Boosting Afghanistan’s Private Sector
Cooperation between India and Afghanistan can bring mutual benefits and strategic advantages.
Worldwide, the private sector is the primary driver of economic growth. It plays a central role in the creation of capital, income, employment, mobilization of domestic resources, innovation and welfare growth. Between 2001 and 2014, Afghanistan’s private sector saw some progress and received investment in various fields such as banking, aviation, telecommunications, higher education, construction and health care. But, given the extent of opportunities and the pledge of millions in foreign aid, the country’s private sector could not sustain its potential as an impetus for economic growth.
The reasons for this are manifold, ranging from lack of investment incentives in the private sector and the adverse security situation to insufficient public and private sector partnerships and the lack of credit and financial resources. However, it was the misuse of millions of funds by former President Hamid Karzai’s highly corrupt government that hampered the potential competitiveness of the market and resulted in the creation of an inefficient oligopoly. Big banks, airline companies and procurement agencies were held and controlled by few vigorous hands with their networks inside the government.
Moreover, over the past decade and a half, donor countries and aid agencies have focused more on the security and defense sectors, and had limited constructive engagement with Afghanistan’s private sector and business community. Between 2002 and 2010, 51% of the total aid was allocated to the security sector. The remaining 49% was distributed across all other sectors, including infrastructure development, governance and rule of law, agricultural and rural development, health, education, the private sector, the media, culture and sports.
The fact that is often dismissed in debates and policy circles about Afghanistan is that the security problem in the country, to a large extent, has its roots in poverty, unemployment, illiteracy and poor living conditions. Many people are victims of illiteracy, poverty and a lack of prospects, falling into the hands of the Taliban and other insurgent groups who turn them against their country and government. Therefore, in the current situation, the revival and development of Afghanistan’s private sector would not only become an engine of economic growth and development, but it would also help in peacebuilding and conflict resolution across the country.
In the transformative decade ahead, the revival and expansion of the private sector is a major task that, fortunately, the National Unity Government (NUG) has included in Afghanistan’s National Priority Programs (NPP). But the point to be underscored is that the status of Afghanistan’s private sector cannot be improved to the expected level if the task is left alone to the government. The major reason would be the highly insufficient capacity of Kabul to do so. This is why the attention and assistance of regional and international allies are required to provide capacity-building, technical support and technology transfer for the revival of Afghanistan’s private sector.
Having said that, a number of Afghan-Indian bilateral initiatives have the potential to reap benefits in trade and investment. More importantly, the direct effects of their cooperation can be seen in the rehabilitation of Afghanistan’s private sector.
Afghanistan and India have, historically, been strategic allies. Ties between the two nations are shaped by geography and have been strengthened throughout the history of sociocultural interactions. This relationship became further intertwined in the post-Taliban era. New Delhi’s assistance now stands at around $2 billion, making India the largest regional provider of humanitarian and reconstruction aid for Afghanistan. India’s grants have been directed toward efficient use in community-based, small development projects such as the short gestation periods, institutional-building, infrastructural development, youth education, capacity-building and food-security assistance, which are vital and immediate needs in a postwar, underdeveloped country.
NEW WINDOW OF HOPE
Prospects for future cooperation and India’s development engagement in Afghanistan can be elicited by a cursory look at both governments’ lines when it comes to policy initiatives. There are three principal reasons why Afghan-Indian relations can be seen as a new window of hope for the betterment of Afghanistan’s private sector capacities and the amplification of trade and investment connections between the two countries.
There is, first of all, the NUG’s strategy of promoting regional cooperation and connectivity, favorable investment and tax policies to attract foreign direct investment, ensuring a conducive business environment, approval of various trade and investment laws and, more importantly, firm counter-corruption measures.
In addition, there are gracious components in India’s foreign policy, namely the development of the private sector in its aid recipient countries and Neighbourhood First and Act East policies. These urge India’s engagement in the development of the private sector of its least developed allied countries for further enhancement of trade and investment relations.
Finally, India’s geographical proximity and assistance with economic rehabilitation in Afghanistan since 2001 have been useful to turn the hearts and minds of the Afghan people in its favor.
There are a number of initiatives already in place.
First, on April 15, 2015, the Federation of Indian Chambers of Commerce and Industries (FICCI) and Afghanistan’s Chamber of Commerce and Industry (ACCI) agreed upon the establishment of a joint Afghanistan-India Chamber of Commerce and Industries (AICCI). The collaborative AICCI is a practical and significant step toward bolstering business cooperation and trade relations. The AICCI will provide a common platform for the exchange of information on economic capacities, relevant government policies, and rules and regulations regarding trade, investment and other related issues between both countries.
