THE year 2001 witnessed more than its usual share of the established pattern of “highs” and “lows” in India-Pakistan relations. The year began with high hopes of peace which reached their crescendo during the July summit meeting between Indian Prime Minister Atal Behari Vajpayee and Pakistani President Pervez Musharraf in Agra and ended with an open talk of war between the two countries.

During the first half of the year India-Pakistan ties showed ample signs of a genuine thaw. Under growing international pressure to defuse tensions along the Line of Control in Kashmir and to address New Delhi’s concern regarding “cross-border” terrorism, Islamabad officially announced on December 2, 2000, that “its armed forces deployed along the LoC will observe maximum restraint. Islamabad also called upon New Delhi to initiate consultations with the leadership of the All Parties Hurriyat Conference (APHC) to prepare the ground for “the commencement of tripartite negotiation between India, Pakistan and the APHC.” Islamabad’s moves to observe full restraint along the LoC came in response to New Delhi’s decision to observe unilateral ceasefire against the Kashmir militants during the holy month of Ramazan.

Building up on these positive moves, Indian Prime Minister Atal Behari Vajpayee extended an open-ended invitation to Pakistani president to come to India in his “Musings from Kumarakom.” Mr Vajpayee not only talked of his personal desire to seek “innovative approaches” toward the Kashmir issue but also clearly stated that “India is willing and ready to seek a lasting solution to the Kashmir problem. Towards this end, we are prepared to recommence talks with Pakistan at any level, provided Islamabad gives sufficient proof of its preparedness to create a conducive atmosphere for a meaningful dialogue.”

Islamabad positively responded to this offer of top-level talks, which was conveyed to General Pervez Musharraf by the Indian High Commissioner in Islamabad, Mr Vijay Nambiar when he met the Pakistani leader on January 14, 2001. On May 23, New Delhi sent a formal letter of invitation to General Musharraf for a visit to India to hold talks with Prime Minister Atal Behari Vajpayee on “ all outstanding issues, including Jammu and Kashmir.”

Islamabad accepted the invitation a week later emphasizing the need for the two sides to “do their utmost to overcome the legacy of distrust and hostility, in order to build brighter future for our people.”

General Musharraf visited India from July 14 to 16, 2001 under the full gaze of the global media. His characterization of Kashmir dispute as the “core issue” coupled with his insistence that there could be no enduring peace between India and Pakistan unless it was addressed by both sides in a meaningful, “result-oriented” manner led the hawks in India to hold back Prime Minister Vajpayee from signing an agreed draft of a joint statement which, among other things, said that the “settlement of the Jammu and Kashmir will pave the way for the normalization of Indo-Pakistan relations.” The missed opportunity for peace in Agra was followed by enhanced militancy in the Indian-occupied Kashmir and its brutal suppression by the Indian security forces. India-Pakistan relations turned chilly as both sides accused each other of subverting peace in Agra.

India-Pakistan ties experienced new turbulence in the wake of the September 11 terrorist attacks on the United States. New Delhi’s characterization of Islamabad as the “biggest source of terrorism” in South Asia led General Pervez Musharraf to publicly tell India to “lay off.” Following the October terrorist attack on the State Assembly in Srinagar in Indian-held Kashmir in which 40 people were killed, Indian army shelled eleven Pakistani border posts along the LoC as a “punitive strike” for Islamabad’s perceived support for terrorist activity against India. Two days later on October 17, Islamabad announced that its armed forces had been put on high alert in view of the forward movement of some of the Indian troops and air force assets.”

Alarmed by these escalatory moves, American President George Bush called upon India and Pakistan to “stand down” and his visiting Secretary of State Colin Powell told the feuding neighbours to resume their stalled dialogue.

The relations between India and Pakistan reached their lowest ebb after the December 13 incident of terrorist attack on India’s parliament in which over a dozen people, including five security guards, were killed. Despite Islamabad’s swift and strong condemnation of the attack, Prime Minister Vajpayee accused Islamabad of supporting Kashmir militant outfits Lashkar-i-Taiba and Jaish-i-Mohammed whom he blamed for carrying out the attack. Islamabad denied these allegations and accused New Delhi of “stage-managing” the attack to discredit the Kashmir struggle for freedom and also to give a bad name to Pakistan as a state supporting terrorism.

Having warned Islamabad of dire consequences if it failed to address New Delhi’s concerns regarding cross-border terrorism, especially the arrest and handing over to India of Maulana Masood Azhar, head of Jaish-i-Mohammed, who was released from Indian prison as a swap for a hijacked Indian Airliner in late December 1998, India announced that it had begun deploying troops along its border with Pakistan and that its short-range missile had been put “in position.” New Delhi also rejected Islamabad’s eminently sensible call for an independent investigation of the December 13 attack on Indian Parliament and described as “ cosmetic” Islamabad’s decision to freeze the financial assets of Lashkar-i-Taiba and Jaish-i-Mohammed and to detain the latter’s leader.

