NEPAL-INDIA TRADE TREATY
Facing Ground Realities

The renewal of the treaty has brought both challenges and opportunities for Nepalese businesses. With India no longer providing Nepalese products unrestricted and `easy' access to its vast market, Nepalese industries are faced with a clear message: Develop a sustainable base or perish. With the Maoist insurgency hitting the backbone of the economy, it is not going to be an easy job

By BHAGIRATH YOGI

Businesses thrive on hope, they say. This could not have been truer in the case of Nepalese businesses. As soon as the commerce secretaries of Nepal and India signed an agreement to extend the 1996 bilateral trade treaty for another five years in New Delhi Saturday (March 2), Nepalese businessmen were prompt in welcoming the accord, although it snatched away most of the concessions they had enjoyed over the last five years.

At the end of the four-day marathon talks in the Indian capital, both sides agreed that Nepalese-manufactured items with value addition of 25 percent for the first year and 30 percent value addition for subsequent years would enjoy duty-free access without quantitative restriction into the Indian market. Four Nepalese manufacturing articles, including vegetable ghee, copper wire, zinc oxide and acrylic yarn, will be allowed duty-free entry into India on the basis of fixed quota. (See Box: Protocol to the Treaty of Trade)

Trucks ferrying goods : Will the volume increases ?

India agreed to drop GI pipe, which it had earlier put under the export surge item, from the quota restrictions. As per the agreement, quota fixed for vegetable ghee (fats) stands at 100,000 metric tonnes per year and that for acrylic yarn at 10,000 metric tonnes per year. The limit for copper products is 7500 metric tonnes per year and that for zinc oxide is 2500 metric tonnes per year. Though the new agreement doesn't alter the basic framework of the 1996 treaty, it has modified some protocols to take care of Indian concerns regarding value addition, certificate of origin and ëexport surge' in certain commodities, among others.

Though Nepalese political parties had not commented on the all-important treaty till Tuesday, the business community in general took the renewal with a positive note. Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the apex private-sector body, welcomed the renewal of the treaty. Noting that changes in the protocols have positive aspects, the FNCCI said fixing of quota system for vegetable fat, acrylic yarn, copper products and zinc oxide would affect the concerned industries.

Arun Kumar Chaudhary, president of Nepal-India Chamber of Commerce and Industry (NICCI), also welcomed the renewal of the treaty and said the provision of value addition was not against Nepal's interests. "But the government should give emphasis on its implementation," he added. Agreed Rajesh Kaji Shrestha, President of Nepal Chamber of Commerce: "There was no need to get scared of quantitative restrictions (imposed on certain items) at a time when Nepal was preparing to join WTO (World Trade Organization) and SAFTA (South Asian Free Trade Area).

Trade Negotiations

Like a high-voltage drama, the fate of the treaty hanged in the balance till the last minute. Just five days before the expiry of the treaty, on December 5, 2001, Indian Prime Minister Atal Behari Vajpayee talked over the phone with his Nepalese counterpart, Sher Bahadur Deuba, and informed him that India had decided to extend the treaty by another three months (until March 5, 2002). Over half a dozen official-level meetings took place in Kathmandu and New Delhi over the last eight months to sort out the contentious issues.

In July last year, India formally notified Nepal that it wanted to review certain provisions in the treaty, saying that a surge in exports in five items from Nepal to India had hurt its industries. The Nepalese side maintained that it would like to see the renewal of the 1996 treaty without hampering its spirit, which provides for duty-free access to Nepalese manufactured products in the Indian market, except those in the negative list (tobacco, liquor and perfumes).

Nepalese vegetables : Will they get access to India Market ?

"The renewal of the treaty last week has saved the face of both sides," said Dr. Biswombher Pyakuryal, a prominent economist. "But due to lack of professionalism on our side and undermining the political factor in bilateral relations, the opportunity cost for Nepal was higher."

Though the Nepalese business community had sensed that India was no longer in a mood to provide across-the-board concessions to Nepal, as per the 1996 treaty, some one and half years back, Nepalese officials woke up to the issue only after receiving a formal letter from the Indian government. When the Indian official delegation arrived in Kathmandu in August last year, there was no independent minister to look after the all-important issue, as premier Deuba himself held the industry, commerce and supplies portfolio.

Nepalese officials had to work overtime in order to enter into a hard bargain vis-a-vis the complaints made by the Indian industry. "The December 1996 amendment to the treaty created total trade distortions when the value addition norms and rules of origin provisions were given go by. The treaty has led to the surge in certain items from Nepal and is resulting in systematic decimation of certain established industries in India, be it Vanaspati or acrylic yarn," said Anil Rajvanshi, executive director of the Forum of Acrylic Fibre Manufacturers of India, at a seminar jointly organized by the Indian Embassy and NICCI in Kathmandu, in October last year. "Nepal should save from precious foreign exchange on import of raw materials, which can be sourced from India at competitive prices."

