In a Whirlpool

Money, politics and the LOC trade. R S Gull delves into the elements that construct and deconstruct trans-border business.
A speaker at a conference on trans-LoC trade in Jammu recently said trans-LoC traders are “united in misery,” and so “they need company.” Publicly, they are encouraged to strengthen the CBM that is now in its fourth year; but at institutional levels—they are facing unimaginable problems at the hands of ‘facilitators’.

The last fortnight of 2011 explained this ‘misery’ in many volumes. Traders from Pakistan administered Kashmir (PaK) accused the Trade and Travel Authority (TATA) of corruption. Within days of the allegation making it to the front pages of Pakistani newspapers, the customs department seized nine truckloads of coconuts, black pepper, red chilly, black tea and onions imported from J&K in Pakistan’s “tariff” areas, imposed a fine and did whatever they could. They justified their actions by stating that the goods imported from J&K are duty free and need to be consumed in “non tariff” areas (read Muzaffarabad and Mirpur). Frustrated, the traders took a convoy of trucks and parked them at the main gate of PaK premier’s  office where from they were removed after six days!

“Pakistan should announce whether the barter trade on the two sides of the LoC is smuggling or has any legal sanctity,” trade leaders said at a press conference. “If barter is being declared as smuggling by custom officials, then there is no fun in continuing this.” In addition to traders being labeled as smugglers, they said, sometimes customs officials impose a fine which is more than the actual cost of the consignment.

Apart from Rs 7000 that TATA levies for every truck crossing LoC, traders allege that Pakistan’s FBR and its sister organization, Custom Intelligence, have imposed Jagga Tax and Batta that varied from Rs 15000 to 40000 per truck. The Custom Anti-Smuggling Squad and Custom Intelligence, they said, are making more money than the Custom makes as the duties levied.

The situation on this side of the LoC is also not rosy. Last week, traders in Poonch protested against the Custodian and accused him of corruption. District authorities did meet the protesting traders and assured action. Nothing happened.

The trans-LoC trade has been the only initiative of some consequence between India and Pakistan on the Kashmir front. However, it is gradually losing its sheen despite being an exercise that spans four days a week. “It is just a gamble, you win and become a millionaire or you lose and become a pauper,” admitted a trader, “But there is one person who earns millions, the person who is mandated by law to facilitate the trade.” The barter that India and Pakistan have used to emotionally blackmail millions of the people living on either side of the divide, is serving the interests of a few.

Corruption exists at all borders where trade takes place. But policy makers in Islamabad and Delhi who drafted this trade doctrine have left so many holes in this exercise, that it only suits a high degree of corruption. Poonch traders hit the roads last week simply because a trader, whose red chilly truckload was listed to go, wanted to send a truckload of fresh fruit instead but the authorities refused and the produce perished waiting for clearnace.

Authorities, as per trader’s allegations, facilitated the passage of 13 truckloads of a Jammu trader and allegedly permitted ‘export’ of green grams by listing it as beans!!

The last round of talks between foreign ministers S M Krishna and Hina Rabbani Khar in July 2011 agreed that the list of 21 trading items will be respected by both sides till a working group will review the list. In addition to providing adequate facilities on both sides, strengthening telephone communications, permitting interactions between the trading parties from two sides and encouraging the respective designated authorities to meet every quarter for settling issues, the two countries agreed to permit trading for four days a week. What happened in follow up; is that nothing happened.

Trade across the LoC is perhaps the only business that lacks proper classification of tradable items. In import-export, items are listed in such a way that a kernel is different from a walnut, and hides and skins make different items species-wise. But this is not the case with the trans-LoC trade, where it is permitted in 21 categories like furniture including walnut furniture, wooden handicrafts; fresh fruits and vegetables, dry fruits including walnuts.
Traders have used the categorization very efficiently. Though several items were sent by several people, there was only one item that remained in demand on either side, every time. Initially, the traders were frustrated about what they can import or export. Then, it was garlic coming from PaK and onions going from J&K. As authorities banned the two items, it became a route for import of green gram (Moung Daal) versus the coconuts export. Authorities took different routes – this time the place of origin – to ensure this combination goes ahead no more. Now, it is red chilly powder going and dry fruits coming, plus machine made Pakistani carpets.

