By Ian Bhullar

India will allow foreign direct investment from citizens and companies of Pakistan, according to an announcement made by the Ministry of Commerce and Industry this week.

Although no investments may be made in the space, defense or atomic energy industries—and all investments must be authorized by the Foreign Investment Promotion Board —the move is being lauded as a positive step toward greater goodwill between the two countries, as well as improved opportunities for both Pakistani and Indian industries.

Some routes for Pakistani investment in India already exist. Majyd Aziz, a leading Karachi businessman dealing in minerals and shipping, points to investing through third countries as a primary means for accessing the Indian economy.

“Pakistani industrialists are already able to invest in the Indian market through companies based in places like Dubai and Singapore. It will take some time for direct investments to happen.”

As a result, the effect of this move may be somewhat limited to reducing investment costs and improving access for smaller investors. One industry in particular that may benefit is lightweight “lawn” cotton, widely produced in Pakistan and appreciated on both sides of the border for its coolness in the South Asian climate, according to The Guardian.

It is hoped that the move will increase trade between the two countries. Pakistan-India trade is extremely low after decades of tension and war. Total trade amounted to US$1.731 billion in 2011. Economic theorists suggest that the figure should be much larger for countries that share not only a common border, but also thousands of years of cultural and linguistic heritage.

With a view to fixing this, the two sides are negotiating a new trade regime, following on India’s granting of Most Favored Nation status to Pakistan in 1996, and on indications that Pakistan would reciprocate last year.

Commentators in Pakistan have complained, however, that India’s trade surplus with Pakistan, which stood at US$1.159 billion in 2011, will not be properly addressed by opening to investment. An editorial published in Pakistan’s The Nation on Friday suggests that India needs to address its non-tariff barriers to trade which increase India’s export advantage.

Nevertheless, there is positivity about this step on both sides of the border.

Pakistan Foreign Office spokesman said: “We hope this decision will be fruitful for the people of both countries.”

“It is a great decision … Now Pakistan should also implement the most favoured nation trading status to India,” said Rajiv Kumar of the Federation of Indian Chambers of Commerce and Industry.

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