Unequal partnersThe trade treaty with India has always been guided more by politics than economics
Nepal is in a sorry state with regard to international trade due to its landlocked topography and high dependency on India. Its trade gap, especially with the southern neighbour, has been widening every year. Annual imports from India amount to more than Rs500 billion while exports total around Rs55 billion. Growth in the manufacturing sector, the source of major exportable items, has declined from 8.7 to 1.8 percent within the period of a decade. According to the Trade and Export Promotion Centre, the country imports merchandise goods worth Rs11 for every rupee’s worth of exports. Nepal possesses limited exportable articles compared to India. The southern neighbour is Nepal’s biggest trade partner, and it will remain so for some years to come due to geographical and other barriers to conducting trade with or via China.
The trade treaty signed between Nepal and India has always been guided more by political influence than economic factors. India’s domination of Nepal in the trade treaty can be seen by comparing it with the trade treaties signed with other countries. The treaty has never been in favour of Nepal. It has to accept most of the treaty’s contents prescribed by India as it is India-locked on three sides and there are difficulties in conducting trade with other countries. The pact’s vague wording and provisions permit India to impose tariff and non-tariff barriers, state taxes, quantity restrictions, quarantine barriers, anti-dumping duty and product disqualification.
This creates confusion in the business community which ultimately affects trade to a great deal.
There is a provision in the treaty to control unauthorised trade between the two countries, but it has been growing more or less at the same rate as authorised trade. This has been facilitated by complete freedom in currency movement between the two countries and availability of an increasing number of transit outlets for Nepal through Indian territory. Other reasons behind the swelling illegal trade are administrative hassles at customs, additional detention charges and delayed delivery of goods which increase the cost of transactions in formal trade. This discourages businessmen from conducting business freely and fairly. The difficulty in stopping smuggling of commercial products has ruined Nepal’s industrial base.
India has imposed quantitative restrictions through the trade treaty on Nepali exports such as vanaspati ghee (100,000 tonnes per year), acrylic yarn (10,000 tonnes), copper products (10,000 tonnes) and zinc oxide (2,500 tonnes). Establishing export-oriented industries is thus a risky venture in Nepal. It cannot export more than the stated quantities to India. As a result, numerous Nepali factories which were producing these items in large quantities have either shut down or slashed output. Moreover, dumping of cheap goods by India has killed off budding domestic production. India has started requiring Nepali tea exporters to obtain quality certification from an Indian laboratory each time they ship tea to India. Exports of Nepali processed leather have come to a complete halt after India cited issues of animal quarantine to bar its entry. Moreover, India has been imposing countervailing duty on Nepali readymade garments, copper and brass utensils and kattha.
The trade treaty signed seven years ago expires on October 27. Experts have said that the present bilateral trade agreement extends fewer facilities than agreed upon in multilateral and regional trade agreements. They have argued that the new trade treaty should agree with the arrangements of the World Trade Organisation (WTO) and the South Asian Free Trade Area (Safta). Nepali goods have little chance of being able to compete in the Indian market due to quality, price and supply capability. Lack of production and small number of exportable items are also affecting Nepal’s export trade.
The private sector has sought the elimination of state taxes and simplification of prevailing procedural hurdles to exporting pharmaceuticals, cardamom, ginger, medicinal herbs, tea leaves and other products. It has also called for the elimination of quantitative restrictions, reduction in tariff and non-tariff barriers, and quarantine and customs hassles to save Nepal’s dying export trade. The Eminent Persons Groups of Nepal and India should certainly consider these issues. Nepal should also think about imposing non-tariff barriers, anti-dumping duties and quantitative restrictions on the import of some products in which Nepal is self-reliant. Nepal can do this to protect its industry the same way other countries do. Nepal has made negligible efforts to protect its industry. Goods like biscuits, non-alcoholic beverages, readymade garments, cement, iron rods, meat, fish, edible oils, leather, plastic goods, electric vehicles and furniture can be put under such categories.
It has been ascertained after decades of experience that depending heavily only on India was a great mistake. Balanced trade ties with all the neighbours are necessary for Nepal to boost its industry and export trade. It needs to rapidly diversify its trade with other South Asian countries and China. Lastly, Nepal is in the process of diversifying trade by signing agreements with China to import petroleum products and use its transit trade routes. Previously, they were an Indian monopoly. Nepal should also sign Bilateral Investment Promotion and Protection Agreements (Bippa) with other neighbours as it has done with India to balance trade with all the countries in the region.
Shrestha is a former under-secretary at the Ministry of Finance and was associated with the United Nations Development Programme in Sierra Leone and South Sudan