Chapter-IV INFORMAL TRADE BETWEEN INDIA AND NEPAL

Transcription

1 Chapter-IV INFORMAL TRADE BETWEEN INDIA AND NEPAL

2 Chapter: IV INFORMAL TRADE BETWEEN INDIA AND NEPAL 4.1 Introduction: Informal trade means trade operated through illegal means. Informal trade goes unrecorded in the official statistics and is not included in the national income of a country. It is trade operated by violating existing legal provisions. In simple language, informal trade means trade which is not formal. Formal trade means trade flows which are recorded in official statistics. International trade may also be formal trade as well as informal trade. For the purpose of present study, informal trade between India and Nepal is defined as unrecorded trade flows which are operated violating the existing legal provisions of the two countries. As in formal trade, the motive of such informal trade is to earn profit, but in such trade, the risk is too high which is compensated by high profitability. A low transaction cost which is possible due to avoidance of tariff and non-tariff barriers is the main factor for high profitability. Informal trade mostly includes smuggling of goods which takes place to avoid the tariff and non-tariff barriers across the borders. It is very difficult to estimate the size and nature of the informal trade between the two countries. But at the same time, it is also important to understand 146

3 the characteristics of such trade, the reasons for such trade to take place and its implications on different aspects of the economy of the two countries. Keeping this m mind an effort has been made to examine the nature of informal (illegal) trade between the two countries. Since the size of this trade and the number of such traders are not known, the present researcher has made a survey in some border areas where such trade is operated. After enquiry with the help of the local people of those places, it was possible to contact 20 traders who trade illegally between the two countries. India and Nepal share an extremely porous open border covering 1850 kilometers. This open border is spread over the Indian States namely Uttarakhand, Uttar Pradesh, Bihar, West Bengal and Sikkim. The border with Uttarakhand and Sikkim is mostly mountainous. Hence, no formal or informal trading takes place through this border. For surveying the informal traders, five border areas of the other three States viz. Uttar Pradesh, Bihar and West Bengal were covered on both the sides. The border areas covered in the survey on both the sides of the border are Sukhia Pokhari/Pashupatinagar; Naxalbari/Kakarbhitta; Jogbani/Biratnagar; Raxaul/Birgunj and Nautanwa/Bhairahawa. Altogether 20 informal traders from both the sides were surveyed with the help of a schedule of questions prepared for the same. The informal traders interviewed were selected on the basis of discussions held with knowledgeable people of the area. It is also worth mentioning that the people in the border areas are normally reluctant to share 147

4 information regarding the illegal trade because of the strong presence of the agents of the smugglers in their area. Again, the sample frame was drawn from an unknown population and hence the survey result should be taken as estimates only and should be taken as indicative on the basis of which some tentative conclusions can be made. During the field survey, it was revealed by the people that taking advantage of the porous border between India and Nepal; smugglers are running a mushrooming trans-border operation that is costing both India and Nepal in billions. A report published in a website1revealed that die rampant smuggling of goods into Nepal from India costs the cash-strapped nation a whopping loss of NRs.7.2 billion to NRs.9.6 billion (about $115 million) every year. The same report says that Birgunj city in southern Nepal, which has the highest volume of legal trans-border trade transactions, is also the major route for smuggled goods. Fertilizers, sugar, cotton garments, hardware, tobacco items, cosmetics and rice are the major goods smuggled in, The report - 'An estimate of informal and unauthorised imports from India' - estimates that in , the volume of smuggled goods was worth NRs.33.4 billion ($464.7 million) while bona fide imports totalled NRs billion ($1.1 billion). The matter of informal trade between the two countries is not of recent origin. Historically, there has been an informal content in the trade between India 148

5 and Nepal and the share of informal component has always been large and highly significant. Table 4:1 gives an estimate of such trade in the past. Table: 4:1 Unrecorded Exports of Nepal: Items NRs. Million Timber 37.0 Hides and skins 5.0 Underweight adjustment 59.0 Leakage of exports 30.0 Gradation of quality not taken into account in the case of rice and herbs 29.9 Total Unrecorded Exports Total Recorded Exports Source: Adaptedfrom Rawat P.C., Indo Nepalese Economic Relations, p.127. In the year , out of the total export of Nepal amounting to NRs. 442 million, the recorded exports were worth NRs million and the unrecorded exports were recorded at NRs million. This implies that 36.4 p.c. of the exports of Nepal were unrecorded in that year. Similarly, a significant portion of the imports of Nepal also go unrecorded. It can be inferred from the table that Nepal s trade with India is of larger magnitude than what is reflected in the published data. But non-availability of data is a hindrance in calculating the unrecorded trade. Petroleum products, manufactured goods, transport equipment and machinery constitute major items of India s export to Nepal. India s informal exports to Nepal mostly comprise of live cattle, fertilizers, cotton clothes, sugar, 149