Worried that a shooting war between India and Pakistan will derail its ongoing military campaign against Al-Qaeda network of terrorism in Afghanistan, Washington repeatedly called on India and Pakistan to exercise restraint. Following New Delhi’s decision to recall its envoy from Pakistan and announcement of tit-for-tat economic and diplomatic sanctions by both sides. UN General Secretary Kofi Annan called on Islamabad and New Delhi to “avoid escalating actions and further statements that could aggravate the situation between both countries.”

Despite these calls for restraint, relations between India and Pakistan remain explosively volatile. Apart from their historic rivalry over Kashmir, entrenched adversarial perceptions and lack of mutual trust, the main factor driving the latest phase of hostility between India and Pakistan is the unprecedented reversal of India-centric American policy approach toward the region triggered by September 11 events.

Much to the chagrin of New Delhi, the strategic ties between United States and Pakistan have not only been revived but Pakistan has also regained its privileged status of a frontline state. New Delhi had neither expected this to happen nor it thought that its sustained efforts to pin the label of a terrorist state on Pakistan would go down the drain so quickly. Contrary to Indian wishes, General Musharraf’s government has not only escaped any retribution for its past close links with the defunct Taliban regime in Afghanistan but is being handsomely rewarded for its central role in the global fight against terrorism. All American curbs against Pakistan have been lifted and Pakistan has regained its lost position of respect and dignity among the comity of nations.

The army-led regime of General Musharraf is no longer an international pariah but is being increasingly perceived to be a force for regional stability and peace in South Asia. Pakistan’s remarkable diplomatic resurgence since September 11, especially the stunning change in its international image from a “failing” state to a stable and pivotal entity, has exposed the limits of Indian diplomacy to influence international events to its own advantage. At a deeper level it also underscores the persistence or zero-sum mindset in New Delhi in which any gain by Pakistan is perceived to be a loss for India. Both India and Pakistan need to overcome these adversarial perceptions. Unless that happens the prospects for peace between them would remain bleak.

IN the last two years General Pervez Musharraf has passed through tough times. But what he is facing now is by far the toughest.

Having committed himself to the world alliance against terrorism, and having reaped rich dividends for his support in the war in Afghanistan, he is now required to pass the final test of this commitment: snap all official and non-official backing of Kashmiri militant groups, and make sure that they end their low-intensity guerrilla war in Indian-held Kashmir.

He has measured up to the initial requirements of this test: Pakistan has frozen the funds of Lashkar-i-Taiba and has curtailed the activities of another outfit, Jaish-i-Muhammad. The government has also worked out comprehensive legal and administrative measures to crack down on the sources of support in men and money to some of the groups fighting in Kashmir. But the real challenge remains. And that is to reach a consensus on a policy away from the traditional approach of allowing a free hand to groups with a strong link to the on-going fight in occupied Kashmir to maintain a strong presence in Pakistan.

There is no denying the fact that the Musharraf government is being driven in the direction of changing Pakistan’s policy towards the Kashmiri groups by the force of world opinion. In today’s global diplomacy no room is left for a fine destinction between factors that separate freedom struggles from terrorism. Nobody is willing these days to put up with groups that use violent means to achieve their goals, no matter how laudable these goals may be. The Kashmiri fighters, who use militant methods to highlight their cause, are no more attracting positive attention. And if Pakistan continues to back them, it too would find itself in a difficult diplomatic situation. General Musharraf does not want that because the country cannot afford it.

There are reports that Washington has told the government that it wants Kashmiri groups to end violence. Violence only begets violence, and would win no approvation.

Washington’s aversion to the use of force by Kashmiris as a means to achieve the end of freedom, or to promote an acceptable a political statement, has a new ring of harshness about it. This is because some groups from Kashmir were also involved in activities inside Afghanistan. Such groups are very few. But they prove that over the years militants fighting in Afghanistan have been crossing into Kashmir and from there back to Afghanistan.

Also, no matter how small the number, it tarnishes the Kashmiri struggle with the taint of involvement of those who either had fought alongside Al Qaeda or had the same jihadi zeal that made the Taliban support Osama bin Laden.

It is this linkage of some Kashmir groups with Afghan militants and also their use of violent means that is behind the new US policy of not sparing them while preparing its lists of terrorist organizations.

