India-Nepal Trade and Investment

A Market Expansion Study

By Ankur Mahantaa Pritam Banerjeeb

March 2011

a Ankur Mahanta is Executive, International Trade and Policy at CII b Pritam Banerjee is Head, International Trade and Policy at CII

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About CII

CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 115 years ago, it is India's premier business association, with a direct membership of over 8100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations.

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Acknowledgement We are grateful to His Excellency Ambassador Rakesh Sood, Mr. Harsh Kumar Jain, Counsellor (Commerce) and Mr. R. K. Mishra, First Secretary (Economic), Embassy of India, Kathmandu, Nepal for sponsoring the study and for their advice and feedback. The authors gained valuable insights through interviews that were held in Nepal and India. In Nepal, the excellent support offered by Nepal – India Chamber of Commerce and Industry (NICCI), Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and Birgunj Chamber of Commerce and Industry (BiCCI) in arranging the conference, meetings and field visits are gratefully acknowledged. A special word of thanks is also due to Ms. V Khare, Chaudhury Group, Nepal for reviewing this study and providing us with critical feedback. In India, the central and regional offices of the Confederation of Indian Industry (CII) are acknowledged for their support. The various industry associations in Delhi, Kolkata and Siliguri are also acknowledged for providing the authors valuable feedback. Finally, we would like to extend our gratitude to the government officials in MOCI, DGCIS, Customs, CONCOR and Kolkata Port Trust for their help and providing the necessary resources to complete this study.

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Table of Contents Executive Summary ........................................................................................................................ vii

1. Introduction ............................................................................................................................. 1

2. India – Nepal Trade ................................................................................................................. 3

2.1. Recent Trends in India’s Exports to Nepal ..................................................................... 3

2.2. Composition of India’s exports ...................................................................................... 5

3. Potential for Enhancing Indian Exports to Nepal .................................................................... 8

3.1. Product-wise benefits of DRP withdrawal & Competitiveness: ..................................... 8

3.2. Summary ...................................................................................................................... 15

3.3. Re-exports through Nepal to Third Countries and vice-versa ..................................... 17

3.4. Re-exports to Nepal via India ....................................................................................... 20

3.5. Potential Exports to Nepal under SAFTA ..................................................................... 20

4. Nepal’s Trade Structure ......................................................................................................... 22

4.1. Nepal: A Case of Import Dependence? ........................................................................ 22

4.2. Recent Trends in Nepal’s Imports ................................................................................ 23

4.3. Major Third Country Supplying Markets to Nepal and their Commodities ................. 24

4.4. China’s Economic Presence in Nepal ........................................................................... 25

5. Trade, Transport and Trade Facilitation between India and Nepal ...................................... 29

5.1. Trade through Major LCS between India and Nepal .................................................... 29

5.2. Trade and Trade Barriers in Strategic LCSs: A Field Study ........................................... 30

5.3. Trade and Transport Facilitation: A Key Challenge ...................................................... 36

5.4. Priority Trading Routes and Government Initiatives ................................................... 38

6. Industry Perceptions on India – Nepal Bilateral Treaty and Trade ....................................... 40

6.1. Responses from Exporters to Nepal ............................................................................ 40

6.2. Responses from Importers in Nepal ............................................................................ 41

6.3. Results of Consultations with various Stakeholders .................................................... 43

7. Indian Investments in Nepal: Prospects and Issues .............................................................. 45

7.1. Investment Climate in Nepal ........................................................................................ 45

7.2. Investment-led Trade ................................................................................................... 46

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7.3. Investments from India ................................................................................................ 48

8. Key Findings and Policy Recommendations .......................................................................... 50

8.1. Exports ......................................................................................................................... 50

8.2. Trade Facilitation ......................................................................................................... 51

8.3. Investments .................................................................................................................. 51

8.4. Recommendations to take forward the Bilateral Treaty ............................................. 52

Annexure I ..................................................................................................................................... 55

Annexure II .................................................................................................................................... 57

Annexure III ................................................................................................................................... 61

References ..................................................................................................................................... 63

Appendix I ...................................................................................................................................... 65

Appendix II ..................................................................................................................................... 73

Appendix III .................................................................................................................................... 75

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List of Tables Table 1: Export Matrix of Non-POL items ........................................................................................ 7

Table 2: Nepal’s Preference Utilization as an LDC from ‘Quad Countries’ .................................... 17

Table 3: Import Basket of Nepal, Share by Major Commodity Groups: 1998-2008 ..................... 24

Table 4: China’s Presence in Nepal: Some Indicators (in US$ million) .......................................... 25

Table 5: Status of Trade Facilitation Services at the LCSs Surveyed ............................................. 31

Table 6: Top Exports through Raxaul LCS, 2008-09 ....................................................................... 33

Table 7: Rail Traffic at Birgunj ICD* ............................................................................................... 33

Table 8: Top Exports through Panitanki LCS, 2008-09 .................................................................. 35

Table 9: Trading Across Borders: Select Landlocked Countries .................................................... 36

Table 10: Distance (by road) to Kathmandu from Major Indian Economic Centres ..................... 38

List of Figures Figure 1: POL and non-POL Exports to Nepal: 2001-02 to 2008-09 ................................................ 4

Figure 2: Aftermath of the Crisis: Month-wise (y-o-y) Indo-Nepal Trade Trend ............................. 5

Figure 3: Top non-POL Exports to Nepal, their Growth and Share ................................................. 6

Figure 4: Comparison of Trade Balance to GDP ratio among LDCs ............................................... 22

Figure 5: Trend in Nepal’s Trade in Goods: Since 1990 ................................................................. 23

Figure 6: Major Supplying Markets to Nepal other than India: 1990-2008 .................................. 25

Figure 7: Indian Exports through the Major LCSs to Nepal ........................................................... 29

Figure 8: Share of LCSs in Total Exports to Nepal: 1999-2009 ...................................................... 30

Figure 9: Logistics Performance of Nepal: A Cross-Country Comparison ..................................... 37

List of Text Boxes Text Box 1: Highlights of Indo-Nepal Trade ..................................................................................... 3

Text Box 2: DRP in Brief ................................................................................................................... 8

Text Box 3: Diagrammatic Representation of DRP Withdrawal Benefits & Indicative Trade

Potential ........................................................................................................................................ 16

Text Box 4: Special Economic Zones in Nepal: Current Status ...................................................... 48

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Glossary of Abbreviations ASEAN Association of South East Asian Nations

ASYCUDA Automated System for Customs Data

BCP Border Crossing Point

CAGR Compound Annual Growth Rate

CTD Customs Transit Declaration

DFQF Duty Free Quota Free

DRP Duty Refund Procedure

EBA Everything But Arms

EDI Electronic Data interchange

EU European Union

FDI Foreign Direct Investment

GOI Government of India

GON Government of Nepal

GSP Generalized System of Preferences

ICD Inland Clearance Depot

ICEGATE Indian Customs EDI Gateway

ICP Integrated Check Post

L/C Letter of Credit

LCS Land Customs Station

LDC Least Developed Country

LLDC Landlocked Developing Country

MFN Most Favoured Nation

MOP Margin of Preference

MRA Mutual Recognition Agreement

POL Petroleum, Oil and Lubricants

ROO Rules of Origin

SAFTA South Asian Free Trade Agreement

SEZ Special Economic Zone

S&DT Special and Differential Treatment

SPS Sanitary and phyto-Sanitary

TBT Technical Barriers to Trade

TEU Twenty-foot Equivalent Unit

WTO World Trade Organization

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Executive Summary The revised India – Nepal Trade Treaty and the Agreement for Co-operation to Control Unauthorised Trade signed in October, 2009 marks a watershed moment in the bilateral trade relations between India and Nepal. It departs from the previous revisions to the treaty, in that, the scope has been broadened to include more than tariff and other duty concessions through a ‘tariff-plus Agreement’; where, non-tariff issues like Sanitary and Phyto-sanitary (SPS) measures, Technical Barriers to Trade (TBT) and importantly, trade facilitation measures are addressed. While the treaty is non-reciprocal, as India provides unilateral tariff concessions to exports from Nepal, it has addressed some key concerns that could boost Indian exports. The revised treaty provides for withdrawal of the Duty Refund Procedure (DRP) and is seen as a major change in the Indo – Nepal trade scenario. The proposed provision would do away with discrimination in respect of tax and other benefits to Indian exports merely on the basis of payment modalities and currency of payment basis. Once withdrawn, India’s exports of 63 goods out of Nepal’s top imports would become competitive (roughly 30% of India’s total non-POL exports to Nepal), in some cases by as much as 37%. Exports of industrial machinery and electrical and electronic goods are expected to benefit the most with DRP withdrawal benefits of 10.3% on some products and high indicative export potential. The withdrawal of DRP is also expected to reduce accounting complexities, under-invoicing of exports, unofficial payments and in general, facilitate trade movement across the border. The treaty allows for re-exports from India via Nepal to third countries and vice-versa. Nepal receives greater Generalised System of Preferences (GSP) benefits as an LDC from the developed economies and particularly by the European Union (EU) under its Everything But Arms (EBA) scheme for LDCs. The EU allows for ‘regional cumulation’ under which Nepalese and Indian manufacturers can collaborate to maximize benefits under the scheme. Some product groups where regional cumulation of origin could benefit Indian exports include iron and steel and other non-ferrous metals, chemicals and products of plastics and rubber, textiles and ready-made garments and gems and jewellery. Nepal’s major trade market is India. The other major source of Nepal’s imports is China with a share of 11.5% in 2008-09, up from just 7.5% in 2005-06. Chinese exports of medium-to-high technology goods are gaining market access even in sectors where Indian manufacturers have hitherto been competitive in Nepal. Investments and foreign aid commitment by China are also on the rise along with executing contract projects. There are over two dozen projects, worth over US$ 500 million under funding from Government of Nepal, Government PSUs and multilateral donors that are being executed by Chinese contractors, besides executing contract projects for the private sector in Nepal. These are large contracts involving Hydropower, Irrigation and Water supply, Power and Transmission and Telecommunications projects. One of the key challenges for enhanced trade relations between India and Nepal is the issue of trade facilitation and the lack of proper trade infrastructure. Out of the five major Land Customs Stations (LCSs) that account for 95% of the export flow from India to Nepal, only Raxaul has relatively efficient trade facilitation services. Exporters have cited increased transaction costs caused by delay in customs clearance and poor roads as one of the major barriers to trade. The

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Government of India has, on a priority basis, decided to set up four Integrated Check Posts (ICPs) along the Indo – Nepal border. Once completed, the four ICPs are expected to have a multiplier effect on bilateral trade. Efficient customs clearance, quarantine and laboratory facilities eliminating certification delays, cold storage and warehousing facilities and multi-modal transport system would result in efficiency gains translated into growth in bilateral trade and transit trade for Nepal. It is suggested that the Panitanki – Kakarvitta trading route be developed, on a priority basis, given its potential of developing into a major through point for bilateral trade with North-East India. After the initial optimism triggered by political changes in 2006, the investment climate in Nepal has deteriorated in the past few years. By 2009, there were over 1700 foreign investment projects in Nepal with commitments of US$ 634 million. With over 430 ventures, India accounts for nearly 44% of total FDI inflows into Nepal. Although significant bottlenecks remain in terms of basic infrastructure, poor roads, unreliable power supply, labour problems and bureaucratic apathy, Nepal has a marked investment potential in natural resource development. Some high potential investment sectors are hydropower, agro-based industries, tourism, textiles and clothing and light engineering equipments. Once the bottlenecks on investments are reduced and a strong political will emerges, Nepal’s estimated hydropower potential of 83,000 MW is expected to significantly boost economic activities within the country. Indian companies can play a major role in boosting investment-led trade in Nepal. Joint Ventures and collaborations between Indian and Nepalese manufacturers to exploit markets in the EU and through investments in the SEZs to be developed in the Terai region of Nepal to cater to the South Asian market are some of the opportunities for Indian investors. However, Indian investments in Nepal, critical to the country’s industrial development, have suffered in the past five years. Investments face three types of difficulties in Nepal: Entry Barriers, Institutional Hurdles and Operational Hurdles. The most pressing of these issues is that of labour unrest in a politically polarized nation. The Government of Nepal needs to address these issues on a priority basis in order to sustainably attract investments from India. The revised trade treaty between India and Nepal could become instrumental in streamlining India – Nepal trade in the next seven years, before the next revision takes place. It takes care of some of the Indian exporters’ most pressing demands, viz. withdrawal of the DRP mechanism, availing of export incentive schemes on exports to Nepal and trade facilitation measures. However, efforts should be made by government agencies, industry associations, export promotion councils and industry houses on both sides to disseminate trade treaty information, improving export competitiveness and trade facilitation services. Economic and trade development is crucial for Nepal’s peace and prosperity.

