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Emerging Issues in India–Pakistan Trade: An Introduction Read chapter Read first chapter

2017 | OriginalPaper | Chapter

8. India’s Informal Trade with Pakistan

Authors : Nisha Taneja, Samridhi Bimal

Published in: India-Pakistan Trade Normalisation

Publisher: Springer Singapore

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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. Studying the informal aspect of the trading relationship would offer insights into the functioning of the bilateral economic relationship and help provide policy inputs into the trade normalization process. In this context the 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.

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previous chapter India–Pakistan Trade: A Case Study of the Pharmaceutical Sector
next chapter India–Pakistan: Second Trade Perception Survey
Footnotes
1
Hawala by definition is a traditional system of transferring money used in Arab countries and South Asia, whereby the money is paid to an agent who then instructs an associate in the relevant country or area to pay the final recipient.
 
2
Nostro Account: Bank account established in a foreign country usually in the currency of that country for the purpose of carrying out transactions there. For example, most commercial banks maintain US dollar accounts with their correspondent banks in USA in order to facilitate settlement of interbank and customer transactions in US dollar.
 
3
Taneja et al. (2011).
 
4
The uniqueness of this system is that there is no physical transfer of currency. This mechanism, referred to as the ‘hawala’ in India and Pakistan, operates on the same principles. Thus an Indian exporter, who exports goods to Pakistan, gets his payment through the ‘hawala.’ The dealer in Pakistan sends an ‘I owe you’ to the dealer in India and the requisite equivalent amount is paid to the exporter. The ‘I owe you’ is analogous to cash or cheque in the modern banking system.
 
5
ICRIER Survey in Dubai in December 2014.
 
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Metadata
Title
India’s Informal Trade with Pakistan
Authors
Nisha Taneja
Samridhi Bimal
Copyright Year
2017
Publisher
Springer Singapore
Book
India-Pakistan Trade Normalisation

Print ISBN: 978-981-10-2214-2

Electronic ISBN: 978-981-10-2215-9

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-981-10-2215-9_8