Mohan Dev Pant, the Commerce Secretary of Nepal for more than six years till his retirement from HMG service last year, says the recent revisions in Nepal-India trade treaty give a message for Nepal to change its strategy in international trade. Excerpts of an interview:

How do you evaluate the latest revision in the Nepal-India trade treaty?

It is a retrograde revision. The facilities enjoyed by Nepal are reduced to the level less than what she was enjoying before 1991. For example, before 1991 though there was the material content fixed for Nepali products to enjoy concessional entry into India, there was no quantitative restriction, thus Nepal could export any quantity enjoying duty concession once Nepal fulfilled the material content requirement. Now even after fulfilling the specified value addition requirement, Nepal cannot expect duty concession for export beyond the quantity that is fixed.

Does the latest revision indicate that India wishes to make its trade relations with Nepal in line with the WTO regime?

No.Rather, this revision indicates that India wants to impose duty on all the items that it imports from Nepal. For example, if the Indian government feels that any Indian industry is injured, it can ask the Joint Economic Committee for corrective measures, and if the Committee fails to come up with the solution as desired by India within 60 days, India can take unilateral safeguard measures. But what does the term "injury" mean? Will there be an injury if the export increases to Rs. 501 while it was only Rs. 500 till the last year? WTO principle is that if the imports are more than 3% of the total domestic consumption, then the item may be subject to the interpretation of surge or injury. By not defining the term "injury" and keeping the right for unilateral action in its hand, India has indicated that it does not want to let Nepali exports to India grow beyond a level it seems fit. Therefore, you cannot interpret this revision as the intention of India to go for the WTO regime. What it indicates is simply that India does not want to let Nepali goods to be imported into India without imposing import duty.

If you study the WTO provisions, you will find that there is an arrangement, in principle at least, for zero duty for the imports from least developed countries. India has stated in this case that it is not going to honour this WTO provision.

What other significant disadvantages do you see to Nepal from the recent revision compared to the earlier treaties?

The other major difference between the treaty now and that signed in 1996 is that in the 1996 version all the exports from Nepal were free of customs duty and quantitative restrictions. Now the quantitative restrictions have been imposed on these four products (vegetable fat, acrylic yarn copper products & zinc oxide). As regards to the customs duty, the treaty uses now the qualification "normally applicable". Its implication is that if there is any other duty applied by India for the products from outside, it will be applicable also on the products from Nepal. Moreover, India can now impose duties specific to imports from Nepal as it has done in its new budget imposing 4% special additional duty on Nepali products.

Regarding the value addition, the earlier treaty had specified that the exports from Nepal had to be manufactured in Nepal. That in effect was a value addition requirement. The decision regarding the actual percentage of value added was left to the discretion of HMG. Accordingly, HMG had decided to issue certificate of origin for only those products in which there was at least 20% value addition. That means, in the 1996 treaty India had entrusted Nepal the responsibility of fixing the value addition requirement. Now the rate of value addition is imposed by the treaty itself. Moreover, HMG has to report to Indian government about the way Nepal is calculating the value addition. That means, now the Indian government has the right to ask for correction in the value addition calculation if it feels the need. Thus the exports may come to a halt the moment India raises such a concern. Such a halt can be there also when the Indian government feels the threat of injury even if there may not be an actual injury.

Now regarding the certificate of origin, the earlier provision was such that once HMG issued the certificate there was no possibility of any question raised about it. But now if the Indian customs has any doubt about the certificate, it has the right of verification. The practice the world over about the certificate of origin is that the if there is any doubt, the customs office of the importing country requests the exporting country’s government to verify whether the certificate is genuine. But in this case between Nepal and India, such verification will be made by the importing country’s government itself.

Another major point is that the facility being provided by India for the products of the small industries of Nepal will be provided now only for those units that are specified by HMG as small units as of December 2001. That means if Nepali government revises the list later, the industries that newly fall under the small industry category will not be allowed the facility by India.

With such provisions, which allow India all the control over the trade between the two countries, how can we expect the foreign investors to come to Nepal? The market situation now becomes unpredictable. So far the situation was that if Nepal had any problem with any state government of India the central government would take care of the problem. But this time, they have behaved as if Nepal has to have separate treaties will each Indian state. Being a sovereign country Nepal simply cannot do that.

What is the policy implication of all these?

Nepal should abandon the strategy of negotiating with India for concessional arrangement. Rather it should concentrate on making the Nepali products more competitive. We have to realize that our industries are being injured due to this treaty with India that allows concessional entry into Nepal for all the Indian goods. For example, we never look for value addition in the imports from India. We accepted such a treatment in the past because it allowed our products concessional entry into India’s vast market. Now that India has adopted a strategy of safeguarding its industries from the competition with the Nepali industries, it is now our duty to see that our industries are protected.

