To Trade More Than Just Insults

Dabur International's group director P.D. Narang is sure about one thing. That his company's current brand ambassador, superstar Amitabh Bachchan, can help sell anything, anywhere. Even in Pakistan, where Dabur plans to aggressively expand its operations. Says he: "We know we can leverage him more there than in India." However, there's a small hitch. The neighbour has banned advertisements featuring Indian celebrities. So, Narang hopes to lobby for a policy change when he visits Pakistan next month.

This is just one of the several tentative steps that Indian companies are taking to make inroads into a market that was virtually closed to their products due to open hostilities between the two neighbours over Kashmir. "It is a mating dance before we start a real relationship," says Anand Mahindra, chairman, M&M group. And the moves have been prompted by two factors: one, the two nations have decided to smoke the peace pipe—apparently in all seriousness this time—and two, they became willing signatories to the free trade agreement inked by the seven South Asian nations in January 2004.

Obviously, the prospects of an open and free trade and investment regime offers great potential to the business community in both countries. At the economic level, the mutual complementing in the structure of the two economies, price advantages, low freight costs on account of contiguous land borders, and cultural and linguistic similarities provide enough rationale for enhanced links. And if it's a truism that trade diminishes tensions, there is probably no better place on the planet for a soupcon of detente.

Although the official trade between the two nations is $200-250 million a year, this can easily increase 15-20 times to $3-4 billion. Even now, smuggling across the border and third-party trade (where exporters route goods through other destinations, like Dubai or Singapore, to get around high tariffs and other curbs) account for $2-3 billion. Senator Ilyas Ahmad Bilour, who heads the India-Pakistan Chamber of Commerce and Industry (IPCCI), hopes Pakistan will accord India the most favoured nation (MFN) status this year. Things will then move faster, especially after safta (South Asian Free Trade Agreement) comes into play in 2006 (India, which gave MFN status to Pakistan in 1995, has imposed a number of curbs on imports.)

So, the business community is gearing up for the coming action. The Indian side feels Pakistan, which imports goods worth $12 billion annually, can substitute them for Indian goods. For example, Pakistan is one of the largest tea importers (130-150 million kg a year). But it has kept Indian tea out through high duties, choosing to buy the Kenyan variety. Last year, when the duty was cut by 5 per cent, Indian exports doubled to 7 million kg a year. Similarly, Bilour feels that "despite the fact that Pakistan needs industrial machinery, cement, tyres and coffee, the high duty (like 46.6 percent on Indian tyres) makes it unprofitable for Indian exporters".

As the duties come crashing down and the bureaucratic controls vanish, the markets will grow rapidly. Apart from Indian products becoming cheaper, exporters won't have to take circuitous third-party routes. Indian exporters, like Markfed (flour) and Chambal Agritech (seed potatoes), which have inked export contracts with Pakistan, are excited about the future. A senior manager in Chambal Agritech explains that his company's potatoes cost $500 a tonne compared to around $700 for the Dutch seed potatoes that Pakistan imports. But his current costs are higher as he has to send them from Punjab to Mumbai to Dubai to Karachi and on to Lahore, which is only a few hours away by road or rail from his factory.

Consider another case from the other side about a Pakistani businessman who was recently in Delhi and felt like "I am in my own backyard".It was his first trip across the border, although he had been supplying his embroidered cotton fabrics to Indian designers like Rina Dhaka via Dubai. In fact, he felt the bane of Indo-Pak trade was the third-party route, so well-established and entrenched that businessmen find it far more reliable to send goods via a third country than simply across the border.

All that may change as pressure mounts in both nations to jettison existing policies and improve the transportation networks. Markfed, owned by the Punjab state government, has asked the ministry of external affairs to expand the rail and road networks to cut down on time and cost. Says Khalid Amin, secretary general, Federation of Pakistan Chambers of Commerce and Industry (FPCCI): "We have made representations to allow imports of machinery to make cooking oil and textiles from India. These products are cheaper and of as good quality as what we import from elsewhere."

Pakistani experts believe their country has distinct advantages in electric power, cotton and textile production. Don't be surprised if Pakola, a Pakistani cola drink, is available in the Indian market in the next few months. There are some areas of mutual advantage to both sides, like information technology. Says a Pakistani economic expert: "There is considerable interest in Pakistan for moving into IT. A fledgling Pakistani industry is unlikely to provide serious competition to the enormous Indian industry, but there could be mutually beneficial links that could be cultivated if the political context became more favourable."

