India has been Nepal’s largest trading partner for most of the latter’s history as a nation, making for 90 percent of its international trade between 1950 and 1970. But the trade gradually shifted to other countries with the growth in export of readymade garments, carpets and handicrafts to third countries under Generalized System of Preferences (GSP) on one hand and restrictive rules of origin criteria under the preferential trade agreement between Nepal and India on the other. The deceleration continued until 1994-95 when this trend witnessed a reversal thanks to inclusion of provisions of duty free access for Nepali products. This change was introduced in 1996 with a revision in the Protocol to the Treaty of Trade (Article-V). [break]
There was nine-fold increment in the volume of Nepali exports to India during 1996-2002. However, this momentum could not be maintained after 2002, mainly due to the inclusion of restrictive rules of origin criteria and tariff rate quota during the renewal of trade treaty and the opening of Indian markets for other exporters. Nepal is experiencing galloping imports and stagnating exports due to loss of competitiveness. The eleven month trade data (2012-13) published by Trade and Export Promotion Center (TEPC) shows that there was 25 percent increment in imports from India (Rs 362.24 billion from Rs 290.20 billion in 2011-12) and 0.4 percent increment in export (Rs 46.50 billion in 2012-13 from Rs 46.32 billion during eleven months of 2011-12), making for trade deficit of Rs 316 billion during eleven months of last fiscal year. This unsustainable deficit is causing shortages of Indian currency to pay import bills.
Trade ties between Nepal and India should be considered from two dimensions: bilateral exchange of goods, and transit services for trade with third countries. Nepal as a landlocked country is highly dependent on port, road, railway and border infrastructures of India. Trade and transit are inseparable elements of trade of Nepal. The demands for restructuring the basic foundations of trade and transit treaty are in line with changes in the global trading system.
The fundamentals of the treaty of trade and transit are inherited from the provisions laid down in 1978; no substantial changes have been made in the treaties except changes on its protocol or memorandum. The tech innovation and conceptual changes in the philosophy of trade and transit have infused dynamism in international trade. The treaty should be able to embrace these innovations and not confine to the rhetoric of tariff preferences.
Nepal-India treaty of trade, treaty of transit and the agreement of cooperation to control unauthorized trade are bound within a short time frame of seven years. Each time, there are negotiations before renewal of the treaties, which give a sense of insecurity and unpredictability to entrepreneurs and potential investors. The agreements should be for fairly long period with the goal of achieving further integration of economies.
There were substantial changes in the provisions of the protocol during the signing of treaty of trade in 2009. But many of these changes have not been implemented. The treaty seeks to promote bilateral cooperation for trade capacity enhancement, address supply side constraints, implement trade facilitation measures particularly focusing on upgrading the border infrastructures, mutual recognition and accreditation of the test and certification processes, exchange of trade related data, allowing temporary admission of equipment and machinery for repair and maintenance, among others. Implementation of these provisions could have far reaching consequences in enhancing complementarities in bilateral trade.
The potentials of Nepal-India trade and economic cooperation can be unleashed at three fronts. First, the existing agreements that serve the trade in goods should be refocused to increase intra-industry trade, commercialization of production and quality enhancement of the products along the value chain. Second, the focus should be on energy trade through hydropower development through the creation of a favorable investment climate and third, collaboration to promote the services sector, particularly tourism, education, health and ICT. This also calls for creation of favorable investment climate for commercial presence under mode-3 of GATS and promotion of cross border consumption by the people (Mode-2) of two countries.
The current system of transit through the port of Kolkata is becoming obsolete in the wake of emerging concepts and technologies that serve the twin purposes of protecting legitimate interest of the transit countries and facilitating the flow of transit traffic between the transit and landlocked developing countries. There should be broader vision to optimize benefits through reform in transit along with the enhancement of port and border infrastructures and upgrade of the transport system. Unfortunately, Nepali authorities are adopting a rather myopic approach, with useless discussions of additional one time lock (AOTL). The use of Visakhapatnam port, Singhabad-Rohanpur corridor, and simplification of the procedures for rail movement and operation of Kakarbhitta-Phulbari corridor are being made hostages to these unproductive discussions. Lack of systematic study and research on implication of policy decisions often leads to immature positions in negotiations and resort to penny-wise-pound-foolish decisions.
The institutional arrangements under the bilateral treaty of trade are not functioning very effectively. Given the number of issues that have cropped up over various products and processes, regular meetings are very important to address these problems before it is too late. Some crucial issues like countervailing duty on readymade garments, requirement of country of origin certification for transited goods and review of the Rail Services Agreement could be settled with relative ease if consultations were held as frequently as provisioned in the bilateral agreement.
Another crucial element in the bilateral process has been ‘the rewind and replay’ phenomenon adopted by the Indian government, raising para-tariff barriers including additional countervailing duty. In the past, such duties were levied on a number of products, but they were removed after the request at the highest level of government. However, these duty and charges are repeatedly imposed, again seeking the same type of redress mechanism. There should be some reliable mechanism to settle such issues within the framework of bilateral treaty of trade without the recourse of referral to the highest political level.
It is pertinent for Nepal to work closely with India to increase its export with a view to reducing the widening trade deficit and sustaining trade in the long term, which will call for a coordinated effort to enhance the supply-side capacity and ensure market access by resolving the issues of trade and transport facilitation. Similarly, both the countries need to work together to create a seamless transport system that not only facilitates the transit of Nepali goods through India but also helps build intra-regional connectivity among South Asian nations.
The writer is former commerce secretary
puruojha@gmail.com
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