Goodperson
SENIOR MEMBER
- Joined
- Dec 26, 2005
- Messages
- 2,860
- Reaction score
- 0
Very good article from DAWN.
Working with India
PAKISTAN is not likely to solve its resource problem any time soon. It will not be able to increase either its domestic savings rate to invest more in the economy or its tax-to-GDP ratio for the government to turn its attention to provide services to the poor.
With the current domestic rates persisting into the future, the economy cannot expand by more than 3 to 3.5 per cent a year. At that rate the incidence of poverty would continue to increase and the country will become even more socially and politically unstable. This means that for years to come the economy will remain dependent on external capital flows. These, of course, come in several different forms. They come in as official development assistance, the money provided by rich governments to the poor states and by multilateral development institutions.
As was seen in the case of Kerry-Lugar bill, this type of aid comes with political conditions that may be hard to swallow. Foreign capital can only be obtained by accessing international financial markets by floating sovereign bonds. However, for that to happen, the borrowing country must have the credit-worthiness or else it will have to pay prohibitive interest rates. This option is virtually closed to Pakistan. The third way is to attract direct foreign investment. This had begun to come before the arrival of Islamic extremism and terrorism associated with it. For understandable reasons, foreign investors are reluctant to risk their capital in the country. One way of getting them back is to develop close economic links with India which has become an important destination for foreign investors.
For decades, Pakistans economic policies have been oriented towards achieving relative independence from India. The country was set on that course by New Delhi way back in the late forties and the fifties. Then it tried to cripple Pakistan economically in the hope that the act of partitioning British India could be annulled and the newly created Muslim state would once again become part of greater India. That, of course, did not happen but the memory of those efforts have stayed with Pakistan. It is important that policymakers climbs out of that mind set and learns to work with India.
India has also relied on foreign capital flows from the private sector to increase the rate of growth of its economy and to accumulate large foreign exchange reserves. In fact, it has the fifth largest foreign exchange reserves in the world. The difference with the other large reserve holders is that while they have built them on the basis of large trade surpluses, Indian accumulation is entirely the consequence of private capital flows. These have come in the form of foreign direct investment and as portfolio investments in the countrys capital markets. For years India has been one of the favoured destinations for foreign investors.
Foreign flows were interrupted by the strains in the global markets in the last couple of years. Portfolio investors pulled out their investments and foreign direct investments declined. However, like several other Asian countries where foreign investors have been active, foreign capital has begun to return to India. Prime Minister Manmohan Singh told The Washington Post in an interview on the eve of his departure for a state visit to the United States that the flow of capital [was] affected by the crisis in the West. But more recently capital has started returning back to our country. Before the crisis, our growth rate was 8.5 to 9 per cent. This year it will be about 6.5 per cent. In two years, we should go back to nine per cent growth rates.
In other words foreign flows have added and can add two to three percentage points to the rate of growth in the Indian economy. That option is closed to Pakistan for the time being. One way of opening it is to work closely with India on the economic front and get foreign investment to come from that route.
I will use an illustration to advance this argument. One of the foreign firms that have gone to India in recent months is Michelin, the tyre manufacturer. According to a news item in the western press, the move by the French manufacturer, creating a plant to make trucks and buses, highlights the swift pace of recovery in Indias auto industry after last years woes.
The companys decision to invest $870 million in a plant in Chennai in south India was taken in spite of a series of violent strikes following mass worker redundancies during the financial crisis. But with Michelin pledging to create 1,500 jobs by 2012, when the plant is expected to open, the investment should provide not just a lift to the local market but also much-needed boost to workers morale.
One reason for the French companys interest in making such a large investment in India is the expected increase in the demand for truck and buses that would result from the large infusion of state funds into building of roads in the country.
According to Prashant Prabhu, Michelis president for Africa, India and the Middle East, with the accelerating development of road and highways infrastructure and the number of ongoing road development projects, India is on course to offer customers the opportunity to extract the full value from radial tyres. Similar developments are taking place on the Pakistani side of the border.
With better relations with Pakistan, Indian companies may be willing to invest in Pakistan. I believe during the Musharraf period Tata Computer Services had shown some interest in investing in Pakistan, making use of the cheaper skilled labour available here compared to the demands of workers in India. The Reliance Group also wanted to develop oil storage facilities in the Jhelum area making use of the exhausted salt mines. This would have reduced the amount of freight and storage India was paying on the Middle Eastern oil. But Pakistan did not permit these investments for political reasons. A democratic government may be able to take a different policy stance.
Another way Pakistan could benefit from the revival of interest in India on the part of foreign investors is to establish strong links with some of the industrial sectors in India. Automobile industry is one such candidate. Recent industry data showed sales of trucks and buses in India rose 52 per cent in October, the fourth consecutive monthly rise and the strongest expansion since April 2007.
Until recently Pakistans automobile industry was also making good progress but behind a relatively high wall of tariff. Vendor industry has developed along with car manufacturing. This industry could also feed Indias automobile producers and could interest foreign investors who are looking for opportunities in emerging markets as the industry in the industrial world goes through restructuring.
Foreign investment could come to Pakistan in the sectors where the much larger Indian market offers opportunities. Pakistan, therefore, needs to rethink its entire approach towards its neighbour. It needs to cast off the burden of history and become pragmatic in its approach.
