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Nepal-India Trade Treaty 1996
Need For Status Quo

By Prof. Dr. Madan K. Dahal

THE 1996 Nepal-India Trade Treaty could be described as an outstanding example of India’s best understanding towards promoting Nepal’s burgeoning economy through bilateral trade and cooperation. The treaty fully assures duty free access to goods, except specified in the negative list, manufactured in Nepal to Indian market without being subjected to any quantitative restrictions. The biggest virtue of the treaty is that "The Treaty shall be automatically extended for further periods of five years at a time, unless either of the parties gives to the other a written notice, three months in advance, of its intention to terminate the Treaty. This Treaty may be amended or modified by mutual consent of the parties" (Article XII).

Both Nepal and India have immensely benefited from the treaty. Available statistics reflects that trade-flow has increased both ways, though heavily in favour of India. Over the years, investment-flow from India also increased considerably to 85 operating, 14 under construction, 42 licensed and 48 approved joint ventures as of July 15, 2001. Nepal’s export to India went up remarkably from Rs. 8.8 billion in FY 1997/98 to Rs. 27.3 billion in FY 2000/01, while imports from India increased from Rs. 27.3 billion in FY 1997/98 to Rs. 46.7 billion in FY 2001/02 with a deficit of Rs. 19.4 billion which is estimated to be 4.7% of the GDP. The overall impact of treaty is found to be positive.

Despite this, India’s initiation to amend the treaty is conspicuous and contrary to what is envisaged in the Article II that "The Contracting Parties shall endeavor to grant maximum facilities to undertake all necessary measures for the free and unhampered flow of goods, needed by one country from the other, to and fro from their respective territories". India’s proposal for a major change in the 1996 Trade Treaty primarily confined to the need for addressing five objections to treaty comprising the issues of rules of origin, export surge for specific items (hydrogenated vegetable, zinc oxide, acrylic yarn, copper wire and iron pipe), certificate of origin, negative list and WTO compatibility.

In this context, the Joint Economic Council (JEC) of Nepal and India—Federation of Nepalese Chambers of Commerce & Industry (FNCCI) and Confederation of Indian Industries (CII) have made a number of recommendations to address these issues that would help promote Nepal’s export to India and Indian investment in Nepal and foster ‘win-win’ trade for both countries. The major recommendations of JEC comprise that 1996 Nepal India Trade Treaty should be automatically extended. The JEC further suggested for initiating strong measures to control trade deflection across the border, having minimum 30 per cent value added to qualify for duty-free export to India, defining appropriately the concept of ‘surge’, exploring ways and means jointly by Bureau of Indian Standards (BIS) and Nepal Bureau of Standards and Metrology (NBSM) about which products certified by NBSM are accepted in India, and developing efforts to promote Indian investment in Nepal. Responses to these recommendations have been lukewarm from India side.

India’s demand for 30-50 per cent value added on Nepali goods to be exported to India is not export-friendly, for it would create extremely adverse impact on Nepalese economy. Nepal has always been a big market for India, irrespective of tariff barrier, attributing to open border. With 1996 treaty Nepal had the advantage to penetrate Indian market and correct its balance of trade disequilibria with India. However, India’s unilateral attempt to modulate the treaty in recent days would totally disrupt the free access to Nepalese goods in Indian market and marginalize Nepal’s efforts towards development through trade with India, an emerging economic power. Nepal is deprived of the benefits from the economies of neighborhoods.

The issue of export surge and, for that matter, expansion of negative list from earlier three to now eight items ranging from alcohol, perfume and tobacco to hydrogenated-vegetable (Banaspati Ghee), zinc oxide, acrylic yarn, copper wire and iron pipe is over exaggerated, for major ten export items from Nepal to India include only Banaspati ghee and polyester yarn that occupy a negligible status in India’s total imports.

India’s apprehension to export surge of a few Nepali products with so-called injury to Indian industries is discernible obsession to levy anti-dumping duties and luxury tax on some of the imports from Nepal. This is not explicable how a small quantity of exports from Nepal ruined entire Indian industries within a short span of time. Although the argument for WTO compatibility posed by India seems to have some theoretical underpinnings of globalization, Nepal’s growing trade relations with India is of utmost priority. However, it is also imperative to examine the benefits from SAFTA and assess the prospects for moving towards zero tariff regimes between the two countries in future.

India’s proposal for a drastic change in the existing treaty has appeared at a time while Nepal is engaged in formulating Tenth Plan (2002-07) to achieve a high level of sustainable growth for poverty alleviation through providing employment opportunity. At this juncture, India’s cooperation to Nepal by maintaining status quo in the existing trade treaty, for the next five years, will have far reaching implications in Nepal-India economic relations. Discrepancies in the treaty could be resolved, subsequently, through protocols and the letters of exchange between the two countries.

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