Quantifying Informal Trade Between Pakistan and India

Shaheen Rafi Khan, Moeed Yusuf, Shahbaz Bokhari and Shoaib Aziz

Pakistan and India have recently undertaken initiatives to liberalize trade relations. In the light of these initiatives and to inform future measures, a holistic assessment of the potential impacts of trade liberalization was needed. In this regard, the World Bank, responding to a Government of Pakistan request contracted with key research institutes and universities in Pakistan to undertake formal and informal sector studies. SDPI conducted the study on informal trade between Pakistan and India, with the aim of quantifying the volume and analyzing the dynamics of informal trade.

Prior to this study, guesstimates of informal trade between the two countries ranged widely from USD 0.5 -10 billion. In view of the trade liberalization initiatives, it was important to get a more accurate fix on these guesstimates. This study had had a three-fold purpose:

• To estimate the value of informal trade and to assess whether such trade would be re-routed through official channels if trade barriers were removed.
• To estimate the potential revenue impact of switching from informal to formal trade
• To assess the impact on local industries

Study findings point to an overall informal trade volume approximating USD 545 million, ninety eight percent of which flows from India to Pakistan. Indian cloth, pharmaceutical and textile machinery, tires, and cosmetics and jewellery are the major traded items. Informal trade takes place through five major and six minor routes. The major routes are:

• Dubai-Bandar Abbas-Herat-Kabul-Jalalabad-Bara
• Dubai-Bandar Abbas-Herat-Kandahar-Wesh-Chaman
  • Dubai-Bandar Abbas-Herat-Kandahar-Wesh-Noshki-Quetta
• Sind cross border
• India-Dubai-Karachi (illegal and quasi-legal)

The minor routes are:

• Delhi-Amritsar-Lahore
• India-Singapore-Karachi
• India-Hong-Kong-Karachi
• Mumbai-Karachi (boats, launches)
• Mumbai-Kabul-Bara
• Afghan Transit Trade (ATT)
  • Karachi-Chamman-Afghanistan
  • Karachi-Peshawar-Afghanistan

Study results highlight that the likelihood of diverting informal trade to legal channels is low under an MFN regime, as existing tariffs would more than offset the net transaction costs on the circuitous but important informal trade routes. It would take a substantial tariff reduction and a lowering of formal transaction costs to re-direct informal trade to the more direct routes between India and Pakistan. In fact, if tariffs remain - even at lower levels - the more proximate and legal direct routes may trigger additional informal trade. Revenue generation for the government in this scenario is also not likely to be significant. The policy implication is that free trade, a la SAFTA, is likely to yield higher trade gains. However, it would also constitute a threat to local industries, especially, cosmetics and drugs and medicines, and the engineering industry.

The study also highlights the need for trade policies to consider the socio-economic consequences of disrupting informal trade practices, which are both historically, entrenched and generate employment. In fact, they cushion the effects of government neglect in marginalized and politically volatile areas. So complementary polices which provide alternative livelihoods and establish social and physical infrastructure become key.

Download Report