SUMMIT: Economic Issues
by B.Raman
Liberalisation, but not normalisation.
That is emerging as the likely Pakistani strategy on
economic relations between the two countries during the forthcoming Agra
summit between the Indian Prime Minister, Mr.A.B.Vajpayee, and Gen. Pervez
Musharraf, Pakistan's self-styled Chief Executive and President.
Since 1993, the question of the grant of the most
favoured nation (MFN) status to India, in reciprocity to a similar status
already unilaterally granted by India to Pakistan, and the normalisation
of bilateral trade relations has been under periodic examination by the
regimes of Mrs. Benazir Bhutto (1993-96), Nawaz Sharif (1997-99) and
Musharraf (since October 1999).
The demand for normalisation has come from the business
class, particularly from Pakistan's textile industry, which is short of
funds for the modernisation of the industry and is not in a position to
import modern machinery and spare parts from its traditional suppliers,
which are mainly Japan, China, the UK and Germany.
To modernise the textile industry so that it is in a
position to compete with the textile industries of other Asian countries
by the end of the year 2004, when the present export/import quota
restrictions are expected to be phased out, the Musharraf Government, in
association with the textile industry, has drawn up a Textile Vision 2005
project for implementation on a crash basis. This project, which
intends to modernise and overhaul the industry, is estimated to cost US $
5 billion.
Neither the Government nor the textile industry has this
kind of money. Nor is it likely to have it in the near future.
The economic sanctions imposed by the US and Japan and Pakistan's bad
credit rating because of its huge external debt (US $ 38 billion) make it
unlikely that the industry would be able to raise the required money
overseas. Except China, no other country is prepared to offer the
Pakistani industry credit facilities to finance the imports.
The textile industry, therefore, feels that a way out
could be to allow it to import the machinery and spare parts from
India. It has assessed the quality of the machinery produced in
India to be as good as that produced by its traditional suppliers and less
costly. Transportation costs would also be considerably less.
It has, therefore, been pressing that the Government
should either grant the MFN status to India and normalise trade, thereby
facilitating the import of textile machinery or exempt the textile
industry from existing restrictions on normal trade with India. The
All-Pakistan Textiles Mills Association had again taken up this subject
strongly with Shaukat Aziz, the Finance Minister, when he asked for
suggestions from all industries before finalising his budget for 2001-02
last month.
The opposition to the grant of the MFN status has mainly
come, in the past as well as now, not only from the religious political
parties, the jihadi organisations and the ulema, but also from the
economic managers, the Foreign Office, the Inter-Services Intelligence (ISI)
and many retired bureaucrats. Lt.Gen.Mahmood Ahmed, the present
Director-General of the ISI, like his predecessors, has been one of the
strongest opponents. So is Abdul Sattar, the Foreign Minister.
Even before Sattar became the Foreign Minister under Musharraf in October
1999, he was in the forefront of the campaign to oppose this.
The oppositions is based partly on political/religious,
partly on economic and partly on security grounds. The
political/religious argument is as follows: After having demanded at
almost every meeting of the Organisation of Islamic Conference (OIC) since
1993 that the Islamic nations should impose economic sanctions against
India for the alleged violations of human rights in Kashmir, how could
Pakistan grant India the MFN status and remove the existing curbs on
bilateral trade?
Before joining the Government in October,1999, Sattar
had said: ""Pakistan has so far used trade as part of an
integral policy towards India…Tensions and perceptions of threat to
security do not permit normal, good-neighbourly relations in any
field…The assumption cannot be that past policy (of linking trade with
Kashmir) was wrong; that our political leaders, professional analysts and
public opinion were misguided; and that, now, all of a sudden, the
Government has attained enlightenment, so that regulation and caution
should be discarded in favour of free and even preferential trade with
India."
The economic arguments run as follows:
* "We, as a nation, cannot compete with India.
Our industry needs reform and restructuring to be competitive.
Necessary studies must be conducted first."
* "Though multilateral and regional agreements
must be honoured, a detailed and serious study of the issue is
necessary. There is no room for urgency at the moment."
* Pakistan should learn from the experience of
Bangladesh, whose markets have been flooded with Indian goods without
its drawing any corresponding benefits for its exports to India.
* Despite the present curbs, the Pakistani market is
already being flooded with Indian consumer articles procured by
Singapore-based firms and re-exported to Pakistan. Even after
paying the customs duty, their prices are much lower than those of
quality goods made in Pakistan. Such instances of dumping, to the
detriment of Pakistani industries, would increase if the policy was
reversed.
* Pakistan is not bound to give MFN status to India
just because India has extended it to Pakistan. It can definitely
deny it or make it conditional under Article 24, paragraph 11 of GATT
1994 relating to special arrangements for trade between India and
Pakistan. According to the opponents, this para says: "Taking
into account the exceptional circumstances arising out of the
establishment of India and Pakistan as independent States and
recognising the fact that they have long constituted an economic unit,
the contracting parties agree that the provisions of this agreement
(GATT) shall not prevent the two countries from entering into special
arrangements with respect to the trade between them, pending
establishment of their mutual trade relations on a definitive
basis."
The argument of the security establishment is : After
having repeatedly accused India of infiltrating terrorists into Karachi
and Punjab for destabilising Pakistan, how could Pakistan allow the free
flow of vehicular traffic across the border, which would inevitably follow
a greater flow of trade?
