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Widening Indo-Pak economic divide

This is the final part of a two-part series of articles, highlighting the differences between India and Pakistan’s state of the economy.

Cricket, a great if not the only unifier in Pakistan’s highly divisive society today, is one area in which the country legitimately competes with India. This week past there was general angst at the delay in issuing Indian visas to the Pakistan cricket team to play in the thirteenth edition of the World Cup (5 October to 19 November). The visas were issued only after the Pakistan Cricket Board (PCB) wrote a strongly-worded letter to the International Cricket Council (ICC).

This delay on the back of our humiliating defeat against India on 11 September, India’s refusal to send its cricket team to this country for any match even though Pakistan was the declared host of the Asia Cup 2023 and, even more inexplicable, the envisaged disruption to play due to rains forecast in Sri Lanka during the scheduled match days, has not lessened public interest in the World Cup matches in general and a desire to beat India on their own home ground in particular. Be that as it may, the welcome on twitter by some Indian players to the Pakistan team indicates a marked divergence from the Modi government’s position.

India’s rising clout internationally can be entirely sourced to its state of the economy. Earlier this year, IMF’s Deputy Managing Director Gita Gopinath projected India would become the third largest economy in the world by 2027-28 while Ishaq Dar continues to cite a 2016 Price Water House Coopers projection – an international accountancy/consultancy firm with a presence in Pakistan – that Pakistan would become the world’s twentieth largest economy by 2030 and sixteenth largest by 2050.

In 2016 Pakistan was ranked 37 and India ranked at 39 while today India is ranked as the fifth largest economy and Pakistan is at 41. In other words, India’s gain in seven years has been striking while Pakistan’s decline has been little – four down.

Opinion in Pakistan remains highly partisan as to whether military rule or periods of civilian rule, or both, are responsible for there no longer being any meaningful comparison possible between India and Pakistan. Finger pointing remains the only argument employed by all previous administrations, harbouring political ambitions against their rivals – perceived or otherwise.

There are three statistics that clearly show how far ahead India has come with respect to Pakistan and explain its rising international clout. First, India’s foreign exchange reserves stood at 598.897 billion dollars on 1 September 2023, making it extremely attractive as a trading partner. In contrast, Pakistan’s foreign exchange reserves stood at 7.779 billion dollars on 1 September out of which 5 billion dollars were borrowed from friendly countries subsequent to reaching a staff level agreement with the International Monetary Fund on a Stand-By Arrangement dated 29 June 2023. To maintain that the massive differential is due to India’s size, which is several multiples of Pakistan is an invalid argument as the island nation of Singapore posted reserves of 326.7 billion dollars in July 2023.

Second, while the US is India’s largest trading partner, the next three countries in descending order in terms of total trade value are China (in spite of political differences and border disputes), the United Arab Emirates, and Saudi Arabia – countries that Pakistan defines as friendly countries, not for purposes of trade but for purposes of borrowing. This should bring home to Pakistani stakeholders that the economic environment as opposed to perceived level of friendship (based on past history or shared religion) dictates trade.

And third, India is the fourth largest recipient of foreign direct investment (FDI) in the world and posted a high of 83.57 billion dollars in 2020-21, which declined to 70.87 billion dollars in 2023 due to global uncertainties. The United States is India’s third largest source of FDI at 6.04 billion dollars, while Singapore holds first position at 17.2 billion dollars, followed by Mauritius at 6.13 billion dollars. The United Arab Emirates was the fourth largest FDI source for India at 3.35 billion dollars followed by the Netherlands at 2.49 billion dollars.

In contrast, Board of Investment data indicates that Pakistan’s FDI peaked in 2017-18 at 2.78 billion dollars – or a mere 3.32 percent of India’s total FDI. China accounted for the bulk of FDI to Pakistan that year with 1.3119 billion dollars (out of which 1.179 billion dollars was invested in expensive energy projects) under the umbrella of the China Pakistan Economic Corridor (CPEC). This clearly indicates that the majority of CPEC investments were not FDI because the contracts not only required sovereign guarantees but were on the same pattern as those signed with previous Independent Power Producers (IPPs) – capacity payments, repatriation in dollars – that is one of the root causes of high tariffs today.

Pakistan’s recently established Special Investment Facilitation Council (SIFC), envisaging 25 billion-dollar Foreign Direct Investment (FDI) within the short to medium term and 100 billion dollars in the long term, seeks to deal with all issues associated with excessive red-tapism and security threats. And is reliant on the goodwill of three friendly countries however Pakistan’s history of past FDI pledges not materializing should have led to two critical lessons learned: (i) investment decisions are motivated by the rate of expected returns while extending loans/deferring payment for imports/cash deposits may be extended to a friend in need of balance of payment support; and (ii) attracting investment to a country where macroeconomic indicators perform poorly and where reforms remain pending from one administration to the next may require signing off on unfavourable contracts – an example being the contracts signed with IPPs under the umbrella of CPEC, which are the cause of public anger today.

Pakistan’s major FDI source in recent years has been China though only in 2015-16 and 2017-18 did China exceed the one billion-dollars annual mark – 1.048 billion dollars and 1.311 billion dollars, respectively.

Maharashtra emerged as the top recipient of FDI at 14.80 billion dollars followed by Karnataka at 10.42 billion dollars while Delhi and Gujarat attracted 7.53 billion dollars and 4.71 billion dollars, respectively. And the major sectors that received the inflows were computer software and hardware (9.39 billion dollars) followed by services sector (8.7 billion dollars), trading 4.79 billion dollars, drugs and pharmaceuticals 2.05 billion dollars, automobile 1.90 billion dollars, chemicals 1.85 billion dollars and construction (infrastructure) activities 1.7 billion dollars.

Inflows in Pakistan are not itemized province- wise, which clearly indicates that no province took the initiative to attract FDI in a meaningful way or encourage a sector with the capacity to attract FDI. Power and communications were the major sources of FDI but here too the amounts are well under half a billion dollars.

The question is whether this difference in FDI inflows is due to India presenting a much larger therefore more attractive market, or due to a much more targeted development of specific sectors (particularly computers and providing services), or focused policies by specific states to attract specific FDI, or indeed the general state of the economy or an amalgam of all these factors? The answer is clearly an amalgam and Pakistan needs a holistic approach to be able to increase FDI – an approach that must begin with sectoral reforms.

To conclude, there is an emergent need to not only focus on getting out of the current deep economic impasse facing Pakistan today but to implement power sector and taxation reforms and support provinces to compete to attract FDI in the future. Pakistan will have to remain on this path for at least a decade if not more to get out of the existing economic mire and another decade or two to emerge as a country with a say in the affairs of the international community.

Anjum Ibrahim, "Widening Indo-Pak economic divide," Business recorder. 2023-10-02.
Keywords: Economics , Economic crises , International accountancy , Economic environment , Foreign exchange , Ishaq Dar , Pakistan , China , FDI , SIFC

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