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1. Introduction Nepal’s current peace-building process after the democratization of the country is fraught with polarization of its economy and polity. The importance of a peaceful and prosperous Nepal for the longer term security of South Asia cannot be overstated. India is committed to help Nepal in its economic development and nurture industrial growth with a view to employment generation. Keeping this development agenda in mind, the revised India – Nepal Trade Treaty and the Agreement for Co-operation to Control Unauthorised Trade signed in October, 2009 provides even more liberal terms of market access for Nepalese goods to India along with a commitment to improve trade facilitation in Nepal. The purpose of this report is to analyse the implications of these agreements on India’s export and investment interests in Nepal. It also aims to provide a comprehensive understanding of India – Nepal trade and economic engagement from a private sector perspective. The previous revisions of the India – Nepal Treaty (in 1996 and 2002) had led to trade increasing in the past decade and a half. Investments also peaked during the late 1990s. However, the economic realities are much different today than it was a decade ago. Nepal, during its accession to the WTO in 2004, made sweeping commitments to liberalize its economy. Customs tariffs that peaked up to 130% in 1998 on industrial goods now max at 80%, with more than 85% tariff lines in the duty range of 0-15%.1 Nepal’s imports have hence ballooned, and a burgeoning trade deficit is creating pressure on the country’s Balance of Payments (BOP). At the same time India’s tariffs have also fallen leading to a classic case of preference erosion for Nepal, i.e., high tariff barriers that India maintained has come down in the past decade narrowing the Margin of Preference (MOP) that Nepal hitherto enjoyed in the Indian market. The purpose of the revised treaty is to take into account these changes and consider Nepal’s developmental needs. The treaty also provides for real economic engagement between Indian and Nepalese industry. It departs from the previous treaties, in that, the scope has been broadened to include more than tariff and other duty concessions through a ‘tariff-plus Agreement’; where, non-tariff issues like Sanitary and Phyto-sanitary (SPS) measures, Technical Barriers to Trade (TBT) and importantly, trade facilitation measures are addressed. The major revisions to the treaty are highlighted in Annexure I. India’s exports to Nepal during the last decade have experienced a healthy rate of growth. The study distinguishes between India’s POL exports (done exclusively through an agreement between two respective PSUs from India and Nepal) and non-POL exports. Within non-POL exports, India’s exports of high-to-medium technology goods have been below potential. While India and China compete in the global market to increase their share in manufacturing exports, India is falling behind China in merchandise exports growth to Nepal even with a favourable trade regime and geographical proximity between the two countries. The revised treaty, while addressing the development concerns of Nepal, also offers a new regime for Indian exports to

1 WTO Tariff Profiles; available at

http://stat.wto.org/TariffProfile/WSDBTariffPFView.aspx?Language=E&Country=NP, retrieved on 20/03/2010

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Nepal with the withdrawal of the Duty Refund Procedure, or ‘Nepal Rebate’. Given this context, the scope of the study includes the following:

Examining India’s export basket to Nepal to identify potential products that can be exported competitively

Analysis of Nepal’s import structure to identify products where India’s market share is below potential and measures that can be undertaken to gain/regain market access

Identifying export opportunities arising out of the revisions to the India – Nepal Trade Treaty and also through the South Asian Free Trade Agreement (SAFTA)

Examining the non-tariff barriers to trade and trade facilitation measures required to enhance bilateral trade

Analysis of Nepal’s investment scenario to identify potential sectors for investment and investment-led trade

Approach to the Study The study undertakes extensive primary and secondary data analysis. Consultations with sectoral and regional industry bodies were conducted both in India and Nepal to identify key issues regarding bilateral trade and investments. Relevant agencies of government and quasi-government bodies were also consulted for feedback on policies. A perception survey was conducted amongst Indian exporters to Nepal and Nepalese importers to assess the impact of the India – Nepal Trade Treaty and issues regarding exports to Nepal. A total of 28 filled questionnaires were received, 11 Indian Exporters to Nepal and 17 Importers from Nepal responded. Field studies were conducted in two select Land Customs Stations (LCSs) along the Indo-Nepal border to understand the issues at the ground level, viz., Panitanki-Kakarvitta and Raxaul-Birgunj. Furthermore, a stakeholders meeting was organized in Kathmandu to bring policy makers and industry members under one platform to discuss relevant changes in the treaty and explore the opportunities for trade and investments. Existing treaties and literature has been reviewed to identify relevant issues. Secondary data has been collated from government agencies in India and Nepal, independent data sources and other multi-lateral organizations. Disparities in data have been highlighted and the methodology explained.

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2. India – Nepal Trade India – Nepal bilateral trade has been conducted predominantly under the India – Nepal Treaty of Trade. The treaty has a coverage of almost 100% (with a few exceptions like alcoholic liquor, perfumes and cosmetics with non-Nepalese, non-Indian brand names and cigarettes and tobacco, which are not given preferential access from Nepal to India) for Nepalese imports to India. On the other hand, Nepal provides a Margin of Preference (MOP) of 7% (on MFN tariffs up to 30%) and 5% (on MFN tariffs above 30%) on Indian exports.

2.1. Recent Trends in India’s Exports to Nepal Since 2003-04, India’s exports to Nepal saw a healthy rate of growth of both POL and non-POL exports. POL exports experienced a CAGR of 14.7% during 2003-04 and 2008-2009 while non-POL exports grew by 14.8% during this period (see, Figure 1). India’s total exports during this period grew at a CAGR of 14.8%. According to Nepal Rastra Bank (NRB) data, the share of POL imports into Nepal has remained roughly around 25% of total imports from India during this same period.

Text Box 1: Highlights of Indo-Nepal Trade

Ever since the India-Nepal Trade Treaty was revised in 1996, India has been Nepal’s largest

trade partner. In 2008-09, India accounted for 58.2% of Nepal’s trade with - 57.6% imports and

60.9% of Nepal’s exports.

Nepal enjoys less than 0.5% of India’s trade share, accounting for 0.9% exports and 0.2% of

India’s imports in 2008-09.

India’s exports to Nepal experienced a CAGR of 14.8% during the period 2003-04 to 2008-09.

Imports from Nepal, on the other hand, experienced a CAGR of 4.9% during the same period, in

US dollar terms.

The balance of trade has historically been in favour of India with the trade surplus crossing

the US$ 1 billion mark for the first time in 2006-07.

Major export commodities from India and their share in the total export basket include- POL

items (25%); agriculture and allied products (11%); transport vehicles and spare parts (10%); steel

incoils (hot rolled and cold rolled) (6%); other machine equipments and spare parts (4.4%);

medicine (4%); M.S. Billet (3.4%); cement (2.5%); electrical equipments (2.4%); chemicals (1.7%)

and thread (1.6%)

Major import commodities from Nepal and their share in the total import basket include-

textiles (22%), iron and steel products (21%); food and related items (12%); artificial resins &

plastics (9%); chemicals and related products (9%); non-ferrous metals (5%).

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Figure 1: POL and non-POL Exports to Nepal: 2001-02 to 2008-09

Exports have grown steadily until the economic crisis...

-1,000

-500

0

500

1,000

1,500

2,000

2,500

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

US$

mill

ion

-16

-8

0

8

16

24

32

40

%

POL exports (LHS) Non-POL exports (LHS)

POL growth (RHS) Non-POL growth (RHS)

Note: the figures have been converted from NPR to current US$ using NRB foreign exchange rates archives. Accessed at http://nrb.org.np/detailexchrate.php?YY=&&MM=&&DD=&&YY1=&&MM1=&&DD1= Source: Nepal Rastra Bank

The distinction between POL and non-POL exports is important as POL exports from India to Nepal are predominantly done through Government undertakings (under an agreement between Indian Oil Corp. and Nepal Oil Corp.) without much private sector involvement. However, for the Indian industry non-POL exports to Nepal are of primary concern since this is the category where exports require product diversification on the face of strong competition from third country exports to Nepal. Since Nepal’s POL imports come almost exclusively from India, the competition in Nepal is really therefore on non-POL imports. India’s market share in Nepal’s total non-POL imports has remained stagnant at a little over 50% during the period 2003-04 to 2008-09. While India’s export share in world total exports has increased substantially during the last decade, Indian exports have not been able to expand its markets in Nepal. The biggest advantage for Indian exports – proximity to the Nepalese market, may not hold good as trade facilitation measures are undertaken and cost to import from third country markets decrease. Therefore any market expansion strategy will need to integrate a mix of product diversification, high growth products, export incentives, utilization of preferential agreements and reduced transaction costs. Impact of the Global Economic Crisis on India’s Exports to Nepal India’s trade with Nepal, that experienced a slump following the global economic crisis, has seen positive growth since Q3 of Financial Year (FY) 2009-10. While latest official data suggests that total bilateral trade shrank marginally by -0.4% in FY 2009-10, exports to Nepal saw a growth of 2.3%. Imports from Nepal, however, shrank by -8.8% during the same period. Monthly trade data reveals that negative growth in exports, which began in November 2008, was not reversed definitively until October, 2009 (see Figure 2). Besides agricultural exports, which plummeted by over -17% in the FY 2009-10, some major export groups such as textiles,

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transport equipments and electronic goods saw negative growths of 45%, 12% and 7% respectively. However, primary iron & steel products, machinery & instruments and pharmaceuticals & chemical products experienced positive growth rates of 90%, 21% and 4% respectively in the FY 2009-10. POL exports, the largest export group from India to Nepal, also registered a growth of 12% during the same period. Figure 2: Aftermath of the Crisis: Month-wise (y-o-y) Indo-Nepal Trade Trend

Trade picked up in Q3 of 2009-10

-60

-30

0

30

60

90

120

Oct

-08

No

v-0

8

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-0

9

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

%

Exports growth (%) Imports growth (%)

Source: FTPA, DGCIS

According to India’s official statistics, exports to Nepal stood at US$ 1605 million while imports from Nepal were US$ 452 million. At a bilateral trade of US$ 2.1 billion, Nepal was India’s third largest trading partner in South Asia after Bangladesh and Sri Lanka during 2009-10.

2.2. Composition of India’s exports2 An analysis of the composition of Indian exports to Nepal reveals that traditional exports like iron and steel products, non-ferrous metals, medicines, primary goods like cement and food products dominate the exports basket. While they are on a high-growth trajectory due to Nepal’s dependence on India on primary agriculture and industrial products, it must be borne in mind that Nepal’s consumption basket is also rapidly changing. Roughly 22% of Nepal’s total imports are machinery and transport equipments and India’s share in Nepal’s machinery and electronics imports are below potential. Out of the 20 top non-POL exports of India to Nepal, only four products are from the category of machinery and transport equipments (see Figure 3). The top export products are steel sheets, steel billets, vehicles and parts, medicine and various cement products. Many of these products are used as raw material or inputs in Nepal’s industrial activities. The exports of value-added

2 The analysis on growth and share provides a quick look at the potential commodities for market

expansion. In an ideal scenario, the CAGR of the commodity would be compared with the market share in Nepal. However, due to disparities in the 8-digit HS codes of India and Nepal, and unavailability of time series data (at the 8-digit HS level) of Nepal’s trade, the analysis uses the commodity’s share in India’s total exports to Nepal.

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products such as machinery and mechanical appliances, electrical and telecommunication equipments and electronic goods remain below potential. Figure 3: Top non-POL Exports to Nepal, their Growth and Share

Medic aments

S teel s heets <0.5mm

MS Billets

Cement c linkers

PP polymer

Cement dry

Other Medic ine

Mus tard s eeds

Motorc yc les

Goats

S teel s heets >1mm

S .oil res idues

V ehic le parts

Z inc , not alloyed

Tobac c o

Bis c uits

Mus tard broken

J ute

Trac tors

Freez ersRepres entative bubble=

US $ 10 mn

-10

0

10

20

30

40

50

60

70

80

90

100

-0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

S ha re in India 's ex port ba sket (in %)

CA

GR

, 2

00

4-0

9 (

in %

)

Note: The analysis does not take into account petroleum, oil and lubricants (POL) exports. Source: India Trades, CMIE From the Export Matrix of Indian exports to Nepal (see Table 1), we can infer that a majority of the high share commodities are either primary produces of agriculture and allied activities, mineral ores or primary iron and steel products. However, the table shows that India can leverage its growth in value-added engineering goods like freezers, industrial machinery and vehicles and parts that have the potential to expand their market share in Nepal. Vehicles and parts export to Nepal have kept pace with India’s global rise in the sector. As an export group, India’s share of Nepal’s total import of vehicles and parts has increased from 70% in 2005-06 to 75% in 2008-09. In the second column of low-growth commodities, Indian exports of certain iron and steel products, medicines and pharmaceutical products, cement and some agriculture produces are experiencing less than average growth in the last five year period. Low growth in these products could be attributed partly to the sluggish growth in the global economy in the past two years and partly to competition from third countries like China.

