Revised Indo-Nepal Trade Treaty

India maintains special bilateral economic ties with Nepal on the basis of the 1991 Indo-Nepal treaties on trade, transit and agreement for cooperation to control unauthorized trade. After the signing of Trade Treaty in 1996, Nepal enjoyed duty-free access for all Nepali-manufactured goods into the Indian market on a non-reciprocal basis except the three items that were included in the negative list – cigarettes, alcohol and cosmetics. During Prime Minister M K Nepal’s recent visit to India, both the countries initialed the revised trade treaty. The added feature of the treaty was the addition of the provision that it would be renewed every seven years instead of five.

In the 2009 revised trade treaty, India has emphasized the need for a paradigm shift in bilateral economic cooperation. In this context, as both the countries favor making trade less import-centric and more comprehensive and mutually beneficial, India intends to work towards Comprehensive Economic Partnership Agreement (CEPA) by extending economic ties from trade in goods to trade in services and investment as well. Unless bilateral discourse in trade negotiation converge with India’s CEPA proposal, it will be difficult to expect the agreement to be implemented fully without any interruptions.

Exports to India rose by 6.2 percent in 2008/09 as against a decline of 7.6 percent in the previous year. Therefore, as the trend is positive, with the signing of the revised treaty, one should expect Nepal’s trade deficit with India to gradually reduce.

The other reason for focusing more on comprehensive agreement was because of the widely-talked import surge problem with regards to five major Nepali export products into the Indian market especially the vanaspati ghee, which India thought had made adverse impact in their domestic market. It was one of the crucial factors for discouraging Nepal’s lopsided focus on imports and duty exemption. The revised treaty has, however, abrogated duty-refund procedure and the system of exporting vegetable ghee through a channeling agency by allowing traders dealing in IC to enjoy excise and other facilities at par with the traders dealing in convertible currency.

Nepal’s major concern during all the trade treaty negotiations have been the issue of non-tariff barriers, largely sanitary and phyto-sanitary measures (SPS) imposed by India on Nepal in respect to their primary product exports to India. Except the quota and canalization on vegetable fats, acrylic yarn, copper products and zinc oxide, Nepal’s pharmaceutical industries are restricted to export their products because the registration of pharmaceutical products is virtually impossible in India. India does not allow Nepali entrepreneurs to send their machineries for repair and maintenance after three years of import from India to Nepal. The restriction in the export of industrial byproducts to India and poor infrastructural facilities at the borders are other concerns of Nepali exporters. Recent congestion and delay in importing cargos from Kolkata port has significantly increased the cost of imports on top of the already higher transaction costs that Nepali traders have to bear.

The revised treaty has brought about major changes in simplifying the procedures at quarantine check posts at the customs offices. After Nepal upgrades its laboratories, India has committed that it would recognize quality certification issued by Nepali labs. This means lowering the opportunity costs of Nepali agro-exporters as they do not have to produce quality certification from Indian labs to enter into the Indian market. India has, however, disqualified the issue of non-reciprocity with regards to agricultural products. In other words, Nepali agricultural products do not enjoy duty-free access to India, unless Indian farm products are also given similar treatment in our market.

India’s concern is the erosion of sense of security of Indian investors, which is mostly created by labor protests. The much talked about initiative in executing industrial security plan is still pending making prospective investors suspicious about returns from their investments in Nepal. The acute shortages of power, raw materials, petroleum and diesel are a blow to the sustainability of the joint-venture Indian enterprises. The case of the closure of Dabur because of labor unrest is a serious concern raised by Federation of Indian Chamber of Commerce And Industry.

The system of duty refund has been done away with. The number of land routes has also been increased from 22 to 26, which may help in accessing additional destinations for exports. Currently India-Nepal trade is nearing $3 billion. Indian investment in about 400 projects make up 44 percent of the total foreign direct investment. The total authorized capital of Indian ventures as of Feb 5, 2009, was NRs 48.5 billion of which 36.9 billion was fixed capital and NRs 11 billion was working capital. Foreign equity was NRs 30.5 billion. The local employment generated by Indian JVIs was 49,256 while foreign employment remained at only 1,581. Therefore, the challenge is to retain and expand the ongoing projects and initiate employment-creating joint-venture industries.

Nepal’s exports to India and other countries have increased during FY 2008/09. The contributing commodities for the increase were readymade garments, textiles, G I pipes, catechu, shoes and sandals. Out of the 51 major exportable commodities to India, the top five products were textiles, zinc sheet, thread, polyester yarn and juice. With regards to imports of 49 selected commodities, the top five imports included petroleum products, vehicles and spare parts, other machineries and parts, medicines and coldrolled sheet incoil. If one compares the total value of exports with that of the value of imports, Nepal’s imports becomes pretty expensive as compared to the gains from exports largely because of the price variation.

Correcting imbalances should mean exploring cost-competitive products that are highly in demand in the Indian market. We still lack information about each other on import needs, economic opportunities, market and labor workforce, investment opportunities, export potentials and other inherent constraints. Besides the compilation of annual data, the system of maintaining information on updated country-specific trade data has not yet been developed. The government should integrate the country’s economic policy into foreign policy goals and strategies and develop a system to link national data with Nepali missions abroad to make economic diplomacy result-oriented.

With regards to third-country exports, although in terms of investment, the presence of other countries besides India is not that prominent, a recent trend of the structure of international trade indicates the possibility of increasing export trade, where relatively more value addition is possible. The policy to encourage third-country exports should temporarily focus on export of pulses followed by pashmina, woolen carpets, handicraft and herbs. The possibility of increasing the export of these products is based on the annual data of third-country priority exports.

To conclude, the year 2008/09 looks better than FY 2007/08 with regards to exports to India. In 2008/09, exports went up by 13.5 percent in contrast to a nominal decline of 0.2 percent in the previous year. Exports to India rose by 6.2 percent in 2008/09 as against a decline of 7.6 percent in the previous year. Similarly, exports to other countries also expanded by 26.9 percent compared to an increase of 17.3 percent in the previous year. Therefore, as the trend is positive, with the signing of the revised treaty, one should expect Nepal’s trade deficit with India to gradually reduce.

bishwambher@yahoo.com