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Investors see no miracles at Indo-Pak summit

Sabyasachi Mitra in Hong Kong

Foreign investors do not expect Indian Prime Minister Atal Bihari Vajpayee and Pakistani President General Pervez Musharraf to perform a miracle at their high-stakes summit this weekend.

But they hope the meeting sets the stage for a dialogue to ease tensions between the two South Asian rivals that could spur India to realise its much-hyped potential and help economically enfeebled Pakistan to stand on its feet.

Geoff Lewis, investment services manager at JF Asset Management Ltd in Hong Kong, said neither side had given an indication of its negotiating strategy.

But the very fact that the summit was taking place at all was positive. "It is good to see at least direct contact is being made," Lewis said.

JF Asset Management, part of JP Morgan Fleming Asset Management, has an exposure of about $150 million in India.

India says it wants to discuss a raft of issues, including economic and trade ties, to ease tensions with Pakistan.

But Islamabad insists the July 14-16 summit in the Indian city of Agra must focus on Kashmir, the disputed territory over which the neighbours have waged two wars.

"I think they should try to set trends for future prospects for the easing of relations," said Arjuna Mahendran, head of economic research at SG Securities in Singapore.

Relations ebbed to historical lows after the two rivals conducted tit-for-tat nuclear tests in the summer of 1998 and then fought a brief battle in the icy Kashmir mountains in 1999.

While India managed to skirt around the limited economic sanctions slapped on by the West and Japan in the wake of the nuclear tests, Pakistan never quite recovered.

"Pakistan has fallen off the radar screen. Returns from Pakistan are even lower than Sri Lanka," Mahendran said.

In the year to date, the Karachi Stock Exchange has lost about 13.9 per cent versus a 3.9 per cent decline for Sri Lanka's Colombo Stock Exchange.

Defence costs climb

India, too, has not escaped unscathed. Border tensions spurred New Delhi, which has fought three wars with Pakistan since the two countries won independence from Britain in 1947, to sharply raise its defence expenditure.

Military spending is expected to jump by a further 14 per cent to Rs 620 billion in the financial year that began in April, on top of a 28 per cent increase the year before.

That accounts for nearly 2.5 per cent of India's GDP and is nearly half of the Union government's deficit target this year of 4.7 per cent of GDP.

Chronic fiscal deficits limit the ability of the central bank to lower interest rates, a key factor in bolstering private investment and economic growth.

"India has a high potential and a reduction in border tension will help. The United States benefited from an upswing in capital efficiency and investment after the Cold war," Lewis said.

Investors vote for Sinha

Fund managers said India's reform programme -- unleashed in 1991 to break the shackles of decades-old socialist economic controls -- was on the right track, but domestic politics and the maze of Indian bureaucracy were slowing the implementation of policies.

Union Finance Minister Yashwant Sinha, the architect of India's insurance liberalisation, launched a second generation of reforms in his 2001-02 budget including radical changes to labour laws, opening up the finance and energy sectors and privatising state-owned firms.

But his plans have run into stiff opposition from trade unions and opposition political parties.

"Foreign investors like the finance minister. He is moving in the right direction. But the question is whether he will be able to get the bureaucracy behind him," Lewis said.

"The tax reforms in the last budget will have a far-reaching impact."

India's failure to accelerate the implementation of reforms has pushed foreign investors into the arms of its neighbour, China.

China, one of the world's fastest-growing economies, attracted some $40 billion of foreign direct investment last year -- almost 80 per cent of all FDI into Asia and some 15 times India's $2.6 billion inflow.

"India has less further to travel (than China), but it has been slower," Lewis said.

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