Working with India
PAKISTAN is not likely to solve its resource problem any time soon. It will not be able to increase either its domestic savings rate to invest more in the economy or its tax-to-GDP ratio for the government to turn its attention to provide services to the poor.
With the current domestic rates persisting into the future, the economy cannot expand by more than 3 to 3.5 per cent a year. At that rate the incidence of poverty would continue to increase and the country will become even more socially and politically unstable. This means that for years to come the economy will remain dependent on external capital flows. These, of course, come in several different forms. They come in as official development assistance, the money provided by rich governments to the poor states and by multilateral development institutions.
As was seen in the case of Kerry-Lugar bill, this type of aid comes with political conditions that may be hard to swallow. Foreign capital can only be obtained by accessing international financial markets by floating sovereign bonds. However, for that to happen, the borrowing country must have the credit-worthiness or else it will have to pay prohibitive interest rates. This option is virtually closed to Pakistan. The third way is to attract direct foreign investment. This had begun to come before the arrival of Islamic extremism and terrorism associated with it. For understandable reasons, foreign investors are reluctant to risk their capital in the country. One way of getting them back is to develop close economic links with India which has become an important destination for foreign investors.
For decades, Pakistans economic policies have been oriented towards achieving relative independence from India. The country was set on that course by New Delhi way back in the late forties and the fifties. Then it tried to cripple Pakistan economically in the hope that the act of partitioning British India could be annulled and the newly created Muslim state would once again become part of greater India. That, of course, did not happen but the memory of those efforts have stayed with Pakistan. It is important that policymakers climbs out of that mind set and learns to work with India.
India has also relied on foreign capital flows from the private sector to increase the rate of growth of its economy and to accumulate large foreign exchange reserves. In fact, it has the fifth largest foreign exchange reserves in the world. The difference with the other large reserve holders is that while they have built them on the basis of large trade surpluses, Indian accumulation is entirely the consequence of private capital flows. These have come in the form of foreign direct investment and as portfolio investments in the countrys capital markets. For years India has been one of the favoured destinations for foreign investors.
Foreign flows were interrupted by the strains in the global markets in the last couple of years. Portfolio investors pulled out their investments and foreign direct investments declined. However, like several other Asian countries where foreign investors have been active, foreign capital has begun to return to India. Prime Minister Manmohan Singh told The Washington Post in an interview on the eve of his departure for a state visit to the United States that the flow of capital [was] affected by the crisis in the West. But more recently capital has started returning back to our country. Before the crisis, our growth rate was 8.5 to 9 per cent. This year it will be about 6.5 per cent. In two years, we should go back to nine per cent growth rates.
In other words foreign flows have added and can add two to three percentage points to the rate of growth in the Indian economy. That option is closed to Pakistan for the time being. One way of opening it is to work closely with India on the economic front and get foreign investment to come from that route.
I will use an illustration to advance this argument. One of the foreign firms that have gone to India in recent months is Michelin, the tyre manufacturer. According to a news item in the western press, the move by the French manufacturer, creating a plant to make trucks and buses, highlights the swift pace of recovery in Indias auto industry after last years woes.
The companys decision to invest $870 million in a plant in Chennai in south India was taken in spite of a series of violent strikes following mass worker redundancies during the financial crisis. But with Michelin pledging to create 1,500 jobs by 2012, when the plant is expected to open, the investment should provide not just a lift to the local market but also much-needed boost to workers morale.
One reason for the French companys interest in making such a large investment in India is the expected increase in the demand for truck and buses that would result from the large infusion of state funds into building of roads in the country.
According to Prashant Prabhu, Michelis president for Africa, India and the Middle East, with the accelerating development of road and highways infrastructure and the number of ongoing road development projects, India is on course to offer customers the opportunity to extract the full value from radial tyres. Similar developments are taking place on the Pakistani side of the border.
With better relations with Pakistan, Indian companies may be willing to invest in Pakistan. I believe during the Musharraf period Tata Computer Services had shown some interest in investing in Pakistan, making use of the cheaper skilled labour available here compared to the demands of workers in India. The Reliance Group also wanted to develop oil storage facilities in the Jhelum area making use of the exhausted salt mines. This would have reduced the amount of freight and storage India was paying on the Middle Eastern oil. But Pakistan did not permit these investments for political reasons. A democratic government may be able to take a different policy stance.
Another way Pakistan could benefit from the revival of interest in India on the part of foreign investors is to establish strong links with some of the industrial sectors in India. Automobile industry is one such candidate. Recent industry data showed sales of trucks and buses in India rose 52 per cent in October, the fourth consecutive monthly rise and the strongest expansion since April 2007.
Until recently Pakistans automobile industry was also making good progress but behind a relatively high wall of tariff. Vendor industry has developed along with car manufacturing. This industry could also feed Indias automobile producers and could interest foreign investors who are looking for opportunities in emerging markets as the industry in the industrial world goes through restructuring.
Foreign investment could come to Pakistan in the sectors where the much larger Indian market offers opportunities. Pakistan, therefore, needs to rethink its entire approach towards its neighbour. It needs to cast off the burden of history and become pragmatic in its approach.