There are traders who still have coconuts worth crores stored in their warehouses. “We only want that the government should tell us at least two months prior that they are going to ban a particular item; and that can save us a fortune,” said Shahid Choudhary, adding, “Let there be another items that could substitute the banned one.”

“They have permitted us to import Peshawari sandals from PaK and export Imli (tamarind) which does not exist in J&K,” a trader Abdul Rashid said. “And now, they are raking up place of origin issue.”

But the incomplete categorization of items gives customs officials and trade facilitation authorities a lot of leeway to do what they want to. “Even after coconut was banned, several trucks were permitted to cross over,” one trader admitted. “This was after they got a cut.”

But that is not the only issue the trade is facing. “Status of the trade is very important,” said Zahoor Ahmad. “We want the two governments to decide whether it can be classified as foreign trade or a domestic trade, and once they decide let there be legal protection to it.” Traders and the government consider it as ‘intra-Kashmir’ trade, but this is not anywhere in the books.  Once the Commercial Tax department imposed VAT on “imports” forcing traders to suspend the trade and hit the streets, the issue of the trade’s status was raised. Traders now want assemblies in J&K as well as PaK to make a law which would protect the trade.

The law cannot be thought about unless crippling issues are not tackled. The trade continues to be blind, because the supplier does not know the buyer and vice versa in most of cases. While India hosted a trade delegation prior to the start of the trade in 2008, Pakistan has not been able to fast forward a return visit by trade from J&K. A survey carried out by Mercy Corps suggests that half of the traders from J&K have never met the person they are supplying. In 51 percent of the cases, traders have never travelled across but in 27 percent cases they have used Wagha to crossover and meet their colleagues on the other side.

The trade had evolved a system of its own for interaction. They meet at zero point, once in a month, in which they discuss trade related issues including conversion rates and the dispute resolution. Usually, authorities including armies from the two sides facilitate these meetings. But not everyone has been lucky to be part of this exercise. While there has been only one such meeting between the traders of Salamabad and Chakothi using Jhelum Valley Road for business, the trade in Poonch has had more than 38 meetings so far. This included the famous meeting in which there was a fistfight over the issue of transactions and backlog.

Banking and currency would continue to be a major challenge for the two governments to settle. Initially the idea that was discussed at the top level in both nations was to permit the state government owned J&K Bank to revive its pre-partition two branches in PaK and the newly set up Azad Kashmir Bank will open two branches in J&K. Somehow that did not click. Now the idea is to encourage sovereign banks of the two states to start operations. It might be linked to the MFN status that Pakistan has extended to India.

But currency will still remain an issue. In the summer of 2011, Indian officials had suggested to their Pakistani counterparts that the Asian Clearing Union (ACU) should be the currency for the LoC trade as well. The Kashmir Chamber of Commerce and Industry (KCCI) immediately reacted to it saying it was a move aimed at upgrading the intra-Kashmir trade into an import-export exercise. A noted economist who was associated with trade related issues while in J&K said he has no reason to doubt what the KCCI said. “The political significance of following the ACU route is that it is the first step towards making the LoC into a border,” Drabu told a newspaper. “No matter which way you look at it, only Kashmiris are the losers.”

The trade between India and Pakistan is conducted under the aegis of ACU because it is the simplest form of payment arrangement whereby the two parties settle payments for intra-regional transactions among the participating central banks on a multilateral basis. Member countries take recourse to ACU because it economizes on the use of foreign exchange reserves and transfer costs. Debtors, in this system, pay up their dues in convertible currencies. Though the accounts of the ACU are held in “Asian Monetary Units” (AMUs), RBI permits members to settle transactions either in ACU dollar and ACU euro. As the trade linked it with the politics of the region, it was skipped.

Then, Drabu suggested adopting the nostro-vostro accounts route. Under this system J&K Bank, in which the state government is a majority shareholder, will open a Pakistani Rupee (PKR) nostro account in a Pakistani bank having a presence in PaK. In response, any bank in PaK opens an Indian Rupee (INR) vostro account in J&K Bank. Import and Export transactions will be settled through these accounts.

Since the PKR/INR is not traded in India / Pakistan, RBI in collaboration with the State Bank of Pakistan, under this system will have to provide a window for buying/selling of PKR from/to J&K Bank to fund the rupee  vostro account or absorb the surplus balance in this account. State Bank of Pakistan will have to provide reciprocal facilities to their Bank in PaK. For covering the exchange risks, RBI and SBP may buy/sell the PKR/INR at a fixed rate to these identified banks.

