Mainly India is the major trade partner for Nepal enhanced due to geographical proximity, and open border and cross-border trade infrastructures between the two countries. India’s fast growing economy plays a pivotal role in expanding trade relations between the two countries. In the last fiscal 2017-18, two-third of imports and 57% of exports were carried out with the southern neighbour, according to the Trade and Export Promotion Centre. Nepal’s total import in fiscal 2017-18 was Rs 1,245 billion. Out of this, goods worth Rs 812 billion was imported from India. However, overall export to India has slowed. In last fiscal, Nepal exported goods worth Rs 46.66 billion or 57% of total exports to India. Nepal faced trade deficit worth Rs 766 billion with its southern neighbor. Deficit with India in the first six months of this fiscal 2018-19 stands at Rs 438.85 billion, and the figure could double by year end.
“Trade deficit with India is alarming and unsustainable” said former Vice Chairman of the National Planning Commission, Dr Shankar Sharma, “Nepal government should approach the Indian government to minimise the deepening trade imbalances through diversifying trade relations with preferential market access and attracting Indian investment into Nepal.”
In this backdrop, Foreign Direct Investment (FDI) from India could be an anchor to address the widening trade deficit with India.
Indian companies in Nepal could garner better access in Indian markets for exports, as is example of the multinational Dabur Nepal which is the largest exporter of juice from Nepal. Juice is now the second largest export commodity after jute to India. In the first half of the ongoing fiscal, Nepal has exported juice worth Rs 2.04 billion to India.
Composition of imports
Nepal’s major import from India is petroleum products categorised as energy product. In the first half of the current fiscal 2018-19, Nepal imported petroleum products worth Rs 103 billion, which is 50% increase compared to the corresponding period of the previous fiscal. According to Professor Amrit Man Nakarmi, Nepal can substitute the import of LPG (cooking gas) worth Rs 35 billion per annum from India if there is reliable access to electricity and massive electrification across the country. Despite having clean, green and renewable source of energy, i.e. hydroelectricity, the country has been spending its foreign exchange reserves to import petroleum products from India due to lack of leadership and vision. “Not only from the perspective of import substitution of fossil fuel, hydroelectricity is fundamental for energy security which is vital,” Nakarmi told Business 360.
Nepal government has been advised to investigate opportunities to link small-medium enterprises with the larger production chain of India which will ensure the sustainability of Nepali SMEs as well as create jobs and boost production. Another option is inviting Indian investors to invest in Nepal in manufacturing, tourism, agriculture and hydropower.
“If Nepal improves it strength in supply of reliable electricity and use of electric vehicles as well as boost agricultural production, Nepal’s import dependency on India will be reduced substantially,” said Dr. Posh Raj Pandey, Chairman of South Asia Watch on Trade, Economics and Environment, a regional think-tank based in Kathmandu.
Review of Indo-Nepal Trade Treaty
Nepal and India have recently started the process of revision of the Indo-Nepal Trade Treaty, renewed for the next seven years in 2016. Joint Secretaries of Ministry of Industry and Commerce of both countries have started discussions to finalise the draft of the Indo-Nepal Trade Treaty. Nepal and India had reviewed the provisions of Indo-Nepal Trade Treaty last time in 2009. The treaty is renewed every seven years, and was renewed without change in 2016 as there was political tensions between both countries at that time.
Ravi Shanker Sainju, Joint Secretary of the Ministry of Industry, Commerce and Supplies has informed that rounds of discussions will be held for the comprehensive review of the treaty and there have been two meetings so far, one in Delhi (India) and another one in Pokhara (Nepal). “Indo-Nepal Trade Treaty will be reviewed comprehensively in the modern context comprising the provisions of regional and multilateral trade agreements and arrangements,” said Sainju.
He further said that the revision of the treaty will protect the interest of both countries as Nepal has been looking for ways to narrow down the widening trade imbalances, and India has specific concerns about protection of intellectual property rights of Indian goods in the Nepali market, among others.
Trade and investment are dynamic issues and the revised treaty is expected to address these. “Trade and investment have complementarities in each other, this is why we are eyeing a favorable ground for Indian investment in Nepal and the trade treaty will be focused on providing that ground for Indian investment in Nepal,” Sainju emphasised.
Regional and multilateral trade agreements and arrangements
Revision of Indo-Nepal Trade Treaty will align the provisions of the bi-lateral trade treaty with regional and multilateral trade agreements /arrangements, namely, South Asia Free Trade Area (SAFTA) and World Trade Organisation (WTO). Some of the clauses in bilateral trade treaty are irrelevant such as tariff rate quota for certain Nepali products for export to India as well as value addition requirement for goods being exported to Indian markets. Indo-Nepal Trade Treaty has fixed tariff rate quota on certain products such as vegetable ghee, zinc oxide, copper wire and acrylic yarn since 2002, which is against the multilateral trade arrangement.
Similarly in the WTO India has promised 25% value addition for rules of origin criteria for products of least developed countries (LDCs) for export in Indian market. However, there is 30% value addition for Nepal to issue rules of origin certificate to export in the Indian market. On other hand, Nepal also has promised to eliminate other tariffs and fees within 10 years since its accession to the WTO in 2004. Despite that, Nepal has been imposing additional 5% tariff in the import of Indian agricultural goods in the name of Agriculture Reform Fees which is against the country’s promise at the WTO. After elimination of the Agriculture Reform Fees, Indian agro products will be cheaper in Nepal, which could distort the agricultural base of the country. Experts have urged that Nepal should talk to India for cooperation in agriculture sector to enhance competitiveness of the sector in the country.
The Indo-Nepal Trade Treaty does not allow Nepali importers to import goods of third country origin from India. However, most reputed brands have set up authorised dealers of their goods in India. Traders have said that it would be cost and time-saving for them to import from India than a third country.
As per the provision of the existing Indo-Nepal Trade Treaty, Nepal must grant similar facility that it provides to any other country to India. Due to this, Nepal is unable to expand diverse trade relations with other countries because the same facilities must be granted to India. For example, Nepal and Bangladesh agreed to provide preferential market access to each-others market, Nepal has obligation to provide similar facility to India. As a result, Nepal has lost the opportunity to expand trade relations with other countries apart from India in reciprocity.
Value addition on primary goods and addressing non-tariff barriers
To minimise the widening trade deficit with India, Nepal must enhance its export base to India. Most products being exported are primary in nature or low-value added products. Finished or high value added products face more tariff and non-tariff barriers for export in the Indian market. Export of primary or low-value added goods is easier but it depends on the discretion of the Indian quarantine as majority of primary goods being exported to India are agro commodities such as large cardamom, ginger, tea, among others. Indian quarantine imposes sanitary and phyto-sanitary measures on Nepali exports and creates hassles delays at checkpoints for extended periods. As a result, agro commodities of perishable nature often incur heavy losses for Nepali exporters.
Nepali exporters have been demanding an internationally accredited laboratory in Nepal so that they can certify their products before export to avoid such hassle at India-Nepal border checkpoints.
Vertical specialisation
Nepal has the potential to promote industries of vertical specialisation for larger production units of India. Indian industries can source raw materials and partially low-skilled and labour intensive products from Nepal. Nepal can supply raw materials and parts for assembling industries in India. Fragmented mode of production or vertical specialisation is common worldwide and also in India which is an emerging global economic power. Ancillary industries for the larger production units of India have the potential to flourish in Nepal and create a strong manufacturing base in the country. This will contribute to economic growth, job creation, and help narrow down the widening trade deficit.
