Indo-Pak Trade: Financial Facilitation

Majyd Aziz

Preamble:

Bilateral trade, especially among neighbors or within a region, has been highlighted as an ideal way to do business, plan investments, and develop a peaceful environment. Today, this narrative becomes more profound when taken in the context of bilateral relations between India and Pakistan. Although bilateral trade has demonstrated a noticeable increase in 2013, with Pakistan’s exports to India crossing the $500 million threshold due to a 28% increase, while India’s exports to Pakistan improved by 19% to cross the $2100 million figure, the underlining viewpoint is that the potential is immense and, simultaneously, mutually beneficial.

A major component of trade and investment bilateral regime is the availability of a streamlined, responsible, and defined financial facilitation system that enables enhancement and improvement in trade. However, in the framework of India and Pakistan, there is still a regimented and full of hurdles mode in vogue rather than any taking or initiating steps for removal of roadblocks and bureaucratic twists and turns.

Position:

Since there are no bank branches in each other’s country, the correspondent banks impose their own rules and procedures that hamper instead of facilitate financial transactions. In the Indo-Pak case, the Pakistani banks open Letter of Credit through foreign banks and vice versa. It is important that the Reserve Bank of India and the State Bank of Pakistan approve and allow banks to establish their branches across the border in more than one or two locations to enable maximum utilization of their services. 

There is also no NOSTRO arrangement between Indian and Pakistani banks. There is no Test Arrangement used within the banking channels for Indo-Pak trade. Moreover, additional expenses are incurred due to procedural delays and payments made through Asian Clearing Union. There is an imperative need to establish a Currency Swap Agreement among SAARC countries with India becoming the prime facilitator by establishing a US$ two billion outlay. There is also a crucial need for Alternate Dispute Resolution mechanism involving, initially, the SAARC Chamber of Commerce and Industry as the focal point. With the popularity and benefits of Islamic Banking in many countries, it is also felt that Islamic Banking may become a prime source of financial facilitation in the future, especially as a financial intermediary between Pakistan and India, taking into consideration the huge Muslim population of India.

It has been observed that in case of any negative event triggering tension between the two countries, banks often change the 90-days Letter of Credit to Sight Letter of Credit that often results in cancellation of the business deal. Moreover, because of the problems related to acceptance and confirmation of L/Cs, at times trade transactions are carried out through a contract offered by the bank, that states the details of the trader and of the transaction but does not ensure payment guarantees and thus serve as a restriction to trade. It seems that there exists a mistrust or disconnect between the banks of both Pakistan and India.

Importers  of  refined  petroleum  distillates report that  Indian  banks  do  not  honor  L/Cs  opened  by  Pakistani  banks  issuing  beyond  an  arbitrary limit  of  about  US$ 10,000  due  to  this trust  deficit.  The  fear  is  based  on  assumed noncompliance  of  terms  of  credit or delayed payment  by  the  issuing  bank.  As  a  result,  shipments  are  released  in  parts  replicating  overheads,  transport  costs  and  processing. Some other finance related issues include cumbersome payment system, restrictive official foreign exchange allocation, regulations concerning terms of trade for import payments, non-acceptance of letter of credit, higher commission of foreign banks offering letter of credit and lack of bank branches.

India is considering the establishment of a South Asian Development Bank that would fund infrastructure projects and also promote trade in the SAARC region. The decision is seen as playing a critical role in facilitating trade within the eight-member Association. As most of the non-tariff barriers are an infrastructure deficiency, that need funds to be fixed, trade facilitation is essentially a question of finding money. That is what the proposed South Asia Development Bank is expected to facilitate. 

Case:

Another very disconcerting issue relates to the service sector. A case in point is that Pakistani artistes who are invited to perform in India are not allowed to open a Bank Account due to Reserve Bank of India’s policy of proof of possession of property and address in India. Since Pakistani artistes usually live in hotels or enjoy home hospitality, and since they are not allowed to buy property, they cannot open the accounts. Interestingly, one Pakistani artiste applied for an Indian PAN Card and mentioned his Pakistan address and the card was surprisingly delivered to his Pakistani address. Yet, when he went to open an account, he was denied the facility. Moreover, RBI stipulates that payments must be made through banking channels and thus the artiste is in a Catch-22 situation. It is reported that Pakistani artistes have to pay 25-30% of their Indian income to their agents or third parties for obtaining payments by countering the RBI rules and regulations.

Reflections:

It is important that businessmen should understand the complexities of politics of each other’s country. Traditional hostilities between India and Pakistan will continue to hamper trade liberalization. They should comprehend very explicitly that Non-Tariff Trade Barriers would not vanish due to feel good factors. As tariff goes down, NTBs will increase. Every week new NTBs are invented. In fact, non-facilitation of finance is not an ordinary NTB. It is a CNTB (Cumulative Non-Tariff Barrier). Fault also lies with the business community of both India and Pakistan as they do not have the critical mass to compel the governments to change or remove the NTBs and other irritants that impede trade. However, the advantage of proximity for strategic sourcing is one prime reason why it is imperative that there should be liberalization of trade among SAARC countries, and especially between India and Pakistan. Businessmen must not lose hope. They should persevere with 4Cs: Continuity, Consistency, Commitment, Courage. The optimism is that the Modi and Sharif governments would, in reality and practice, take long steps forward to achieve trade and investment liberalization. As James Broughton stated, “the only limits are, as always, those of vision.”