The peace building process between India and Pakistan has escalated at a speed unseen in the history of the two countries’ relations. The recent Indian visit by Gen. Musharaf was preceded by a lot of hype about an ‘irreversible peace process’. Many of us have wanted this peace for a long time.

We have pointed towards the large amounts of our [check these figures – they do not look right] budgets (14% for India and 23% [this is more like 35%] for Pakistan) budget that are spent on defence and have highlighted the fact that these amounts are ill-afforded by both countries that need to spend much more on the education and health of their people; that the insecurity and paranoia generated by the discourse of exclusion and communalism has distorted our societies; that the people in general hold a lot of good will towards each other; and that the military-political elites have built and used a fear of the ‘other’ to legitimise their rule.

Certainly, then there is cause for celebration as the two countries come closer. Nevertheless there is a need to critically examine this somewhat sudden change in the behaviour of the very elite that had previously created the spectre of the ‘enemy-neighbour’. Unofficially Gen. Musharaf is acknowledged as the architect of the failed Kargil operation. What has changed to make a dove out of a hawk? And can this current stage of bonhomie really be treated as ‘irreversible’ as the General claims?

Some analysts have focused on personal motivations for both leaders. Vajpayee was 79 years old when the process started and wanted to leave behind a legacy of lasting peace, they argue. In similar vein, some argue that Musharaf was so shaken by the two attempts at his life by Islamic militant groups that he has come to a complete re-evaluation of their role in Pakistan’s internal and external policy. Other analysts have tried to take a broader canvass than individual motivations to declare that it is easier for ‘right wing’ governments to make moves towards peace because their nationalist credentials are not questioned.

Although this may provide a partial answer it still does not explain why the peace process has gained such momentum at this point rather than any other, especially since this is not the first time that the military or religious group dominate politics in either India or Pakistan. In fact this is a critical question: why now?

Some point towards the momentum build up by Track 2 diplomacy to explain why the peace process has speeded up now. It is argued that these initiatives have forced the governments of their respective countries to respect people’s desire for better relations. In a recent visit to Lahore, Tapan Bose, one of the architects of the Pakistan India People’s Forum for Peace and Democracy, reminisced that when the inaugural meeting of the forum was held in Lahore at Falatties Hotel there were only 25 people who attended it.

In contrast, the most recent meeting held in Delhi this year was attended by 600 delegates, half of them from Pakistan. Moreover, this meeting was held with the blessing of the Indian External Affairs Ministry that made Hyderabad House, normally reserved for visiting heads of states, available for use by the delegates. There can be little doubt that the People’s Forum and similar initiatives have had an impact but the sudden escalation in the peace process seems to have surprised its participants too. It is a little hard to credit the change in government policy solely to a sharp increase in good will among the masses. Moreover it assumes a certain level of responsivenss to people’s desires on part of the government that is sorely lacking on other fronts.

Most people acknowledge the key role that has been played by the US in prodding the two governments to the negotiating table and speeding up the process. However, that the US has kick started this process and literally shoved the two governments into each others arms is often mentioned but glossed over as relatively unimportant. The tacit understanding is that even though the US is not acting altruistically we should be happy because by some accident of history Pakistani people’s interests have coincided with the US. But this seeming ‘accident of history’ needs closer examination.

The US has several economic, political and strategic motives for taking on the role of a mediator in the region. Pakistan is a key ally in the ‘war on terror’ but India has been identified by the US as its strategic partner in the larger Asian region. The Council on Foreign Relations, an important US think tank declared in a recent report that ‘If New Delhi and Washington continue to broaden and deepen official and non-official ties, the prospects are good that by 2010 the world’s two largest democracies will succeed in consolidating a genuine partnership.”

This partnership is important to the US in part for its potential to defuse the rising economic and political might of China that threatens US dominance. India is the only other country in Asia that has the population, technical capability and infrastructure commensurate with the Chinese. When corrected for purchasing power, in dollar terms China is the world’s third largest economy and India is the fourth. A stronger more focused India can taken on China more effectively than any other country in the region, particularly since the East Asian ‘tigers’ and ‘miracle economies’ collapsed so spectacularly in 1997.

At the same time stability in the region is critical to US political interests. Given the ongoing and particularly difficult war in Afghanistan, where the US has not still managed to establish the kind of control it had hoped to, further distractions in the region would be highly unwelcome. In this context the Kashmir issue takes on a radically important role for the US. The current US administration is particularly keen to defuse the Kashmir issue because it is seen as a training ground for spreading anti-American sentiment in Pakistan and beyond into other Central Asian countries.

Political interests are tied in a close and dynamic relationship with economic interests. India, with a middle class approaching 300 million, the same size as the entire American population, is a large market for multinational companies. India’s average income levels, with a per capita GDP of $2,571 (about 25% higher than Pakistan’s at $2,014) do not adequately reflect the actual buying power of the middle class, which is much higher. So far Indian exports to the United States have grown far more rapidly than U.S. sales to India.

The United States is the largest destination for Indian exports, accounting for about 20 percent. In 2002, Americans bought $11.8 billion worth of goods and $5.8 billion of IT services from India, up 20% from 2001 levels. A recent McKinsey & Co. study predicts that India’s computer related sales to the United States could reach $30 billion annually by 2008. The US portfolio investment accounts for $7 billion of India’s total $13 billion portfolio investment. Some US companies have major operations in India already. With 19,000 employees, including 15,000 in “back office” operations, General Electric (GE) has the largest Indian stake of any U.S. concern and in 2002 earned more than $1 billion from India.