It would highlight the opportunities, as well as the bottlenecks, for business and industrial cooperation between both nations’ private sectors, and it would accordingly recommend measures and strategies to the concerned institutions of the two governments for better utilization of the opportunities and minimization of obstacles. Hence, a joint AICCI is an excellent platform for Afghanistan’s businessmen and businesswomen to learn from the Indian business community’s experiences and seek business-related technical assistance, training and consultancy. Moreover, given the relatively favorable connectivity, the full operationalization of AICCI would rigorously expand the two countries’ trade and investment, and would assist with the empowerment of Afghanistan’s private sector.
Second, based on a tripartite agreement between India, Iran and Afghanistan, New Delhi agreed in May 2016 to invest $500 million in a deal to develop Chabahar port. With the expected accomplishment of the first phase of this project by early 2018, the project will facilitate trade between the two markets, circumventing the difficult Wagah border route through Pakistan. Contrary to the Afghanistan-Pakistan Transit Trade Agreement (APTTA) signed in 2010 — allowing Afghanistan and Pakistan to use each other’s territory to trade with a third country — Islamabad has been inconsistent in granting full transit rights to Kabul. Currently, Afghanistan can only export goods to India but is not allowed to import Indian products along the route.
India’s investment in Chabahar port, besides creating more regional and trans-regional connectivity and helping landlocked Afghanistan to get access to the sea, will also fulfill New Delhi’s strategic interests. Chabahar port serves as a counterweight to China’s investment in Gwadar port in Pakistan, marking the China-Pakistan Economic Corridor (CPEC), which is part of Beijing’s initiative to revive the historical Silk Road. Furthermore, Chabahar will give India access to Afghanistan and the vast markets of the Commonwealth of Independent States and their abundant energy resources, and it would eventually connect it to European markets.
Third, Indian companies have had a historic interest in long-term investment in Afghanistan. Among the 22 companies shortlisted to submit the formal bids to mine Hajigak iron ore deposits, 14 were Indian. A consortium of seven Indian public and private enterprises won the bid and contracted the extraction of three of the four blocks of Afghanistan’s Hajigak iron ore deposits of some 128 billion tons of iron reserves. The contract for extraction of the remaining 25% of Hajigak ore was awarded to a Canadian company in 2001.
Besides iron, quality silk, cotton, handicrafts and carpet weaving present enormous potential of the Afghanistan’s textile production. To exploit this opportunity, India has been at the forefront to revive Afghanistan’s textile industry by providing the technical and capacity-building assistance.
Fourth, although Afghanistan and India have strong potential for trade, this amounted to only $787 million in 2015. Based on the existence of underutilized trade potential between Afghanistan and India on the one hand, and Pakistan’s refusal of India’s inclusion in the APTTA on the other, the two countries have agreed to establish an air corridor to boost trade. This is part of the ongoing project by the NUG to construct and develop inland ports and special economic zones (SEZ) in nine airfields across Afghanistan. The project is a move toward the commercialization of military bases in the country that, if realized, would lay down the basis for better regional integration and alter the sociopolitical and economic dynamics of Afghanistan. Moreover, the development of SEZs is a signal of the government’s commitment to create a supportive environment for national and international investment and the development of the Afghanistan’s private sector.
There are enormous opportunities available in Afghanistan and India that, if exploited, would guarantee mutual benefits and strategic advantages. Lucrative investment opportunities in various sectors of Afghanistan’s economy such as mining, manufacturing, agribusiness, telecommunications and construction have great potential for better returns on investment.
The rapid growth and expansion of the Indian economy, on the other hand, provides an increasing space for its private sector. According to a 2015-16 economic survey report, in 1986-87 — just a few years before the liberalization of the Indian private sector — gross capital formation was 10.9%, increasing to 25.2% in the fiscal year 2014-15. However, the 1986-87 share of the public sector was 12.5%, falling to 7.4% in 2014-15.
Better regional integration and overcoming Afghanistan’s geography can now, with India’s help, bridge it as a trade hub between South, Central and West Asia. Moreover, an empowered and developed private sector that becomes more feasible through institutional reform and infrastructure development would be an effective mechanism for combating poverty, unemployment and reducing conflict in Afghanistan.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
Photo Credit: USAID