India-Nepal Bilateral Trade

Presented at the “International Conference on Regional Trade and Economic Cooperation in South Asia”

2-3 May 2013

New Delhi

Ratnakar Adhikari, PhD Chief Executive Director

Puspa Sharma Research Director

Background

• India is the largest trading partner of Nepal with whom Nepal conducts almost 2/3rd of its trade

• In 2012, Nepal imported goods worth NPR 360 billion from India whereas it exported only around NPR 52 billion

• Trade deficit with India is increasing at an alarming pace (Figure 1). As a percentage of GDP, Nepal’s trade deficit: ▫ total : 25%

▫ with India: 16%

Figure 1: Historical shares in trade deficit (India vs. others)

Source: Adhikari and Sapkota (2012)

State of play • In South Asia, Nepal has the second highest degree of trade

intensity with India, only after Bhutan

• Nepal’s export basket is heavy with low-value products, including minerals and agriculture products

• Nepal has not been able to diversify production into and exports of core manufacturing goods

• Items with relatively inelastic import demand such as petroleum, coal, chemical, rubber, plastic, mineral and food products weigh heavy on Nepal’s import basket

Export potential • Looking at the share of Nepal’s export to India in total export of

each product, it appears that Nepal is close to exhausting its existing supply capacity

• Nepal is under-utilizing its potential in export of the products on which it has comparative advantage because of the inability to scale up production

• There exits huge potential for intra-industry trade of processed agriculture, light manufactured and heavy manufactured goods

• From among the products in which RCA>1 for Nepal in 2010, considering the existing demand-supply conditions, applicable tariffs, and intra-industry trade dynamics between the two countries, the list of products having export potential to India are shown in table 1

Table 1: Nepalese products with high export potential in India

Source: Adhikari and Sapkota (2012)

Chapter

Product name (HS2007, 2-digit)

08 Edible fruit, nuts, peel of citrus fruit, melons

09 Coffee, tea, mate and spices

23 Residues, wastes of food industry, animal fodder

33 Essential oils, perfumes, cosmetics, toiletries

34 Soaps, lubricants, waxes, candles, modeling pastes

53 Vegetable textile fibers nes, paper yarn, woven fabric

55 Manmade staple fibers

64 Footwear, gaiters and the like, parts thereof

72 Iron and steel

73 Articles of iron or steel

74 Copper and articles thereof

76 Aluminum and articles thereof

Table 1: List of products in which Nepal has export potential to India

Critical barriers to

export growth

Non-tariff barriers-I • Arbitrary and unpredictable use of NTMs; thus Nepalese

exporters having to make informal payments to Indian customs officials.

• Indian custom offices do not accept test reports or certification issued by Nepalese labs. They allow Nepalese food items only when exporters submit a report of prevention of food adulteration (PFA) test conducted at designated regional food labs in India.

• Out of 26 land borders only three have quarantine facility and only two have food testing facility.

• Nepal-India Trade Treaty provides for “mutual recognition” of standards between the two countries, and India will make best endeavour to assist Nepal in upgrading its facilities.

Non-tariff barriers-II

• Nepalese exporters have to either get their products tested from one of the laboratories located in India or obtain Bureau of Indian Standards (BIS) certification to export their products to India. E.g., polyster fabrics have to be tested in Indian labs before export since test certificate issued by the Nepalese Bureau of Standards and Metrology (NBSM) or any lab accredited by NBSM are not recognized in India.

• But, out of 129 general purpose laboratories recognized by BIS (as of 21 February 2012), the nearest one from Nepal’s border is the one located at Noida.

• Stringent ROO requirement.

Para-tariff barriers • Multiplicity of para-tariffs such as countervailing duty (additional

duty of customs-ADC), education cess, special additional duty, etc.

• Lack of consistency and predictability in the imposition of para-tariffs. E.g. India has reimposed 12% countervailing duty on Nepal’s RMG exports.

Discriminatory application of duties • Nepalese exporters have to pay duty on finished products, their

Indian counterparts pay the duty on inputs thus putting Nepalese goods at a competitive disadvantage.

• Exporters of utensils (mainly copper and brass) manufactured in Nepal are subjected to 5 percent ADC, but the manufacturers of these products in India pay only 1 percent excise duty on these products.

Transport hassles

• Indian trucks are allowed free and unfettered access to any part of Nepal for a period upto 72 hours without having to pay any extra charge, but Nepalese trucks are only allowed into India upto the nearest market towns and rails heads.

• If Nepalese trucks or any vehicle have to go anywhere else in India, they need entry permit for every trip, which is valid for a maximum period of three months.

• Nepalese goods, more often, have to be transhipped to Indian trucks at the border, which adds to the time and cost of trading across border due to loading and unloading required.

• Problems in transit at the state level.

Other barriers

• Non-acceptance of Indian currency of higher denomination.

• Stopping of consignments on the ground that they are not included in the treaty.

• Certification requirement for pharmaceutical products.

Supply-side constraints

• Infrastructure ▫ Electricity; road-transport; standard-related

• Human capital ▫ Skill deficit; high wages; labour militancy

• Access to finance ▫ Collateral and high interest rates as major deterrents

• Access to technology ▫ Weaknesses in technology acquisition and adaption and limited

investment in R&D

• Trade facilitation measures ▫ Despite some progress, customs formalities remain way below

regional standards

Indo-Nepal Trade Treaty

Major provisions

Major provisions - I

• Latest version of the trade treaty was signed in 1996, which allowed reciprocal duty free market access for primary products (agriculture and minerals) on both sides

• For industrial products India provided duty free access to virtually all the products (except alcohol, tobacco and perfumes)

• In the 2002 version of the (renewed) treaty, two major changes were introduced: ▫ First, rules of origin criteria (30% value addition and change in tariff

heading)

▫ Second, quantitative restrictions on four items (acrylic yarn, copper wire, vegetable ghee and zinc oxide)

Major provisions – II

• Treaty renewed in 2007 without any change

• Later revised in 2009 by including the following provisions: ▫ Annulment of duty refund procedure (DRP)

▫ Duration extended to seven years

▫ Mutual recognition of certifications and commitment for technical assistance

▫ Four additional transit points and international airports connected by direct flights between Nepal and India (Kathmandu and four Indian cities) allowed for trade

▫ A few items added to the duty-free list of primary products (e.g, Atta, herbs, floriculture, stone aggregates, boulder, sand, gravel etc.)

▫ India “to consider” waiver of “additional duty” over and above excise duty

▫ Duty free temporary importation of used machinery and equipment for repair upto 10 years from the date of exportation

Implementation/other issues

• Trade and other treaties (e.g., control of unauthorized trade, transit, rail service) need to be periodically renewed, which puts relatively weaker partner in a vulnerable position

• Inter Governmental Committee meetings are not held regularly; even when they are held they are bogged down with procedural issues and not “trade promoting” policy-related issues

• There is no mechanism for “fast track” settlement of trade disputes

• Promises for technical assistance and mutual recognition have not been implemented in practice

• Treaty puts Nepal in a difficult position because if any other country is granted more liberal facility, that has to be unconditionally granted to India

• Treaty covers “goods” only

Conclusion • Being a larger economy, India needs to show magnanimity

in dealing with its smaller neighbours.

• The treaties need to be revisited based on ground realities.

• Implementation of the treaties should be made more effective and discriminatory and unpredictable use of different protection measures should be avoided.

• Nepal should strengthen its supply capacity.

THANK YOU