Pakistani women shopping in Amritsar. A file picture

Mumbai/Karachi, March 7 (Reuters): The year is 2010. Business between India and Pakistan is flourishing. Banking and telecoms links wedding the two former enemies have proliferated. Trade disputes replace military disputes.

A pipe dream?

For now, investors are cautious. But the strongest signs yet of a diplomatic breakthrough between the nuclear rivals have got economists wondering how big a boon peace in South Asia could be.

“I see a tremendous impact on trading activity,” said Krishan Kalra, additional secretary general of the Federation of Indian Chambers of Commerce and Industry.

India and Pakistan agreed last month on a “basic roadmap” for peace, aimed at putting decades of enmity behind them and boosting trade across their 3,224-km border. Train and air links were re-established at the start of the year.

It may be only a few years away, but Kalra sees bilateral trade ballooning to $10 billion by 2010, five times greater than current trade, which is mostly channelled through countries like Singapore and Hong Kong.

Direct trade is just $200 million, a sliver of India and Pakistan’s global trade.

“There are no direct banking and telecoms (cellular roaming) links, shipping, road and railway links are inadequate, getting a visa takes a long time,” said Ajay Khanna, deputy director-general of the Confederation of Indian Industry.

“These are the major irritants to doing business.”

But that could change if peace grows, reducing the costs of doing business between the two countries and oiling the trade in pharmaceuticals, steel, auto parts, cotton, tea and other goods.

Senator Ilyas Ahmed Bilour, co-president of the India-Pakistan Chamber of Commerce and Industry, said transportation costs of $2 billion on indirect trade would be cut drastically once direct trade was permitted.

Pakistan could open up to Indian imports, currently restricted to a list of 712 items, mainly raw materials. India has no formal restrictions on Pakistan imports.

India buys pulses, dried fruit, leather, semi-precious and precious stones and cotton from Pakistan, which buys chemicals, engineering goods, tyres and pharmaceuticals from India.

The paradox of India and Pakistan’s trade is reflected in the lack of tea moving across the border. “Pakistan presents a huge opportunity for tea exports, the country’s per capita consumption is twice that of India’s,” said Anil Goel, vice-president finance at Tata Tea Ltd, India’s biggest tea exporter.

Pakistan imports 150 million kg of tea a year making it the world’s third-biggest importer. Less than four million kg, below three per cent, comes from India, the world’s biggest producer.

“India could displace Kenya and Sri Lanka as the primary source but that could take time as consumers gradually adjust their palate,” Goel said.

Conversely, Pakistan is one of the largest cotton growers in the world, while India is a traditional importer.

“Rationalisation of duties and provision of facilities could see growth of 25 to 100 per cent in chemicals, pharmaceuticals and auto components,” said Sunil Tandon, president at Apollo International, which has around Rs 250 million of tyre exports annually.

Even as India and Pakistan move towards peace, tensions between the two could move into the trade arena, although they have signed up to the Saarc Preferential Trading Arrangement, effective 2006, under which members Pakistan, India and Sri Lanka will cut tariffs to between zero and five per cent by 2013.

“Pakistan can withstand Indian imports, which will be facing tough competition,” said Karachi-based independent economist Akbar Zaidi. “It has started preparing for globalisation much earlier and slashed its import tariffs.”

But some analysts say that Pakistan’s $70 billion economy, dwarfed by its $500 billion neighbour, would be cautious about giving full access to Indian manufacturers.

“Pakistan will be very cautious about opening up; the economy is just coming out of the woods and the government may not want to create any potential disruption to job-creation,” Sakib Sherani, chief economist with ABN-Amro Bank, Islamabad.