Nepal loses on auto-renewal of trade treaty with India

The trade treaty was inked in 1978 and the last amendment was made in October 2016 without changes. The treaty is renewed every seven years.

Krishana Prasain

Krishana Prasain

The Kathmandu Post


Exports from Nepal to India declined 31.26 percent to Rs106.68 billion during the review period. The trade deficit with India stood at Rs1 trillion in the last fiscal year. PHOTO: THE KATHMANDU POST

December 8, 2023

KATHMANDU – With the automatic renewal of the Nepal-India trade treaty in November, Nepal has lost the opportunity to negotiate and amend a few Articles important for the country to boost bilateral trade, according to trade experts.

The trade treaty was inked in 1978 and the last amendment was made in October 2016 without changes. The treaty is renewed every seven years.

“The trade treaty meeting should have been conducted by Nepal and officials should have proposed changes to the article that have been impacting Nepal’s trade. But the Nepal government ignored the issue,” according to experts from the South Asia Watch on Trade, Economics and Environment (SAWTEE).

“The Indian side did not give it a priority. Nepali experts had been proposing a few amendments to the government,” they said.

Nepal will now need to wait until 2030 for any amendment to the treaty.

Trade expert Purushottam Ojha said that for decades there have been frequent changes of commerce secretaries and as a result it has been harming Nepal’s negotiating capabilities.

The treaty allows duty-free and quota-free access to Nepali goods—those listed as primary goods, including agricultural products—in the Indian markets.

However, there is a quantitative restriction imposed on four items—vegetable ghee, acrylic yarn, copper products and zinc oxide.

According to experts, Nepal just missed an opportunity to negotiate with India to make amendments to some of the restrictions that have been detrimental to Nepal’s trade.

They have been saying that removing duty-free market access to India in primary agricultural products will enable Nepal to impose a duty on the imported agricultural goods from India, which are heavily subsidised.

Agriculture, horticulture, floriculture and forest products, rice, pulses, flour, livestock, poultry bird and fish, bees, beeswax and honey need to be excluded from the reciprocal list, trade experts said.

Also, milk, homemade products, milk and eggs should not be reciprocal, they said.

According to SAWTEE research, Nepal can’t continue to afford to provide tariff-free access to heavily subsidized agricultural products from India. Therefore, select primary agricultural products, including cereals, must be removed from the list of primary products to which both countries are currently providing reciprocal tariff-free access.

Nepali jute products have been subjected to anti-dumping duties in India for the last seven years. In theory, according to SAWTEE, dumping is said to occur when goods are exported for less than they are sold in the domestic market or third-country markets, or at less than the production cost. Nepali jute products manufacturers say they are not doing so.

India is Nepal’s top trading partner. According to the Department of Customs, the year-on-year imports from India to Nepal declined 14.35 percent to Rs1 trillion in the last fiscal year that ended in mid-July.

Likewise, exports from Nepal to India declined 31.26 percent to Rs106.68 billion during the review period. The trade deficit with India stood at Rs1 trillion in the last fiscal year.

Trade experts said that increasing trade deficit, failure to participate in the value chain, presence of non-tariff barriers, preference erosion and adverse impact of the treaty on primary and agriculture sectors are the emerging trade issues between Nepal and India.

“There are a few important points which need to be amended in the treaty,” said Ojha, former commerce secretary.

Nepal cannot impose a duty on agricultural products as per the existing provision which is one of the reasons why Nepal’s agricultural sector is not performing, Ojha said. “Nepal’s agricultural products cannot compete with Indian agricultural products, which are heavily subsidised.”

In Article 3 of the treaty, there is a provision in the existing treaty that says the trade concessions granted by Nepal and India to third countries will be reciprocally applied automatically, Ojha said.

“Due to this provision, Nepal has not been able to provide a subsidy, especially for agricultural products,” Ojha said.

For instance, Ojha said, Nepal cannot have a trade treaty with Bangladesh.

He said that Bangladesh wants certain concessions on its products, but once it is provided, India will automatically get the same concessions.

Besides the provision, the treaty would have addressed the issues related to phytosanitary and sanitary measures, issuing accreditation to each other’s products and enhancing the quality infrastructure of Nepal.

Experts said many issues raised by Nepal regarding the treaty on several occasions have yet to come into implementation. So there is a need to review the implementation part of the trade treaty and find out the reason for poor implementation, Ojha said.

There is no effective mechanism to implement the dispute related to trade, Ojha said. The Inter-Governmental Committee mechanism could be more effective, he said.

The criteria for rules of origin is complicated and needs to be simplified.

Ojha said the issue of investment also needs to be included under the trade treaty. Due to insufficient investment, the production in Nepal is low. It is important considering that the Bilateral Investment Promotion and Protection Agreement has virtually become ineffective.

Ojha said that despite the automatic renewal of the treaty, both countries can revisit the treaty as per their timetable.

“In 2007, the trade treaty was automatically renewed, but in the same year we started negotiating for changes and an amended treaty was signed in 2009,” he said.

“We have to revise the treaty according to the changing dynamic of international trade,” Ojha said.

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