By hook or by crook

Converting informal trade into formal, fruitful business

There is always more than one way to skin a cat. You put one stumbling block; they will try to remove it amicably. You don’t do away with it or put another one, they will find an alternative to get their job done by hook or by crook.

The informal trade or undocumented trade or smuggling between India and Pakistan works on the same principle. On the face of it, excessive import tariffs, non-tariff barriers/measures (NTBs/NTMs), cumbersome border and custom procedures and time costs involved in formal trade coerce the traders to switch to informal trade.

According to a 2007 World Bank (WB) study, the lowest range of informal trade between Pakistan and India in 2005 was $545 million and the highest was $10 billion. Considering the lowest range, Pakistan’s informal exports were $10.4 million and Indian exports to Pakistan were $534.5 million.

As per a presentation made by a member of Bureau of Research on Industry and Economic Fundamentals (BRIEF, New Delhi), in Lahore in April 2014, the estimated informal trade between India and Pakistan is $3-5 billion against a formal trade of $2.4 billion. Whereas the total estimated trade potential between the two neighbours is $10-12 billion.

According to a 2007 World Bank (WB) study, the lowest range of informal trade between Pakistan and India in 2005 was $545 million and the highest was $10 billion

So what and how much of it is informally traded between the two countries? As per the WB study, cloth is the overwhelmingly highest informally exported item to India with a total value of $9.095 million out of the export figure mentioned above. On the imports side, again cloth is the most imported item with a value of approx. $186 million. Other significant informally imported items include pharmaceutical and textile machinery ($75 million), cosmetics and jewelry (approx $64 million) and tyres ($73.282 million). However, the study reveals that the informal tyre imports from India to Pakistan have largely been replaced by informal tyre imports from China.

The study tells that cosmetics and jewelry, medicines, blankets, electroplating chemicals, cloth, rickshaw and motorbike parts, Paan ghutka, paan parag, Indian blade and Biri (Cigarette) are completely banned items to be traded between the both countries. Interestingly, these are all the major items imported informally from India. Import value of medicines is around $33 million, blankets $5 million, electroplating chemicals $15 million, rickshaw and motorbike parts almost $5 million, Paan ghutka, paan parag almost $3.5 million, Indian blade $2.225 million and Biri around $8.5 million. Values of Other items have already been mentioned above.

So this ban on formal trade may be a significant reason for informal trade between the two countries. It is also obvious from the fact that the composition of the two types of trade is quite dissimilar. The main items of informal exports from Pakistan are textiles (cloth, bed-sheets, and prayer mats comprise 90 percent of informal exports), whereas textile products comprise only 8–13 percent of formal exports. Similarly, three-fourths of informal imports from India are made up of cloth, machinery, jewelry and cosmetics, and tires, whereas the bulk of formal imports from India consist of chemicals.

Let us now see what are the informal trading routes between India and Pakistan? They may be categorised as major and minor routes. The major routes include Dubai–Bandar Abbas–Herat–Kabul–Jalalabad–Bara, Dubai–Bandar Abbas–Herat–Kandahar–Wesh–Chaman, Dubai–Bandar Abbas–Herat–Kandahar–Wesh–Noshki–Chaman–Quetta, Sindh Cross-Border (crossing in Tharparkar) and India–Dubai–Karachi.

Cloth is the overwhelmingly highest informally exported item to India with a total value of $9.095 million out of the export figure mentioned above. On the imports side, again cloth is the most imported item with a value of approx. $186 million

The minor routes include Delhi–Amritsar–Lahore, Mumbai–Karachi (boats, launches), India–Singapore–Karachi, India–Hong Kong–Karachi, Mumbai–Kabul–Bara and Afghan Transit Trade through, Karachi–Chaman–Afghanistan and Karachi–Peshawar–Afghanistan.

Looking at these trade routes, it is very logical to guess that, if nothing else, at least a huge amount of time can be saved if this informal trade is formalised through six available land routes between the two countries in addition to air and maritime trade.

So now we must see whether trade liberalisation by all means between the two countries would switch informal trade towards formal trade?

The WB study shows that it is improbable until and unless the transaction costs involved in the formal trade are significantly reduced. Moreover, the tariffs need to be reduced substantially and grant of MFN from Pakistan to India is necessary, but not sufficient to achieve this change. Furthermore, the procedural impediments also need to be done away with for this change.

So, a significant reduction in transaction costs, almost 32pc reduction in cross-border tariff, doing away with the procedural impediments, making the most of the available land routes, reduction or removal of NTBs and hidden restrictions by both countries, getting rid of asymmetric information and achieving transparency and last but not the least political will and mutual trust would be a perfect recipe for converting this informal trade to a formal one.