Drabu, on being asked by the union finance ministry, wrote in detail a letter to the then Finance Minister P Chidambaram explaining the system. Later, when Pranab Mukhrejee took over as the new Finance Minister, Chief Minister Omar Abdullah also wrote a detailed letter to him. “While the trade between India and Pakistan is transacted via the ACU dollar and ACU Euro, trade across the LoC cannot be transacted the same way for a variety of issues, including that of classification of this trade as foreign trade,” Omar wrote to Mukherjee. “Also, it will not meet the aspirations of the traders, as well as the people in J&K.”  Omar suggested that “we have to devise a system for settlement of cross LoC trade outside the ACU mechanism which will operate in Indian /Pakistani Rupees.”

A few months later, after India suggested ACU, Islamabad turned it down. Even a feeling in New Delhi that adopting ACU would mean compromising the claims over PaK added to its cancellation.

“We want a rupee trade,” says Dr Mubin A Shah, former KCCI president who continues to be involved in the trans-LoC trade issues. “India is having a rupee trade with Nepal and Bhutan so the practice can be applied in J&K-PaK as well.”

All these unresolved issues have created a situation that there is high level of attrition among the people who intend to trade through LoC. An engineer, J P Singh, who started trading through the LoC’s Poonch window said the trade is a crisis. “We have 800 traders registered but less than 100 are trading,” he said. It is the same crisis in Uri where the number of active traders’ nosedived from around 500 to less than 40 now.

“If the survival in trade is 40 or 50 out of 500, it essentially would require understanding the wisdom of how they survive,” states one trader, who wishes to remain anonymous. After a pause, he answers, “It is not mere survival of the fittest; it is how the compromises are made at both the levels.” In addition to local traders operating for the biggies in business from the plains, traders seem to be working for a few wholesalers who are adequately connected in the system.

The loopholes in the system are being used by facilitators to their personal advantage and the traders who are desperate to survive bend the way they are asked to.

“Being LoC trader is humiliation,” said trade leader Asif Lone. “We are being termed smugglers by the officials and even when we visited Chief Minister and sought his help on certain issues he also accused us of being hawala dealers.” In a conference on the trade in Jammu recently, Lone said the police have registered an FIR for hawala and almost every trader is an accused. “They trace our calls, then summon us and say that the person who called you is a wanted militant,” Lone said. At one level a trader who owes around Rs 18 lakh to a trader from across was suggested by an officer that “you give us eight lakhs, take ten lakhs home and tell the person that we have taken it.”

KCCI executive member Shahid Choudhary is facing the music because he received a call from someone from PaK enquiring about rates. “Now three agencies are investigating me but how can I convince them that I do not know the person and had never talked to him?” There are dozens of cases like this. Last time when a lawmaker wanted details about the state and status of hawala in J&K, the state government gave its response in many pages listing names and places – mostly the LoC traders.  Tired of massive corruption and harassment, when the traders hit the streets, a senior police officer visited them at Salamabad. They shared their problems with him and briefed him in detail about the systems that have emerged in absence of institutional infrastructure and ambiguity in the mechanism. “A lower rank officer was shifted,” Lone said.

Traders understand the security concerns involved in the system. In 2011, the police, according to a trader, came across a case in which a south Kashmir truck driver got a pistol from Chakothi while delivering the consignment. After several months, the person was arrested. Recently, news reports from Delhi suggest certain elements in a Delhi blast has something to do with the cross-LoC trade. The latest development is one of Poonch traders has been arrested for managing import of Rs 2.24 crores of fake currency and its subsequent supply to markets in Delhi as part of a fabric cargo.

The systems in place are interesting. Traders take their consignments to Trade Facilitation Centres at Salamabad (Uri) and Rangar (Poonch). They list the consignment and all the cargo is handed over to the TFC officials. They are taken by drivers who are registered by police after certifying their antecedents. Paid by the traders, they take the cargo across and return. Trade ha been seeking installation of whole body scanners and the government agreed. Given the systems that emerged the scanner would have been in place by December 2011 but it did not happen and officials say it will still take some time. At Poonch, one scanner is already there. While it is not sufficient to manage the load, it is mostly idle for want of electricity.

