, so argue domestic political pundits, adding that India is clearly no longer in the same league as Pakistan. The obvious reason is the escalating economic divide between the two arch rivals.

India was bailed out by the International Monetary Fund (IMF) seven times and the last bailout availed was in 1991-92 with all repayments completed by 31 May 2000, twenty-three years ago. Pakistan is currently on the twenty-third Fund programme, is labelled a perennial borrower by Fund staff, and “friendly” countries have clearly indicated that they would no longer extend pledged assistance (rollovers or new loans) until and unless the country is on a rigid reform agenda, closely and regularly monitored by the IMF.

India’s score in environment, social and governance (ESG) versus Pakistan is in the table below:

=================================================================================================
Environment, Social and                     India                                        Pakistan
Governance
=================================================================================================
Political stability and right   5-with a percentile rank below         5 - with a percentile rank
                                    50 for the respective             below 50 for the respective
                              governance indicator, this has a     governance indicator, this has
                               negative impact on the credit .    a negative impact on the credit
                                           profile                                        profile
Law, institutional and             5 (+) with a percentile               5-with a percentile rank
regulatory control and         rank above 50 for the respective           below 50 for governance
control of corruption           Governance Indicators, this has    indicators this has a negative
                               a positive impact on the credit          impact on credit profile.
                                           profile.
Human rights and political     4 (+) - with a percentile rank            4-with a percentile rank
freedoms                         above 50 this has a positive         below 50 for the respective
                                   impact on credit profile.     governance indicator, this has a
                                                                    negative impact on the credit
                                                                                          profile
Creditor rights                4 (+)-a record of more than 20        4-willingness to service and
                                years without a restructuring         repay debt (but as Pakistan
                              of public debt, which is captured  participated in the Debt Service
                                in our SRM variable, this has      Suspension Initiative in 2020,
                                a positive impact on the credit     this has a negative impact on
                                           profile.                           the credit profile.
=================================================================================================

The differences between the two economies are therefore stark and are widening with the passage of time. Pakistan has yet to embark on an in-house out of the box reform agenda designed to get the economy out of the ongoing impasse and thereby narrow the growing economic divide with India.

Instead, the country continues to rely on support from multilaterals/bilaterals whose calls to end the elite capture of resources and allocations continue to be ignored while their emphasis on full cost recovery, translated into passing on the buck onto the hapless consumers, is being implemented, which is the root cause of public discontent today.

Fitch rating agency affirmed India’s BBB negative rating with outlook stable on 8 May 2023 reflecting strength from a robust growth outlook, resilient external finances (584 billion dollars as on 21 April 2023) that were nonetheless offset by weak public finances with central government planned fiscal deficit at 5.9 percent of GDP in fiscal year 2024 against 6.4 percent in fiscal year 2023 by a cut in subsidy spending before the national elections scheduled next year.

Modi opted to cut subsidies the year before elections, sound economics, to accommodate higher subsidies in the election year. Be that as it may, the Indian government is in no way liable to explain its expenditures to the Fund or any other multilateral/bilateral, unlike Pakistan.

Pakistan was rated at CCC negative on 14 February 2023 and upgraded to CCC positive on 10 July 2023 – an upgrade not due to implementation of out of the box reforms with the capacity to improve the performance of key macroeconomic indicators but because of reaching the staff level agreement (SLA) on the Stand By Arrangement (SBA) with the IMF on 29 June 2023 which “would improve external liquidity and funding conditions.”

The SBA envisaged going back on the IMF driven reforms that were violated by the Dar-led finance ministry and held up the ninth review of Pakistan’s Extended Fund Facility programme, and include addressing shortfalls in government revenue (estimated at 200 billion-rupees in addition to what was budgeted prior to the SLA), energy subsidies (raising tariffs to meet full cost recovery criteria) and policies inconsistent with market determined exchange rate, including import financing restrictions.

Fitch further contended that “Pakistan has an extensive record of going off-track on its commitments to the IMF”. However, there are pre-caretaker and post-caretaker setup measures that should be a cause of concern as they may possibly delay an SLA on the first review scheduled for late November/early December: (i) over 50 billion rupees earmarked for parliamentarians with sizeable disbursements by the Dar-led finance ministry, budgeting an unrealistic 650 billion-rupee provincial surplus and an inexplicable rise in current expenditure of 53 percent from the budgeted amount last year and 26.5 percent from the revised estimates of last year; (ii) pledged reduction in current expenditure of 80 billion rupees by the previous government in all likelihood would be adjusted in a further reduction in development expenditure, with obvious negative ramifications on growth, as would the 80 billion rupees earmarked to encourage remittance inflows through legal channels announced by the caretaker Finance Minister, though time will tell whether these incentives would be effective; (iii) subsidies in the budget were not adjusted in the revised post-SBA budget uploaded on the Finance Division website though they may have been pledged to the Fund; and (iv) the ongoing crackdown in the foreign exchange and commodities markets early this month limits itself to targeting speculators and does not translate into a policy designed to reducing imported inflation to ease growing public discontent as this would lead to a resurfacing of balance of payments issues.

India’s current account deficit is projected to narrow to 2.3 percent of GDP with a 1.24 percent of GDP forecast for 2024 – a projection driven by “robust services exports and buoyant remittances combined with moderating goods deficit from declining oil prices.” And Fitch noted that though the Indian government debt - with government interest payment/revenue ratio of around 27 percent in 2023 - is a structural weakness yet “India’s public finance risks are mitigated in part by limited reliance on external financing.”

For Pakistan, Fitch’s outlook is concerning on two counts. First, the government expects 25 billion dollars external funding (1.5 billion dollars in market issuance and 4.5 billion dollars in commercial borrowing – both expected to prove challenging) against 15 billion dollars in public debt maturities - including one billion dollars in bonds and 3.6 billion dollars to multilateral creditors though the expectation is that rollover of 9 billion dollars from friendly countries would again be rolled over in 2024.

And second, “the Current Account Deficit could widen more than we expect, given continued reports of import backlogs, the dependence of the manufacturing sector on foreign inputs, and reconstruction needs after last year’s floods.

Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favourable parallel market exchange rates.”

To conclude, the disparity in economic achievements is simply too wide to be bridged in less than a decade of sustained commitment by Pakistani officialdom to wean the country off foreign assistance, to end annual massive government dis-savings that would provide space for the private sector and to acknowledge the link between the rule of law, institutional and regulatory quality and peaceful political transitions.

Copyright Business Recorder, 2023