Revision of India-Nepal Treaty of Trade and Its Implications for Strengthening Bilateral Trade and Investment Linkages

Indra Nath Mukherji
JEL codes: 
Discussion Paper # 161

Relations between India and Nepal have been bound by long-standing geographical, historical, cultural, social and economic ties that the peoples of the two countries have shared since times immemorial. For quite some time, and particularly with the installation of Maoist-led coalition government in August 2008, the demand for revision of treaties trade and of peace and friendship was being made in the context of new developments in bilateral relationships.
Underscoring the close linkage between security and economy, Indias first treaty of Trade and Commerce with Nepal was signed on the same day as the Treaty of Peace and Friendship on 31 July 1950. The first section of this paper traces historically, the evolution of Indias Trade and Transit Treaties with Nepal beginning from the time such a Treaty was initiated in 1950 till the last revision was enacted on 28 October 2009. The paper focuses particularly on the last revision to analyze to what extent it addresses the concerns of the respective governments and stakeholders. The impression obtained is that the amendments rightly stress on a variety of non-tariff barriers as also non-tariff measures that need to be streamlined to enable trade, particularly exports from Nepal to flow more smoothly to India. However some time-bound institutional mechanism needs to be put in place to ensure that the incorporated provisions do not remain in the nature of best endeavor clauses. This is particularly relevant given that with the signing of several bilateral/regional free trade agreements by India over the last decade, the preference margin being enjoyed by Nepal has been severely eroded. In this context Indias offer to consider the removal of special additional duties on Nepalese exports to India (on specific request from Nepal) appears plausible.
The paper highlights the trend in bilateral trade between the two countries. It notes that barring setbacks in certain years, the bilateral trade between the two countries has been growing briskly. It notes that even though Nepal has been able to diversify its trade with India, its trade deficit with India has been increasing sharply, and its export earnings are barely sufficient to meet the cost of imports of petroleum products from India. The paper identifies products with high trade potential of both the countries so that these could be targeted in trade facilitation measures or when mutual recognition of each countrys certification is accepted by the other.
Noting the close linkage between trade and investment, the paper examines the volume and status of Indian foreign direct investments in Nepal. An exercise in intra-industry trade between the two countries gives direction for sectors/industries in which Indian investment could flow.The paper expresses concern about the labour situation in Nepal and the lack of arbitration tribunals in case of dispute. Quite a number of Indian industries have been shut down and those in the pipeline could also be adversely affected. In this context the need for long- pending Bilateral Investment treaty between the two countries has been emphasized.