KARACHI, Feb 25: Regional tensions have emerged as an important impediment in increased private capital flows, specially foreign direct investment and add to drags on sovereign ratings of both India and Pakistan.

Sovereign ratings of both the countries have languished well below investment grade, with Pakistan’s currently six notches below Standard and Poor’s B-Stable and Moody’s Caa I and India’s two notches adrift of S&B BB\negative and Moody’s Ba2, says an ABN-Amro report.

Press reports from India on the eve of the new budget expected on February 28 say that “the investment confidence is at a low ebb” and fiscal deficits remain “alarmingly high”. Stock brokers complain that no projects are being launched.

The massing of the Indian troops in offensive posture on Pakistan’s border has so far cost the Indians five times the expenditure incurred on the defensive response taken by Pakistan, reckons a Pakistani official.

According to ABN-Amro, the disclosed defence expenditures total 4.5 per cent of the GDP in the case of Pakistan ($18 per capita) and around 2.5 per cent of GDP for India ($9 per capita). In contrast, social spending totals less than three per cent of GDP for Pakistan and close to two per cent for India (central government spending).

Traditionally, trade within the Saarc region has been hostage to tensions between India and Pakistan. A World Bank report reveals that intra-Saarc exports amounted to only five per cent of the total member country exports as of 1998, as opposed to 20 per cent for ASEAN.

The inflation rate has fallen to the lowest rate since decades to 1.13 per cent in India, worrying analysts that it pointed to a recessionary trend in the economy. The growth rate was four per cent in last fiscal when a consistent 10 per cent growth rate is needed to eradicate poverty. India has one billion people living below the poverty line.

Indian industrial output grew 2.3 per cent in August- December 2001 as compared to 5.8 per cent growth in the corresponding period last year. The trend of declining growth is continuing. Similarly, Pakistan’s inflation rate is down to 2.6 per cent, growth rate is expected to be around 3 per cent and the country has suffered industrial stagnation as result of September 11 fall out, Afghan war and finally tensions on the borders with India.

Both the countries are carrying unsustainable economic burden of regional tensions.

As global efforts to defuse the crisis appear to be well on the way to success, analysts at the ABN-Amro are taking an optimistic view: “In the long term, there appears to be a silver lining for the region as a whole— a real chance for durable peace.”

In the immediate terms, in the hype of bellicosity, the analysts concede that it may not seem likely that both India and Pakistan could be standing on the edge of peace rather than on the precipice of war. Yet, they believe that it would be more useful to focus on the “peace dividend” that can finally be at hand in a region torn by conflict.

If the leaders from the two countries can be persuaded to grasp the chance for peace—and a place in history—this region will be well served. It would require sustained commitment from the international community—principally from the United States—how to convert threat of war into a chance for lasting peace.

While one cannot be overly optimistic on the issue, these analysts add nevertheless that the threat of a nuclear conflagration in a region housing almost one-fifth of the global population, cannot be ignored for too long.