India's Informal Trade With SriLanka

The study is based on an extensive survey carried out in the Indian cities of Chennai, Trichy, Thiruvananthapuram, Tuticorin, Mumbai and Rameshwaram. Informal trade between India and Sri Lanka is largely a one way trade from India to Sri Lanka and is almost a third of the total value of trade through formal channels. Informal traders have developed efficient mechanisms for information flows, risk sharing and risk mitigation. The transaction costs of trading in the informal channels are significantly lower than in the formal channel. Ethnic trading networks between trading partners continue to facilitate informal trade by reducing transaction costs through minimization of risk costs, market information and search costs. An important policy implication of the study is that improving the transacting environment of formal traders would lead to lower informal trade but such trade would be difficult to eliminate. [Working Paper No. 82]