However, even though the US is India’s biggest trading partner, India remains frustratingly closed to multinationals and US companies, dictating terms and pace of entry. The pace of liberalization has not been what the MNCs would prefer it to be, and the US government represents the interests of those MNCs more effectively than any other government in the world currently. Recent IMF and World Bank pressures on India have highlighted this frustration on part of the MNCs. Last month IMF chief Rodrigo Rato reiterated the Fund’s position on India: India is ready to take off economically but must make it easier to foreigners to do business in order to secure sustained growth. “India lags well behind much of Asia in attracting foreign direct investment,” Rato said, pointing to the fact that in 2003 FDI to India totalled just 5% of GDP compared to 31% for Thailand and 35% for China.

“Yet surveys consistently point to India as being one of the top two or three destinations for FI in the coming years, so opportunity is there for the taking. What is perhaps important is to make India an easier place to do business.” Indian companies, strong now after years of protection through import restrictions and subsidies are not willing to be junior partners in international trade as in other developing countries. Many like Mittal dominate their industry globally. Others like Wipro and Infosys are path breakers in their industries. Indian companies are negotiating hard for options for their own growth before committing to head on competition with MNCs through increased liberalization.

Access to Pakistani economy, easily dominated by Indian companies, can be seen as part of a deal sweetener for some sections of the Indian business community. This would have the added attraction of diluting India’s business links with China which are growing at a rate faster than the US would prefer. IMF chief Rato in his last month’s statement also urged strong regional trade relations in South Asia. “Much of India’s recent export growth has been fuelled by trade with China. Despite geographical proximity and cultural affinity, South Asian countries, barely trade with one another,” he said.

As a first step then, the MNCs and thus the US government are pushing for increased liberalization of trade between India and Pakistan. Reflecting the changed situation, Yogendra Kumar Modi, President of the Federation of Indian Chamber of Commerce and Industry says, ‘There is a huge change in the way Indian companies are looking at Pakistan, and vice versa.” There are discussion underway to open up trade ranging from increasing the number of items on each countries lists of non-prohibited items to creating only a small list of items to be actually prohibited leaving the field open for trade on all other areas including services. Trade between India and Pakistan has jumped from $157 million in 1997-98 to $343 million during the financial year ending in March 2004.

It is believed to be in the $500 million range currently. However, this is only the official trade. Smuggling and un-official trade, where trade is routed through third countries, accounts for an estimated $2billion.

Until recently the Indian presence in Pakistani economy was managed through representatives in the Middle East. The dramatic rise in property prices in the major cities particularly Lahore and Islamabad is attributed in part to the fact that Indian buyers, operating through fronts in the Middle East, are snapping up real estate in expectation of increased presence here. In a move much publicized in India but receiving little public exposure in Pakistan, Bajaj Autos from India and Saigol Motors from Pakistan are believed to have agreed to production of Bajaj two wheelers and three wheelers in Pakistan.

At present Indian companies are exporting sugar, plastic, pharmaceuticals, rubber, iron ore and tea to Pakistan. Pakistan exports fabrics, spices, fruit and nuts to India. The technology gap between India and Pakistan is typified not just by the list of items traded with India selling higher value added goods, but also by the Bajaj/Saigol partnership. In the IT sector, India’s highly successful industry, it seems that many Pakistani businesses are looking not to gain access to Indian market with their products but to tail ride on the Indian companies through sub-contracting work.

At one level these economic ties with India are precisely what peace activists have been advocating for a long time. Certainly, for Pakistani consumers there can be little difference between a bottle of water sold by a Swiss company or by an Indian company. And if there is to be no support for local industrialization and development, then the dominance of Indian companies is likely to have the added advantage, compared to other foreign companies, of fostering peace in the region.

If as Prime Minister Shaukat Aziz promised in Davos last year, he will push for ‘privatisation of 100% of Pakistan’s state-owned companies’, Indian companies may serve the purpose as well as any other foreign company.

However, we need to be clear headed in our analysis of the gains and losses we expect to make from the new situation. In the short term open trade with India may benefit some textile manufacturers, certain fruits and agricultural exporters and some parts of Pakistan’s fledgling IT industry; and wipe out others given that most local manufacturers and traders will face tough competition from India’s diversified, professionally managed and organized service and manufacturing sectors. But the true implications will be evident in the medium term as both Indian and Pakistani markets are ‘homogenized’ by the MNCs.

Past experience in other countries and in the case of privatised electricity for instance in Pakistan has shown that ‘homogenized’ prices invariably have meant higher prices for local consumers. Homogenized prices mean that local consumers have paid international rates or more even with the exchange rate factored in. There are also important ramifications for farmers in both India and Pakistan as we enter a more liberalized regime. At the very least we need to carry out a systematic analysis of these potential impacts.

We need and want a sustainable peace. Not one that is being imposed without due considerations for the concerns of the people in the two countries. There are two main dangers that arise through this imposed ‘peace’. One that the US political needs may change and it will pull the plug on this process as abruptly as it started it. Until significant momentum is generated and real advantages accrue to people either through redirected spending from defence to education and health, or through economic relations with India, pulling the plug will be easy. Neither of these seems likely in the short term, particularly as the army seems in no hurry to relinquish its stronghold on the country’s budget and on the ‘peace process’.

And herein lies the second danger, as our government raises expectations and hype surrounding India-Pakistan relationship, failure for this peace to deliver real change will only play into the hands of those who have opposed it all along. For all the reasons discussed above, both Indians and Pakistanis need to work together to build peace through consensus and democracy, through a clearer understanding of the obstacles we continue to face. In many ways, the real challenge for building lasting peace has only just started.