6 rice, motor parts, hardware, tobacco items, cosmetics and medicines. India s unofficial imports from Nepal comprise mostly of consumer goods, raw material and intermediate goods almost all of which is of third country origin. Manufactured goods which are unofficially imported from Nepal to India are carpets, shoes, pipes, doormats etc. On the other hand official imports are of manufactured goods and food items. 4.2 Profile o f the informal Traders: The survey was conducted on a total of 20 respondents, 10 each from India and Nepal. The actual number of the respondents in the various border centers is presented in Table 4:2. Table: 4:2 Number of Informal Traders Selected for Field Survey Border Centre No. of Respondents India 10 Raxaul 4 Naxalbari 2 Jogbani 2 Nautanwa 1 Sukhia Pokhari 1 Nepal 10 Birgunj 4 Kakarvitta 2 Biratnagar 2 Bhairahawa 1 Pashupatinagar 1 Source: F ield Survey 150

7 Unofficial figures suggest that the Raxaul/Birgunj trade route also accounts for maximum informal trade. Hence, 4 out of 10 respondents in each side were interviewed in this area. The other 4 border centres in each side are also given due weightage while selecting the respondents. Out of the 10 Indian informal traders, 7 were importers of commodities and 3 were exporters. Out of 10 Nepalese informal traders, 4 were importers and 6 traders were exporters. Neither of these informal traders were found engaged in both exports and imports. This shows that the informal traders in India and Nepal are engaged in either exporting or importing activity. 4.3 Commodities Traded: Informal trade does not take place in all commodities. The informal traders select commodities on die basis of certain criteria such as high import tariff for such commodity on the other side of the border, high demand, fashionable items and easy transportability of the commodities to the other side. On the basis of interaction with the local people, some of the commodities which are mostly preferred by the informal traders were selected for analysis. The informal traders were found to be dealing in more than one commodity. It is also observed that a trader changes the commodity traded depending upon the seasonal demand of the commodity on the other side of the border. 151

8 Table: 4:3 Commodities Traded and Number of Informal Traders Items India to Nepal Nepal to India No. of Traders p.c. No. of Traders p.c. Machineries/ Spare Parts Food Items Textile and Clothing Electronic Items Fuel like Petrol/Diesel/ Kerosene Other Source: Field Survey Note: (1) p.c. is calculated on 10 informal traders o f India and Nepal each. (2) Each informal trader carry out activity in more than one commodity (except in case ofelectronic Items), hence the total no. o f traders is more than 10. It can be observed from Table: 4:3 that 80 p.c. of the informal traders are engaged in the trading of food items from India to Nepal. Another item in which the informal traders were mostly engaged in is fuel like petrol, diesel and kerosene. 60 p.c. of the informal traders send these fuels from India to Nepal. Other items that were sent by the informal traders from India to Nepal were textile and clothing (50 p.c.) and machineries and spare parts (40 p.c.). Textile and clothing here means mostly cotton textiles which is informally sent from India to Nepal. Only 10 p.c, of the informal traders were involved in sending electronic items from India to Nepal. 60 p.c. of the informal traders were engaged in exporting other items like live cattle and fertilizers and computer hardware. 152

9 The commodities traded from Nepal to India mostly comprised of textiles and clothing and also various electronic items such as music system, digital cameras, calculators etc. Almost all of these informal exports from Nepal to India were of third country origin. These types of items were traded by 70 p.c. of the informal traders in each case. Other items sent from Nepal to India were food items and other items like carpets, shoes, different types of pipes, doormats etc. No informal traders were found to be engaged in sending items like machineries and spare parts and fuels like petrol, diesel or kerosene from Nepal to India. 4.4 Value of Trade: The informal traders were asked about the volume of their trade. Table: 4:4 is reflective of this fact. Table: 4:4 Approximate Annual Value o f Trade (Value in Indian Rupees) Year Total Value No. of Traders Average Value ,20, ,26, ,28, ,86, ,64, ,58, ,56, ,82, ,20, ,81,000 Source: Field Survey Table: 4:4 is based on all the 20 informal traders interviewed from both the sides of the border. Country specific value of informal trade could not be obtained from the informal traders. Hence, the analysis is done with respect to the total value of informal trade which includes imports and exports from India as well as Nepal as reported by the informal traders. The value of trade expressed by the 153

