Commerce ministers of Nepal and India signed a new bilateral trade treaty, which would have a life of seven years, yesterday. This new treaty is particularly promising for Nepal because it scraps many non-tariff barriers and direct tariffs on majority of goods. It also sorts out certification problems related to sanitary and phyto-sanitary measures. These measures are expected to increase price competitiveness of Nepalese export items. Importantly, it might help decrease the towering, unsustainable trade deficit, which was over Rs 108 billion in FY2008/09. This treaty is highly significant for Nepal because over 60 percent of total trade takes place with India.The top five exports to Indian are textiles, zinc sheet, thread, polyester yarn and juice.
Progressive reforms on sanitary and phyto-sanitary measures are probably the most exciting stuff for some exporters (India’s quality requirements were bugging them for a long time).
The treaty also binds India to recognize Nepal’s standard certification. It also puts the responsibility of upgrading Nepal’s laboratory on India’s shoulder, a provision which officials said will ensure enforcement of standard accreditation provision. Once that happens, exporters of Nepali tea, cardamom, ginger and other agricultural produces will not need to produce quality certification from Indian laboratories in Kolkata or Patna for entering their produces to India. This will prevent traders from losses they incurred while waiting for a week for certification to come, and thus will boost the export of primary goods.
The new treaty has for the first time open bilateral trade via air route. For the purpose, Tribhuvan International Airport (TIA) will be used as the official port for exports and airports in Delhi, Mumbai, Kolkata, Bangalore and Chennai will be ports for imports. It has also added four new land routes, namely, Maheshpur/Thutibari (Nawalparasi), Sikta-Bhiswabazar (Parsa) Gulariya-Murtiya (Bardiya) and Laukahi-Thadi (Siraha), for bilateral trade.
However, there is a hook, which will not help lower extra costs incurred by Nepalese garment exporters. It is not surprising that the Indian government declined to clear all hooks in the garment sector. The Indian government does not want to take dampen its garment sector by importing cheap, similar garments from Nepal.
Despite expressing good gestures and promises of all possible support, Indian Commerce Minister on Tuesday indicated that Nepal’s readymade garment could continue to face countervailing duty (CVD) of 4 percent.
The CVD that India imposed a couple of months ago has brought exports of popular brands like John Players, Peter England and DJ & G to a grinding halt. Nepali exporters argue that the imposition of duty on a product, on which India has no excise duty, was against the spirit of ´National Treatment´ provisioned for Nepali exports.
"Worse still, India has been imposing duty on maximum retail price (MRP), self-assessing the export value as 60 percent of MRP tagged on the product. This is unfair and should be eliminated," said Prashant Pokharel, president of Garment Association Nepal.
Though, it is not a happy moment for the Nepalese garment sector, the agriculture sector (only some of them; differences still remain in sorting out full tariff reduction on some agricultural products), mining and related activities, and pharmaceutical sector should benefit from the new trade treaty. I expect increased trade volume, which is already $3 billion, with India and a decrease in existing negative balance of trade.
The full benefits of new trade concessions from the Indian side (don’t get me wrong, the Nepalese government has also reciprocated with similar tariff reduction, which should benefit Indian exporters even more) would depend on how much Nepal facilitates trade related activities (decrease transaction costs, smoothen supply activities by removing transport bottlenecks, disseminating relevant information to traders, extend credit and technology-related subsidies etc). As of now, trade facilitation in Nepal is dismal. The government has to improve on these complementary factors to reap full benefits from the new trade treaty.
Here are the major points:
- No non-tariff barriers and extra-customs duty on Nepali exports
- India to recognize Nepali standard certification
- DRP, channeling agency on vegetable ghee exports to be annulled
- Trade via air to be recognized
- Five new trading routes to be opened up, including TIA
- Treaty will last for seven years
Bishwamber Pyakuryal, a professor of economics at Tribhuvan University, weighs in:
Correcting imbalances should mean exploring cost-competitive products that are highly in demand in the Indian market. We still lack information about each other on import needs, economic opportunities, market and labor workforce, investment opportunities, export potentials and other inherent constraints. Besides the compilation of annual data, the system of maintaining information on updated country-specific trade data has not yet been developed. The government should integrate the country’s economic policy into foreign policy goals and strategies and develop a system to link national data with Nepali missions abroad to make economic diplomacy result-oriented.
The year 2008/09 looks better than FY 2007/08 with regards to exports to India. In 2008/09, exports went up by 13.5 percent in contrast to a nominal decline of 0.2 percent in the previous year. Exports to India rose by 6.2 percent in 2008/09 as against a decline of 7.6 percent in the previous year. Similarly, exports to other countries also expanded by 26.9 percent compared to an increase of 17.3 percent in the previous year. Therefore, as the trend is positive, with the signing of the revised treaty, one should expect Nepal’s trade deficit with India to gradually reduce.