Though Nepalese industrialists tried hard to make their point by arguing that Nepalese exports were meager (from 0.5 to 2 percent of the total imports of the said item by India), there was no way they could withstand to the powerful industrial lobby of India.

During the negotiations, Indian officials initially proposed that Nepal should have at least 50 percent local value addition (on all the manufactured items) prior to their export to India ó as was the case in 1991 treaty. The final agreement, however, came close to what apex business chambers in both the countries, CII (Confederation of Indian Industry) and FNCII had already agreed. "Nepalese officials need to be commended for their relentless efforts to get good bargain despite in such difficult situations," said Padma Jyoti, a leading industrialist and President of SAARC Chamber of Commerce and Industry. "CII also needs to be thanked for its continuous support to Nepalese businesses."

The 1996 Treaty and After The implementation of the 1996 treaty, that was based on the famous 'Gujral doctrine' of non-reciprocity toward smaller neighbors, witnessed a quantum jump in the bilateral trade. While exports from Nepal grew from Rs 5 billion in 1996 to over Rs 25 billion in 2001, exports from India to Nepal almost doubled from Rs 24 billion to Rs 46 billion in the same period.

One of the positive contributions of the treaty has been to widen the basket of Nepalese export commodities to India. Besides the traditional Nepalese exports like jute goods, pulses, ginger, oil cakes and hide and skin, a number of new commodities including vanaspati, toothpaste, yarn, Ayurvedic medicines, soap, turpentine, brooms and handicraft good were added Nepal's export basket. A total of 184-odd Nepalese products are being exported to India at present.

India's share in Nepal's exports and imports stood at 47.7 percent and 41.1 percent respectively in the year 2000-01. India continues to be the single largest exporter to Nepal exporting nearly Rs 50 billion worth goods to Nepal every year through official channels. Though both countries have signed an agreement to control unauthorized trade, entrepreneurs said such trade through the common, open border between the two countries also runs into several billion rupees.

During the last five years, investment worth some Rs 15 billion flowed into Nepal, generating around 20,000 jobs, thanks to the bilateral treaty. The Indian government also took a decision putting over 300 crore worth investment in Nepal by Indian industries under fast track. But because of the deteriorating law-and-order situation here, no significant investment has come into Nepal from India, or from the third countries over the past couple of years. The direct foreign investment from India stood at Rs 0.21 billion in 1996/97, which further declined to Rs 0.08 billion in 1997/98.

Birgunj border : Important transit point

For the last several decades, Nepalese businessmen have suffered from what is called ëtraditional trading syndrome' under which industries based on ëscrew driver technology' were set up most along the Indo-Nepal border to take benefit of duty difference between the two countries. During the Panchayat era, Nepal benefited from customs and other duties on imports that were re-exported to India, say observers.

Nepal's trade with India was fairly open even before the onset of the liberalization process. At present, India consumes more than 44 percent of Nepal's total export whereas little more than 35 percent of total Nepalese

imports come from India. Three joint-venture companies, Dabur Nepal (Pvt.) Ltd., Nepal Lever Limited and Colgate-Palmolive Nepal Pvt. Ltd. together represent up to 40 percent of Nepal's total exports to India.

The 1996 treaty provided one of the best opportunities for Nepal to move toward developing, what Arun Chaudhary calls, a sustainable industrial base for Nepal. But many now think that Nepal largely lost that opportunity due to its short-sightedness, political instability and deteriorating law-and-order situation.

During the negotiations last year, both sides agreed to strengthen the implementation of provisions of the trade treaty of 1996 by resolving some operational issues, specifically waiving the premium in the leased

properties at Kolkata port, setting up lab testing facilities at Raxaul and Gorakhpur for exports of food articles from Nepal, concern of Indian joint venture industries in Nepal, and improvement of physical facilities and infrastructure at major border points.

Both sides also agreed to make best efforts for finalization of railway operation agreement for operationalizing of the Birgunj Inland Container Depot and the agreement on regulation of vehicular traffic. Similarly, understanding has been reached for enhancing the process of agreement between Bureau of Indian Standard (BIS) and Nepal Bureau of Standards and Metrology (NBSM), the Ministry said. The Indian side agreed to look into the request to waive excise duty imposed on fuel supplied to Nepalese aircraft in India.