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Table 1: Export Matrix of Non-POL items High Growth Commodities (HS code) Low Growth Commodities (HS Code)

Hig

h S

har

e

1. Steel sheets (72091820) 2. Medicaments (30033900) 3. Mustard seeds (12075090) 4. Goats (01042000) 5. Steel sheets (72091620) 6. Soy bean oil residues (23040090) 7. Vehicle parts (87089900) 8. Zinc, not alloyed (79011100) 9. Biscuits (19059020) 10. Mustard seeds (12075010)

1. MS billets (72071920) 2. Cement clinkers (25231000) 3. Portland cement (25232910) 4. Other medicine (30049099) 5. Motorcycles (87112029) 6. Tobacco (24012090)

Low

Sh

are

1. Jute (53031010) 2. Tractors (87012010) 3. Freezers (84181090) 4. Polyester (55032000) 5. Sugar (17019990) 6. Other tractors (87012090) 7. Steel coils (72083690) 8. Kraft liner (48041900) 9. Bicycles (87120010) 10. Mechanical shovels (84295900)

1. Potatoes (07019000) 2. Onions (07031010) 3. Ayurvedic medicines (30039011) 4. Steel billets (72249091) 5. Steel bars and rods (72139110) 6. Other vehicles (87021019) 7. Sodium compounds (28151110) 8. Machine tool parts (84669390) 9. Malted milk (19011010) 10. Other steel bars (72131090)

Note: High growth = more than 18.6% (India’s export CAGR, between 2003-04 and 2008-09 with Nepal) High share = more than 0.5% of India’s total export basket to Nepal The analysis is carried out on exports to Nepal > US$ 2 million Source: India Trades, CMIE

The above analysis illustrates the range and depth of exports from India to Nepal. India’s Export Intensity index (EII)3 with Nepal is 57, which reveals that India dominates exports to Nepal from the world. In 1995, India’s EII with Nepal was 25 which increased to nearly 70 in 2003-04. However, in recent years, India is losing its market share, especially in the non-POL imports basket of Nepal. A favourable trade regime and the recent spurt in India’s export activities could help the case of India’s exports to Nepal. The next section provides a preliminary impact assessment of the revisions in the Indo – Nepal trade treaty and the potential to increase India’s exports to Nepal in the light of changing dynamics between the two countries.

3 Export intensity index is the ratio of export share of a country to the share of world exports going to a

partner. An index of more than one indicates that trade flow between countries is larger than expected given their importance in world trade.

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3. Potential for Enhancing Indian Exports to Nepal Under the revised India – Nepal Trade Treaty in 2009, Nepal does not provide reciprocal tariff elimination to Indian exports and this non-reciprocity in tariff reduction takes into consideration the development concerns of Nepal. However, there are certain key revisions that have the potential to enhance Indian exports to the country. The following section provides a preliminary assessment of the benefits that could accrue to Indian exports under the revised treaty.

3.1. Product-wise benefits of DRP withdrawal & Competitiveness:4 The revised 2009 Treaty of Trade between India and Nepal proposes to exempt Indian exports against Rupee payment from excise duty. At present, Indian exports to Nepal are levied excise duty and other additional duties that are imposed on domestic goods. The excise duty, however, is refunded back to the Government of Nepal (subject to certain conditions) under a mechanism called the DRP (see, Text Box II).

4 The excise duty rates in India refers to the excise duty levied from 1 March 2010

Text Box 2: DRP in Brief An Indian exporter to Nepal pays excise duties on its exports, at the same rate as domestic goods and exports it under an excise bond through the ‘Nepal Invoice’. Since the goods are not consumed in India a special mechanism was instituted called the Duty Refund Procedure (DRP) for refunding the excise duty paid in India back to Nepal. However, the DRP is paid by the GOI to GON without any duty benefits accruing to the Nepalese consumer (who pays for the Indian excise duty). The rebate of duty paid on the excisable good exported from India to Nepal is granted, provided; that the rebate does not, in each case, exceed the aggregate of the duty of Customs and

additional duty of Customs levied by the Govt. of Nepal on such goods when the goods are exported by land, the export takes place only through the designated

routes as laid down in the India – Nepal Trade Treaty the exporter follows the required procedure, as laid down in Annexure to the NOTIFICATION

NO.20/2004-Central Excise (NT) DATED 6.9.2004 Total Rebate paid by GoI to GoN; Available data shows that the amount of rebate of central excise duty sanctioned to the GoN has grown from INR 1.66 crore in 1964-65, the initial year, to INR 70 crore in 1996-97 and over INR 200 crore in 2008-09.

Item/Year 1964-65 1996-97 2004-05 2005-06 2006-07 2007-08 2008-09

Nepal Refund (INR crore) 1.66 70 137.2 144.7 118.6 187.3 200.7

Source: DGICCE, Government of India; Nepal Rastra Bank

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The exemption of excise duty is anticipated to make certain Indian exports, hitherto uncompetitive, gain greater market share in Nepal. While the exporter will get the excise duty rebate, the product itself is expected to become price competitive wherever the excise duty levied in India is greater than the customs duty levied by Nepal. Moreover, the treaty will bring bilateral trade conducted in Indian Rupee at par with trade in convertible currency (currently, the Nepal Rastra Bank (NRB) maintains a list of some 135 items that can be imported from India in US dollar5). This would make an Indian exporter to Nepal eligible for export promotion schemes prevailing in India. The simplification and harmonization of the export procedures is also expected to facilitate Indian exports to Nepal. The following section identifies the principal commodity groups under which certain goods could benefit, once the DRP is withdrawn. While the benefits from exports to Nepal in convertible currency already accrue to certain products, emphasis must be laid on the fact that exports in Indian Rupee getting the same benefits would have a set of positives; a. Appreciation in terms of Real Effective Exchange Rate (REER) has a severe effect on

exporters’ margins, which has become increasingly volatile in the current economic crisis. Exports payment in Indian Rupee would shield exporters from such volatility as the Nepalese Rupee is pegged to the Indian Rupee (1 INR= 1.6 NPR), and

b. Defaults on payment through Indian currency is less likely to happen than defaults in convertible currency

The analysis is carried out on the top 120 overall imports of Nepal plus the top 48 exports of India to Nepal, not already included, extending the product coverage to any imports > US$ 2.45 million at the HS 8-digit level. The section also identifies two other variables, (A) Indicative trade potential6, and (B) Competitors in the said commodity group. The Product-wise table can be found in Appendix I.

3.1.1. Agriculture and allied products

On most agricultural produce in India, the excise duty is exempt. Hence, there may not be benefits accruing from DRP withdrawal, in terms of price competitiveness. Agriculture products account for over 11% in India’s export basket to Nepal. DRP Withdrawal Benefits: DRP withdrawal benefits will be clearly available for the exports of raw sugar (HS code- 17019100) from India to Nepal that amounts to over US$ 4.4 million; the benefit will be up to 10.3%. Nepalese imports of partly or wholly stemmed tobacco (HS code- 2401.20.00) amounts to over US$ 17.2 million. While India enjoys a share of more than 99% in the product, the aggregate excise duty paid is 51.5% in India, whereas the import duty in Nepal

5 The current list is available at:

http://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)--2009-10_Report-NEW.pdf 6 Indicative trade potential is calculated as, a) the difference between India’s total exports in the product

to the world and India’s exports in the product to Nepal, wherever Nepal’s total imports in the product is greater than India’s total exports in the product to the world, or b) the difference between Nepal’s total imports in the product and India’s exports in the product to Nepal, wherever India’s total exports to the world in the product is greater than Nepal’s total imports in the product. Products with indicative trade potential of over US$ 2 million are only considered.

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is 15%. Once the DRP is withdrawn, the exports are expected to become competitive by over 37.5%. This could be a major boost for exports. Indicative Trade Potential: India has an indicative trade potential in exports such as chickpeas (US$ 6 million), ginger (US$ 3.7 million), concentrate of non-alcoholic soft drinks (US$ 13 million) and animal food (US$ 3 million) in the agriculture and allied products category. Competition From: China and the Southeast Asian countries are also sizable exporters in agriculture goods, particularly, powdered milk, garlic, ginger, apples, roasted malt and wheat gluten from China. The Southeast Asian countries of Indonesia, Malaysia and Thailand are major exporters of betelnuts to Nepal, besides soyabean oil, palm oil and sunflower oil. India’s export capacity in oils of soyabean, palm and sunflower is zero to negligible, which makes it difficult for Indian exporters to compete with the exporters from Southeast Asian countries that supply majority of Nepal’s needs. In the particular case of betelnuts, price per 100 kg of betelnuts is US$ 44 from Indonesia, US$ 53 from Malaysia and US$ 67 from Thailand; compare this to the US$ 73 from India and even with a 15% tariff barrier that Nepal imposes, imports from the above countries would still be price competitive. However, an important issue to note is that Nepal’s import of betelnuts is beyond its consumption. Most of these imports are diverted to India through unauthorized channels. This also applies to ginger. Nepal has a significant production of ginger, which is exported to India. Additional quantities are imported for diversion to the Indian market as either product of Nepalese origin or through unauthorized channels. Discussions with Indian customs officials in the Land Customs Stations (LCSs) reveal that some of these consignments to Nepal are confiscated on account of irregularities in the Customs Transit Declarations (CTDs).

3.1.2. Chemical, Pharmaceutical and Petro-chemical products

DRP Withdrawal Benefits: India’s exports of solid caustic soda (HS code- 28151100), organic compound (HS- 29420000) would become competitive by 5.65% (the difference between Indian excise duty on the product and the corresponding customs duty in Nepal). Similarly, herbicides (HS- 38089300) and industrial acids (of HS code 3823) would also benefit by 5.65% once the DRP is withdrawn. Sodium sulphides (HS- 28321000), ayurvedic and yunani medicines (30039010), LABSA (34029010) is expected to benefit by 1% once the DRP is withdrawn. However, except herbicides and ayurvedic and yunani medicines, the other products are allowed to be imported in convertible currency by the NRB. Indicative Trade Potential: The indicative trade potential in pharmaceutical products is immense, even though India may not enjoy any DRP benefits in the product category. However, with the benefit of export promotion schemes, India could look to expand its market in Nepal, which has a pharmaceutical imports market of US$ 130 million. India’s trade potential is high in products such as vaccines (US$ 8.7 million), antibiotics (US$ 5.1 million) and homeopathic medicines for retail sale (US$ 12 million). Industrial fatty acids have an indicative trade potential of US$ 17 million. Petrochemical products like polymers of ethylene, propylene and PVC products (products of HS codes 3901, 3902, 3904 and 3907) would become competitive by a margin of 1% once the DRP is withdrawn

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although India’s indicative trade potential in PVC products (under HS 3904) is low to negligible. These products can be imported in convertible currency under NRB’s list. Competition from: In pharmaceutical products, the major competitors are Switzerland (US$ 14 million), USA (US$ 10 million) and France (US$ 9 million). However, some of the pharmaceutical drugs also come as medical aid from the developed countries to Nepal and as such may not be comparable for market expansion. Nepal’s US$ 163 million plastics and PVC imports market is dominated by the gulf countries like Saudi Arabia (US$ 19 million), Qatar (US$ 10 million) and ASEAN countries like Malaysia (US$ 7.6 million) and Indonesia (US$ 4 million) and China (US$ 24 million). India faces a cost disadvantage in these products due to the large subsidies that the gulf countries receive in the petroleum and petro-chemicals sector. For instance, Saudi Basic Industries Corp., the largest petrochemical maker in the world, buys feedstock for its petrochemicals at fixed prices from state-owned oil company Saudi Aramco. Most Indian petrochemical manufacturers and rivals outside the Middle East use naphtha, a more expensive feedstock that is linked to the price of oil. Industry bodies such as Chemicals and Petrochemicals Manufacturers Association, India (CPMAI) points out that if local stock points are allowed to operate within Nepal, Indian manufacturers and exporters would benefit immensely in gaining market access, as it would provide a ready supply to Nepalese importers.

