FEATURES NEWS THE RISING NEPAL (DAILY)

Nepal-India Trade Treaty
Needs A Reform Policy

By Laxmi Bahadur Vaidya

AFTER the restoration of democracy in Nepal the new Treaty of Trade was signed in 1991 between Nepal and India. In December 1996, the Treaty was renewed with the main objective to accelerate industrialisation in Nepal with the provision of automatic renewal every five years. The Nepal-India Trade Treaty of 1996 had provided access for the Nepali products to the Indian market free of customs duties and quantitative restrictions. And only those goods were restricted which were in the negative list. Except that all the Nepalese manufactured goods were eligible for preferential access into the Indian market on the basis of certificate of origin provided by the government of Nepal. The treaty immensely benefitted both Nepal and India and trade flow increased on both sides. However, the available data revealed that trade balance between the two countries is heavily in India’s favour. Over the years investment flow from India has increased tremendously.

Trade Growth

As far as foreign trade is concerned, India is Nepal’s largest single trading partner. The total trade between Nepal and India has increased significantly from Rs. 30.1 billion in 1996/97 to Rs. 73.96 billion in 2000/01. Almost more than half of Nepal’s foreign trade is with India. However, the goods India imports from Nepal is less than 0.1 per cent of its total import.

Regarding the renewal of the trade treaty, India had proposed to review some issues which were needed to be addressed. These issues were rules of origin and ‘export surge’ for the specific five products exported from Nepal such as vegetable ghee, acrylic yarn, steel pipe, copper wire and zine oxide (later steel pipe dropped) which India claimed to have fallen under the surge net and it hit hard the concerned industries.

After a series of talks the Treaty was renewed on March 2 this year for another five years making some changes and adding a new protocol. The Trade Treaty had expired three months back on December 5, 2001 but had been extended for three months by India. The treaty has come is in to effect from March 6, 2002.Without any major alteration in the main articles, the new agreement has been modified in Protocol V and new Protocol IX has been added. Mainly the revised Protocol has made three changes. The first one relates to the provision of value addition for all 184 items identified as exportable from Nepal to India. As per the revised treaty, all the Nepali manufactured products using the Nepali or Indian raw materials are needed to add value of 25 per cent for the first year and 30 per cent for subsequent four years. After that the Nepali products will be eligible for duty-free access into the Indian market.

Secondly, India has imposed annual quantitative restrictions for four Nepali products such as vegetable ghee, acrylic yarn, copper products and zinc oxide. For duty-free entry into India, it has imposed a fixed quota annually on each item: 100,000 tonnes for vegetable ghee, 10,000 tonnes for acrylic yarn, 7500 tonnes for copper products and 2500 tonnes for zinc oxide. In addition, in extra four per cent has been added as additional duty on those four items.

As in the past, all products of the small scale industries are exempted from the additional duty levied by India. And the items that were previously under the negative list have now been included in the most favoured nation list. Now these items can be exported to India at MFN customs rates.

For the Nepali products with third country inputs value addition is at a maximum ceiling of 75 per cent for the first year and 70 per cent thereafter.

Thirdly, the significant addition to the protocol is a safeguard clause which could be used to protect the domestic industry. As per the clause both the countries can formulate necessary laws and regulations to safeguard their industries.

There is also a provision in the renewed treaty for a joint economic committee to monitor the implementation of the treaty which will meet in every six months.

To formulate and prepare new regulations regarding the product certificate the transitional period will be effective until April 16, 2002.

Some of the prominent economists, industrialists and businessmen including policy makers are of the view that both the value addition and quantitative restrictions are counter to the spirit of a liberal trade and the fundamental principles of the World Trade Organisation. Further it will affect the country’s vulnerable economy. Moreover, Nepal is suffering from a huge trade imbalance with India. In such a situation the imposition of a four per cent additional duty on the four Nepalese products is not justified because it discourages foreign direct investment. Such an unilateral exercise as additional duty or anti-dumping duty are against the spirit of the 1950 treaty.

Though the provisions in the renewed treaty is weaker compared to the provisions incorporated in 1996 treaty in totality it is not regressive. Their opinion is that it depends on how the spirit of the treaty is put into practice. The provision of value addition and the detailed rules of origin incorporated in the modification of the protocol have good aspects too. It encourages genuine industrialists and discourages those who import semifinished products from third countries and exports them to India.

The agreement in recently renewed trade treaty suggested that Nepal should be wary and efforts should be made to be self-reliant and independent. For this purpose the government must be committed and must take bold action towards this direction.

If a least developed country like Nepal is to compete in a rapidly modernising international economy, it needs to enhance its efficiency, becoming flexible in production structures and adapting to changing external demands.

The government must adopt a trade policy reform to improve economic performance. It has two main objectives. The first is to help raise economic growth and employment generation by improving resource allocation and economywide efficiency. The second is to help improve the balance of payments by strengthening the competitiveness of the external sector and expanding exports and efficient import substitutes.

Export reforms include reducing export restrictions and taxes normally exempting exporters from restrictions and tariffs on imported inputs. Exporter of manufactured products must meet frequently changing demands and must deliver their products reliably and on time. To perform these works in an effective and efficient manner exporters must be provided support with facilities such as an adequate and efficient infrastructure and telecommunications, readily available export credit, technology development, quality control, production planning and other support services.

For More Benefits

As Nepal is striving for the membership of the WTO, it is an urgent need to enhance competitive strength by identifying the products in which Nepal can reap more benefits.

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