“We told the chief minister that to address these concerns he should entrust the job of cargo movement to the SRTC,” Lone said. “This would help the corporation to make good money and prevent us from becoming counter-guarantors to the truckers whom we know less than the police.”

In barter, there are no transactions. But balance of trade does tilt to one or the other side. A trader paying excess amount to someone related to the other party could become an easy instance of a hawala transaction. “And there are instances in which the traders landed in such a crisis,” admitted a trader. “The system is so evolved now that vested interests use fake calls to threaten competitors.”

Police, on their part, say they cannot be held responsible for the loopholes in the barter. “We are mandated to take care of situations that may arise out of the trade given the involvement of the security,” a junior level police official said. “If a trader gets truckloads of clothes from Karachi and it directly is diverted to Surat and in return a good number of truckloads goes from Surat to Karachi via Uri and we know that the two businessmen from Surat and Karachi have settled the deal in Dubai, don’t you think we need to ask the local trader who he is and where his stakes are?”

The loopholes help security agencies to intervene and force a new regime of corruption on the traders. “We pay for everything and we are told that they (officials manning the TFC) can do anything as long as they have their share,” one trader admitted on the condition of anonymity. “That is creating a bad precedent and bad practices.” Traders are quite surprised over how the TFC permitted the worst grade of chilly powder that was rotting in Punjab for many years. The entire consignment was tested by authorities on the other side and it showed carcinogenic elements. As it was seized across, there was no action against the supplier from this side. “It works inversely,” said a trader. “We have been told that we would be responsible for the consignment that comes in our name so if somebody sends guns we will be caught regardless of the fact whether we have ordered it or not.”

This situation has created a vested interest. People aware of the systems purchase their spaces to operate. A Mercy Corps survey done earlier in 2011 also points towards the crisis. Thirty-two percent of traders want the trade to remain as barter. This might be simply because that it helps them to hedge risk but other motives can’t be ruled out. Involvement of traders has decreased by 82 percent and there is keen interest only in nine percent. Of those who are still involved, only three percent see it as highly profitable. Fifty percent of the traders have never met the people they are trading with. One third of the traders are not very optimistic about the future of the trade in this form.

The lack of infrastructural and institutional facilities has forced some of them to explore other options. For instance, one third of them are using the internet and Skype to get in touch with their counterparts. Some of them are taking the Wagha route to cross over and vice versa. Personal visits have become the only option for individuals who have suffered losses.

Wagha trade bodies have been not very supportive of the LoC operations. The importers alliance in Amritsar has gone to all the concerned in Delhi including the PMO to petition against the LoC trade. They see several black sheep using the zero duty trade to make quick bucks in items that otherwise become costly through Wagha. The practice they are referring to is correct, minus the security concerns they have been raking up, off and on.

The additional issue is that of MFN. This will reduce the tariff of certain items that may be become less lucrative to trade with at the LoC. Already New Delhi is signing an agreement with Kabul that will make imports from the war ravaged economy a duty free trade.  In such a situation, a major initiative is on the brinks of failure despite having respective turnover crossing Rs 2000 crore in last three years. “I see two options, one is the possibility of value addition to raw material added with the increase in number of products and another the transit trade which can actually help Kashmir scale up the volume and get benefitted,” said Dr Mubin. “Otherwise the systems will never permit it (trade) to be what the premiers of India and Pakistan want it to be.”

The trade needs a strong voice and intervention as it is passing through its formative years. When the government permitted the trade delegation from PaK in 2008, KCCI embraced it and formed the joint chamber of commerce. As a big brother gesture, they gave its leadership to Zulfikar Abbasi for a year. As the time for giving up the symbolic position (to KCCI) reached, he started questioning the latter’s legitimacy. This created a lot of fuss. But a British charity intervened, almost overstepping its mandate, and started helping the trade to set up a joint chamber of commerce. Its elections were to be held in Srinagar last month. It failed, as the stakeholders raked up apparently unconcerned issues. At the end of it, the people who wanted continuation of the status quo won. And these included the groups outside Kashmir who did not want the KCCI nominee to lead. Kashmir seems to be losing in the initiative that many think might eventually pave way for the solution!!

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