10 informal traders in the Nepal side in Nepali Rupees (NRs.) is converted to Indian Rupees (Rs.). It is clear from the table that the value of trade of the informal traders has gradually increased over time. The annual average value of trade of an informal trader was Rs. 13, 26,000 in 2005 which gradually increased to annual average of Rs. 36, 81,000 in This is 2.77 times of the value of This indicates a very rapid growth of this kind of trade between the two countries. This also encourages others to join this business besides the informal traders who are already into this trade. 4.5 Sourcing o f Goods by the Exporters: Table: 4:5 Sourcing of Goods Country of Manufacture India to Nepal No. of Traders Nepal to India No. of Traders India 9 0 Nepal 0 1 Third Country 0 8 Don t Know 1 1 Source: Field Survey When asked about the place of manufacture of the commodities being exported informally, 9 out of 10 traders exporting informally from India were of the opinion that the commodities they were exporting were manufactured m India. Only 1 out of 10 informal exporters from India to Nepal was unaware of the manufacturing country of the commodities being exported informally to Nepal. The survey reveals that not a single commodity of third country origin was 154

11 exported informally from India to Nepal. On the other hand, most of the goods, exported from Nepal to India through informal route were of third country origin. Only 1 out of 10 informal traders disclosed that the commodities exported informally were of Nepal origin. This reflects that the informal traders find it profitable to export goods of third country origin from Nepal to India. This is because of the high tariff charged on the legal exports of such commodities into India. The informal traders are taking advantage of the demand created for these foreign goods in India. If these are bought from the formal market the cost will be much higher. The inherent reasons for such a market for foreign goods in India can be summed up as follows: (i) High tariff imposed by Indian authorities on foreign goods imported to India; (ii) Indian middle class and lower middle class is veiy much fond of goods manufactured in countries like China, Thailand, Singapore, Japan, South Korea among others because of the innovations and usefulness in day to day life; (iii) The goods of these countries are of reasonable quality and available at a cheaper price in comparison to similar goods manufactured in India. In case of goods which are of inferior quality, substantially low price makes them quite attractive to fee Indian consumers. 155

12 4.6 Controllers of Informal Trade: The enquiry reveals that there is a hierarchy of traders in the operation of such trade. At the top there are financiers, below them there are suppliers of commodities and at the lowest level, there are brokers and delivery agents. The financiers control the whole business. In many cases their identity is not known to the delivery agents. The above mentioned hierarchy is found in the trade of commodities of high value like fuel and machineries and precious metals. For items of general use and less value, the hierarchy comprises of the financiers and delivery agents only. The enquiry revealed that such trade was also financed and controlled by criminals, politicians and big business houses. The respondents were asked about their knowledge on the controllers of informal trade that exists between India and Nepal. Table: 4:6 show the result of the survey on this aspect. Table: 4:6 Controllers of Informal Trade Controllers Average p.c. of Informal Traders Politicians 2 Bureaucrats/Officials 2 Indian Traders 55.5 Nepalese Traders 30 Criminals 6 Others 4.5 Source: Field Survey Note: The respondents were asked to assign p.c. o f the total trade controlled by each controller. The average p.c. is calculated after adding up the total p.c. assigned against an option and dividing the total by

13 It is found that Indian traders control the informal trade to the maximum scoring 55.5 average p.c. score. Nepalese traders also control a substantial value of the informal trade and the average p.c. score in the case of Nepalese traders was 30. The survey revealed that Criminals, politicians, and officials also controlled such kind of trade. The involvement of politicians and bureaucrats in such trade is a matter of concern for both the countries. 4.7 Motivation behind Informal Trade: Because of illegal nature of the trade and the risk perceptions, it is very important to have an understanding of the possible motivators or inspirers of the informal traders to start the business as well as to continue with it. Table: 4:7 Motivators of Informal Trade Motivators No. of Informal Traders p.c. of Informal Traders Friends 9 45 Relatives 2 10 Own Initiatives 6 30 Political Leaders 2 10 Custom Officials 1 5 Source: Field Survey On being asked what motivated them to adopt such kind of profession, 45 p.c. of the responding informal traders were of the opinion that they joined this profession on the motivation of their friends. Here, friends include persons already into such trade who is on good terms with the respondents. 30 p.c. of the informal 157

