Informal trade in the South Asian region

Magnitude
Total informal trade, according to a recent report, exceeds US$ 3 billion, which is almost double the formal trade in the region. India's informal trade with Pakistan is almost ten times that of formal trade, that with Nepal and Bangladesh is almost as large as formal trade, with Sri Lanka it is almost one-third of formal trade and that with Bhutan is three times as much as formal trade (Table 1 and Table2).

Since India is the only country which shares its borders with almost all the South Asian countries and at the same time no country shares its border with countries other than India within South Asia, the central actor in informal trade has been India. India shares a long and porous border with Bangladesh, Nepal and Pakistan. Informal trade with these countries largely takes place across the land borders. Informal trade with Sri Lanka takes place largely through air passengers, with small proportion being carried out by sea through country boats.

India has a trade surplus with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial trade account, while with Nepal it has a trade deficit. Interestingly, a similar pattern can be observed on the official trade account (see Table 1 and 2). Of the US$2 billion informal trade with Pakistan, almost half is traded through third countries (technically official trade) such as Dubai, CIS countries and Afghanistan, while remainder is cross-border informal trade.

As Bangladesh is sandwiched between the northeastern region of India and the West Bengal borders of India, informal trade between India and Bangladesh takes place both along the borders between West Bengal and Bangladesh and between the northeastern regions and Bangladesh. Commodities exported informally from India to Bangladesh through West Bengal comprise of cattle, sugar, kerosene oil, sarees, bicycles, automobile components and parts and other consumer goods like plastic items, razor blades, medicines etc. Items imported from Bangladesh into India through West Bengal comprise of synthetic fabrics, spices, and Hilsa fish. Informal exports from the northeastern region to Bangladesh comprise fruits, fish, sugar, cattle, raw cotton, spices, medicines, sarees and coal. Imports on the other hand consist of polythene, palm oil, plastic shoes and a range of miscellaneous consumer items.

Causes
Of course, high tariffs and the presence of non-tariff barriers in the form of quantitative and other restrictions create a strong incentive to avoid formal channel of trade in the region. The unweighted tariff average was highest in India at 39 percent, followed by Pakistan (25 percent), Bangladesh (20 percent) and Sri Lanka (15 percent). In the early 1990s, India and Bangladesh had the highest non-tariff barrier coverage ratio for primary and manufactured goods. India has a non-tariff barriers (NTBs) coverage ratio of 66 percent and Bangladesh had a NTBs coverage ratio of 52 percent.

Close ethnic ties between trading markets also encourage informal trade across countries. This is particularly important where the same ethnic community is divided into two national boundaries: for example, in the case of India, Bangladesh, Pakistan and Nepal. It has been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka informal trading ethnic ties are stronger in the informal channel than in the formal channel.

The lack of education deters from using the formal channel. Also lack of education would preclude traders from having information on trade policy. Most informal traders are not aware of the details of different trading arrangements. Informal traders in Sri Lanka have pointed out that the terms and conditions of trade agreements are available only in English and not in any local language spoken in the two countries. This fact is also supported by many past studies, that is, in Indo-Nepal, Indo-Bangladesh and Indo-Pakistan trading, level of education for formal traders are significantly higher than those of informal traders.

Transaction costs and transacting environment are also responsible for bulk informal trading in the region. The inadequate transport and transit systems have led to high transportation costs. Particularly in the case of perishable commodities, port congestion, excessive documentation, delays, slow movement of goods, non-availability of equipment and railway wagons, transshipment and other indirect costs increase transportation costs. Thus as long as transport costs are higher in the formal channel than in the informal channel, unofficial trade will continue to take place.

Intrinsic to the activity of trading is the issue of transacting environment. Studies have shown that formal trading procedures are extremely complex in the South Asian region. For instance, the number of documents that need to be filled up for formal trade is 29 for India, 83 for Nepal, 25 for Pakistan, 22 for Bangladesh and 15 for Sri Lanka. Also clearances have to be obtained from multiple agencies at various stages of trading that include obtaining licences and getting clearances from banks. Apart from incurring costs, such procedures also lead to rent seeking activities. Traders are known to pay hefty bribes at various stages of trading before their destination.

Way-out
Because of strong ethnic ties and historical linkages among the traders in the region, informal trade cannot be ignored and that is why it would be difficult to eliminate totally from the region. The involvement of law enforcement agencies to detect and obstruct informal transit of goods across borders is not a viable solution. Enforcement mechanisms could only lead to increase in rent collections and thereby act as added incentive to carry on informal trade. What would be more effective to reduce the impediments to trade in the formal channels.

Further reduction of tariffs, improvements in the transacting environment of formal trade, simplification of existing complicated procedures, improving information dissemination, improving awareness and education levels etc. would lead to a decline in informal trade flows. Many scholars may think of a focus on free trade agreement among the member countries as a solution to the problem. India and Nepal have a long history of bilateral free trade agreements signed since 1961, but the results are frustrating. The south Asian countries formed SAARC, SAPTA and SAFTA.

SAARC is well reputed for limited achievements on crore issues. Studies have shown that the SAPTA process contributed very little in stimulating intra-regional trade. The framework agreement for SAFTA signed at the 12th SAARC summit does not address the issue of informal trade. Due to the slow progress of the regional initiatives of promoting trade, a number of SAARC member countries decided to embark on bilateral free trade agreements. These sub-regional initiatives however, were not considered for preferential trading but for sectoral cooperation. Thus further reduction and harmonisation of tariffs and improvement of institutional mechanism for trade may be the viable solution in arresting the large informal trade of the region.

Dr Haripada Bhattacharjee is Professor (Marketing), Dhaka University.