3.1.3. Textiles and Readymade Garments (RMG)

DRP Withdrawal Benefits: Exports of synthetic staple fibres (of the HS code 5503) and waste of man-made fibres (of the HS code 5205) would benefit by 5.65% due to DRP withdrawal. Moreover, cotton yarn (HS- 52051100) would also become competitive by 5.65% once the DRP is withdrawn. Although, DRP benefits are not expected to accrue to RMG products, India has a high indicative trade potential in these products. Indicative Trade Potential: India has an indicative trade potential in wool products (US$ 12 million) although most of Nepal’s supplies come from China (with a market of about US$ 17 million) and New Zealand (a market of US$ 5.3 million). However, India could explore its potential in polyester products like synthetic acrylic fibre (US$ 4.4 million), and RMG products like cotton wears (US$ 6.3 million) and synthetic jackets and blazers (US$ 4.9 million) and cotton trousers (US$ 2.8 million). Competition from: Indian textiles exports could become more competitive with the withdrawal of DRP that have to compete with growing exports from China and the Southeast Asian economies, besides niche imports from Switzerland, Hong Kong and New Zealand. Besides cotton and some polyester product groups, India has a low market penetration in silk, wool and RMG products that is dominated by China.

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3.1.4. Engineering goods; of which

3.1.4.1. Iron and Steel

DRP Withdrawal Benefits: India exports a sizable quantity of iron and steel products to Nepal. Of the major iron and steel products that Nepal imports, Indian exports in HS codes 7201, 7203, 7204, 7207, 7208, 7209 and 7213, would become competitive by 5.65% due to DRP withdrawal. However, exports in most top products in the export group are allowed in convertible currency under NRB’s list except exports of flat-rolled products of iron and non-alloyed steel (HS-72092700), which will clearly benefit from DRP withdrawal. Indicative Trade Potential: India has an indicative trade potential in waste and scrap of cast iron (US$ 8 million), flat rolled iron products < 3mm (US$ 9 million), bars and rods of iron or non-alloyed steel (US$ 18.3 million). Competition from: Indian exports in these products face competition predominantly from cheaper imports from China and to a lesser extent from Indonesia and Thailand.

3.1.4.2. Non-Ferrous Metals

DRP Withdrawal Benefits: India’s share in Nepal’s imports of certain copper and aluminium products (of HS codes 7408 and 7602) are comparatively low. A benefit of 5.65% would accrue in all these product sub-categories (including products of HS codes 7601, 7605 and 7901) once the DRP is withdrawn and could make Indian exports competitive. However, all the top imports in this category are allowed to be imported in convertible currency. Indicative Trade Potential: India has an indicative trade potential in products like refined copper wire (US$ 8 million), aluminium scrap (US$ 8.2 million), aluminium wire (US$ 3.7 million), aluminium foil (US$ 6.7 million), unwrought zinc (US$ 2.6 million) and non-alloyed tin (US$ 2.5 million). These products can be exported in convertible currency according to NRB’s list except non-alloyed tin (HS-80011000). Competition from: Indian exports to Nepal in this product category compete with exports from Australia, Singapore, Malaysia, Russia, South Korea and South Africa. While India has demonstrated export competitiveness in copper products (total global exports of US$ 3 billion), aluminium products (US$ 1.1 billion) and to a certain extent in zinc products (US$ 300 million), India still has not penetrated the Nepalese market in value-added items.

3.1.4.3. Industrial Machinery and Equipments

Nepal’s market in industrial machinery and equipments is roughly US$ 283 million. India’s share in Nepal’s imports of machinery, engines, and equipments is relatively low at 40.6%. While data shows that India’s exports in the product category has increased from 4.76% in India’s export basket to Nepal in 2004-05 to 6.66% in 2008-09, India’s exports in some major products are still low.

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DRP Withdrawal Benefits: Benefits of DRP withdrawal could be from a marginal 1% in aircraft engines to 5.65% in products like mechanical shovels, bulldozers and printing machinery (HS codes 8429 and 8443) to 10.3% in computer peripherals and data processing machines (HS codes 8471 and 8473). However, these products are allowed to be exported in convertible currency according to NRB’s list, except parts and accessories of data processing machines (HS- 84733000) where DRP withdrawal benefits could be up to 10.3%. Indicative Trade Potential: India has a high indicative trade potential in the export category of Industrial machinery and equipments. The trade potential is evident in aircraft engines (US$ 7 million), front end shovel loaders (US$ 8.5 million), offset printing machinery, (US$ 4.4 million), portable data processing machines (US$ 13.9 million), parts and accessories of data processing machines (US$ 9.3 million) and crushing and grinding machinery (US$ 5 million). India’s global exports in this category are estimated at US$ 8 billion with a growth rate of 18%. Exports to Nepal ranks at 28 with exports growth of 12%, ranking behind Sudan and even Oman, which indicates that India can gain greater market access given DRP withdrawal. Competition from: Major exporting countries to Nepal in this product category are China (17.3%), Japan (8.9%), Singapore (8.2%) and Thailand (6.9%). Chinese exports have a clear market lead in products like crushing and grinding machines, foundry machines, automated data processing machines, parts and accessories of data processing machines. While India has demonstrated export competitiveness in automated data processing machines (global exports of US$ 237 million), India’s exports to Nepal rank 24th with a negative growth of 47%, clearly losing market share to Chinese exports. Similarly in parts and accessories of data processing machines, India’s global exports are over US$ 240 million although exports to Nepal are ranked 32nd with a negative growth of 32%. In the category of shovel loaders, bulldozers etc (HS- 8429), India’s global export competitiveness is still low (global exports of US$ 77 million) but growing at over 77%. As the production capacity in India increases with more foreign investments in the industrial machinery segment coming in, exports are expected to increase. In the coming years, India needs to take advantage of the DRP withdrawal and a 7% MOP to penetrate this growing export category as infrastructure projects increase in Nepal.

3.1.4.4. Electrical Equipments and Electronic Goods

Nepal’s total market in electrical machinery, telecom equipments and electronic goods is US$ 282 million. DRP Withdrawal Benefits: Most exports in this product category are not permitted in convertible currency from India. Thus exporters of Cellular phones, telephony and related products, transmission apparatus, parts of TV and storage devices (HS codes 8503, 8517, 8523, 8525, 8529, 8540 and 8541) from India would benefit by a margin of 10.3% as a result of DRP withdrawal on account of zero duty customs duty in electronic goods in Nepal. This is a substantial margin for competitive products to gain larger market share in Nepal’s electronic goods segment.

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Indicative Trade Potential: India has a high indicative potential in electrical equipments like generating sets (US$ 2.9 million), parts of generating sets (US$ 4.9 million), electrical transformers (US$ 5.8 million); electrical apparatus like cellular and cordless phones (US$ 29.1 million); telecom equipments like routing apparatus for AV and other data (US$ 17 million), apparatus for transmission of AV data (US$ 22.1 million), parts thereof (US$ 5.6 million); transmission apparatus like semiconductor media (US$ 6 million), reception apparatus (US$ 8.5 million), radio receivers (US$ 5.7 million), photo-sensitive devices (US$ 5.1 million). India’s has demonstrated global export competitiveness in this export category with overall exports of US$ 9.5 billion, which have seen a growth of 78% during 2008-09. Exports to Nepal are relatively low and rank 39th out of India’s global exports with a growth rate of 18%. Global electronic majors are increasingly setting up bases in India (through SEZs and industrial corridors like Delhi-Mumbai Industrial Corridor) to cater to the large South Asian market. With the DRP withdrawal, we can expect Indian exports to Nepal in this category to see an increase in the coming years. Competition from: India’s share in this product category is 26.1%. The market leader is China with a share of 37.2%, while Japan (7.3%) and Sweden (6.8%) also have substantial market access. China has established a strong market hold on electrical machinery like generating sets, electrical transformers, lead acid accumulators; electronic goods like exports of cellular or cordless phones, routers of AV data, apparatus for transmission of AV data, parts of apparatus for data transmission; cathode ray tubes, TV parts and radio broadcast receivers; electric conductors etc.

3.1.4.5. Vehicles and Transport Equipments

Nepal’s total market in this import category is estimated at US$ 302 million, which would make it the second largest import category after mineral fuels. DRP Withdrawal Benefits: The DRP withdrawal could benefit Indian exports of tractors (HS code 8701.90.00) which would become competitive by 5.65%. While no DRP withdrawal benefits are expected to accrue to passenger vehicles, commercial vehicles or two-wheelers segment, Indian exports to Nepal being treated at par with exports in convertible currency would provide automobile exports the benefit of export promotion schemes. In exports of mid-sized airplanes to Nepal, India’s export capacity is still low (HS code 8802.40.00, where India’s global exports are US$ 73 million in 2008-09 from 0.03 million in 2007-08, a growth of over 26000 %!) but exports would get a marginal DRP withdrawal benefit of 1%. However, in parts of airplanes and helicopters (HS code 8803.30.00) where India’s overall exports to the world exceeded US$ 1 billion in 2008-09, a marginal benefit of 1% could increase the negligible exports to Nepal. Indicative Trade Potential: India has an indicative trade potential of US$ 7.7 million in motor cars between 1000cc and 1500cc; US$ 4.9 million in motor cars between 1500cc and 3000cc; US$ 2.8 million in double-cab pickup vehicles and US$ 2.3 million in parts and accessories of motor vehicles.

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Trade potential in aeroplane exceeding 15000 kg is US$ 22.5 million and in parts of aeroplanes and helicopters it is US$ 16.4 million. India’s export potential in this segment has seen a growth in recent years due to increased production capacities in the field of aerospace and aircrafts. Since 2005-06 exports have increased from US$ 63 million to US$ 1500 million in 2008-09. Competition from: In motor vehicles, major exporters to Nepal are Japan, South Korea, China and Thailand). Nepal’s current imports of airplanes and parts thereof are mainly from EU countries like France and UK.

3.1.4.6. Medical & Precision Instruments

Nepal’s major imports of electro-medical instruments (HS code 9018.90.00) mostly come from Switzerland and Japan. Indian exports are less than 15% in this product category. The DRP withdrawal could see a rebate of 5.65% for Indian exports.

3.2. Summary Text Box 3 below provides a clear representation of the export potential of certain products (at the HS-8 digit level) that are expected to emerge out of the revised trade treaty between India and Nepal. The Venn diagram illustrates the exercise carried out on 168 products of export interest from India to Nepal and takes into consideration two important parameters- DRP withdrawal benefits coupled with indicative trade potential. The intersection between the two sets ‘DRP Withdrawal Benefits + Indicative Trade Potential > US$ 2.5 million’ provides the potential export products with the ideal mix. The intersection includes products from most export category but highlights that export potential of industrial machinery and equipments and electronic equipments and goods are the highest. Indian exporters in these product categories can look to increase their market share in Nepal given a favourable export environment. The Withdrawal of DRP will not only make certain exports to Nepal more competitive but it will also overcome certain associated trade barriers, including;

maintaining quadruplicate copies, along with other documents required for exports, and verification through multiple agencies

under-invoicing of exports; and Unofficial payments required to be made for customs clearance of the ‘Nepal invoice’

form that add to the transaction costs of exports

The DRP is considered a very cumbersome process where payment of rebates could be held up to 6-8 months. However, its withdrawal needs to be substituted with some preventive measures so that exports meant for Nepal are not sold in India or re-routed back to India through unofficial channels.

