Informal flow of merchandise from India: The case of Pakistan

Abstract

This chapter aims to update past estimates on informal trade between India and Pakistan. This survey-based study captures the informal merchandise flow from India through the various routes identified by Pakistani traders. The quantitative estimates provided by the wholesaler and retailer community were validated through clearing agents and customs officials. We found that the key sectors in which informal flow from India takes place are fruits and vegetables, textiles, automobile parts, jewelry, cosmetics, medicine, tobacco, herbal products, spices and herbs, paper and paper products, and crockery. The major routes from where these goods are channeled into Pakistan are Dubai, Kabul, Kandahar, Chaman, and Bandar Abbas. The minor routes include several places in the adjoining border region. Our estimates show that the value of this informal flow from India to Pakistan is US$1.79 billion annually. While such flows have narrowed the demand-supply gap in various product categories and created livelihoods for several in the poor regions, we also observe that this expansion in informal trade is hurting the manufacturing community. Pakistani producers end up competing with items on which duty has not been paid and, thus, are cheaper in the local market. There is also a loss of revenue to the government, as these goods are not subjected to the usual customs procedures. In the case of food, herbs, and pharmaceutical items, the merchandise is not checked for health and safety standards, which poses risks to human health. We argue that given the large volumes of informal trade, it is in the interests of the government to move fast and adopt measures that lead to the formalization of trade. The overall process of India-Pakistan trade normalization can certainly help this endeavor.