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Why LoC trade ban with Pakistan doesn't mean much

Mudit Kapoor     April 19, 2019

Informal trade between Indian and Pakistan is likely to see a surge after India's suspension of LoC trade with the neighbouring country. Most of the trade between India and Pakistan happens through informal channels. This means the trade ban at Salamabad and Chakkan-da-Bagh in Jammu and Kashmir is unlikely to make a big impact.

As per a study by ICRIER, informal trade between the two countries in 2012-13 was almost double the value of formal trade, and most of this was routed through a third country.

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The study was published in May 2016 by Indian Council for Research on International Economic Relations (ICRIER). The report uses trade statistics of the year 2012-13. This is the latest available study on informal trade between India and Pakistan. No other recent data is available.

As per the report, the value of informal trade between India and Pakistan was estimated at USD 4.7 billion in FY13. Of this, India's exports to Pakistan were estimated to be USD 3.99 billion and imports from Pakistan USD 0.72 billion. Most of India-Pakistan informal trade flows through third country, in particular Dubai. Similar to formal trade, the balance of informal trade is also tilted in favour of India.

While formal trade between India and Pakistan is surprisingly low (the study notes that the potential is 15 times), informal trade between the two countries has continued to thrive.

What is informal trade?

Informal trade is that trade which is not included in the national income. Countries sometimes choose informal trade route over the formal trade route to avoid high tariff and trade restrictions.

Why do India and Pakistan resort to informal trade?

Informal trade between countries happens through a third country. The third country will officially (formal trade) buy the goods from one country and sell it to the other country at a higher price. This price is still lower than the price at which formal trading would happen.

For example, in the case of India and Pakistan, India-Dubai-Pakistan is the main channel for informal trading. Trade is recorded between India and UAE and between Pakistan and UAE, but is not recorded between India and Pakistan. The report broadly outlines seven routes through which informal trade between India and Pakistan takes place:

As per the study, back in 2012-13, the main items India exported informally were jewellery (24 per cent), textiles (20 per cent), machinery and machine parts (8 per cent), electronic appliances (6 per cent), chemicals (5 per cent), paper (5 per cent) and tyres (5 per cent). While, India's informal imports from Pakistan mainly consisted of textiles (49 per cent), dried fruits (32 per cent), spices (10 per cent) and carpets (4 per cent).

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