Nepal, for its part, has offered 20 percent concession on the prevailing tariff to the products of India, the only country to enjoy such a privilege. Nepalese exporters, however, complain that they have faced difficulties due to the Indian provision of Duty Refundable Process (DRP) and later due to CENVAT (Central Value Added Tax). Sometime back, India imposed 4 percent Special Additional Duty (SAD) on all imports from Nepal, which was withdrawn later year after tremendous pressure from the Nepalese government and the business community. In this year's budget too, the Indian government has again introduced 4 percent Additional Special Tax (AST) on all imports, which is bound to affect Nepalese exports.

The imposition of quarantine fees by bordering Indian states on the imports of agricultural products from Nepal, levying of ëluxury tax' by the West Bengal state government and allegations that Nepal is flooding Indian market with the goods smuggled from China have strained bilateral trade relations from time to time.

The Road Ahead

The recent negotiations made it clear that Nepal can no longer enjoy the same facilities offered by the 1996 treaty. "Nepal must enhance its competitive strength and formulate necessary mechanism, rules and regulations to suit the changing environment," said Jyoti. Added Prof. Pyakurel, "Concerned government ministries should immediately set up technical cells and continuously monitor the flow of trade and problems faced by Nepalese entrepreneurs, if any."

There is no doubt that the old ways of doing businesses will no more be relevant as Nepal is expected to join the WTO, hopefully within this year. But its land-lockedness, small economy, unskilled labor and traditional management practices, to name a few, pose serious challenges to the country's efforts to modernize the economy. This means that as the world is moving rapidly toward free trade regime, Nepal must identify and exploit areas of its competitive advantage.

"More than hydropower or tourism, Nepal's competitive strength lies in agricultural products. Rather than going for 'controversial' industries, Nepalese private sector needs to be more enterprising and more forward looking, " said Finance Minister Dr. Ram Sharan Mahat.

The business community, however, insists that the government should complement their efforts. "There is a need to immediately reform the labor laws, taxation policy and give impetus to exports by setting up export processing zones around the Dry Port (which is yet to be operated)," said Rajendra K. Khetan," second vice president and spokesman of the FNCCI. "Now the government must support us in these areas." Added former commerce secretary Mohan Dev Pant, "Nepal should develop industries based on domestic raw materials and revise tariff structure so as to help domestic industries to survive. We should also explore new transit routes like Hong Kong and Tibet. Nepal can't survive the competition unless we diversify our products, market and even transit routes."

As Nepal is still working on to formulate a long-term industrial policy, recent developments in the Nepal-India trade treaty must have given policy makers a clear idea of what needs to be done to move forward in the future. While using all its strength to contain a ruthless insurgency back home with its limited resources, the country needs to gear up ó without losing further time ó to make itself competitive in the global economic arena. Maybe Nepalese businesses will learn some new techniques to hope against hope. 

Protocol to the Nepal-India Treaty of Trade

With Reference to Article V

1.      The Government of India will provide preferential access to the Indian market free of customs duties normally applicable and quantitative restrictions, except as mentioned elsewhere, for all articles  anufactured in Nepal, provided they fulfill the qualifying criteria given below:

a)      the articles are manufactured in Nepal wholly from Nepalese materials or Indian materials or Nepalese and Indian materials; or

b)      (i) the articles involve a manufacturing process in Nepal that brings about a change in classification, at four digit level, of the Harmonized Commodities Description and Coding System, different from those, in which all the third country origin in materials used in its manufacture are classified; and the manufacturing process is not limited to insufficient working or processing as indicated in Annexure 'B', and

b)      (ii) From 6th March 2002 to 5th March 2003, the total value of materials, parts of produce originating from non-Contracting Parties or  of undetermined origin used does not exceed 75 percent of the ex-factory price of the articles produced, and the final process of manufacturing is performed within the territory of Nepal. From 6th March 2003 onwards, the total value of materials, parts or produce originating from non-Contracting Parties or of undetermined origin used does not exceed 70 percent of the ex-factory price of the articles produced, and the final process of manufacturing is performed within the territory of Nepal.

Note:

The value of materials, parts or produce originating from non-Contracting Parties shall be the CIF value at the time of importation of materials, parts or produce, at the point of entry in Nepal, where this can be proven, or the earliest ascertainable price paid for the materials, parts or produce of undetermined origin in the territory of the Contracting Party where theworking or processing takes place.

c.      For Nepalese articles not fulfilling the conditions given in sub-para-1 (b) (i) above, but fulfilling the condition at sub-para-1 (b) (ii) above, preferential access may be given by the Government of India, on a case by case basis, after satisfying itself that such article has undergone a sufficient manufacturing process within Nepal.

d.      However, the import of Nepalese manufactured articles described in Annexure 'C' which fulfill the criteria in sub-para-1 (a) or (b) (i) and (ii) above will be governed by the terms specified in this Annexure.

e.      In the case of other articles manufactured in Nepal which do not fulfill the qualifying criteria specified in sub-para-1 (a) or (b) (i) and (ii) above, the Government of India will provide normal access to the Indian market consistent with its MFN (Most Favored Nation) treatment.

