The ethnic groups involved in illegal trade in Indian goods are predominantly Afridi Pathans, Hindus, Sikhs, Afghans and Pathans.
The Sikhs and Hindus settled in the tribal areas almost a century ago have adapted Pathan culture and are fluent in Pushto. In Balochistan, three clans - Achakzais, Milzais and Ghilzais -- live on both sides of the border and dominate illegal trade.
Most of the tire business in Balochistan is conducted by "kuchis" (gypsies) whose fortunes have improved visibly over time. Three major tribes - the Mehar, Mangrio and Bhambro - dominate the Sindh cross-border trade. A small proportion of this trade is conducted by the Thori and Bhatoorv castes. The ethnicity-laguage-information flows on prices and demand for goods.
-- Ethnicity also has a bearing on the second attribute, which is the rate of entry/exit. Entry and exit from informal trade is low. The ethnic complexion of the trade makes entry difficult. Second, ethnic ties increase credibility in a business much of which is based on trust and credit.
The third attribute is risk. One would expect that circumventing restrictions would entail the risk of confiscation. In reality, such risks are low, thanks to collusion between the smugglers and officials.
The khepias (carriers) bribe the customs officials in Karachi and Dubai and the Federal Investigation Agency (FIA) officials in Karachi to ensure unhindered travel. They provide their tentative weekly flight schedules to officials at the airport.
Additional bribes are paid to the airport security police at Karachi and to police on the road leading to the airport. Personal contacts and ethnic connections also act as risk mitigating factors across trade routes. They minimise default in the delivery, specifications and payment for goods. Bribery is a common practice on the Chaman border. It can range from 0.15 to 2,000 dollars depending on the volume and quality of goods.
FIVE DIFFERENT AGENCIES: Frontier Constabulary, Pishin Scouts, regular police, FIA and the Customs - are stationed within half a kilometer, from Wesh to Chaman. The various authorities are paid on daily, weekly and monthly basis. Payments extracted by low-level functionaries are graduated up the hierarchy of command.
However, the multiple recipients notwithstanding, bribes are low and affordable on a per unit basis. It is only when the incidence of interdiction and seizure of goods increases that smugglers switch to other routes, such as Noshki and Gulistan.
The fourth attribute is financing. Payments, both to importers and wholesalers, are deferred under arrangements known variously as ograi (in Bara) and across other routes as hundi/havala.
The arrangements are based on trust and client credibility, a large part of which has to do with common ethnic and tribal ties.
Bank financing is difficult and involves interest, Instead business capital is raised from family members or own savings are utilised. Payments for consignments are also done through interbank transfers outside the country, in Dubai or India. In Balochistan, Pakistani and Afghan currencies are accepted for transactions on both sides of the border.
SOCIO-ECONOMIC IMPERATIVES: The socio-economic driver for illegal trade is extreme deprivation, in the absence of social and physical infrastructure and economic opportunities.
There are few schools, medical facilities, roads, utilities and jobs in the major smuggling areas, whether in the tribal agencies, or in Pakistan close to the borders. This is the stark reality on the western and eastern borders where illegal trade flourishes, whether it is Bara, Chaman, Gandasingh Wala or Tharparkar.
Smuggling becomes the only viable recourse, a source of enormous profit for the favoured few, and meagre livelihood for a multitude of dependant carriers and transporters working under brutally harsh conditions. Such trade provides huge illegal gratuities for government officials.
Not surprisingly, this income distribution pattern replicates the national macroeconomic situation. While it is difficult to ascribe exact numbers, impressionistically, anywhere between a half to one million people and their dependants are sustained by smuggling.
The clan and tribal connections provide an historical context to this trade. Such connections also ensure some economic stability in a highly volatile business environment.
The situation clearly demonstrates that broad-sweep policy-cum-ethical takes on smuggling not only buck self-interest and tribal prerogatives but are premised upon providing alternative economic opportunities in marginalized areas, which the government traditionally has not been prone to do.
REVENUE GENERATION: The revenue impacts are likely to be insignificant since most of the informal trade would continue despite giving MFN status to India. As indicated, the only switch that is likely to take place is on the Dubai-Karachi route where the assessed value of third country trade is in the region of 90 million dollars.
