Trade treaty: A paradigm shift

There are several countries with which Nepal has trade agreements. However, among them, India is perhaps the only country with whom Nepal has a trade treaty. Treaty per se denotes special relations between two countries and that is amply demonstrated in the new treaty signed between Nepal and India on Oct 28, 2009, which is the revised version of the 1991 treaty.

Commenting on the treaty, Nepali Minister for Commerce and Supplies Rajendra Mahato categorically said that it would help Nepal reduce trade deficit with India. The Indian Minister for Commerce and Industries Anand Sharma also said that the new treaty would not only help reduce existing hurdles in trade but it would also create better environment for expanding the volume of trade between Nepal and India. He added that India was in favor of prosperous neighbors and the trade treaty was a step in that direction.

If Nepal cannot improve its trade deficit with India with so many favorable clauses in the revised trade treaty, it would not be possible for it to reap dividends from other countries with far less provisions for such concessions.

It is not without reason why such optimism has been expressed on the possible outcome of the trade treaty. Significantly, for Nepal, the new treaty has removed all forms of non-tariff barriers on Nepali exportable items to India, which was a major hurdle in boosting the country’s exports of agro- and non-agro-based products to India.

The problem under the non-tariff barrier was that Nepal had to produce quality certificates issued by laboratories in India. Sometimes, it took the concerned party a few days or even weeks to receive such certificates. Goods loaded on trucks had to remain in queue and wait for days along the custom offices at the border to get such certificates.

However, under the new trade treaty provision, even the laboratory facilities in Nepal have been recognized as competent to issue quality certificates. This would substantially reduce time during the process of custom clearance. Besides, the transportation cost on the exportable items is likely to be less. For this, the trade treaty has made provision for capacity building of the Nepali laboratories for which technical standards, quarantine and testing facilities and human resource capacities would be enhanced.

Another important achievement of the new treaty is the scrapping of the duty refundable process. Now, the Nepali traders can import goods from India in Indian currency at par with trade in convertible currency without even paying excise duty to India. For the same item, the Indian buyers would have to pay excise duty. This would reduce the price of the Indian commodities in the domestic market in Nepal and thereby benefit the common consumers. At a time when Nepali consumers are reeling under inflationary pressure, this would certainly provide them relief.

Also, the consideration made in the trade treaty to waive any additional duty over and above the countervailing duty is a significant achievement. No less important is the agreement of cooperation to control unauthorized trade, which allows re-export of goods manufactured in one contracting party to third countries through the territory of another contracting party without manufacturing activity.

In order to reap the gain of duty-free access to India without any quantitative restriction, some new products have been added to the list of primary products to be exported to India. Such new items include products like floriculture, wheat flour, bran, husk, bristles, herbs, stone aggregates, boulder, sand and gravel.

The provision made for additional Land Customs Stations and open air traffic is another major breakthrough. Altogether, four Land Customs Stations have been added, which include Maheshpur-Thuthibari (Nawalparasi), Sikta-Bhiswabazar, Laukaha-Thadi and Gulariya-Murtia. Trade by air would be allowed through Kathmandu, Delhi, Mumbai, Kolkata and Chennai airports.

Incorporation of some of the above provisions in the new treaty between Nepal and India is expected to bring positive results for both the countries. If in the absence of some of these provisions, the exports from Nepal to India could grow 13 times and exports from India to Nepal by six times in 13 years beginning 1996, there is no reason why there would not be spectacular improvement in the days to come with the addition of so many favorable clauses.

However, the onus to benefit from the new treaty is on Nepal. The ballooning trade deficit with India amounting to Rs 108 billion cannot be reduced substantially until the supply side is duly promoted. Nepal, virtually, has very little surplus for exports to India.

Because of climate change, there has been no improvement in agricultural productivity and production. Also, the deteriorating law and order situation has encouraged criminal elements to ask for donations from industries. There is labor problem in most of the industries as a result of too much of unionism. The situation has aggravated with bandas and transport strikes taking place frequently. Hence, many of the industries are now closed. Even some of the industries run through foreign investment, such as Dabur, is in trouble.

In such a challenging situation, Nepal needs to improve its law and order situation and ensure security to the investors, both domestic and foreign. Besides, green revolution has to be ensured to improve agricultural production and productivity by adopting innovative land management system. Production in other sectors also needs to be promoted to improve the supply side dynamics.

If some of these improvements are made, it is likely that Nepal’s exports to India would increase. Also, it is likely that the investment from India to Nepal would further grow. With some of these developments, trade deficit between Nepal and India is likely to narrow down. If Nepal cannot improve its trade deficit with India with so many favorable clauses, it would not be possible for it to reap dividends from other countries with far less provisions for such concessions.