For decades, cross-border trade between Nepal and India was traditionally done due to social ties spanning borders. The situation now is different.

It’s now an organised commercial informal trade happening at a large scale, according to a research finding.

Rice appears to be a key commodity ‘highly informally’ imported from India to Nepal.

The research, ‘Dynamics of informal cross-border trade in agricultural products between Nepal and India,’ prepared by South Asia Watch on Trade, Economics and Environment (SAWTEE) in partnership with the International Food Policy Research Institute, shows that only 40 percent of rice is imported to Nepal from India through a formal channel.

India’s share in Nepal’s imports in formal trade is 60 percent, but the shares and volumes of informal trade are likely to be higher.

The research has pointed out that informal trade has thrived after the imposition of a 9 percent agriculture reform fee and a 2.5 percent advanced income tax, leading to a total duty of 11.5 percent on rice imports.

In the current fiscal year, the government also introduced a 13 percent VAT on some vegetables, including onions and potatoes.

With this variation, the price differences between Nepal and India become 18-20 percent, or rice in India becomes cheaper by at least 18 percent.

The paper said that India's ban on rice and other agricultural exports has led to massive smuggling of food from the 1,800 km porous border between Nepal and India Nepal in the south, east and west.

According to a separate report by the International Food Policy Research Institute, carrying or informally transferring goods has become a full-time profession for many poor families living close to the towns along the Nepal-India border.

“Carriers,” many of them women, collect the goods on the Indian side and bring them in via the open border, escaping the formal customs entry points, sometimes on foot, sometimes on bicycles and motorbikes, and always at their own risk.

Presenting the report titled ‘Insights into Informal Cross-Border Trade in Agri-Food Commodities in South Asia’, Dikshya Singh, programme coordinator at SAWTEE, a South Asian think tank based in Kathmandu, said the export duty imposed by India on rice in September 2022 followed by an export ban on non-basmati rice in July 2023, fueled the informal trade.

The report said that rice, vegetables, chemical fertilisers, and seeds are other agricultural products and inputs that have been largely coming through informal channels.

The study reveals that this informal trade is dominated by a small group of traders forming an oligopoly. Moreover, the study indicates that large-scale informal trade is controlled by mafia-style syndicates with political backing.

Anand Bagaria, managing director of Nimbus Holdings, said Nepal needs proactive measures to deal with informal cross-border trade. “Since we cannot influence our neighbouring countries’ policies, Nepal needs to be clear about what could be the right balance between inflation, government revenue, and mitigating quality-related risks while dealing with informal trade.”

Singh said Nepal heavily relies on informal trade to meet its need for agricultural inputs.

The report attributes the illegal import of chemical fertiliser to the persistent shortage in Nepal and cheaper rates in India.

The report showed that Nepal needs 800,000 tonnes of chemical fertiliser annually. The country has been able to import 400,000 tonnes formally, and an estimated 200,000 tonnes come through informal channels.

According to the report, farmers in Nepal have been informally importing a variety of seeds that are not available locally, especially hybrid seeds of vegetables, mainly due to import restrictions and to avoid non-tariff requirements.

SAWTEE conducted surveys at nine customs points, including Birgunj, Bhairahawa, Biratnagar, Nepalgunj, Kakarbhitta, Krishnanagar, Jaleshwar, Suthauli, Maheshpur, and Bhadrapur and the border crossings in their periphery.

“The informal trade between Nepal and India is as big as formal trade,” said Paras Kharel, executive director of SAWTEE.

Purushottam Ojha, former commerce secretary, said that gold and silver, areca (palm) nuts, onion and garlic, poppy seed, edible oil, and black pepper are informally exported to India from Nepal.

“Informal trade is rising between Nepal and India because of the price differences caused mainly due tariff advantage and tariff differences and non-tariff barriers for formal export.”

“The misdeclaration of exported goods from Nepal to India needs to be addressed,” he said. For instance, Nepal exports cabbage to India from Koshi province. As India has restricted the import of other types of vegetables from Nepal, traders are exporting other vegetables like okra, chayote, and chilli under the name of cabbage, Ojha said.

Article 2 of the trade treaty between Nepal and India, and the agreement on cooperation to control unauthorised trade talks about controlling informal trade. “During the bilateral discussion, be it commerce level, inter-government committee meetings, or customs director-level meetings, either annually or bi-annually, they discuss informal trade. But there hasn’t been any serious discussion about controlling informal trade,” Ojha said.

Nepal raised issues like the informal import of agricultural goods from India to Nepal, while the Indian side brought up issues like the informal import of goods including areca nuts, edible oil, poppy seeds, and black pepper, but no concrete solution has been found yet, according to Ojha.

Sabnam Shivakoti, joint secretary at the Ministry of Agriculture and Livestock Development, pointed out that cross-border trade that was done traditionally due to social ties across borders is not the same as the organised commercial informal trade that is happening now on a large scale. “This has been affecting agricultural and industrial sectors as they have to compete with cheap imports.”

According to Shivakoti, an import restriction on dairy products was announced in February 2024 to protect domestic farmers and the dairy industry, but that led to formal imports being diverted to informal channels.

Trade experts said that as the Indian government is providing eight types of subsidies on agricultural products, as a result, Nepali products become less competitive even in the domestic market, raising the informal trade to Nepal.