Nepal's lucrative palm oil exports to India could hit a setback as the southern neighbour has suspended all import licences besides imposing stringent trade measures in a bid to check cheap imports and protect domestic industry, Indian media reports said.

"The Directorate General of Foreign Trade of India has issued 39 licences to different firms. The Department of Commerce has reviewed its decision and has decided to suspend all these licences," the directorate said in an office memorandum dated May 11, according to reports.

The new trade policy that came through the Trade Notice issued on April 13 said that applications for import authorisation should be accompanied by a pre-purchase agreement and details of the import of refined palm oil items for the past three years.

The validity period of import licences for refined palm oil has been slashed to six months from the usual 18 months.

Applicants who do not utilise the import authorisation will be disqualified from getting any further licences for these items in the future, and Indian customs will be required to diligently enforce the ‘rules of origin’ criteria for the import of these items originating from Nepal and Bangladesh.

Rules of origin determine where goods originate, that is not where they have been shipped from, but where they have been produced or manufactured.

The South Asian Free Trade Area agreement, to which Nepal is a party, stipulates that goods with preferential origin are eligible to be imported and re-exported with lower duty rates or at zero rates if the requirements are met.

For Nepali exports to India to be eligible for tariff exemptions under this treaty, imported goods need to have at least a 30 percent value addition. Nepali trade experts have been saying that Nepali traders do not meet the 30 percent value addition requirement.

Palm oil has become Nepal's top export product although the country does not produce a drop.

On January 8, India’s Directorate General of Foreign Trade issued a notification saying the foreign trade policy had been amended from 'free' to 'restricted' for refined palm oil trade.

Under the new rules, firms are required to obtain an import licence from the directorate.

Navaraj Dhakal, joint secretary at the Ministry of Industry, Commerce and Supplies, told the Post that they were not fully aware of the new arrangements. “But we are in consultation with our Indian counterpart.”

According to The Economic Times, the licences were suspended to check illegal cheap imports and to protect domestic industry.

The firms holding the licences were slated to import 455,301 tonnes of refined palm oils including 293,000 tonnes from Nepal only.

Many of the permits were issued to companies located in eastern India, especially in West Bengal and Bihar states, the report said. “The import of refined palm oils has been rising in the last few months, affecting domestic refiners and local jobs,” states the report.

Indian media quoted Mumbai-based Solvent Extractors Association of India Executive Director BV Mehta as saying that Indonesia and Malaysia were major suppliers of palm oils. But the shipments are routed through Nepal and Bangladesh illegally at nil import duty.

"The government has started enquiring if rules of origin of the product were flouted. It is a major revenue loss to the government if imports are allowed through such routes," he said, adding that the Solvent Extractors Association had made several representations to the Commerce Ministry to check such imports.

A World Bank report attributes Nepal’s windfall in exports solely to increased demand for non-crude palm and soybean oil in India.

Tariff exemptions on Nepali exports to India under the South Asian Free Trade Area agreement gave domestic traders an advantage. Countries outside of South Asia are slapped with tariffs of 54 percent on palm oil and 45 percent on soybean oil.

According to the Nepal Development Update released by the World Bank in December, Nepal capitalised on this arbitrage opportunity and significantly increased exports of the two products. “However, it might not be a sustainable option in the long run,” the report said.

Subodh Kumar Gupta, president of the Association of Nepalese Rice, Oil and Pulses Industry, said that the inconsistent trade policy of the Indian government had been hurting Nepal. “Halting imports time and again has caused stress to Nepali businesses that have injected billions of rupees into the palm oil trade.”

Due to the good rate of return, some factories with huge investments have come into operation, said Gupta. “Now investments worth billions are at risk.”

According to him, the factories were in the process of producing or shipping huge amounts of processed palm oil to India, but were prevented from doing so due to the Covid-19 lockdown.

“These factories owe billions in bank loans.” He said that 90 percent of their output of processed palm oil was exported to India.

The Indian government should have given at least three months' notice instead of imposing the decision immediately, he said. “The government has conducted negotiations time and again, and we hope that it will try to find a way as quickly as possible,” Gupta added.

According to a Nepal Rastra Bank report, the country exported refined palm oil valued at Rs15.35 billion in the first eight months of the current fiscal year, a 244 percent jump year-on-year.

During the same period, Nepal imported crude palm oil worth Rs14.29 billion, up 133 percent year-on-year.