Published: The Business Recorder, Pakistan, June 25, 2005

By Pradeep S. Mehta & Huma Fakhar

A foundry equipment manufacturer in India procured an order of Rs 7crores for supplies to a new foundry in Pakistan in 2004. The equipment was routed through Dubai with all signs of India removed from the machinery. The Pakistani importer had to pay at least 17 percent more than what he would have paid if he could have imported the equipment directly from India.

In any case the cost of similar equipment from other countries would have been higher by at least 35 percent, so the Pakistani businessman soundly bought the equipment from India. When he will need to buy spare parts, he would follow the same circuitous route. Similar experiences obtain in many such situations, where goods worth hundred of crores from India and Pakistan are bought through either a circuitous route or clandestine channels.

However, times seem to be changing and the greater social impacts seem to have made everyone alive to the fact that every action does have its rather, grave, economic implications which cannot but be taken into account. Regional and bilateral trade, more often than not, have been the first casualty in cross-border conflicts. It’s a double whammy and therefore, costs tend to be multiplicative rather than additive in their emergence and effect.

A simple back of the envelope calculation of such costs indicates that costs of conflict in addition to the costs of lost trading opportunities more often than not constitute a not so significant proportion of GDP. Had it not been for these costs the impact on social development could have pushed most countries engaged in cross-border conflict a few notches up the HDI. Conflict deterrence, therefore, seems appropriate and a Rupee saved, is therefore a Rupee earned. In times of fiscal stringency with ever widening costs of running a country, such cost cutting efforts are most welcome.

More significant are the costs to the consumer and the producer – the most significant segments of the social dynamo. A look at Indo-Pak trade is rather instructive about the need to make economics central to all our efforts.

Admittedly, Indo-Pakistan trade is competitive rather than complimentary, and according to some trade pundits, there is little scope for expansion. However, a large informal, illegal, border, call it what-you-like trade indicates the contrary.

Though official bilateral trade figures are pegged at slightly less than $400mn, illegal trade is $1.5-2bn. Informal trade, through third country like the foundry equipment purchase, is another $1bn. Some talk of a range of $2-8bn! Official trade figures apart, informal and illegal trade are mere guesstimates. Nevertheless, they indicate the huge potential for trade.

The size of market demand, therefore, cannot be dismissed as piffle. Business on either side hunts for market access, market penetration, market share in all regions except in countries with contiguous borders. Does it make sense or is it force of circumstance? Obviously the latter. Going by the unofficial figures, who wouldn’t want to trade with there neighbours.

In all this number crunching, the plight of the consumer and the producer, be it in India or Pakistan is rather unenviable. The Pakistani consumer pays higher costs virtually for every commodity coming from India, primarily because of a round-about the consignment takes to reach from India to Pakistan. Also, something available in the neighbourhood, is not permitted becomes more costly at the point-of-purchase, being sourced from a costlier supplier. India should consider a preferential tariff and reduced non-tariff barriers formula for Pakistan.

A Bilateral Investment Treaty can readily neutralise the supply side constraints in Pakistan and the fear of being swallowed by the giant Indian economy. At the end of the day despite huge trade deficits countries have not stopped trading with China. Even Nepal, Bangladesh and Sri Lanka have FTA’s with India. If it’s only politics pulling Indo-Pak back, then the new norm needs to be reiterated, which is, economics will drive politics for all future and practical purposes.

India should not be looked as a competitor alone, for sure India will win the numbers game in the short run due to its huge market size, however, Indian market should be eyed as the hub of investments and transfer of technology not alone for Pakistan but for the whole region.

At present, Pakistan, which has one of highest per capita consumption of tea, imports 150mn kgs mainly from Kenya, even though Pakistanis prefer Indian tea. India didn’t buy from Pakistan directly. If it did, as is experienced today, the Chana (chickpea) in our dal in Delhi would be much cheaper being sourced through Wagah than from Maharashtra!!. Zinetac, a patent medicine for acidity, sells in India at Rs 7.20 for 10 tablets; it retails in Pakistan for between Rs 80 and Rs 150.

For decades, Pakistan imports iron ore, rice and sugar from Australia, Indonesia and Brazil respectively. If we take just another example of Suzuki motor cars, Pakistanis pay more than twice as much than what an Indian would do in India. The spare parts of the car are believed to cost nearly seven times as high. Instead, it could have been imported these from India, and enjoyed lower transport costs. Do we see an opportunity here?

Significantly, in times of crisis we knock on our neighbour’s door. In 1990, India helped Pakistan tide over a potato and onion crisis, and during a sugar shortage in 1997, it imported 50,000 tons of Indian sugar. Recently, too, Pakistan sourced meat, tomatoes, onions, garlic and potatoes from India, duty free, to rein in prices and meet domestic demand.

Similarly, in 2003 India sourced enormous consignments of grains from Pakistan due to an emergency. Where else could both have acquired food supplies on an emergency basis but from its neighbour? It is expected that if importers decide to pass through the price differentials domestic prices would drop by 15-20%.

On the other hand, Pakistani industries and engineering sector can benefit from the import of machinery and basic and intermediary raw materials to reduce the costs of capital goods and machinery as well as the finished goods. Pakistani textile industry can be the single biggest beneficiary because Pakistan leads India in coarse counts 20s and below and India leads Pakistan in fine counts 40s and above.

In addition, India needs to source woven fabric from Pakistan; one of the heaviest and more recent investments made by Pakistan textiles sector is in the woven sector, what could be a better market? Allowing the import of capital goods and machinery from each other will offer substantial savings in freight costs and time due to the geographical proximity.

Economics has assumed a pivotal role in the foreign policy exercise among nations since the end of the Second World War. History bears testimony to the fact that even countries of the war-ravaged Europe displayed a vision by deciding to set aside their mutual political and security problems for widening their bilateral and multi-lateral economic interactions.

Let’s learn from the humble housewife, who seems to have more economic wisdom than the political masters of our countries. Buy from the cheapest source, in commercial language called “forum shopping” shopping from the most cost effective forum/source. After all we just happen to be neighbours. What if our politics makes a little noise!