Increased trade would go hand-in-hand with higher investment inflows across the border. Dabur, which sold its products through a Pakistani distributor, and has a joint venture there, now plans to set up a manufacturing base. "If the talks go off well, we will set up a base near Karachi," says Dabur's Narang. And he hints that the operations may be partially manned by Indians. "Our formulations are secret, so we will need our own people to do the mixing. If tensions do ease, we could post our people there," he explains.

While Tata Tea plans to invest close to 300 million Pakistani rupees in its proposed venture with Pakistan's Laksons Tea, Ashok Leyland and Wipro's consumer products division are still in the exploratory stage. This month, when thousands of Indian cricket fans are in Pakistan, some of them may give the planned filmstars night a miss to check out business prospects. Those who do that would definitely include K.V. Kamath, CEO, ICICI Bank, who's taking 35 of his clients (including top CEOs and CFOs) for a cricket jaunt-cum-investment meet.

However, energy may become the first priority for both India and Pakistan. After years of indecision, Pakistan has expressed its willingness to join the $5 billion 2,670-km long India-Iran gas pipeline project, meant to download 20 million cubic meters of gas per day in India. Held up for nearly three decades by Pakistan's lack of response and India's demands for assurances of an uninterrupted flow of gas, it remained a dream until Pakistan's own depleted gas resources led to positive overtures recently. Naurez Shakoor, Pakistan's minister for petroleum and natural resources, openly admits: "Pakistan will charge a heavy fee for the use of its territory and have natural gas at a lower price than India."

Pakistan has also approached India to help six of its cities to convert to CNG. Proshanto Banerjee, GAIL's MD, is likely to visit Pakistan next month to share the Indian expertise on such conversion (in Mumbai and Delhi). Says he: "The Pakistani petroleum secretary was here in January and was amazed at how pollution levels have dropped in Delhi and is keen to replicate it there." Banerjee says it could grow into a consulting and training assignment for gail.And, if things go well, Pakistan might even import CNG vehicles from India. Then there are giants like Indian Oil and Reliance which are vying to grab a slice of Pakistan's 8-million-tonne diesel import pie.

Despite the growing enthusiasm on both sides, a number of bottlenecks remain. Everything will depend on the progress made by India and Pakistan on the Kashmir issue. In addition, there are fears in Pakistan that Indian goods are likely to destroy domestic producers. FPCCI's Amin feels that "increased contact will imply that Pakistani businesses would want to import more". Adds Maitreya Doshi, MD, Premier Auto, which plans to export a new eight-seater vehicle to Pakistan: "There's definitely a fear that our products will swamp their local industry."

The point is that Indian firms enjoy certain advantages over their Pakistani counterparts. The first is sheer scale and, hence, low production costs. Explains Muhammad Sohail, head of research, InvestCap Securities: "Pakistan's annual cement demand (10-11 million tonnes) is met by over two dozen domestic plants. But just one or two cement giants in the neighbouring country could fulfil the demand for they have large installed capacities." So, he feels, in the short run, Pakistani firms will suffer more.

But experts like Sohail are quick to add that in the long run, both countries are likely to benefit from this mutual exchange in the realm of free trade. For example, in the case of bulk commodities, where freight is an essential cost element, Pakistani producers can grab a sizeable share of the Indian market. "Trade between India and Pakistan will be a win-win situation for both," adds Ajay Khanna, deputy director, cii. For, studies point out that ftas bring opportunities to both parties, the smaller and the larger country involved.

Several Indian businessmen are also apprehensive about dealing with a country where passions can run high. "No one wants to wait too long and miss opportunities, but at the same time there's some apprehension about whether we'll be welcome there or not," feels Mahindra. Probably, people like Mahindra fear their initiatives could backfire if the current peace talks fail. That's why Indian firms are cagey to talk about their Pakistan plans. In fact, Tata Tea has fronted its Pakistan venture through Tetley, its British arm.

Couple this with the fact that travel between the two nations is never going to be very open. "It's pointless to give MFN status if there are no flights, trains and hardly any visas are granted. Such problems are disruptive for business," says Farrukh Khan, chief executive of Pakistani financial services firm, BMA Capital.

"There are a lot of things bubbling but bubbles do burst," says GAIL's Banerjee. But for now, he along with a number of Indian and Pakistani businessmen are busy blowing bubbles.