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DRP Withdrawal Benefits Agriculture Products: 17011110, 24012000 Chemicals & Pharma: 28151100, 28321000, 34029010, 29420000 Textiles & RMG: 52051100, 52053100, 55032000 Iron & Steel: 72011000, 72031000, 72083600, 76011000 Industrial machinery & Equipments: 84295900, 84288000, 84342000, 84792000 Electronic Equipments & Goods: 85299010, 85401100 Vehicles & Transport Equipments: 87019000

Indicative Trade Potential > US$ 2.5 mn Agricultural Products:

07131000, 07132000, 08029000, 09101000, 10063000, 21069040, 23099000 Chemicals & Pharma: 30022000, 30039090, 30042000, 30049090 Plastics & Other Products: 39202000, 39269090, 48010000, 49070000 Textiles & RMG: 51011900, 51012100, 62032200, 62033300, 64029900 Non-Ferrous Metals: 76072000 Electronic Equipments & Goods: 85021100, 85043300, 85072000, 85287200 Vehicles & Transport Equipments: 87032200, 87032300, 87042110

DRP Withdrawal Benefits + Indicative Trade Potential > US$ 2.5 mn Chemicals & Pharma: 28151100, 38231900, 39011000, 39012000, 39021000, 39041000, 39076000 Textiles & RMG: 55033000 Iron & Steel: 72041000, 72071900, 72082700, 72083900, 72091800, 72139110 Non-ferrous Metals: 74081100, 7602000, 76051100, 79011100 Industrial Machinery & Equipments: 84071000, 84295100, 84295200, 84431900, 84713000, 84716000, 84733000, 84742000 Electronic Equipments & Goods: 85030000, 851712000, 85176200, 85176900, 85177000, 85238000, 85255000, 85256000, 85414000 Vehicles & Transport Equipments: 88024000, 88033000 Medical & Precision Instruments; 90189000

Text Box 3: Diagrammatic Representation of DRP Withdrawal Benefits & Indicative Trade Potential

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3.3. Re-exports through Nepal to Third Countries and vice-versa The revised Agreement on Co-operation to Control Unauthorised Trade includes a provision to allow re-exports through Nepal to third countries and vice-versa without the necessity of carrying out manufacturing activities. This provision also has the potential to benefit Indian exports via Nepal. Some of the trading houses and manufacturers based in Nepal are of the view that the provision would help them re-export Indian goods to markets like China, particularly the Western China region of Tibet and Xinjiang, the EU, Gulf countries and Southeast Asia. The idea of re-exports between Indian and Nepalese exporters are not new, as textile manufacturers from both the sides regularly used each other’s quotas under the Multi-Fiber Arrangement. However, with its expiration in 2004, exporters, particularly from India, stopped re-exporting from Nepal. Some of the particular products of interest are; Non-alcoholic drinks Cement dry Pharmaceutical products FMCG products like toiletries and other grocery products Polypropylene + Polyethylene Granules Brass products Billets, Sponge Iron, Wire Rods Nepal, as a Least Developed Country (LDC) member of the World Trade Organisation (WTO), receives ‘special and differential treatment’ (S&DT) from major developed economies in terms of tariff concessions under ‘duty free, quota free’ (DFQF) arrangements. Although, preferential treatment also comes with stringent conditions of Rules of Origin (ROO), which would make value addition necessary in Nepal, some countries like the EU allows for regional cumulation of origin that could benefit India. Table 2: Nepal’s Preference Utilization as an LDC from ‘Quad Countries’ Preference Giving Countries Potential Cover

Rate Utilization Rate Utility Rate

Canada 45.4 77.4 35.1

European Union 100.0 71.3 71.3

Japan 99.7 80.1 79.9

USA 4.7 90.7 4.2

Total Quad 44.9 74.1 33.3 Source: WTO

Looking at Nepal’s trade preferences (see Table 2), primarily given by the ‘Quad countries’ (USA, EU, Canada and Japan), it can be inferred that Nepal’s utilization rates are still below potential. The coverage is highest in EU (100%), but the utilization rate is highest in the US. In the US, the coverage is quite low, as a result the utility rate is also very low (4.2%), despite higher rates of

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utilization. An assessment of the preferential arrangement and their significance for Indian re-exports are provided below;

3.3.1. The European Union GSP

The EU has provided DFQF facilities to the Nepalese export under its Everything but Arms (EBA) Scheme for LDCs. Under this arrangement the EU has been granting all LDCs duty free access to the EU market for all exports except arms and ammunition. Earlier there used to be transitional quotas for sugar and rice which has recently been liberalized from 1 October 2009 onwards. The EU has classified developing countries in three groups benefiting from ‘regional cumulation’ of origin.7 It is interesting to note that, both India and Nepal fall under the Group III which allows them to work together for the purpose of manufacturing products which are eligible for preferential tariff treatment. If a product originating in India is used for further manufacturing activities in Nepal, it shall be treated as being originated in Nepal, provided value added there is greater than the highest customs value of the products used originating in any other countries of the regional group. In this case, both India and Nepal can derive maximum benefit by mutual co-operation in manufacturing sectors. Some product groups where regional cumulation of origin could benefit Indian exports include;

Products of iron and steel and other non-ferrous metals Chemicals and products of plastics and rubber Textiles and ready-made garments Gems and jewellery

As an LDC, items exported by Nepal to Europe include executive jewellery (silver & stone), leather items, traditional craft, metal ware, pashmina (sourced from India), cottons (sourced from India), hemp-jute-straw woven fabric- furnishing and clay-earthenware items. While these are folk and handicraft items, they are high value and high in demand items in EU. There exist potential synergies between industry in India and Nepal in the above sectors in terms of raw material, skilled and semi-skilled labour and existing capacities. Given the size and extent of the EU market, and given India’s export volumes to EU (under GSP benefits) regional cumulation of origin could hold tremendous prospects for boosting both Indian and Nepalese exports.

7 Regional cumulation of origin refers to products originating in any of the countries of a particular group

and used in further manufacture in another country of that group, which shall be treated as if they originated in the country of further manufacture, provided the value added there is greater than the highest customs value of the products used originating in any one of the other countries of the regional group, and the working or processing carried out there is more than minimal. In group III, the countries are: Bangladesh , Bhutan , India , Maldives , Nepal , Pakistan , and Sri Lanka. Please see the EU website; http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/preferential/article_781_en.htm

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3.3.2. The US GSP

The US, in addition to the standard GSP coverage of 4,650 products, provides 1,450 articles exclusively for LDC beneficiaries for duty-free treatment (UN, 2008). Nepal is amongst the 43 LDCs that could benefit from this program. Nepal’s five largest export categories in 2008 to US were: Textile Floor Coverings (US$ 46 million), Woven Apparel (US$ 14 million), Knit Apparel (US$ 5 million), Precious Stones (US$ 3 million), and Art and Antiques (US$ 3 million).

3.3.3. Japan GSP

Japan provides an enhanced DFQF to LDCs. It provides duty-free market access on 8,859 tariff lines (or 98 per cent of the tariff line level), covering over 99 per cent in terms of the import value from LDCs. However, stringent rules of origin criteria could discourage India’s exporters (materials or parts) to reach Japanese markets via Nepal. Only if a product undergoes sufficient amount of processing in Nepal, will it be considered as originating in Nepal and benefit in terms of receiving preferential market access.

3.3.4. Canada GSP

Canada extends duty free and quota free access for all imports from LDCs including textile and clothing, except for some agricultural products such as diary, poultry and egg products, which remain subject to duties and quotas. Canada also introduced new rules of origin requirements in the year 2003 that apply to the covered textile and apparel products entering the Canadian market from LDCs. These changes are friendlier for LDCs and require 25 percent value addition, which indicates commercially meaningful market access initiatives are possible. These can be of great significance to the both Nepal and India. However, for any meaningful market access to the Quad countries, Nepal needs to improve not only its supply chain but the competitiveness of its major export items. The revision in the Agreement on Unauthorised Trade, coupled with the revisions in the main trade treaty, could help Nepal and Indian industry in increasing the ‘regional exports’ to the developed countries. Likewise, the benefits would also be available for Nepalese exports to third countries via India, taking advantage of Indian trading houses’ market penetration in developed countries. This would also benefit Indian exporters on account of product diversification, supply enhancement and export margins. Some of the potential product groups that can be re-exported via India include handicraft and cottage industry products, fruit-based preparations, organic tea, folklore and curios, carpets, pashmina and jute products. For manufacturing exports Nepal can make use of Indian trading houses for exports of PP polymer, artificial jewellery, light engineering products like iron and steel implements and utensils of brass.

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3.4. Re-exports to Nepal via India Under a revised provision in the Agreement on Cooperation to Control Unauthorised Trade, re-exports to Nepal from third country imports would be allowed but would require prior authorisation from the two governments. This provision has been included to accommodate Nepalese industries’ demand to source inputs for their production competitively through Indian trading houses. Currently, importing small quantities of intermediate goods increases the overhead expenses for Nepalese manufacturers, due to associated high transaction costs. Re-importing from India will not only reduce costs but also guarantee a steady supply for manufacturers in Nepal. Products that can be re-exported to Nepal include;

Paints and emulsions Chemicals Automotive parts Processed food products Pharmaceutical products including special care and life saving drugs Industrial raw materials, machinery components Cigar

Palm oil, palmolein, paraffin wax, electronics as assembly parts and as fully assembled, food processing additives, furniture (cast and wooden) and trading software are some of the other products that can piggy back as India’s third country re directed exports to Nepal. The recent conclusion of the Trade in Goods Agreement under ASEAN-India Free Trade Agreement (AIFTA) has brought down tariffs on most products from ASEAN countries. During consultations manufacturers in Nepal expressed that Malaysia and Thailand are very strongly pushing business houses in Nepal to co partner Indian trading houses in such possibilities. Under Indian customs notifications8, re-exports are allowed duty drawback. For instance, any goods, with certain exceptions, imported into India and upon which duty has been paid and are entered for export to Nepal, 98% of the duty will be repaid as drawback. This is under the condition that goods are identified as the goods which were imported and the goods are entered for export within two years of payment of import duties. With the aforementioned provision and duty drawback, Nepalese manufacturers can take advantage of India’s tariff liberalization that has been done unilaterally and bilaterally under various FTAs.

3.5. Potential Exports to Nepal under SAFTA Indian exports to Nepal can also utilize another preferential arrangement, i.e., the South Asian Free Trade Agreement (SAFTA). Nepal and India, along with five other countries from South Asia, are signatories to the SAFTA that came into force in January, 2006. All member countries maintain a sensitive list, consisting of items which are not subject to tariff reduction. Nepal, being a LDC, maintains a longer sensitive list of 1335 items for non-LDCs, including India, which is equivalent to roughly 25.6% of Nepal’s total HS lines at the 8-digit level. Even the time-frame

8 Re-export of imported goods (Drawback of Customs duties) Rules, 1995

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for tariff liberalization under SAFTA is relatively long, with LDCs having to reduce tariffs to 0-5% within 8 years, i.e., by 2014. Under the India – Nepal Treaty of Trade, Nepal provides an MOP of 7%, on duties up to 30%, and an MOP of 5%, on duties above 30%, on all exports of Indian manufactures. Under SAFTA, Indian exports would have to meet the twin ROO requirement of Change in Tariff Heading (CTH) at the 4-digit HS level and 40% value addition, to avail of tariff benefits. Therefore, the market access benefits for India under SAFTA seems less favourable when compared to the bilateral agreements that India has with Nepal, or for that matter, with Bhutan and Sri Lanka (Ratna and Sidhu, 2008). However, a comparison of Nepal’s customs duties on its top 120 imports along with 48 top exports of India (not already included in Nepal’s top 120 imports) under the bilateral trade treaty and under SAFTA reveals that 23 commodities can be exported competitively under SAFTA as compared to exports under the India – Nepal Trade Treaty;

3 agriculture products (malt extracts, oil cakes and animal food) can be exported competitively under SAFTA with duty differentials of 3.45%, 1.8% and 4.3% respectively

1 inorganic chemical product (sodium sulphides) has a duty difference of 1.8% 5 commodities belong to the petrochemicals and plastics sector (polyethylene and

polypropylene of HS-3901 and HS-3902, PVC, PET) where the duty differential is 1.8% 3 paper and paper products (bleached kraft paper; paper and paperboard; unused

postage, stamps, bank notes) can be exported competitively under SAFTA with a duty differential of 3.45%, 3.45% and 1.8% respectively

2 textiles products (woven fabric of cotton, unbleached and dyed) under SAFTA enjoys a duty differential of up to 8.95%

1 product from articles of metals (Carboys, bottles, flasks, jars, pots and phials of glass) can be exported competitively under SAFTA with a duty differential of 3.45%

2 products from base metals and products (container for compressed or liquefied gas; aluminium foil) can be exported competitively under SAFTA with duty benefits of 3.45%

2 products from industrial machinery segment (aircraft engines, pumps for liquids) can be competitively exported under SAFTA with duty differentials of 1.8% and 6.45% respectively

3 products from electrical equipments and electronic goods (generating sets, of various power) enjoys a duty differential of 3.95% under SAFTA

2 products from aircrafts category (aeroplane > 15000 kg, parts of aeroplane and helicopters) can be exported under SAFTA with a duty differential of 1.8%

The product-wise table is given in Appendix II. The analysis takes into account Nepal’s revised duty rates applicable under SAFTA for 2010-11. It must be borne in mind that exports under SAFTA has to be accompanied by a Certificate of Origin stating that the commodities comply with the ROO criteria.

22

4. Nepal’s Trade Structure We now look at Nepal’s trade structure, with a focus on its import composition and main supplying markets. The following section attempts to highlight the major import items where India has a potential for market expansion. The section also analyses China’s economic presence in Nepal in the past decade.