14 traders joined this profession at their own initiative and 10 p.c. got inspiration from their relatives and families. It is astonishing that political leaders also motivated them for such trade as has been disclosed by 10 p.c. of the responding informal traders. Custom officials have motivated one of the responding informal traders constituting 5 p.c. for such trade. Hence, it can be observed here that inspiration from friends and the own initiatives of the informal traders are the main driving force into this business. 4.8 Mode of Payment: Table: 4:8 Mode of Making or Receiving Payments P p... Mode p.c. of Informal Traders Advance Payment 15 Cash on Delivery 20 Credit Allowed 55 Accounts Settlement 10 Source: Field Survey In order to have an understanding about the mode of making or receiving payments in informal trade, the traders were asked about the method they use for this. It is found that 55 p.c. of the informal traders allowed credit to each other. This indicates mutual understanding and organized character of such trade prevailing specially in the border areas of the two countries. 20 p.c. of the informal traders pay or receive cash as soon as the goods are delivered. 15 p.c. opted for advance payment for which the goods are delivered at a later date. Only 10 p.c. of 158

15 the traders settled their accounts through account settlement. Account settlement here means adjustment for the value of the commodities received and the commodities delivered to the same party on the other side. 4.9 Risk Perception: Table: 4:9 Risk Perception of the Cross Border Informal Traders Risk Perception p.c. of Informal Traders High Risk 60 Moderate Risk 25. No Risk 15 Source: Field Survey Since cross border informal trade is illegal, the common perception about informal trade is that such kind of trade involves high risk. The informal traders in the survey too have endorsed this common perception. On being asked of the risk of being caught and seizure of goods, 60 p.c. of the informal traders agreed to the fact that there involves a high degree of risk of being caught and seizure of goods in this kind of trade. 25 p.c. of the informal traders said there is moderate risk involved and 15 p.c. were of the opinion that there is no risk of being caught and seizure of goods in such kind of trade. The no risk is perhaps because of the organized character of such trade and the existing channels of operation. The channels are said to be so strong that established informal traders do not consider that there is any risk in such kind of trade. 159

16 4.10 Cost of Transaction: Table: 4:10 Cost of Transaction Cost (as p.c. of value of transaction) p.c. of Informal Traders Less than 10% 55 10% to 20% 25 20% to 30% 15 More than 30% 5 Source: Field Survey During the discussion with the traders, it is found that the transaction costs include the payment to the carriers of goods, bribes to the various parties, transportation cost etc. The cost of transaction affects the profitability of the informal trade. Low cost of transaction acts as an incentive to opt for such kind of trade. On the other hand high cost of transaction acts as discouraging factor to start such trade. Almost all the informal traders agreed that in recent times the cost of transaction of such trade has increased. 55 p.c. of the respondents said that they were incurring transaction cost of less than 10 p.c. of the total value. 25 p.c. of the respondents incurred transaction cost of 10 to 20 p.c. Again, 15 p.c. of the informal traders were of the opinion that they were incurring transaction cost between 20 to 30 p.c. of the total value. Only 5 p.c. of the informal traders had to bear more than 30 p.c. of the value as the transaction cost. Another important factor that has increased the transaction cost recently is the commission that the traders have to pay for obtaining Indian currency in Nepal. The informal traders disclosed that they have to pay commission of 3 to 5 160

17 p.c for obtaining Indian currency in exchange of Nepalese currency from the unofficial channels. It was also informed that this kind of illegal money changing business has recently grown in the border areas of Nepal taking benefit of shortage of Indian currency in those areas Financing o f Informal Trade: Table: 4:11 Sources of Finance Source p.c. of Informal Traders Own Finance 55 Friends and Relatives 35 Money Lenders 10 Source: Field Survey Finance is an important requirement for any kind of trade. As such, informal or illegal trade also requires a sizeable amount of finance. The informal traders were asked about the various sources from which they generate finance for their trade. It was found from the survey that no informal trader has been able to secure any finance from any financial institution. This is obvious because of the fact that financial institutions do not finance informal or illegal trade. But it was revealed by some respondents that they had obtained bank loan for house building, personal loan etc. and a significant portion of such loan was diverted to finance illegal trade. But they did not divulge this fact in the schedule of questions. As high as 55 p.c. of the informal traders disclosed that their business was financed 161

