JK Bank

Just as the cross-LoC traders in Poonch were breathing a sigh of relief after resumption of trade on 16 April, the Ministry of Home Affairs (MHA) issued an order to suspend the Jammu and Kashmir cross-LoC trade indefinitely two days later. Citing ‘misuse (that) involves illegal inflows of weapons, narcotics and currency’, the trade has been put on hold effectively from 19th April, in order to put in place ‘a stricter regulatory regime’.

Cross-LoC trade, started on 21 October 2008, is one the most successful Confidence Building Measures, along with cross-LoC travel. The trade, barter in nature, has been conducted on a mutually agreed list of 21 items, based on zero tariffs with the modalities highlighted in a Standard Operating Procedure (SOP) signed between India and Pakistan. LoC trade takes places four days a week, wherein the traders are allowed to send 140 trucks per week with a restriction on the maximum weight of trucks.

During its inception, questions on the economic viability of the LoC trade loomed large. However, not only did the trade sustain, but goods worth approximately INR 7500 crore (approximately USD 1,071 million) have been traded in the period between October 2008 and January 2019 from both Salamabad and Poonch trading points. The number of active traders has also grown from approximately 50 in 2008-09 to 229 (Salamabad) and 380 (Poonch) today. The trade has also had positive economic dividends wherein it has generated an employment of 1.76 lakh manpower days to date. A local labourer was able to take home an income of approximately INR 1400 per day (for 100 kg of cargo handled), and the transporters earned between INR 8000-15,000 per truck.

The spatial setting of the trade makes it prone to vulnerabilities. Various studies have highlighted the operational challenges of this trade – lack of truck scanners, no banking mechanism, no formal communication channels on either side, and absence of a dispute settlement mechanism. In the last decade, there have been some reported incidents of smuggling of drugs and weapons. The usual procedure has been to suspend the trade for a few days in the aftermath of a breach in security. Apart from this, in 2016 and 2018, the National Investigation Agency (NIA) had conducted raids at both Trade Facilitation Centres (TFCs), under suspicion of ‘hawala’ trading. In spite of such trials, the trade continued.

The traders considered the NIA raids as positive intervention that led towards streamlining of the LoC trade. They also realized the need for improvement in the trading practices. As a result, a number of steps were undertaken by traders and the local authorities. The TFCs banned some suspicious traders and trading companies from operating on LoC route. The trader registration process was rationalised to make it more transparent and accountable. Furthermore, the traders themselves took some initiatives to support the authorities – a minimum price cap was fixed for agricultural commodities, in consultation with the relevant departments of the Government of Jammu and Kashmir to keep a check on under-invoicing, and trade of California almonds stopped in the latter half of 2016.

With the recent withdrawal of the MFN status and increase in tariffs on imports from Pakistan, it was presumed that the cross-LoC trade will be used as an alternate route. However, it may not be as straight forward as there are several limitations to this. A number of studies have suggested that a large quantum of India-Pakistan trade also takes place through third countries. LoC trade, while offering the benefit of zero duty, limits the trade due to a cap on the quantity of trade that can be conducted in a week. To exemplify, India’s annual import from Pakistan has been approximately USD 460 million (2017-18), whereas, LoC trade achieved this figure cumulatively in the first 6 six years of its operation through both ‘trading-in’ (import) and ‘trading-out’ (export) processes.

Notwithstanding the economic and peace dividends of LoC trade, the vulnerabilities warrant strict reform measures. The objective of the government with this suspension is to put regulatory norms in place. This can be achieved by undertaking a number of infrastructural and policy interventions.

Firstly, from the security perspective, installation of full body truck scanners is necessary to check movement of narcotics and weapons. Secondly, there is a need for establishment of formal communication channels at the TFCs. In the absence of such channels, the traders rely on cross-platform messaging services to conduct trade with their counterparts in PoK that has given rise to suspicions. Thirdly, there is a need to make good on the RBI’s suggestion in 2016 on monetisation of trade through establishment of an interest-free Trade Facilitation Account (TFA). A TFA would push instant transactions through bank account instead of the current three-month waiting period for trade balancing and make transactions transparent.

Fourth, the trader registration process needs to be streamlined through compulsory re-registration based on GSTIN. This will facilitate monetary tracking. Fifth, there is a need for replace of the current ‘general’ commodity list with a ‘specific’ list of tradable items in consultation with the LoC traders to ensure that only permitted goods are being traded. Finally, provision for compulsory compliance requirements for sensitive commodities traded-in through the LoC must be made. These basic steps will go a long way in streamlining LoC trade.

For the last decade, the continuation of cross-LoC trade and travel has exemplified that Confidence Building Measures can exist in isolation of the political tensions between India and Pakistan. In order to ensure continuation of the process, it is important to adopt reform and monitoring measures on a regular basis instead of ad-hoc suspensions.

Riya Sinha is Research Associate at Bureau of Research on Industry and Economic Fundamentals in New Delhi.

The views expressed here are personal.


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