India-Pakistan : Informal Trade

Facts:

• Over the last five years, the bilateral trade trajectory has been volatile.
• From a high of $2.70 billion in 2013-14, it fell to $2.40 billion in 2017-18. During this time, while Pakistan’s exports to India were (and have been) fairly consistent, India’s exports decreased.
• Overall, India still manages to have a significant trade surplus with Pakistan (about $1.4 billion in 2017-18).

 

Punjab Government view:

• Punjab asked central government to negotiate with Pakistan to boost trade through land route.
• Punjab wants the Centre to negotiate with Islamabad to boost exports to Pakistan through the land route
• This will reduce cost of transportation as Lahore is only 25 km from Punjab
• This would also improve India’s trade with countries that were part of Commonwealth of Independent States (part of the erstwhile Soviet Union, except Baltic States).

 

What does the centre says?

It may not be “appropriate” to take up this matter with Pakistan now.

 

What does Pakistan want?

Wanted India to consider joining the (over $50 billion) China-Pakistan Economic Corridor, instead of opposing the project.

 

Study on India Pakistan Trade:

A recent study by Delhi-based research institute Indian Council for Research on International Economic Relations (ICRIER) shows that informal trade between India and Pakistan is almost twice the value of formal trade between the two countries.

  

What is informal trade?

Informal trade is broadly defined as all trade between two countries that should be included in the national income statistics, according to conventional national income accounting, but is not.

 

What drives informal trade?

Factors such as high tariffs, political tension, infrastructure impediments, and ease of trading goods via third countries have generated a thriving industry for informal trade between the two South Asian giants.

1. Pakistan’s negative list of 1,209 items is the most important factor pushing informal exports from India.
2. 58% of the traders cited ease of sending goods via a third country as the second biggest important reason. This highlights weaknesses in infrastructure for formal trade, consequently leading to high transport costs.
3. The third biggest reason was seen to be high tariffs. Compliance to the tariff liberalization plan of South Asian Free Trade Area (SAFTA) is expected to bring down tariff rates.
4. The fact that Pakistan has refrained from according the Most Favoured Nation (MFN) title to India has also hindered barrier-free trade, say trade analysts.

 

MFN:

According to the World Trade Organisation, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners—whether rich or poor, weak or strong.

• In India: Following the Uri incident, there were demands for revocation of the Most Favoured Nation status given to Pakistan in 1996.
• Pakistan, a member of the WTO, has not yet granted MFN tag to India (and Israel).

 

How does informal trade take place?

• Most of informal trade between the two countries were also found to be via a third country, in particular Dubai.
• About 68% of India’s informal export to Pakistan was found to be routed via Dubai.
• 59% of informal import from Pakistan was accounted for by passengers travelling by bus or rail.
• 24% of informal import from Pakistan was via Line of Control trade routes, while 17% was via Dubai.

 

Which commodities are traded?

• Real jewellery, including gold, diamond and precious stones, accounted for the largest share of 23% of informal exports from India to Pakistan. It also included chemicals, tyres, alcohol and tobacco products, among several others.
• While India’s imports from Pakistan included items such as dry fruits and spices.

 

Formal trade routes are inefficient:

• Delhi-Mumbai-Dubai-Karachi-Lahore route— Higher transaction cost per-tonne-per-kilometre
• limited number of items that can be exported via road route, cumbersome customs checks at Attari/Wagah customs station, transaction costs in the form of bribes incurred in getting customs clearances, physical examination of goods and poor infrastructure, among others.
• While the total cost of shipping would still be lower in the formal channel, given the fact that the distance is one-tenth of the route via Dubai, predictability and comfort encourages traders to incur these high costs

 

The study highlights that – “if appropriate measures are taken, a significant share of informal trade can be diverted to formal channels”.

 

Potential Areas of mutual benefits:

• Textile:
  • Raw material can be exported from India hubs like Surat to Pakistan’s major production centres like Faisalabad.
  • Grom Pakistan, there is a huge demand for salwar-kameez-dupatta made of lawn fabric and wedding attire (shararas)
• Pakistan’s Sports Goods Manufacturing Industry:
  • Sialkot is emerging as a hub for this industry.
  • India can play a key role here in exporting raw material and semi-finished goods such as latex, rubber, and football bladders, which would work out to be more economical for Sialkot than sourcing them from other countries such as Thailand
• Pakistan’s Surgical Instruments Industry:
  • Sialkot is a hub.
  • India imports these instruments heavily.