18 from their own sources. 35 p.c. of the traders arranged finance from friends and relatives. Only 10 p.c. of the informal traders got finance from money lenders Reasons for Entering into Informal Trade: Table: 4:12 Reasons for Entering into Informa Trade Reasons No. of Informal Traders p.c. of Informal Traders High duties in formal trade No Paper work 7 35 Operational Flexibility 9 45 Less Bribe 4 20 Haat/Bazar on the other side 3 15 High demand of the goods on the other side 9 45 Source: Field Survey (Respondents were allowed to mark more than one option) It has always been said that one of the main reason for informal or illegal trade to take place is the existence of high tariffs. To have an idea about the main reasons which drive the traders into informal or illegal trade, they were asked about die reasons for which they had adopted such kind of trade. The most common reason, as stated by the respondents for entering into cross border informal trade was the prevalence of high custom duty. It was found that 15 out of 20 traders had cited this reason (75 p.c.). The next important reason which was cited by 45 p.c. of the informal traders was operational flexibility where the trader could select the day of sale or delivery to the prospective customer to veil him from the official watch. High demand of the goods on the other side of the border 162

19 was another important reason cited by 45 p.c. of the responding informal traders for opting to such trade. 35 p.c. of the respondents cited the absence of paper work as one of the reasons for entering informal trade. Another interesting reason that was cited by 20 p.c. of the informal traders was that they had to pay less bribe in the course of informal trade. Haat bazaar on the other side of the border also facilitated the informal traders (15 p.c.) to involve them into such trade. The informal traders surveyed were asked about the possible impact on informal trade if the custom duties are curtailed substantially. 85 p.c. of the informal traders opined that such kind of action would reduce the volume of informal trade. 15 p.c. of the informal traders surveyed were of the opinion that if the custom duties were curtailed substantially, it will not have any impact on die volume of informal trade. No informal traders were of the opinion that in case of curtailment of custom duties, the volume of informal trade will increase. This fact underlines the necessity of reduction or curtailment of tariffs in order to check the volume of informal trade. Otherwise, the business of informal trade remains as an attractive option for generating income illegally in and around the border areas especially in the case of open border between India and Nepal. It was found during the course of the survey that all the informal traders were aware of illegal aspect of their business. But high returns mainly allure them towards such trade. Especially along the open border between India and Nepal, 163

20 easy transport and accessibility induced them to opt for such kind of trade. In most of the cases where large volume of goods and commodities are exported or imported illegally, the informal traders generally establish good understanding with the custom officials on both the sides. It was disclosed by some of the informal traders during the conversation that some of the custom officials of both the countries are to be paid periodically in order to ensure smooth passage of the commodities. The inefficiency of the formal charnels of export and import of India and Nepal can be said as one reason of flourishing informal trade. Less cumbersome procedure, easy and quick realization of payment, one to one personal contact among the traders etc. are the driving factors of the informal traders. Goods of third country origin are normally exported from Nepal to India informally to avoid high customs duties. Again, it is also alleged in Nepal that Indian carpets are informally imported to Nepal and re-exported to other countries as produce of Nepal. Hence, in order to control this kind of trade, the loopholes present in the current formal channels should be done away with. This can be done by removing the tariff and non-tariff barriers, harmonizing custom procedures and documentation and developing and increasing banking and infrastructural facilities. 164

21 Illegal trade could also take place due to domestic policy distortions. For instance, a trader has the incentive to siphon off subsidised items like sugar, rice, petrol etc. from the public distribution system to the neighbouring countries if such commodities fetch higher prices across the border. Illegal trade of this kind can be checked only if domestic reforms address such policy distortions2. In the case of India and Nepal, because of the open border, siphoning of such subsidized items from India to Nepal is a common phenomenon. REFERENCES 1. IndiaeNews.com accessed on 29/12/ Pohit, Sanjib; Taneja, Nisha; India's Informal Trade with Bangladesh and Nepal: A Qualitative Assessment, ICRIER, New Delhi, July,