Taneja, Nisha; Bimal, Samridhi
Working Paper
India's informal trade with Pakistan
Working Paper, No. 327
Provided in Cooperation with:
Indian Council for Research on International Economic Relations (ICRIER)
Suggested Citation: Taneja, Nisha; Bimal, Samridhi (2016) : India's informal trade with Pakistan,
Working Paper, No. 327, Indian Council for Research on International Economic Relations
(ICRIER), New Delhi
This Version is available at:
http://hdl.handle.net/10419/176354
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1
Working Paper 327
India’s Informal Trade with Pakistan
Nisha Taneja
Samridhi Bimal
July 2016
INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS
i
Table of Contents
Abstract ...................................................................................................................................... i
1. Introduction ...................................................................................................................... 1
2. Framework for Analysis and Methodology .................................................................... 1
3. Sample Design ................................................................................................................... 4
4. Why Informal Trade takes place? .................................................................................. 5
5. How does Informal Trade take place? ............................................................................ 8
6. Survey-Based Estimation of India-Pakistan Informal Trade..................................... 11
7. Transaction Cost of Trading ......................................................................................... 19
8. Major Findings and Policy Recommendations ............................................................ 21
References ............................................................................................................................... 24
List of Table
Table 1: City-wise Break up of Respondents ......................................................................... 4
Table 2: India’s Informal Exports to Pakistan- Estimated Value (2012-13) ....................... 12
Table 3: India’s Informal Imports from Pakistan- Estimated Value (2012-13) ................... 16
Table 4: Route-wise Estimates of India’s Informal Exports to Pakistan (2012-13) ............ 17
Table 5: Route-wise Estimates of India’s Informal Imports from Pakistan (2012-13)........ 19
Table 6: Route-wise Transaction Cost (TC) Per Container ................................................ 20
List of Graphs and Figure
Graph 1: Reasons for India’s Informal Exports to Pakistan (Percent of Respondents) .......... 6
Graph 2: Reasons for India’s Informal Imports from Pakistan (Percent of Respondents) ..... 8
Figure 1: Major Informal Trading Routes between India and Pakistan .................................. 9
i
Abstract
Informal trade continues to thrive between India and Pakistan despite recent measures
undertaken by the two countries to normalize trade and reduce transport impediments. This
calls for an in-depth analysis of India’s informal trade with Pakistan. This study (i) identifies
factors determining informal trade, (ii) prepares estimates of India's informal trade with
Pakistan (iii) examines the modalities of informal trade (iv) analyzes the transaction cost
incurred in trading formally and informally and (v) proposes recommendations needed to shift
informal trade to formal channels.
The analysis, carried out on the basis of an extensive survey conducted in India and Dubai
estimates informal trade to be US$ 4.71 billion. Of this, India’s exports to Pakistan are
estimated to be USD 3.99 billion and imports from Pakistan USD 0.72 billion. The study
concludes that informal traders in India and Pakistan have developed efficient mechanisms for
contract enforcement, information flows, risk sharing and risk mitigation. Further, even though
the transaction costs of trading in the informal channel are significantly higher than the formal
channel, traders prefer to trade through the informal channel since it is more efficient than the
formal channel. An important policy implication is that unless the environment of the formal
trade improves, informal trade will not only continue to coexist with formal trade, but it will
also impact its potential magnitude in the coming years.
________
Keywords: India-Pakistan, informal trade, regional integration
JEL Classification: F10, F13, F50
Author’s Email: ntaneja@icrier.res.in
_________
Disclaimer: Opinions and recommendations in the report are exclusively of the author(s) and not of
any other individual or institution including ICRIER. This report has been prepared in good faith on
the basis of information available at the date of publication. All interactions and transactions with
industry sponsors and their representatives have been transparent and conducted in an open, honest
and independent manner as enshrined in ICRIER Memorandum of Association. ICRIER does not accept
any corporate funding that comes with a mandated research area which is not in line with ICRIER’s
research agenda. The corporate funding of an ICRIER activity does not, in any way, imply ICRIER’s
endorsement of the views of the sponsoring organization or its products or policies. ICRIER does not
conduct research that is focused on any specific product or service provided by the corporate sponsor.
1
India’s Informal Trade with Pakistan
Nisha Taneja and Samridhi Bimal
1. Introduction
Despite trade liberalization efforts by the South Asian countries, formal trade is abysmally low.
On the other hand, informal trade has been a persistent feature of the region and continues to
thrive. Analysts regard this growing informal trade to be one of the key reasons for low intra-
regional trade in South Asia making this issue an important subject of study in the region.
During 1998-2005 several studies examined the issue of informal trade in South Asia (Pohit
and Taneja (2000), Pohit and Taneja (2002), Taneja et al (2005), Rahman and Razzaque (1998),
Rao et al (1997) and Sarvananthan, M. (1994)). The focus of the studies was on estimating
informal trade, identifying factors that determine these flows and examining the institutional
framework which supports it. These studies considered it important to understand the
functioning of informal trading markets so that measures could be suggested to improve the
functioning of formal markets enabling informal trade to shift to formal channels.
The most interesting country pair in South Asia on this issue is India and Pakistan. The two
countries have had a history of strained and restrictive bilateral trade and transport agreements.
Even though in recent years measures have been taken to normalize trade and reduce transport
impediments, informal trade continues to persist between the two countries. In earlier studies,
informal trade between India and Pakistan has been estimated in the range of US$ 250 million
to US$2 billion per year (Kugelman 2013, Kochchar and Ghani 2013, Taneja 2004, SBP 2006,
Khan et al 2005 and Ahmad et al 2014). If such trade is brought within the ambit of official
trade, a significant increase in total trade could be witnessed. Studying the informal aspect of
the trading relationship would give deep insights into the functioning of the bilateral economic
relationship and help provide policy inputs into the trade normalization process.
In this context the present study (i) identifies factors determining informal trade, (ii) prepares
estimates of India's informal trade with Pakistan (iii) examines the modalities of informal trade
(iv) analyzes the transaction cost incurred in trading formally and informally and (v) proposes
recommendations needed to shift informal trade to formal channels.
2. Framework for Analysis and Methodology
For the purpose of the study, informal trade is broadly defined to include all trade between the
two countries that should be included in the national income statistics, according to
conventional national income accounting, but is not. Measuring informal trade involves
preparing estimates of India’s informal trade with Pakistan in terms of its value, and pattern.
Such estimates are important because they would reflect the potential for trade that exists
between the two countries.