4.1. Nepal: A Case of Import Dependence? Nepal’s external trade structure has seen considerable changes in the past decade and a half. As noted earlier, after the 1996 Trade Treaty between India and Nepal, Nepal’s trade orientation shifted heavily towards India. In 1996, India’s share in Nepal’s total trade was 29.8%. This increased to 41.6% in 2001 and subsequently to over 58% in 2008-09. In 2004, Nepal became the first LDC to get WTO membership through the accession process. Nepal’s import basket also highlights its economic structure. It is highly dependent on imports of essential items including agriculture products, textiles, capital goods, transport vehicles and POL items. Nepal’s imports, as a percentage of GDP, have steadily increased from 24% in 2003 to about 33% in 2008.9 On the other hand, export – to – GDP ratio of Nepal was only about 9% in 2008, leaving Nepal with a goods trade balance, as a percentage of GDP, of -23.5% (see Figure 4). Figure 4: Comparison of Trade Balance to GDP ratio among LDCs

Source: World Bank, 2009

LDCs traditionally have a negative trade balance, as compared to developing and developed countries, due to their developmental needs. However, Nepal’s trade balance has worsened

9 World Bank, World Trade Indicators 2008, 2009

23

over the past decade and could soon become unsustainable unless exports are pushed in a big way. Nepal’s accession into the WTO was expected to provide the country with technical assistance from the WTO to address its supply-side constraints and improving market access by benefiting from Special and Differential Treatment provided to LDCs. However, Nepal’s WTO membership has not helped the country achieve its policy objectives, i.e., trade diversification and narrowing its trade deficit. In fact, after its WTO membership in 2004, trade deficit has widened even further, as evident from Figure 5 below. Figure 5: Trend in Nepal’s Trade in Goods: Since 1990

Imports grew at a CAGR of 16% between 2003-08...

-3000

-2000

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4000

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Fiscal Year ending July 15

Accession into

WTO

Source: ADB, 2009

The worrying trend is that Nepal’s export growth has remained marginal in the past five year period, 2003-2008 (8%, as compared to 12% in LDCs). In addition, during the corresponding period, imports have swollen by over 16%. Current transfers (buoyed by over US$ 1.2 billion in remittances from abroad in 2008) have offset the trade imbalance in the recent past, but Nepal needs to boost exports to sustain its ever-increasing imports.

4.2. Recent Trends in Nepal’s Imports Nepal’s import profile has not seen any significant changes in the period 1998 to 2008 (see, Table 3). Import of manufactured items is the predominant sector of imports. Out of manufacturing imports, machinery and transport equipment form over 21% of Nepal’s total imports. Due to the low level of industry output in the Nepalese economy (representing only 15.7% of GDP in 2008), manufacturing imports contribute over 7% of Nepal’s total industrial output.10 The share of food imports is also comparatively high, due to Nepal’s topography. A predominantly agrarian economy (agriculture represents over 33% of Nepal’s GDP), Nepal also has a very high concentration of population dependent upon the available arable land.11 The share of iron and steel imports has increased considerably from 0.8% in 1998 to 4.7% in 2008.

10

Calculations based on ADB, Key Indicators for the Asia and Pacific 2009, 2009 11

Nepal’s real population density or population per sq. km of arable land is 1,259.

24

Fuel imports have also steadily increased to over 22% of Nepal’s total imports during the same period. Table 3: Import Basket of Nepal, Share by Major Commodity Groups: 1998-2008

Commodity Groups 1998 (Share in %) 2003 (Share in %) 2008 (Share in %)

Agricultural products 18.2 22.5 15.7

.Food 12.3 17.7 10.2

Fuels and mining products 21.9 20.0 22.2

.Fuels 18.3 16.0 19.8

Manufactures 59.9 57.5 62.0

.Iron and steel 0.8 6.3 4.7

.Chemicals 11.6 10.5 12.1

..Pharmaceuticals 4.5 2.6 3.6

.Machinery and transport equipment

28.6 16.4 21.6

..Office and telecom equipment 4.3 4.7 4.9

...Electronic data processing and office equipment

1.4 1.3 1.4

...Telecommunications equipment

2.9 3.1 3.1

.. Automotive products 6.7 3.0 3.6

.Textiles 7.5 8.1 2.6

.Clothing 1.1 2.7 1.9

Total 100.0 100.0 100.0 Source: WTO; UN Comtrade and CII calculations

4.3. Major Third Country Supplying Markets to Nepal and their Commodities The main supplying markets to Nepal have undergone changes in the last decade. While imports from India have increased, Nepal has also started to import heavily from China during this period. In the early 1990s, Nepal’s imports were diversified and the major suppliers included Japan, Singapore, India, China and Thailand (see Figure 6). However, in 2008 imports from India and China alone accounted for over 72% (with India accounting for 58%) of Nepal’s imports. As the two largest emerging markets in the world surrounds Nepal, it is not surprising that Nepal sources its imports more competitively and efficiently from India and China. Nepal’s major commodities of import from countries other than India, includes mainly textiles, chemicals, electronic data processing machines, telecommunication equipments, heavy machinery and automotive products. The product-wise list of commodities and the three main source countries with their shares are given in Appendix III.

25

Figure 6: Major Supplying Markets to Nepal other than India: 1990-2008

Imports from China: CAGR of 50% during 2003-08...

0

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China Singapore Thailand Saudi Arabia Japan

Fiscal Year ending July 15

Source: ADB, 2009

4.4. China’s Economic Presence in Nepal China’s footmark in Nepal has grown noticeably since 2000. While both the countries have had good economic relations since the Treaty on Sino-Nepalese Peace and Friendship in 1960, it is only in the past decade that China’s economic presence in Nepal has become second only to India. Table 4 below provides a few indicators on growing Chinese presence in Nepal.

Table 4: China’s Presence in Nepal: Some Indicators (in US$ million)

2004 -05

Share (%)

2005 -06

Share (%)

2006 -07

Share (%)

2007-08

Share (%)

2008 -09

Share (%)

Imports from China 195 9.5 179 7.5 250 9.1 359 10.6 426 11.5 Foreign Aid from China

5.7 NA NA NA 13.7 5.1 12.9 6.5 16.3 4.7

Investments from China

2.4 10.8 2.5 7 7 15.3 6.9 4.6 14.8 18.2

China’s Investment Stock in Nepal

66.4

Note: Share means ‘Share in Nepal’s total’ Source: ADB; MOFA, GoN; Dept. of Industries, GoN; Ministry of Finance, GoN

While Chinese products and imports into Nepal are ubiquitous, China has recently increased its bilateral aid, investments and contract bids in Nepal.

4.4.1. Imports from China:

Trade is the largest measure of China’s economic presence in Nepal. Since 2005, China has overtaken Singapore as Nepal’s second largest import source after India. Its share in Nepal’s total imports has also risen significantly to over 13% in 2008-09. The major imports from China in 2008-09 includes iron and steel products, cell phones and telephones, articles of plastics, electronic data-processing equipments, wool, clothing and footwear products, electrical and non-electrical machinery, food products like ginger, garlic and apples and chemicals.

26

In 2008-09, Nepalese exports were a paltry US$ 24 million to China, composed mainly of agricultural products, imitation jewellery and articles of base metals. Nepal has a huge trade deficit with China, which has worsened progressively from 75% of total trade in 2004-05 to over 89% in 2008-09. To bridge the trade deficit, China has agreed in 2009 to provide duty free access to 497 Nepali goods in its market besides over 4700 tariff lines already receiving duty free access under China’s offer to 33 LDCs. This could well become a goodwill gesture without amounting to much, as prohibitively high transportation costs, high transaction costs and a concentrated export basket of Nepal, relying heavily on agricultural products, carpets and garments exports, may still be unable to crack the competitive Chinese market. This in effect means that the trade deficit is likely to worsen even further as Chinese imports grow at an annualized rate of over 21% into Nepal. While Nepal can look to export to Tibet across the northern border, it is a very small market within China. Both China and Nepal have agreed on opening 6 border crossing points in Nepal’s relatively long border of 1414 kilometers with Tibet for overland trade. However, official trade with Tibet is only a small proportion of trade with China, as major Sino-Nepal trade takes place through the ports of Kolkata and Haldia. A major issue that emerged during consultations with freight forwarders from Nepal is that transport syndicalism in the Nepal – Tibet trade routes has remained a serious issue and the freight charges of one truck could go up to NRS 3 lakh for exports to the Tibetan border towns. This in itself acts as a huge non-tariff barrier to exporters in Nepal.

4.4.2. Investments from China:

The Chinese investors are looking at Nepal as a prospective investment destination. FDI flow from China into Nepal has increased from a low base of US$ 2.4 million in 2004-05 to nearly US$ 15 million in 2008-09. The total Chinese FDI stock in Nepal is US$ 66 million that is likely to increase significantly in hydropower, tourism and agriculture sectors. China’s total industries approved for foreign investments in Nepal up to 2008-09 were 270 or 15.6% of Nepal’s total approvals for foreign investments. Investments from China are mainly in the following areas; hotels and restaurants, electronics, telecommunications services, readymade garments (pashmina), medical services, hydropower and civil construction. Total investments from China is second only to Indian investments in Nepal, although the absolute gap in investments is still large as total Indian investments in Nepal amount to roughly US$ 277 million till 2008-09.

27

4.4.3. Foreign Aid,12 Commitment by China:

According to data released by Ministry of Foreign Affairs, China, foreign aid or development assistance granted to Nepal has reached over US$ 205 million (RMB 1.4 billion) since 1956. China accounted for around 5% of Nepal’s total commitment of bilateral aid in 2008-09, behind Japan, South Korea, UK and Denmark. Chinese aid is focused mainly on infrastructure development in Nepal. It is geared towards

improving Nepal’s trade capability with China, particularly with Tibet via overland route. China’s

assistance is pledged in terms of projects. These are mainly highways, brick-kilns, paper mills, hospitals, schools, hydropower stations, textile plants, tanneries, irrigation projects, sugar refineries and an International Conference House. Other important projects that are in different phases of implementation include the Civil Servant hospital, Syabrubesi-Rasuwagadi Road, B P Koirala cancer hospital, Upper Trisuli Hydropower project, National Ayurvedic Hospital and an Outer Ring Road in Kathmandu. Beginning from 1981, China started executing contract projects in Nepal. Currently Chinese contractors are executing multi-million dollar projects both in the public and private sectors. There are over two dozen projects, worth over US$ 500 million under funding from Government of Nepal, Government PSUs and multilateral donors. These are large contracts involving - Hydropower, Irrigation and Water supply, Power and Transmission and Telecommunications projects.

Chinese contractors are also undertaking various other projects in Construction, Hydropower and Telecommunications for the private sector in Nepal. This has meant an increased import of Chinese goods and presence of Chinese workers in Nepal.

China’s economic cooperation with Nepal is likely to grow in the future. Consultations with industry bodies, business leaders, academicians and noted journalists in Nepal reveal that at the current juncture, China’s presence in Nepal has increased by manifold since the early 2000s, not only in the context of trade and investments but also in the context of Chinese companies taking up private sector and civil contracts. Moreover, Chinese tourists are increasing and occupy the fourth position in terms of total arrivals in Nepal after India, the US and the UK. Chinese investors, who till some years ago, were hesitant to invest in projects with long gestation periods in Nepal, are now looking to invest in hydropower projects ranging from 10

12

In a pioneering study by, Maizels A. and Nissanke M.K., 1984, “Motivations for aid to developing countries”, World Development, Volume 12, Issue 9, September 1984, Pages 879-900, the authors identified two underlying principles for aid allocation- ‘recipient need’ and ‘donor interest’. The second (donor interest) model assumes that all aid serves only donor interests, defined to cover political/security investment and trade interests. This model gives generally good explanations of bilateral aid in the 1980s. Foreign aid is a major component of Nepal’s current account receipts under Balance of Payment. As such the study assumes that foreign aid also plays a significant role in the economic presence of a country in Nepal. Project-based aid or development assistance for construction works, telecommunications network may likely import goods or use technical expertise of companies from the host nation thus boosting investments or trade within the ambit of aid.

28

MW to 500 MW. China has also enhanced its annual grant as well as implementing several other projects under special grant or soft loans. Imports for China, however have shown the most impressive rise, and has multiplied in the past decade. This trend is likely to continue as Nepalese importers look towards cheaper inputs for the production or cheaper finished goods to sell in the domestic market.

