State Bank of India – the country’s largest commercial bank – might set up a presence in Pakistan, while United Bank of Pakistan could be allowed to open branches in India. - File photo

THERE is a sudden momentum in improving trade and business ties between India and Pakistan. And September is witnessing a host of crucial events that are expected to trigger dramatic changes in bilateral relations between the two South Asian neighbours.

There is a flurry of activities in both the political and commercial capitals of the two countries, as ministers, bureaucrats, business lobbies and business leaders are working overtime to ensure that these landmark developments are sealed and executed as soon as possible.

Both governments are now doing their best to cement the trade and business relationship, strained for several years following an aggressive political agenda. While Makhdoom Amin Fahim, Pakistan’s commerce minister, is expected to visit India later this month and make an announcement about the granting of most-favoured nation (MFN) status to India, a team from the Reserve Bank of India (RBI), the country’s central bank, will meet its counterparts in Karachi to discuss the possibility of allowing banks from the two countries to open branches.

“India is keen to engage more with Pakistan and develop deeper economic linkages,” Anand Sharma, India’s commerce minister, said last week while addressing the first meeting of the South Asia Forum (SAF). “That will give more depth and width to our relationship. India, on its part, needs to do a lot more in the South Asian regions.”

According to him, the time has come to take a call on reduction of barriers to trade. “The South Asian Free Trade Area (SAFTA) is moving forward on the path of economic integration and India should give full support so that the region realises its full potential,” he added. The meeting was hosted by India’s external affairs ministry and the Federation of Indian Chambers of Commerce and Industry (FICCI).

South Asian Forum was mooted at the 16th SAARC summit in Thimpu in 2010 with the ultimate objective of achieving a South Asian Economic Union. Its aim is to bring together leaders from government, business and civil society to exchange ideas on a common South Asian economic union.

Importantly, for bilateral trade ties between India and Pakistan, Sharma said, India would lower its peak tariffs under SAFTA in a transparent manner for imports from Pakistan. The peak rates would be lowered to eight per cent on 94 per cent of its tariff lines by next January and five per cent by January 2013. The roadmap for lower tariffs was laid down at a meeting of the India-Pakistan joint working group on economic, commercial cooperation and trade promotion held in Delhi in August.

And next month, India would meet its commitment of reducing tariff lines under the sensitive list by 20 per cent as per the SAFTA agreement, added Sharma. The SAFTA, signed by member-nations of the South Asian Association for Regional Cooperation (SAARC) – a group that includes India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan, Afghanistan and the Maldives – aims to reduce customs duties on all traded goods between the eight countries to zero by 2016.

India allows zero-duty access for the least developed countries (LDCs) of SAARC – which excludes Pakistan and Sri Lanka – for nearly 97 per cent of total tariff lines. It is also committed to bring down the list of sensitive items – now numbering 431 for LDCs and 848 for non-LDCs – by 20 per cent. Items in the sensitive list are not subject to preferential tariff cuts.

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WHILE India has been aggressively pursuing trade with the rest of the globe, including economic blocs such as the European Union and the ASEAN, it has lagged behind in improving ties with its immediate neighbours in the SAARC. India’s trade with the SAARC countries adds up to a mere $13 billion, of its total international trade of $600 billion.

Similarly, while Indian businesses have invested a whopping $100 billion in other parts of the globe, they have put in just about $10 billion in the SAARC. Sharma admits that “this clearly brings out the imperative of creating a more conducive investment climate, a more harmonious linkage between our industry bodies and a strong political commitment for an integrated South Asia.”

While South Asia is among the fastest-growing regions in the world – this year it is expected to clock in a growth rate of eight per cent – it is also one of the most impoverished in the globe. Of the 1.65 billion people in the region, nearly 600 million live on less than $1.25 a day. There are more than 250 million undernourished children in South Asia. According to the World Bank, the region is also the least integrated in the world in economic terms.

Though India and Pakistan are the two biggest economies in the region, bilateral trade ties between the two have been negligible. Bilateral trade between the two is worth over $2 billion; the Federation of Indian Export Organisations (FIEO) estimates this could jump to $10 billion in three years if the barriers are removed.

Besides official trade between the two countries, there is a lot of trade that passes through third countries including Dubai in the UAE. But the land border is now emerging as a major trade route. According to Jyotiraditya Scindia, India’s minister of state for commerce and industry, India exported Rs7.59 billion worth of goods (about $165 million) through the Attari-Wagah border (both land and rail routes) in 2010-11, and imported goods worth Rs20.62 billion (about $445 million).

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BILATERAL trade ties will get a boost once issues such as MFN status to India, liberalisation of the visa regime to businessmen and the question of allowing banks from the two countries to open branches are sorted out.

The visit by Pakistan’s commerce minister Fahim, who is expected to be in India – including Mumbai and Bangalore – later this month along with a large business delegation, will see many of these pending issues being taken up, especially during his interactions with Sharma.

While India is pushing for Pakistan granting it MFN status, the latter also wants India – which has granted MFN status to Pakistan – to open its market further to its exporters.

Both countries are expected to introduce a liberal business visa regime, including allowing multiple-entry visas, to ensure stronger business ties. India is also expected to remove its ban on capital inflows from Pakistan, and also Indian businesses to invest in Pakistan.

Officials of the central banks of the two countries are expected to meet in Karachi later this month to discuss measures on how to improve banking relationships. At present, banking relationship between businesses in the two countries are conducted through banks based in New York.

Once the various issues were sorted out by the central bankers, the select banks from the two countries might be allowed to open branches.

For instance, State Bank of India – the country’s largest commercial bank – might set up a presence in Pakistan, while United Bank of Pakistan could be allowed to open branches in India.

India is also not expected to raise objections at the World Trade Organisation’s council for trade in goods on the time-bound waiver on trade preferences offered to Pakistan by the European Union, which envisages duty-free exports of a range of goods from Pakistan.

Indeed, the next few weeks will see several major developments that should hopefully result in increased trade and investments between the two South Asian neighbours, which would augur well for SAFTA.