Nepal-India Trade Treaty
Automatic Renewal Or Termination?

By Prof. Bishwambher Pyakuryal

The Context

NEPAL’S relation with India is a determinant factor that shapes up economic activities in Nepal because of the 1750-km long and open border between the two countries. For a long time Nepal became an entre pot to supply those imported goods to India the imports of which were highly restricted in India. Since this scheme helped to easily generate revenue, the authorities did not seem to be interested in exploring the inherent and sustainable comparative advantage of the Nepali economy vis-à-vis India and the rest of the world. Re-export of luxury goods to India in turn generated sufficient Indian currency to support Nepal’s imports from India. The history of Nepal’s industrial base was thus nothing more than the imports of such items that were restricted in India because of an excessively high tariff wall. After India aggressively introduced liberalization measures, electrical, steels, polythene based assembly plants that were earlier established in Nepal for re-exporting to India for a premium closed down one after another. Because of the narrow base of industrial development in Nepal, 90 per cent of the industries were closed down in less than a month during Nepal-India Trade and Transit Impasse that lasted from March 23, 1989 through June 10, 1990. Some reports also revealed that industrial production was reduced to as low as Rs. 850 million per month from Rs. 1700 million indicating higher degree of economic dependency on India.

Features of Treaty of Trade, 1996

In consideration of the size of the population, Gross Domestic Product, per capita income and poverty, the Nepalese market is pretty small. Indian market is therefore important for the Nepalese product. In this context, among all the treaties, the bilateral trade agreement of December 3, 1996 is the landmark achievement in Nepal-India relationship. According to Article V 1 of the treaty, the Government of India will provide access to the Indian market free of customs duties and the quantitative restrictions for all articles manufactured in Nepal except for articles in the negative list. Similarly, there is also a provision for the preferential entry on goods imported from India to Nepalese market without any quantitative restrictions. His Majesty’s Government of Nepal will waive additional customs duty on all Indian exports during the validity of the treaty.

The renewed treaty is more liberal on the ground that it provides improved access to Indian market by eliminating the 50 per cent rules of origin provision inherent in the former agreement. The number of items included in the negative list has also been reduced to only three. It is agreed that there will be an automatic renewal of the agreement for five years if either party does not give notice to rectify the agreement before the expiry of 3 months. It was further committed that Nepal would not misuse or jeopardize the Indian economic interest on the basis of openness of new treaty.

Win-win Situation

The average export growth to India remained only 25 per cent during mid-1990s. After the treaty, it increased to above 60 per cent during 1997/98 through 1999/2000. India’s share of Nepal’s import trade has also increased. The share of India in Nepal’s trade was 20 per cent during 1995/96; it however increased to 44 per cent during 1999/00. The magnitude of Nepal’s trade deficit however, widened in absolute term. It rose to 19 billion during 1996/97 through 1999/00 from merely 14 billion five years before the treaty of 1996.

After the treaty, there is an import diversification from India. Nepal mostly used to import raw materials and consumption goods from India. It has now switched over to raw material, machinery and technology creating more demand in Indian market. Nepal pays approximately 7 billion convertible currencies annually for the imports from India. Out of the 698 total foreign investment projects in Nepal under different categories such as agriculture, manufacturing, tourism, service, construction, energy, and mineral based, India has 244 projects constituting almost 35 per cent share. Visible increment can be seen especially after 1996 trade treaty.

Recent Issues

India has recently raised some issues regarding the implementation of the treaty. In a recent visit of Indian external affairs minister Mr. Jaswant Singh, he observed that certain issues have come up in the operation of the treaty over the past five years which need to be addressed and necessary adjustment be made. The Indian Ambassador to Nepal Mr. Dev Mukherji, in his address to the Reporters’ Club on August 23, 2001 in Kathmandu said
that some problems have arisen relating to what is described as "Surge" in Nepalese exports to India by causing serious problems particularly in the neighbouring states. The concern mostly raised is the re-export of third country goods to India without any value being added. India stresses former prime minister Mr. I.K. Gujral’s observation made during his 1997 visit to Nepal that Nepalese entrepreneurs should not resort to screwdriver technology industries. It should be ensured that certificate of origin to Nepalese manufactures which is left at the discretion of Nepalese government is done sincerely to guarantee the genuineness of the products.

(To be continued)

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