Additional tariff realisation would depend on whether Indian tariffs are higher than those in "substitute" countries. Invoicing of Indian goods entering Pakistan via third country trade can, potentially, lead to increased revenue realisations once such imports are legalised, provided Pakistan customs maintains a detailed price list of these imports.
INDUSTRY IMPACTS: Re-directing illegal trade into formal channels is not likely to have much of an impact on domestic industry per se, as it merely changes the importing modality rather than the magnitude of imports. However, a price comparison of smuggled items illustrates the potential for de-industrialisation in terms of the formal trade flows it would induce.
Drugs and medicines coming into Pakistan via illegal channels are valued at approximately 36 million dollars and cosmetics at approximately 50 million dollars. The large price difference for drugs reflects the subsidy on ATT consignments to Afghanistan.
The illegal trade in these is valued at 1.6 million dollars. However, non-subsidised drugs and medicines, making up the remaining 34.4 million dollars in illegal trade, are also priced much lower than in Pakistan, and of a better quality.
At present, there are internal checks on their sales which prevent a large influx of these drugs - an influx warranted by the price difference. Trade liberalisation would remove these checks. And as long as tariffs remain, and informal transaction costs are not high, there will always be an incentive to smuggle goods triggered by the opening of the more proximate routes (Delhi-Lahore, Mumbai-Karachi).
So we come to the interesting result that liberalisation can lead to de-industrialisation not only through the larger quantum of formal trade, but through the induced increase in informal trade as well. In fact, this is an argument that applies across the board for all illegally traded goods.
RECAP: A priori, trade liberalisation between India and Pakistan offers prospects of directing informal trade into formal channels. At present, while tariff rates and quantitative restrictions are coming down under various bilateral, regional and global (WTO) initiatives, Pakistan has not granted India MFN status.
Similarly, India continues to maintain a host of hidden restrictions against imports from Pakistan. Trade between the two remain at historically low levels and volume of informal trade.
However, a discernible momentum is building up to lower the remaining restrictions, which should not only increase cross-border trade but also lower the incidence of smuggling. As potential trade dynamics between the two countries change, it is necessary to finesse trade policies further to maximise fiscal benefits and to ensure that adverse impacts on local industry are kept to a minimum.
The process of fine-tuning trade policies entails determining the extent and speed of trade liberalisation, as well as its sector focus.
An investigation of Indo-Pak informal trade was part of this policy imperative. Its purpose was to quantify the value of informal trade and assess the prospects of channelling such trade legally, under partial (MFN) and complete (SAFTA) trade liberalisation regimes.
Not surprisingly, the ex post findings deviate substantively from the ex ante expectations. Guesstimates of informal trade between the two countries ranged from 0.5 to 10 billion dollars. The study confirms the lower end of the range. In recent years, India has lost a share of its informal market to China.
Six items (of a total of 17) constitute 84 percent of the total import value (492 million dollars).
These are, in order of priority, cloth, pharmaceutical machinery, cosmetics, tires, medicine and livestock. Exports from Pakistan, at 10.37 million dollars, are a fraction of imports; however, they may be understated. Cloth exports constitute 88 percent of the total.
The likelihood of diverting informal trade to legal channels is low under an MFN regime, as existing tariffs would more than offset the net transaction costs on the circuitous but important informal trade routes.
It would take a substantial tariff reduction and a lowering of formal transaction costs to re-direct informal trade to the more direct routes between India and Pakistan.
In fact, if tariffs remain - even at lower levels - the more proximate and legal direct routes may trigger additional informal trade. Institutional considerations are another factor, working through transactions costs, which lower the prospects of changed trade modalities.
Revenue generation for the government in this scenario is also not likely to be significant. The policy implication is that free trade, a la SAFTA, is likely to yield higher trade and revenue gains.
However, it would also constitute a threat to local industries, especially textiles, cosmetics, and drugs and medicines. The comparative prices in the last two categories are highly indicative, and suggest that tariff reductions may need to be staggered.
Finally, trade policies need to consider the socio-economic consequences of disrupting practices, which are both historically entrenched and generate employment.
In fact, they cushion the effects of government neglect in marginalized and politically volatile areas. So complementary polices which provide alternative livelihood and establish social and physical infrastructure become key.
(Concluded)