The need to revisit India-Pak trade

Updated: Jun 30 2014, 07:30am hrs
To facilitate cross-border Line of Control (LoC) trade between India and Pakistan, the recent decision of the Union ministry of home affairs to provide International Subscriber Dialling (ISD) facility for government officials and the trading community, expansion of the list of tradable items, opening banking facilities in both sides of the border, increasing the number of weekly trading days and installation of full body truck scanners are welcome steps.

Cross-LoC trade commenced in 2008 as part of a confidence building measure and was expected to lead to enhanced economic interactions that could lead to improved relations between India and Pakistan. The purpose of the trade was to allow the people on both sides to trade in items produced in the region to meet their daily needs, which, in turn, would help them in building partnerships and relationships across the LoC. Trade was allowed through the Uri-Muzaffarabad and thePoonch-Rawalakote routes on an agreed upon list of 21 items that were of Kashmiri origin.

Two key features lie at the core of LoC trading arrangement: (1) Barter exchange and (2) zero customs duties. Exchange through barter creates difficulties in valuation of goods in the absence of a price mechanism. Trading partners are given three months to reconcile their transactions. Sometimes, traders are unable to reconcile within this time-frame as the two-way exchange of goods has to be of the same value. This imposes a huge transaction cost on traders. Traders also do not have any formal contract with their trading partners. Without institutional processes, this trade is based mostly on trust. Even though ethnic ties on both sides serve as a basis of mutual trust that mitigates risk amongst trading partners, there is no recourse to law in cases of dispute. While such trade builds confidence, its benefits will be temporary if it is not supported by mechanisms and practices that are long-lasting and transparent.

Permitting duty-free trade through the two designated border points in J&K creates trade distortions. Traders trading through other points such as Attari and Wagah feel disadvantaged as they have to pay duties applicable under SAFTA. This distortion has led to diversion of trade from other land routes and sea routes to the state of J&K to avail duty-free access into each others markets. In practice, trade not only takes place in goods from other Indian states but also in third country goods as there is no customs duty at the LoC. Increasing the list of items on the tradable list would widen the distortion as more trade would be diverted from other states and routes to the LoC to trade at zero duty.

The solution to this complex situation is to shift from barter trade in a limited number of items to regular trade through a formal and institutionalised channel that would follow trade rules that are applied to all other trading routes. The process of formalisation of the LoC trade would unleash huge trade opportunities. However, for this trade to be realised, additional measures that could be undertaken include modernising infrastructure at the border, removal on the restriction on the type of trucks, permitting Indian and Pakistani trucks to move freely in each others territory, and easing business travel. In fact, business associations have suggested that they should be issued travel permits to the point of unloading goods where they could meet with their business partners. Such permits are issued to truck drivers for 12-24 hours and can be extended to business persons as well.

But shifting to normal trade would mean imposing duties on traded goods, which is likely to hurt LoC trade. Keeping in mind the sensitivities of the region, this has to be done gradually so that adequate adjustment period is given to traders. Simultaneously, for non-least developed countries (Pakistan and Sri Lanka) in SAARC, India should reduce the tariff levels to zero from the prevailing 0-5%. This would reduce the impact of tariffs on LoC trade.

To normalise and enhance trade between India and Pakistan, it is imperative to develop a uniform and clear trade policy governing trade across all routes between the two countries. The same policies should be followed regardless of the route. For this, it is important to formalise and institutionalise the LoC trade with a dispute settlement mechanism in place. Policymakers should lay down a roadmap for formalising LoC trade and bring it under the ambit of SAFTA. Traders would also have to be sensitised about the long-term consequences of shifting from barter trade to institutionalised trade. A clear direction would perhaps reduce the pain of adjustment and would lead to peaceful and prosperous economic relations between the two Kashmirs. Overall, by reforming existing trade policies, strong cooperation on trade between India and Pakistan could extend to other aspects of the bilateral relationship.

Nisha Taneja & Samridhi Bimal

The authors are researchers at ICRIER. Views are personal