It is clear that this mixing of the Kashmiri groups with the Taliban has not done them any good. The US is talking about breaking the network of terrorism, and would not make an exception in the case of the Kashmiris.

This has put enormous pressure on Pakistan. Since September 11, on several occasions, the US has asked Pakistan to rethink its Kashmir policy. Reports also suggest that Washington has handed a list to Pakistan containing names of Kashmiri groups and individuals suspected of links with Al Qaeda. The US wants Pakistan’s cooperation in investigating those on the list to establish whether they had any links with the global terrorist networks.

It is possible that the names on the list are a result of close cooperation between the US and India in the area of counter-terrorism. Washington is relying heavily on Indian information to find out whether the roots and branches of international terrorism also spread to Kashmir. But the point to remember is that Washington will go to any lengths in pursuing its counter-terrorism goals. It would do so regardless of how embarrassing this might become for any member of the alliance against terrorism.

This has emboldened India to move fast on Kashmir. New Delhi is constantly hammering on a parallel between the situations in the Middle East and in Kashmir. In the Middle East, Israel went through the motions of talking to the Palestinians and then blamed them for the failure of the peace efforts. Then, in the second phase, Israel launched a propaganda campaign to define Palestinian fighters as terrorists before starting the third phase of trying to physically eliminate them and declaring a war on the Palestinian Authority.

India has done the same in Kashmir. It has blamed the militants for scuttling peace efforts through violence, has branded them terrorists and now is likely to use more brutal methods to suppress them.

Under ordinary circumstances islamabad’s reaction to Delhi’s shenanigans would have been strong and harsh and could have expected some support in international quarters for that. But not now. India is running along, hard campaign against the Kashmiris to de-legitimize their struggle. Unfortunately, it has been able to use incidents like the recent attack on its parliament to considerable propaganda effect. Islamabad knows that no one from the West would ask Delhi to justify its crackdown on Kashmiris because after all it is fighting ‘terrorism’. This is the global strategic reality that is weighing on President Pervez Musharraf in changing the course of Pakistan’s Kashmir policy.

Ironical though it is, it is to the advantage of President Musharraf that he is acting under this compulsion because he can easily, and rightly, cite the inescapable realities of international politics as forcing his tough and controversial decisions. However, the bigger part of the challenge of adjusting Pakistan’s Kashmir policy, especially its handling of the Kashmiri militant groups, to the new circumstances is to convince the inner sanctum of the military that the options he is exercising are not just compulsions, but have an intrinsic value — which is that both in the short and long terms these would be good for the country, making it stable, more prosperous, enhancing its international image.

In other words, he will have to forge a national and institutional consensus to underpin the changes in Pakistan’s Kashmir policy profile. Only that will ensure that the new policy is not a reaction to world pressure, but a mature and well judged response to changed times.

THE slow but steady impact of the Poverty Reduction and Growth Facility under which the IMF is to give Pakistan 1.3 billion dollars over a three-year period is becoming embarrassingly clear.

A major development to come soon is doing away with 55 tax exemptions from the next financial year, beginning on July 1, with about twice that number to follow in the next two years. The government is to notify the time-frame for taking this unpopular series of steps by March.

A major question which such moves give rise to is: what will be their impact on the manufacturing sector and future industrial investment in a country where large new investment is the need of the hour for its economic survival?

In addition to doing away with the existing exemptions which are said to number about 150, no new exemptions or exceptions are to be provided for in the fiscal sector even if they are regarded necessary for economic progress.

The result of such massive weeding out of the tax exemptions can be a clean industrial regime and a trade pattern without too many distortions. And there will be increasingly less number of SROs instead of the dense jungle of SROs in which trade and industry now grope and eventually seek the assistance of tax experts to bail them out.

We have both extremes in Pakistan: On one side we have too many taxes. They numbered 102 federal, provincial and local government taxes until recently. And on the other side there are massive exemptions, particularly for the public sector units. For example WAPDA and KESC were recently exempted from numerous provincial and local taxes, without extending the same relief to the private sector power producers as they are not in the distribution game.

The healthiest means of doing away with tax exemptions is to reduce the number of taxes and lower the taxes wherever they are too high. But the government’s need for larger revenues is desperate and the government has stopped after withdrawing a few of the provincial taxes.

How trade and industry and the people at large do now know how high and varied will be the city government taxes and local body taxes elsewhere. Even the sea tax, on imports and exports, is pretty heavy and will meet with stiff resistance from trade and industry which are now clamouring for tax relief. Of course, distortions in the economy have to be avoided, on excess of tax exemptions done away with and the fiscal system simplified. But really what matters is their ultimate impact on our slow growing economy and our exports which have been too stagnant for too long with a ten billion dollar target still a distant goal.

