Cross Loc Trade in the Indian Kashmir

The euphoria for opening cross borer (LOC) trade has forced the Indian Government to approach the Govt of Pakistan (GOP) to give the trade a kick-start. GOI seems to have submitted the list of 14 items, to be traded across the LOC, (there are different versions in terms of number of items)which has reportedly been accepted by Pakistan. There is no denying the fact that the decision taken to undertake the cross border (LOC) trade is based more on political considerations than the economic. While it is expected to satisfy the much talked about demand of the traders in the valley in the post economic blockade scenario, nevertheless the matter need be discussed in the background of certain business realities.

Indian economy is far bigger an economy and a bigger market when compared to Pakistan. It is bestowed with vast economic resources, be it the cheap educated and skilled labour or the raw material. The strong industrial base as also opening its trade allows it to enjoy a vast competitive advantage. Aware of these ground realities Pakistan has all along nurtured apprehensions of economic onslaught from its big neighbor on the plea that its market will be flooded with the cheap products from India which in turn harm the interests of its domestic infantile industry (which is enjoying an assured market at assured prices).

In effect it would always be hesitant to open its market to Indian products. It has not till date agreed to allow MFN (most favoured nation) treatment to India even though the latter has since allowed such a treatment to Pakistan. India on the other hand is said to have raised a wall of ‘protectionism’ by way of imposing higher tariff and non tariff barriers on Pakistani exports. Besides Pakistan refuses to allow MFN treatment for the reason that the Kashmir problem still remains the bone of contention between the two countries. Balance of trade (BOT) between the two countries being heavily in favour of India, the trade deficit against Pakistan raised from $137 million in the year 2001-02 to $893 million in the year 2006-07. It is perceived in Pakistan that the increasing BOT deficit shall aggravate the country’s current account position as also the employment.

On the ground Pakistan deals with India on the basis of positive list (which swelled from 42 items in 1987 to 1075 ending Nov, 2006) and the rest of the world on the basis of negative list (import of all products except those contained in the list for such reason as religion, morality, health, environment, national security). Even when India allows MFN treatment to Pakistan, it imposes higher tariffs and non-tariff barriers to restrict access of Pakistani products to Indian market— for example, 6.4% on industrial goods; 20.2% on textile and 22.4% on clothing (the last two constitute 2/3 of total exports from Pakistan to India).

Earlier as per the road protocol Pakistan trucks would be parked 200 meters away from zero line as against 600 meters in case of Indian trucks from the zero line. Goods were unloaded and transported on head loads by the coolies. Road protocol new revised on the lines similar to what prevails in the cross border trade between India and Bangladesh. Trucks are allowed over to the border and then unloaded for further on road transportation. To top it of the transaction costs, largely the hidden ones comprising mainly of procedural costs, transport related costs, rent seekers and the bribe paid add to the costs involved in the transaction of the trade. All these factors and the hassles involved are responsible for the massive switch/transit trade that takes place through Dubai and Singapore (and of late through Afghanistan as well) to the tune of about US $ 550 even though the added costs in such a trade are 1.4 to 1.7 times higher than the expenses through Mumbai-Karachi route. And finally it is important to note that in view of the strong Indian rupee the exports from Kashmir may have to prove their price competitiveness.

As far the cross border trade through LOC is concerned it is important to note that the world is increasingly becoming a highly competitive market place and the essential functions of moving products from ‘maker’ to ‘user’ are the same everywhere, even though the methods used vary in details among societies and so are the business ways and means developed to accomplish them. In the international marketing dealings are across borders with independent, sovereign countries whose borders are to be crossed, thus meeting with different laws, monetary systems, entry regulations for goods and persons, different degrees of economic development and finally different customs, habits and languages, making up different environmental constraints.

The estimated potential trade between the two countries exceeds us $11.7 billion ($9.2 billion from India and $2.2 billion from Pakistan) – despite this India imports 45 items from the world which it could from Pakistan and 50 items with potential to be exported to Pakistan only 22 items are on the positive list of Pakistan. The export basket from Kashmir that is under consideration for trade from Kashmir to Pakistan under the bilateral trade agreement between the two countries (includes the list of the 14 items that were handed over by the Govt. of India to the Govt of Pakistan) include fruits, handicrafts (carpets, rugs, chain stitch, wall hanging, shawls, embroidery, furniture, and other wooden items) silk and silk products, spices, flowers, saffron, wazwaan, aromatic products and fruit bearing plants. Keeping in view the export statistics of Kashmir in general, the total export potential for the prospective ‘export basket’ from Kashmir, according to an Islamabad based organization SDPI, is to the tune of mere $155.2 million as against $340 million estimated by other sources. Given the limited volume of goods with potential for exports from PAK (marble, apricots, rice, onion, garlic, fertilizers) It is quoted as one of the reasons that the export potential in dollar terms being too negligible that GOP earlier left things out for further analysis.

It is to be borne in the mind that in quantity/volume terms the primary commodities, form the bulk of the ‘export basket’ with out much value/process addition. Fruits are highly perishable, season specific, with little shelf-life and subject to quarantine regulations. For example in case of apples china commands number one position in production/exports to the world (annual production of 23 million tonnes equivalent to 60% of world production, as against 0.9 million tonnes in Kashmir) and has flooded the world markets with its apples. Surprisingly Pakistan is also a major producer/exporter of fruits that include dates, mangoes, kenos and apples to countries in gulf, Singapore, Malaysia, U.K and the like. Handicrafts are the high end products targeted at a selected segment of buyers with higher disposable income.

While the handicrafts from Kashmir, particularly carpets and rugs, are pitted against the indigenous as well as imported products, silk and silk products have to compete with the products from china and Japan which enjoy price, quality and distribution advantages. Saffron from Iran is available at its doors and in effect the kashmiri saffron shall have to face it with chips down in cost and quality terms. Flowers and wazwaan and the aromatic products are the three products with some potential. The flowers being highly perishable products call for an effective logistics and refrigerating facilities.

On the basis of ‘potential trade approach’ the ‘sourcing’ for exports confronts with no dearth of supplies (export surplus) from Kashmir. The products available for export enjoy competitive advantage in the quality and cost terms in the huge domestic Indian market. The cross border trade under reference is expected to reduce the transportation and other logistics costs for the Kashmir exports, and hopefully make them price competitive in the Pakistan market.

The Pakistan market is a new experience for kashmiri exporters with regard to its characteristics, practices, requirements, rules and regulations, the profile of competitors, their strengths and competitive advantages, the market size and demand pattern/mechanism, sales promotion, existing distribution channels and the like. The existing players across the border enjoy the ‘market niche’. As they enjoy all the necessary advantages to maintain their foothold in the market, the Kashmiri exporters require business acumen (which they are gifted with)to penetrate and then capture market as against their existing established share in the Indian market place.

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