So, what should we do?

We should adopt three measures. Our tariff rate is very low – the lowest in South Asia. It should be revised upwards. WTO provisions have in a way recognized that LDCs need 30% protection. That means we should have at least 30% tariff on the manufactured imports. Second, the difference between the tariff for the manufactured goods and the raw material should be greater than the current average 5 or 7 percent so as to give our industry a level playing field. Third, there should be a proper mechanism to ensure proper valuation of the imports. At present the raw material are getting overvalued and the finished products are getting undervalued. Fourth, we should adopt extensive measures to control the unauthorized trade with India. Then only can we achieve industrial growth.

Do you think that the long delay this time in renewing the trade treaty with India is because of some non-business considerations?

It is clearly a situation of Indian government being less favourable to Nepal. If there have been some political developments leading to this attitude, I do not know that for certain. But the indications are there that the decisions are being taken more on the basis of non-business considerations. Unlike in 1996, the Indian government this time rejected the recommendation of CII with which our FNCCI had negotiated for a compromise formula. The new provisions are as demanded by FICCI of India, which means CII could not prevail as it had in 1996. FICCI is opposed to the trade concessions to Nepal. They want the value addition to be as high as 80%. They toned down only after there was a consultation between the prime ministers of both countries.

Some people have again started suggesting that Nepal should now think about alternates to trade with India and transit through India. How is your reaction?

The Fulbari route to Bangladesh that was opened when I was the commerce secretary is being used at present though not in full capacity. Now we also have to start thinking of Chinese transit route. It is not impractical now. Hong Kong is the major market from where we import a huge volume. It is now a part of China. So, we can use mainland China route to import goods from Hong Kong. There is a direct train connection from Hong Kong to Tibet. That has to be extended to Nepal border. Our diplomats should start talking with China about it.

What can be done for increased use of Bangladesh route?

The Nepali business community has not yet developed similar connections in Bangladesh as they have in Kolkata. Apart from that, the Bangladeshi currency is not as easily convertible in Nepal as the Indian currency is. There also are problems in visa for which one has to come to Kathmandu because there is no Bangladesh consulate in Jhapa. Once these problems are resolved, the use of Bangladesh route will increase.

Do you think there will be any problem now in the export of these four items over which the trade treaty with India was held at ransom for so long?

There will be many problems. It is said that the exporting mechanism for these products will be spelt down later by both the countries sitting together. India is trying to channelise the export of these goods through state trading corporation of both the countries. If that happens, the trade will not remain a business-to-business issue. The Indian government officials will be involved even in the trivialities such as that of pricing, discounts and the like. The state trading corporation of India may ask the Nepali exporter for a long credit in which case the Nepali exporter will be automatically forced to stop exporting because it will not have the option of negotiating with another importer.

What exactly is the reason that the negotiations had to be prolonged so much?

Simple. As I said earlier, they (India) do not want to import from Nepal without imposing duty. They do not want to provide a special treatment to Nepal.

Is this the attitude originating in the bureaucratic level or at the political level?

It is from the political level. You see, the issue had reached up to the prime minister’s level in both the countries. The entire Indian Government is against preferential treatment to Nepal.

What will be the implications for SAFTA from this development?

What does SAFTA mean? Zero duty most probably, or a common duty structure in all the countries. If India is not ready to provide zero duty facilities to Nepal, it means India does not want SAFTA. If the SAARC countries open their markets for Indian products, they eventually will find that they are importing Indian products but they are unable to export to India due to similar tariff or non-tariff barriers as Nepal is facing now. SAPTA itself has the provision for zero duty to the products of least developed countries. That provision has not been operationalized as shown by this case – not even for products with 30% value addition. Then how can we dream of a free trade regime of SAFTA?

What should Nepal do now?

We have to spread on our table the list of Indian imports from the third countries. Those of the products in which we may be in more comparative advantage should be identified and policies should be adopted to develop, produce and export such products.

Why is the Nepali business community welcoming the treaty’s renewal when the achievement is apparently so negative as you have shown?

The only explanation is that they are happy because the 1989-like impasse is avoided. Had the treaty been not renewed they could not have exported any quantity. Now, they can hope to export the specified quota.

How can we deal with India if the Indian attitude is so negative towards us?

We have to work to develop goodwill for us in India. We should establish that India’s economic interests are better fulfilled by having good relations with Nepal. Right now India is hesitant to buy more electricity from Nepal because, may be, they have a fear that Nepal may switch off the electricity connection later and put India in trouble. We should convince India that it need not harbour such suspicions about Nepal.