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 the Poonch-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 other’s 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