These arguments, which were used during the tenures of
Mrs.Bhutto and Nawaz to scuttle moves for trade normalisation, are now
again being used to oppose any change in the policy of no normalisation of
bilateral trade relations till the Kashmir issue is resolved. Musharraf
does not appear to be in a position to overrule the opponents and order a
policy change. Shaukat Aziz and Abdul Razaak Dawood, the Commerce
Minister, have already ruled this out .
At the same time, there have been indications of a
likely willingness of Musharraf to consider possible liberalisation of the
existing restrictions without granting the MFN status to India and without
totally normalising trade relations. Musharraf had already decided
last year, without any opposition from the ulema and the religious
political parties, to treat the Iran-Pakistan-India gas pipeline project
as a stand-alone issue without linking it to the issue of trade
normalisation. There are now indications that the Government might
be prepared to expand the list of articles which could be imported from
India and that it would continue to implement the policy initiated by
Nawaz of gradually reducing the import duties on the articles figuring in
the list. The list presently has 573 items. However, the ISI
and other security agencies are believed to be still opposing large-scale
goods movement by road.
The proposal for the gas pipeline through Pakistan,
which was suggested by Iran, has been under consideration since
1994. While the Benazir Bhutto Government agreed to a feasibility
study being conducted by the National Iranian Oil Company in association
with Australia's Broken Hill Proprietory (BHP) and Shell, there was strong
opposition during her regime as well as during the regime of Nawaz from
the Army and the ISI to Iran's proposal to take the pipeline to India on
the ground that the supply of Iranian gas to India would strengthen the
Indian economy and, hence, would not be in Pakistan's national interest.
There was also opposition from Pakistan's economic managers on the ground
that the Iranian gas, to be supplied to Pakistan through this pipeline,
would be 40 per cent costlier than gas from Turmenistan.
The feasibility study got stalled because Teheran felt
that a pipeline to meet only the gas requirements of Pakistan would not be
profitable. Musharraf, who as the Army Chief under Nawaz strongly
opposed the extension of this pipeline to India, changed his mind as the
Chief Executive grappling with an economy on the verge of collapse.
The proposal was revived by Teheran during Musharraf's
visit to Iran in December, 1999. The General and Sattar, who had
accompanied him, reportedly saw this proposal as also an opportunity to
remove the tensions in the relations between Teheran and Islamabad.
On his return to Islamabad, the General set up a committee consisting of
officers of the GHQ and the Ministries of Commerce and Petroleum to
re-examine the original Iranian proposal for the pipeline to India.
The committee recommended that the proposal be accepted
in principle and Musharraf sent his Secretary for Petroleum to Teheran in
March, 2000, to convey this to the Iranian authorities. Islamabad
reportedly suggested to Teheran that it should draft a memorandum of
understanding to be signed by Iran, Pakistan and India providing for an
international monitoring of the pipeline to remove Indian concerns over
possible disruption of the gas supply by Pakistan. It was reported
that, at the same time, Pakistan made it clear to Iran that it would not
agree to any Indian inspection of the pipeline in Pakistani territory.
In April 2000, Iran requested Pakistan for a formal
communication in writing of its acceptance of the proposal in principle
before it could discuss the matter with India. While addressing the
Economic Co-operation Organisation (ECO) summit at Teheran on June
10,2000, Musharraf said: " We are hoping for perfect
understanding among the member-countries of the ECO. That is why we
have recently signed a document giving our agreement to the gas line
project linking Iran, Pakistan and India. "
Since then, Musharraf has been justifying the project on
the following grounds:
* The annual gas transit fee of US$ 600 million to be
paid by Iran would partly alleviate Pakistan's foreign exchange
shortage.
* Pakistan could get Iranian assistance for the
construction of an oil refinery in Pakistan and Iranian POL supply at
concessional rates.
Even if the forthcoming summit leads to an agreement on
the gas pipeline issue, the pipeline is unlikely to materialise till the
normalisation of Iran's relations with the US and the removal of US
sanctions against Iran. Iran is not in a position to find the
required money for investment in the project from overseas creditors due
to the US sanctions. Moreover, it is believed that the US sanctions
prohibit the supply to Iran by foreign companies of not only military and
dual-purpose equipment produced with US licence, but also other equipment
and technologies. This could create difficulties in the procurement
of the required equipment, materials and technologies by Iran and the
foreign (non-US) companies to which it might entrust this contract.
It is believed that another project for the construction of an Iranian oil
refinery in Pakistan has remained stalled since 1994 due to the US
sanctions against Iran.
Therefore, the pipeline project is not for tomorrow,
even if there is an agreement at the summit. There is a more hype on
this project in New Delhi than in Pakistan.
The "Nation" of Pakistan ( June 9) wrote: The
main obstacle in the gas pipeline project is not India's security concern,
but lack of interest on the part of international investors. No
heavyweight operator in the world's oil and gas sector would be able to
get the clearance of the US when Iran would be a major beneficiary.
In the debate in India on whether India should agree to
the project, the focus has been on the question of the security of the
supplies. Amore important consideration, which has not received the
attention it deserves, is: The project, if and when it materialises,
would, at least partly, mitigate Pakistan's economic hardships, thereby
enabling it to buy more missiles from North Korea and to provide more
funds to the jihadis. So long as Pakistan continues to wage its
proxy war against India, is it in India's national interest to help it
come out of its economic crisis?
(The writer is Additional Secretary (retd), Cabinet
Secretariat, Govt. of India, and, presently, Director, Institute For
Topical Studies, Chennai. E-Mail: corde@vsnl.com
)