2.      Import of articles in accordance with the para-a above shall be allowed by the Indian customs authorities on the basis of a Certificate of Origin to be issued by the agency designated for this purpose by His Majesty's Government of Nepal in the format prescribed at Annexure- 'D' for each consignment of articles exported from Nepal to India. Information regarding the basis of calculation for grant of such Certificates of Origin to the manufacturing facilities in Nepal will be provided to the Government ofIndia on an annual basis. The modalities for this will be worked out within three months from the signing of the Protocol. Preferential facility shall not be available for the articles listed at Annexure 'E'.

3.      On the basis of a Certificate issued, for each consignment of articles manufactured in the small-scale units in Nepal, by His Majesty's Government of Nepal, that the relevant conditions applicable to the articles manufactured in similar Small Scale Industrial units in India for relief in the levy of applicable Excise Duty rates are fulfilled for such a parity, Government of India will extend parity in the levy of Additional Duty on such Nepalese articles equal to the treatment provided in the levy of effective Excise Duty on similar Indian articles under the Indian Customs and Central Excise Tariff. However, this facility will be applicable only to articles manufactured in Nepal in such small-scale units which qualify as small-scale units under the Nepalese Industrial Policy as on 5 December, 2001.

4.      The 'Additional Duty' rates equal to the effective Indian excise duty rates applicable to similar Indian products under the Indian customs and Central Excise Tariff will continue to be levied on the imports into India of products manufactured in the medium and large scale units in Nepal.

4.1 In regard to additional duty collected by the Government of India in respect of manufactured articles other than those manufactured in 'small' units; Wherever it is established that the cost of production in a corresponding unit in India, a sum representing such difference in the cost of production, but not exceeding 25 percent of the 'additional duty' collected by the Government of India, will be paid to His Majesty's Government of Nepal provided HMG of Nepal has given assistance to the same extent to the (manufacturer) exporters.

5.      Export of consignments from Nepal accompanied by the Certificate of Origin will normally not be subjected to any detention/delays at the Indian customs border checkposts and other places en route. However, in case of reasonable doubt about the authenticity of Certificate of Origin, the Indian  Customs Authority may seek a clarification from the certifying agency, which will furnish the same within a period of thirty days. Meanwhile, the subject consignment will be allowed entry into India on provisional basis against a bond i.e. a legally binding undertaking as required. After examining the information so provided by the certifying agency, the Indian Customs Authority would take appropriate action to finalize the provisional assessment. Whenever considered necessary, request for a joint visit of the manufacturing facility may be made by the Indian Customs Authority, which would be facilitated by the concerned Nepalese authority within a period of thirty days.

6.      Where for social and economic reasons, the import of an item into India is permitted only through public sector agencies or where the import of an item is prohibited under the Indian Trade Control regulations; the Government of India will consider any request of His Majesty's Government of

Nepal for relaxation and may permit the import of such an item from Nepal in such a manner as may be found to be suitable.

7.      For the purpose of calculation of import duties customs valuation procedures, as prescribed under the prevailing customs law, will be followed.

With reference to Article IX

In the event of imports under the Treaty, in such a manner or in such quantities as to cause or threaten to cause injury to the domestic industry or a significant segment of it relating to the article, the importing country may request for consultations in the Joint Committee set up by the two Governments for this purpose with a view to taking appropriate measures. If the consultations in the Joint Committee fail to resolve the issue within a period of sixty days from the date of such request, then the requesting Government shall be free to take appropriate remedial measures. The India-Nepal Inter-Governmental Committee (IGC) will review such measures.

'Injury' means significant damage to the domestic procedures, of like or similar products resulting from a substantial increase of imports under the Treaty in situations which cause substantial losses in terms of earnings, production or employment unsustainable in short term. The examination of the impact on the domestic industry concerned shall also include an evaluation of other relevant economic factors and indices having a bearing on the state of domestic industry of that product.

(Note: Secretary at the Ministry of Industry, Commerce and Supplies Bhanu P. Acharya and his Indian counterpart, Dipak Chatterjee, signed on the renewed Treaty and accompanying Protocol in New Delhi on March 02, 2002 on behalf of their respective governments.)