In this period of globalization how can Pakistani exporters compete with the rest of the world unless they are provided with a level playing field or unless they are provided with production facilities similar to what their competitors enjoy around the world? That has to be done particularly in the fiscal and monetary spheres in the manner the rest of the world is doing including the US and Japan, are doing to stimulate their economic revival or accelerate economic growth.

And if prior to that, the cost of the industrial inputs is made heavy, as in the case of cotton often and sugarcane, usually, such industries will be severely handicapped and they will not be able to compete with others whose input costs are low. Of course, the growers should be fairly compensated. Otherwise, they will not grow the requisite crops. But if their prices rise far above world prices the industries will be hit hard and finally exports will suffer.

The government which urges trade and industry to accept the challenges of globalization and regard that as an opportunity to export more and make larger profits, have to do three things now. 1. It has to reduce the cost of energy instead of pushing it up to enable WAPDA and KESC to earn more.

Of course both the organizations have large deficits, but the remedy lies in cutting down the heavy theft and loss of power and more efficient management. And the power production units can come up with cheaper power only if the price of oil is reduced by reducing the official surcharge on petroleum and gas which is to rise by Rs 14 billion this year to Rs 47 billion.

Many of the manufacturing units have set up their own power units but that means larger capital costs and higher bank charges or a strain on their resources. 2. Industry needs lower interest rates. At a time when much of the world is paying interest rates between 3 and 6 per cent the rates here are 12 to 14 per cent. And new credit is hard to get for many investors. Export refinance cost has come down from 14 per cent to 12 per cent and then to 10 per cent and finally to 9.5 per cent following last week’s half a per cent cut. But it is still very very high for a country which has real export problems.

3. The tax rates too have to come down. Not all the taxes are high but the multiplicity of taxes makes the tax burden heavy. In fact, a great deal of time is spent in paying the federal, provincial and local taxes. However steps are being taken to reduce some of the taxes, like those paid for labour welfare. The richest country in the world, the US is now lowering the taxes to stimulate its economy and Japan has come up with a series of stimulus packages. Europe too is moving in the same direction.

In addition to the three factors adding to the high cost of production there is the ever-rising level of corruption which inflates the cost of doing business in Pakistan. Look at the restaurants which have to feed the cops of the local police stations regularly to be in business. And look at the corrupt practices of the labour department which is ready to misuse the labour laws.

An unfortunate aspect of our manufacturing sector is the absence of objective studies of the productivity. Official figures speak of production, high or low, but hardly of the increase in productivity. The industrial sector too has not made such studies. Industrialists say with the kind of frequent load-shedding they have along with water shortage it becomes difficult to study proper increase or decrease in productivity.

If we have to compete effectively in this age of globalization and when the textile quotas will vanish within three years we have to lay focus on not only the value-added in each industry but also on increasing productivity. That was the secret of the phenomenal success of the US in the 1990s. The European Union too made productivity gains, though not as much as the US.

Hence the government has to take the lead in making productivity studies and in capital input-output ratios to improve both. Globalization demands distinct and sustained improvements in both areas for Pakistan’s economy to stay competitive.

Right now a number of public limited companies are buying back their shares from the public and making their companies private as they do not want to share the facts of their operations or their real profits with their shareholders.

Nor do they want to be accountable to the Securities and Exchange Commission or the stock exchanges or expose their accounts to detailed scrutiny by the private security companies.

So instead of issuing shares and waiting for public reaction to them they prefer to sell Term Finance Certificates with fixed interest which the public finds more rewarding than the uncertain returns from shares. Too many public limited companies are retreating from the public and becoming closed operations depending on TFCs. This is not a healthy trend but the public prefers selling their shares back at safe prices and then investing in TFCs which are flooding the market.

The IMF which wants most of the tax exemptions to go also want an increase in tax revenues of 1.5 per cent of the GDP in the three-year period, including a 0.3 per cent rise this year, to raise the tax revenue-GDP ratio to 14.3 per cent which is not high.

But we have not been told how much additional revenues withdrawal of the 55 tax exemptions next year or a total of around 150 exemptions in three years will bring.

The IMF also wants lowering of the threshold of the National Savings Schemes for charging withholding tax on the interest income. The small saver stands to lose.

The IMF is emphatic on a fundamental reform of the CBR to save much of the 40 to 50 per cent revenues which goes into the pockets of its officials. Along with that, it wants further broadening of the base of taxation and simplification of the taxation on the basis of the recently promulgated income tax ordinance.

