SANEI: Completed Studies: Abstract

India's Informal Trade with Bangladesh and Nepal: A Qualitative Experience

The large and vibrant informal trade between India, Bangladesh and Nepal continues to thrive despite unilateral/bilateral/regional trade liberalisation in the three countries. This calls for an indepth analysis of India's informal trade with Bangladesh and Nepal. Using insights from the New Institutional Economics informal and formal institutions engaged in cross-border trade are contrasted. The objective in juxtaposing formal and informal institutions in performing similar transactions viz. engaging in cross-border international trade is threefold: first, to understand how informal trading markets function vis-à-vis formal trading arrangements; second, to analyse formal and informal trading arrangements particularly in the context of the relative importance of institutional factors vis-à-vis trade and domestic policy distortions; and third, to see whether informal trading arrangements provide better institutional solutions than formal trading arrangements.

The study indicates that informal traders in India, Bangladesh and Nepal have developed efficient mechanisms for information flows, risk sharing and risk mitigation. Further, informal traders prefer to trade through the informal channel largely due to the inefficient institutional set up in the formal channel. The three important factors (viz. quick realisation of payments, no paper work, no procedural delays) are found to be factors contributing to lower transaction costs in the informal channel. The survey also reveals that the transaction costs of trading in the informal channel are significantly lower than the formal channel in both Indo-Bangladesh and Indo-Nepal informal trade. Finally, the analysis of discriminating characteristics of formal and informal traders in India/ Nepal and India/Bangladesh indicates that transaction cost and level of education are the only common discriminating factors.

The principal policy implication from the study is that unless the transacting environment of formal traders improves, informal trade will continue to co-exist with formal trade, even if free trade is established in the SAARC region.

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