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5. Trade, Transport and Trade Facilitation between India and Nepal

This section contains a review of the bilateral trade between India and Nepal through the trading points along the Indo-Nepal border. It also provides a survey of two select LCSs, namely, Raxaul – Birgunj and Panitanki – Kakarvitta. The section reviews the various modes of trade transport, infrastructure at the LCSs and highlights key government initiatives on development of LCSs. It also highlights certain key challenges in trade and transport facilitation in Nepal, which needs to be addressed, in some cases, bilaterally.

5.1. Trade through Major LCS between India and Nepal Currently, almost all the trade between India and Nepal is conducted by land through designated LCSs. With the revision of the treaty in 2009, four more LCSs have been added to increase the number of trading points to 26. However, if we look at the exports from India in 2008-09 (see Figure 7), over 95% takes place only through five major LCSs – Raxaul in Bihar, being the most important LCS through which half the Indian exports go to Nepal. Figure 7: Indian Exports through the Major LCSs to Nepal

Raxaul is the most important LCS..

0

500

1000

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2000

2500

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4000

RAXAUL NAUTANWA JOGBANI NEPALGANJ PANITANKI Others

in IN

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rore

2008-09 2005-06 1998-99

Source: DGCI&S, Government of India

The five major trading points between India and Nepal are: Raxaul – Birgunj (Bihar), Nautanwa – Bhairahawa (Uttar Pradesh), Jogbani – Biratnagar (Bihar), Nepalgunj – Nepalgunj Road (Uttar Pradesh), Panitanki – Kakarbhitta (West Bengal). With assistance primarily from the World Bank, three Inland Clearance Depots (ICDs) are functional in Nepal at three points close to the border with India; at Birgunj in the centre, Biratnagar to the east and Bhairahawa to the west. All three are linked by road to Kathmandu. The ICD at Birgunj has the only rail connection in Nepal, laid by the Indian Railways.

30

While Raxaul happens to be the busiest trading point between India and Nepal, the share of total exports going through Raxaul has come down in the past decade (see Figure 8). Exporters from India are starting to use other trading points, including Jogbani – Biratnagar and Nautanwa – Bhairahawa border crossing points (BCPs), based upon;

The LCS that cuts down transportation time and cost The LCS nearer to their production base or nearer to the importer’s production base;

and High congestion in the Raxaul – Birgunj trading point that leads to delay, increasing the

transaction costs for exporters Figure 8: Share of LCSs in Total Exports to Nepal: 1999-2009

Raxaul's share is declining...

74.9

55.7 49.3

30.1

22.6

7.5 16.05.4 4.613.0

5.8

0.3

2.5 1.74.6

6.1

0%

20%

40%

60%

80%

100%

1998-99 2005-06 2008-09

RAXAUL NAUTANWA JOGBANI NEPALGANJ PANITANKI Others

Source: DGCI&S, Government of India

The policy angle to this shift in flow of exports is noteworthy. It also follows the shift in Nepal’s industrial and foreign trade policy. In the New Foreign Trade Policy of Nepal in 2008-09, the GON has given high priority to Special Economic Zones (SEZ) as a way to create an environment conducive to rapid industrialization. The existing industrial belt of Nepal, along the Terai region, is also contiguous to the Indian border. In the coming years, it is expected that economic activities in these areas will also help synergize the development of border regions of the underdeveloped states of Uttar Pradesh, Bihar and West Bengal. Keeping in mind the changing industrial scenario in Nepal, the importance of the trading points in Nautanwa, Jogbani and Panitanki will only increase in the coming years.

5.2. Trade and Trade Barriers in Strategic LCSs: A Field Study Given trade between India and Nepal is conducted almost exclusively through the land border, a field study was conducted to assess the trade/transit opportunities and issues along two trading points – Panitanki-Kakarvitta13 and Raxaul-Birgunj14. The purpose of the field survey is to

13

Field Survey in the Panitanki LCS was conducted on 02/02/10. The border was crossed to Kakarvitta on the same day.

31

understand the state of affairs of the LCSs. It is also to be kept in mind that both the BCPs are used for trade as well as movement of people across the Indo-Nepal border. Table 5: Status of Trade Facilitation Services at the LCSs Surveyed

Parameters

LCS Pair I LCS Pair II

Panitanki

India

Kakarvitta

Nepal

Raxaul

India

Birgunj

Nepal

Working time (per day) 0900-1700 0900-1700 0900-1700 0900-1700

Working days (per week) 6* 6* 6* 6*

Physical

Customs 1 1 1 1

Immigration 1 1 1 1

Security 1 1 1 1

Bank 0 0 1 1

Warehouse 0** 0 1 1

Weigh Bridge 0** 0 1 1

Health Inspection 0 0 0 0

Container Handling yard 0 0 0 1

Currency exchange 0 0 1 1

Parking Facilities 0** 0 1 1

Shops, hotels etc 1 1 1 1

Non – physical

Electronic Data Interchange (EDI)

0 0 1# (ICEGATE)

1## (ASYCUDA)

Internet 0 0 0 0

Telecom 1 1 1 1

Fast Track Cargo Clearance 0 0 0 0

Container Scanner 0 0 NA 1

Overall Infrastructure (out of 16) 5 (Poor)

5 (Poor)

11 (Relatively Efficient)

13 (Relatively Efficient)

Notes: Rating system: 0= non-existent, 1=existing. Overall Infrastructure Score: 0 – 5= Poor; 6 – 9; inefficient; 10 – 13= Relatively efficient; 14 and

above= Efficient * While Indian Customs offices remain closed on Sundays, Nepal Customs offices are closed on Saturdays, effectively bringing down the working days to 5 days

** Proposed and land acquired # ICEGATE stands for Indian Customs EDI Gateway. Only for export cargo; import from Nepal

handled manually ## ASYCUDA stands for the Automated System for Customs Data. Only for revenue calculation

purposes and not for customs operation

14

Field survey in the Birgunj ICD was conducted on 15/02/10. While the border was not crossed to Raxaul, adequate information was gathered from the Consulate General of India, Birgunj regarding the state of affairs of the Raxaul- Birgunj trading point.

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Source: Authors’ calculations; De, Chaturvedi and Khan, 2009

Both the BCPs were selected based on: (a) their potential to provide direct connectivity by enabling through movement across important economic centres; (b) the potential for providing shorter routes that would allow major transportation cost savings; and (c) the differences in infrastructure and trade facilitation based on volume of trade between the two LCSs. Out of 16 parameters used to study trade facilitation and infrastructure at the LCSs, all the LCSs fared poorly in the ‘non-physical’ aspects of trade facilitation services. Panitanki and Kakarvitta LCSs scored 5 out of 16, with major bottlenecks in physical as well as non-physical trade facilitation services. Delays in customs clearance is largely due to infrastructure deficits in the BCPs with long waiting lines and physical inspections of documents and, in some cases, cargo. Raxaul and the Birgunj LCSs are relatively efficient as they also handle the largest flow of trade between India and Nepal. Physical infrastructure in place is adequate for normal traffic, although progress is needed to facilitate faster customs clearance through harmonization of customs procedure of India and Nepal, optimal utilization of EDI systems in both the LCSs and expedited customs clearance for traders with high compliance levels through the ‘fast track cargo clearance’. Cutting down on paperwork and excessive compliance procedures would definitely help regular traders along these routes.

5.2.1. Raxaul – Birgunj LCS

Due to its geographical location, the Raxaul – Birgunj trading point is often referred to as the ‘Gateway of Nepal’. In 2008-09, around half of India’s exports went through Raxaul, while over 70% of Nepal’s trade was conducted through Birgunj. Amongst the three ICDs in Nepal, Birgunj is also the only ICD that has rail connectivity with India. It is also the nearest Nepalese dry port with any Indian sea-port (704 kms away from the Kolkata Port, West Bengal). Major Exports from India through Raxaul – Birgunj: As India’s export basket to Nepal has changed in the last decade, so have exports through Raxaul. However, over half the exports through Raxaul are POL items under bond. The other important commodity groups exported through Raxaul are; engineering goods, including vehicles, iron and steel, machinery and mechanical appliances and electrical machinery, chemicals and related products and agriculture and allied products like tobacco and tea. The top ten commodity groups (at HS 2-digit level) are illustrated below (Table 6).

While rail connectivity is available up to Birgunj ICD from India, Indian exports through Raxaul predominantly use road transport. Promoting the rail-based Birgunj ICD for bilateral trade would take a major load off the Raxaul LCS.

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Table 6: Top Exports through Raxaul LCS, 2008-09 HS Code Commodity Description Value (in INR Crore) Share (in %)

27 Petroleum products 1,832 52.8

87 Vehicles 277 8.0

30 Pharmaceutical Products 251 7.2

72 Iron and Steel 189 5.4

84 Machinery and Mechanical App. 150 4.3

85 Electrical machinery and electronics 92 2.7

09 Tea etc 71 2.0

24 Tobacco and tobacco products 52 1.5

33 Oil and Resin, Cosmetics etc 42 1.2

39 Plastics and Petrochemicals etc 41 1.2

Others 474 14

Total 3,471 100 Source: DGCI&S, Government of India

An Assessment of the Birgunj ICD, Nepal: The Rail-linked ICD at Sirsiya, Birgunj (Nepal) was established to cater to both third-county trade and bilateral cargo from and to India. It began its operations in 2004 and has hence become the major artery for movement of cargo in and out of Nepal. As can be seen from the table below, the total TEUs handled by the Birgunj ICD grew at a CAGR of over 44% between 2004-05 and 2008-09. Table 7: Rail Traffic at Birgunj ICD* Import Export Total TEUs Transit (3rd

Country) Traffic

Bilateral Traffic

Total No. of Rakes

FY (July to July) (A) (B) TOTAL (A+B) (C) (D) Total (C+D)

2004-2005 3575 59 3634 55 0 55

2005-2006 9007 73 9080 140 1 141

2006-2007 10840 212 11052 158 14 172

2007-2008 13906 210 14116 165 8 173

2008-2009 14702 1000 15702 176 9 185

2009-2010 9206 401 9607 218 70 288 Note: * All data relates to import and export of Nepal. Bilateral traffic is between India and Nepal Source: HTPL, Nepal

The ICD is well-equipped to handle large numbers of container and cargo traffic and has reduced transportation time by more than 2-3 days on Nepalese exports and imports. Some of the features of the Birgunj ICD include;

Broad-gauge railway yard with 6 full length lines Administrative block with Customs office, HTPL, Bank, Quarantine facilities etc. Container stacking yard capable of holding over 1500 Twenty-foot Equivalent Units

(TEUs)

34

Warehouse facility for import and export cargo Container scanner and handling equipments Parking facilities for more than 250 freight vehicles and 30 big size trailers

The Birgunj ICD predominantly caters to Nepal’s export to and imports from third countries. As can be seen from the table above, out of the total rakes coming in and out of the ICD in 2008-09, over 95% were third country rakes. Only in 2009-10, 70 rakes, or about a quarter of the total traffic, were carrying goods between India and Nepal. There are three major reasons due to which Indian exports do not make use of the Birgunj ICD: (a) Open lorries, wagons, liquid cargo and reefer containers are not handled by the Birgunj ICD, (b) exports from economic centres like Delhi, Mumbai, Ahmedabad, Kanpur or Guwahati cannot be brought by rail as clubbing of domestic and international cargo is not prevalent in Indian railways, and (c) the usage fee of the ICD services are very high compared to movement through Raxaul that act as a disincentive for Indian exporters. There are some management issues that lead to delay in Birgunj ICD, but they can be mitigated through simplification of requirements between various administrative bodies. Some issues include; (a) rakes stopped by Indian customs in Raxaul, if they have reason to believe that seals are mismatched, (b) rake requirement both in Kolkata port and Birgunj ICD, (c) Delay in customs clearance due to improper documentation, and (d) seasonal increases in container handling. A key issue raised by various stakeholders in Nepal is the unnecessary customs inspection that a cargo from or to Nepal goes through. Currently, three clearances are required for a consignment to reach Nepal – first, at Kolkata port by Indian Customs, second, at Raxaul by Indian Customs and third, at Birgunj ICD by Nepal Customs increasing transaction costs.

