India and Pakistan backdoor trade also in jeopardy as borders close

Even as diplomatic tensions simmer and formal trade ties remain frozen, goods continue to move between India and Pakistan — not through official channels, but through informal backdoor routes that have proven resilient to decades of geopolitical friction.

Officially, trade between the two neighbours has dwindled to a mere shadow of its former self. In the financial year 2024–25 (April to January), India exported just USD 447.7 million worth of goods to Pakistan, while imports from across the border stood at an astonishingly low USD 420,000, according to data from India’s ministry of commerce.

This decline is part of a broader trend. From a peak of USD 2.41 billion in bilateral trade in 2017–18, trade volumes have fallen by more than half. India’s decision to revoke Pakistan’s ‘Most Favoured Nation’ (MFN) status in 2019 following the Pulwama terror attack marked a significant turning point. Pakistan, in turn, suspended trade relations and closed the only functional land trade route — the .

While official numbers suggest minimal engagement, the reality is more complex — and lucrative. According to the Global Trade Research Initiative (GTRI), Indian exports to Pakistan may actually exceed USD 10 billion annually, routed indirectly through third countries such as the UAE, Singapore and Sri Lanka.

Here’s how the workaround typically unfolds: Indian goods — ranging from pharmaceuticals and plastic products to coffee, tea and organic chemicals — are first shipped to bonded warehouses in Dubai or Colombo. Once the shipment reaches the transit hubs, the country of origin is changed — and the goods are re-exported to Pakistan as if they originated elsewhere.

“This grey-zone strategy shows how trade adapts faster than policy,” said Ajay Srivastava, founder of GTRI, in a recent LinkedIn post. “Such rerouted trade often fetches better prices and maintains plausible deniability — no ‘official’ trade, yet commerce thrives.”

Pakistan’s main official imports from India used to include pharmaceutical products, edible vegetables, dairy items and plastics. On the other side, India sourced copper, fruits, nuts, salt, and sulphur from Pakistan. With direct channels cut off, the informal route has become a lifeline for businesses and a headache for policymakers.

While trade continues via unofficial means, the closure of the Wagah–Attari land port has had tangible consequences. “Land ports allow for cheaper and more efficient trade,” said Shantanu Singh, an international trade lawyer. “Their closure increases costs, affects trade from Afghanistan and hits local economies that rely on cross-border commerce.”

This disruption is especially critical for Pakistan’s pharmaceutical sector, which depends heavily on imports from India. Singh cautioned that increased transport costs could push medicine prices higher for Pakistani consumers, widening the gap between supply and demand.

The practice of routing goods through third countries to sidestep sanctions or tariffs is not unique to South Asia. India itself has reportedly served as a transit hub for Russian crude oil, which it refines and exports to Europe —despite sanctions following Moscow’s invasion of Ukraine. In 2024, Russian oil made up nearly 40 per cent of India’s total crude imports, up from just 2 per cent in 2021.

China, too, has used ASEAN countries to re-export goods to India at lower tariffs. “Wherever there is demand, trade will find a way,” noted economist Biswajit Dhar. 

Both Indian and Pakistani authorities are aware of the scale of this grey trade. Both India’s and Pakistan’s latest trade restrictions post-Pahalgam even attempt to block third-country rerouting. But enforcing such measures is easier said than done.

“Ultimately, customs authorities in Pakistan have to determine if the imported goods genuinely originate from other countries such as the UAE or if they are Indian goods in disguise,” Singh explained.

This determination hinges on ‘rules of origin’ — documentation that importers must provide to verify the source of the goods. But private intermediaries, not governments, manage much of this backdoor commerce, making enforcement a complex task. 

The Indo–Pak trade relationship has long been on a rollercoaster. Wars in 1965 and 1971 brought trade to a halt, only for it to be cautiously revived through the Tashkent and Simla Agreements. The MFN status granted in 1996 under WTO norms briefly boosted trade, but sustained progress was always undercut by political turmoil.

Today, the seesaw continues — with formal trade at a near standstill and informal trade quietly thriving in the shadows.

Whether future diplomatic engagement will re-establish open trade routes or further restrictions will push grey trade deeper underground remains to be seen.

But for now, it’s clear that economic interests on both sides of the border continue to drive a trade network that, while hidden from public view, is far from dormant.