IT’S NEW YEAR’s eve. It’s chilly, but not too windy. Driving through Washington’s historic Georgetown neighbourhood at around 11 pm, you find few revellers on the streets. A stretched limousine stops and disgorges a gaggle of smartly attired young people who disappear into a restaurant. But it’s quiet.

In Georgetown’s twin, Alexandria Old Town, across the Potomac, King Street is beautifully illuminated with decorative lights draped over the roadside trees. But still only small groups of people, bundled up in dark coats but with bright red mufflers. Some of the popular eating and drinking places are closed.

Is it just the cold, you wonder, that has kept people indoors. Or is it that it is still too close to September 11 for much jollity to be in order? Perhaps, you muse, there is also anxiety about possible disruption in crowded public places. Maybe Washingtonians would much rather spend New Year’s eve with family and friends at private parties. Then there’s this, that as the seat of government, the city attracts employees from all parts of the country, and many of them prefer to spend the winter break in their hometowns.

Washington always has had more cars than people on the streets. There is never the hustle and bustle of London pavements or of the European capitals or even New York. But the absence of crowds in Georgetown and Alexandria Old Town is nevertheless a little disappointing. George W. Bush didn’t set much of an example of having a good time: he went to a restaurant in Crawford, Texas, where he is holidaying at his ranch, and, of all things, had a cheeseburger for lunch and said he would turn in by 9 or 10pm. What can you do with a pedestrian president like that, many Americans would have wondered. No corks popping, no Auld Lang Syne.

Yet, before tucking into his burger and onion rings, Mr Bush found time to praise, before reporters detailed to watch over him during the holidays, Pakistan’s latest moves against extremist organizations, and recounted his conversations last Saturday with General Pervez Musharraf and Prime Minister Atal Behari Vajpayee. The phrase ‘damning by faint phrase’ has never rung truer than now. No one seems much bothered right now about asking one vital question: Fine, Mr Bush, you are twisting Pakistan’s arm to crack down on militants and extremists (which the military government and indeed governments before it should have done anyway, without benefit of the US or the Indian prodding), but what about addressing the problem within Kashmir itself?

What happens if Gen Musharraf does everything that is required of him, this friend asks at the Afghan Restaurant to which we repair for refreshments after the night’s tour of the city, and yet nothing changes in Kashmir? Wouldn’t the general be in hot water if the Indians continue with their oppressive policies in Kashmir? Shouldn’t India scale back its military presence in the territory and at least ensure that the forthcoming assembly elections are held fairly and freely and make a determined bid to persuade the All-Parties Hurriyet Conference to take part?

There is a fundamental problem, and at some point will have to be tackled. Otherwise, we will keep on having this alternation of quiescence and confrontation. India has to make peace with Kashmiris, and if it does, Pakistan is now in no mood to quarrel with it.

Obviously there’s isn’t much time to spare in Washington for Kashmir in the current preoccupation with Afghanistan. The questions disappear in a haze of smoke.

“I am going back,” says the owner of the Afghan Restaurant, Hafiz Abbasi, leaning over the bar counter. “I’ve been here 17 years, but I want to return to my country.” Would he have gone back if the Taliban had been removed without Sept 11 happening? That’s a tricky one, and Abbasi gives a non-committal answer.

But many Afghans who left their country after the Soviet intervention or the civil war that followed or when the Taliban took over and came to America are thinking of returning. The sentiment is largely confined to Afghans who have done well here and run fairly prosperous enterprises, so that they will have some money to live on in Afghanistan and also that, when they leave, they will have someone in the family to mind the store and leave room to come back if conditions are found to be uncongenial in Afghanistan.

The worse-off also yearn for their homeland, but do not know how they will manage amidst the economic chaos there. Abbasi informs you that the two brothers of interim Afghan leader Hamid Karzai living here are also planning to go to Afghanistan, and that the enterprising gentleman who started Azadi Afghan Radio has already gone away.

Back at home shortly before midnight, you switch on the television and find Times Square in New York full of people. There, at least, New Year celebrations are in full swing, with thousands packed into the square, according to one commentator. They all had to pass through security checks, and perhaps the mood is not as boisterous as on other New Year eve gatherings. There is also a heavy overlay of patriotism, with the crowd waving American flags and reporters covering the scene recalling the doggedness of New Yorkers in recovering from the September attacks. Outgoing mayor Rudolph Guiliani, who has become something of a modern-day American legend and Time’s Man of the Year, is everywhere on the screen, and at midnight pushes the button for the traditional dropping of the ball, and the year changes.

The Americans say they’ve weathered the storm, The New York Times has finally discontinued Its A Nation is Challenged section. But how, you ask yourself a little despondently, will Pakistan fare in the coming months, with trouble on both its eastern and western borders and within its borders.