5.2.2. Panitanki-Kakarvitta LCS

The Panitanki LCS in North Bengal was established in 1978 for bilateral trade between India and Nepal. It is the easternmost LCS between the two countries and as such is closest to the seven North-East Indian states and West Bengal to reach Nepal. The Panitanki LCS is also close to Siliguri, which is fast emerging as a commercial city ideally placed between Nepal, Bangladesh, Bhutan, Tibet and the North-East Indian states. The major commodities exported through the Panitanki LCS shows a regional bias. Due to the lack of industrial activities in the eastern region of India and the rich natural resources, the export basket is composed of mainly agricultural products, primary goods and POL items. Exports through Panitanki LCS in 2008-09 were particularly low due to flooding in the eastern region of Nepal (caused by the Kosi river breach). However, exports have seen a CAGR of about 20% through this LCS in the period 2003-2008. Exports are mainly from Assam (for agriculture products), Meghalaya (cement and coal), West Bengal and Bihar. The Panitanki LCS is also used for transit trade between Nepal and third countries. In 2008-09, 1166 Customs Transit Declarations (CTD) were filed for Nepal from third countries while 1140 CTDs were filed from Nepal to third countries.15

15

Roughly equivalent to number of TEUs, although many containers may pass under one CTD.

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Discussion with the Customs personnel present in Panitanki LCS suggest that cheap Chinese imports are no longer a threat, although occasional seizures of betel nuts and Chinese goods like garments, shoes and electronic goods are made. According to the Customs officials, while many traders are shifting to trade through Jogbani in Bihar, Panitanki has the potential to cater to trade from the east and North-East Indian states, provided infrastructure is upgraded to accommodate increasing traffic and trade flows. Table 8: Top Exports through Panitanki LCS, 2008-09

S. No. Commodity Description Value (in INR Crore) Share (in %)

1 Coal 32.0 32.7

2 Potato 8.1 8.2

3 Raw Jute 7.7 7.8

4 Cycle Parts 7.5 7.7

5 POL (under bond) 6.1 6.2

6 Cement Clinker / Slag 3.5 3.6

7 Fruits 1.9 1.9

8 Millet 1.5 1.6

9 Fish 0.7 0.7

10 Formalin 0.5 0.5

11 Others 28.5 29.1

12 Total 98.1 100 Source: Panitanki LCS

The major issues regarding operations at the Panitanki LCS includes;

Congestion in the BCP that could stretch up to 2 kilometers. Since the BCP is also used for cross-border movement of people, it is particularly congested as the two-lane road is used for parking trucks and container traffic.

Infrastructure deficits like lack of parking area, warehousing and cold storage, quarantine and lab testing facilities, EDI system all add to the transaction costs and delays to Indian and Nepalese exports.

The Case for Panitanki – Kakarvitta Trading Point: It is the shortest route for trade between North – east, East India and Bangladesh with Nepal. Distance between Kathmandu and Guwahati through Panitanki – Kakarbhitta is about 900 kms. Panitanki LCS is also important due to the transit trade that takes place with Bangladesh through Phulbari in West Bengal and Banglabandha in Bangladesh. Given its proximity to the commercial city of Siliguri, it has the potential to develop as a major through point for bilateral and third country trade for Nepal. The current broad-gauging of the rail line in Naxalbari (2 kms from Panitanki), if extended to the Panitanki LCS, will provide direct connectivity with the major rail head at New Jalpaiguri, West Bengal, located about 30 kms from the LCS. It is also the closest LCS to the extensive highway development projects in India (the NSEW corridor passes through Siliguri and connects important city centres in India).

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5.3. Trade and Transport Facilitation: A Key Challenge Significant improvements in international trade ultimately hinges on goods moving efficiently and economically between the buyer and seller in different countries. Hence, facilitating trade and transport is vital for Nepal to compete in the global marketplace: traders need to be able to move goods and services across borders on time and with low transaction costs. In fact, potential gains from trade facilitation may be greater than those arising only from tariff reductions.

Even from India’s viewpoint, efficient customs on Indo-Nepal LCSs, good transport networks and fewer document requirements, making compliance with export and import procedures faster and cheaper would make Indian goods exported to Nepal and also exports by Indian JVs in Nepal to third countries more competitive. Nepal is ranked 161 amongst 183 countries in the “Trading across borders” parameter in the Doing Business Report, 2010 (World Bank, 2010a). A comparison with other Landlocked Developing Countries (LLDCs) like, Lao PDR and Ethiopia and high-income landlocked countries like, Czech Republic and Austria highlights the key areas where Nepal lags behind; Table 9: Trading Across Borders: Select Landlocked Countries

Trading across borders data Nepal* Lao* PDR Ethiopia* Czech Republic Austria

Rank 161 168 159 53 24

Cost to export (US$ per container) 1764

1860 1940 1060 1180

Cost to import (US$ per container) 1825

2040 2993 1165 1195

Documents to export (number) 9 9 8 4 7

Documents to import (number) 10 10 8 7 5

Time to export (days) 41 50 49 17 7

Time to import (days) 35 50 45 20 8 Note: * Nepal, Lao PDR and Ethiopia are both LDCs and LLDCs according to the UN classification Source: World Bank, 2010

From the table above, we can see that the cost to export and import from a landlocked country is generally high (across high and low income economies). However, issues such as lengthy documentation procedures and time to trade in LLDCs like Nepal adds to the high transaction costs, which needs to be addressed. Conversely, lengthy documentation procedure is more prone to corruption practices in customs. Long delays in customs clearance and frequent demands for bribes could lead traders to avoid customs altogether and instead take recourse to smuggling of goods across the border. This defeats the very purpose in having border control of trade to levy taxes and ensure high quality of goods (World Bank, 2010b). One of the most important factors to cut down time to trade is transport and logistics. In the recently published Logistics Performance Index (World Bank, 2010c), Nepal scores poorly in all the criteria regarding transport and logistics. Its overall LPI is 2.20 (out of 5) with a rank of 147 out of 155 surveyed economies – only Iraq and a few sub-Saharan economies are worse off.

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Figure 9: Logistics Performance of Nepal: A Cross-Country Comparison

Nepal's poor trade infras truc ture

1

2

3

4

5L P I S core

C us tom s

Infras tructure

International s hipm entsL og is tics com petence

Tracking & tracing

Tim elines s

Nepa l L a o P DR E thiopia C z ec h R epublic Austria

where,

1= wors t

5= bes t

Source: World Bank, 2010

A cross-country comparison of the selected economies (see Figure 9) reveals that Nepal’s trade infrastructure needs concerted improvements if Nepal is to meet its policy objectives related to trade, i.e., trade diversification and export orientation in order to curb its burgeoning trade deficit. Towards this end, trade facilitation issues have to be prioritized by GON. Technical assistance and developing trade infrastructure through financial assistance from multilateral bodies like WTO, WB and ADB also needs to be put on the fast track. WB and ADB are involved in infrastructure building in Nepal through grants and soft loans. Inter-country projects such as the Asian Highway (under UNESCAP) and World Bank’s commitment towards assistance on trade facilitation (like, the three ICDs in Birgunj, Biratnagar and Bhairahawa were funded almost entirely by the WB loan) in Nepal are steps in the right direction. India, being the transit giving country to Nepal and more importantly as its closest economic partner, is ideally placed to assist in building trade infrastructure in Nepal. Besides, because of the size of the Nepalese economy, even limited financial and technical assistance to improve its trade infrastructure could have huge multiplier effect on its economy. Such assistance would not only build Nepal’s trade capacities but also increase bilateral trade flows between the two countries.

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5.4. Priority Trading Routes and Government Initiatives As our field study suggests, existing infrastructure available at LCSs in both India and Nepal are inadequate for high volume trade and traffic- a fact established by government agencies and researchers too (Ministry of Home Affairs, GOI; De, Chaturvedi and Khan, 2009). However, there has been some development in reducing the barriers to trade at the strategic trading points. For instance, GOI has, on a priority basis, decided to set up 13 Integrated Check Posts (ICPs)16 along the Indian border with its neighbouring countries- four of which are located along the India – Nepal border. The proposed ICPs along the India – Nepal border are;

Raxaul – Birgunj Nautanwa (Sunauli) – Bhairahawa Jogbani – Biratnagar, and Nepalgunj Road – Nepalgunj

The GOI and the GON have signed a MoU for setting up the four ICPs in 2005. The estimated cost for the project, pegged at Rs. 316 crores (likely to be revised upwards significantly), would be borne entirely by the GOI. During the visit of the Prime Minister of Nepal to India in August 2009, India agreed to construction of Integrated Check Posts (ICPs) at Birgunj-Raxaul and Biratnagar-Jogbani at an estimated cost of Rs.200 crore. The ICPs are likely to take 14 months for completion and construction would tentatively begin by end of 2010. Table 10: Distance (by road) to Kathmandu from Major Indian Economic Centres Route Distance

(Kms) Approximate time taken by a truck (in hrs)

Kolkata (via Raxaul-Birgunj) 1006 50

Mumbai–Kanpur (via Nautanwa-Bhairahawa) 1931 125

Delhi (via Nautanwa-Bhairahawa) 1063 60

Delhi (via Raxaul-Birgunj) 1074 65

Chennai (via Nautanwa-Bhairahawa) 2286 156

Kanpur (via Nautanwa-Bhairahawa) 643 28

Ahmedabad (via Nautanwa-Bhairahawa) 1717 102

Guwahati (via Panitanki-Kakarvitta) 915 40 Note: Calculations based on average speeds, road conditions, stoppage time including borders checks along Indian roads and crew refreshment. Does not include delays at the India-Nepal border which can be substantial. Source: Mapsofindia.com and National Highways Authority of India (NHAI); Roy and Banerjee, 2006

Once completed, the four ICPs along the Indo – Nepal border is expected to have a multiplier effect on bilateral trade. Efficient customs clearance; reduction in trans-shipment time and altogether eliminating it through multi-modal transport; quarantine and laboratory facilities

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The ICPs would be sanitized zones with dedicated passenger and cargo terminal providing adequate customs and immigration counters, X-ray scanners, passenger amenities and other related facilities like service stations, fuel stations etc. in a single modern complex equipped with state of the art amenities. It would be under the Land Ports Authority of India, akin to the Airport Authority of India, that would be responsible for its management and operations.

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eliminating certification delays; cold storage and warehousing facilities would result in efficiency gains translated into growth in bilateral trade and transit trade for Nepal. Another major improvement expected in the next few years is the road connectivity between major city centres within India (through the Golden Quadrilateral and NSEW Corridor projects of the GOI) that would immensely reduce the transportation time to Nepal. For instance, a consignment from Mumbai to Kathmandu, which currently takes approximately 125 hours, can be effectively reduced by half once the projects are completed (98% of the GQ is completed while progress on the NSEW corridor is expected to pick up under Phase II, i.e., from 2009-10 to 2013-14). This is expected to have a major impact on the India – Nepal bilateral trade, which predominantly takes place through road transport.

Both the governments have also revised the Rail Services Agreement (RSA) in December 2008 and the Air Services Agreement (ASA) in February, 2010. This is expected to boost trade levels as new rail infrastructure is proposed to be built in five new points. Similarly, the ASA has liberalized air traffic from over 21 points in India, besides the six metros, connecting seven points in Nepal. This is expected to facilitate business to business contacts and cargo movement between the two countries. A major policy change that is expected benefit Nepalese trade will be the opening up of the Vizag port for Nepal’s trade with third countries. It has been a long standing demand by Nepalese traders that another port be opened for trade with third countries, besides KOPT and Haldia ports due to frequent congestion and over capacity experienced in these ports. The opening up of Vizag is expected to reduce transaction costs and improve Nepal’s transit needs. Similarly, the opening up of the Singhabad-Rohanpur transit point between Nepal and Bangladesh will provide Nepal direct access to Mongla port in Bangladesh. Singhabad-Rohanpur transit point is said to be the most practical route to Nepal to and from Bangladesh in comparison to Radhikarpur-Birol transit point. Studies undertaken by the GON have shown that Raxaul-Singhabad-Rohanpur-Naopara-Mongla route is the shortest and cheapest route for trade between Nepal with and through Bangladesh. This is likely to have a positive impact on Nepal’s east-bound trade with China and Southeast Asian countries. However, for this transit point to remain effective, delays in transshipment, customs clearance and other transactions costs need to be minimized.

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6. Industry Perceptions on India – Nepal Bilateral Treaty and Trade

In order to understand the range of economic issues and opportunities that exist between India and Nepal, the study carried out extensive qualitative and quantitative analysis. Industry perception was gauged through consultations, semi-structured interviews and group discussions with traders, traders associations and apex chambers of commerce in the two countries. A stakeholders’ meeting was held in Kathmandu where the focus was to build awareness of the economic opportunities post- Trade Treaty. Moreover, a perception survey of exporters from India and importers from Nepal was conducted to assess the revised India – Nepal Trade Treaty and the current scenario of bilateral trade. The focus of the survey was to identify the scope for further market expansion between India and Nepal. The following section provides an analysis of the main results.

6.1. Responses from Exporters to Nepal The surveyed firms were from various sectors including automobiles, steel and engineering, FMCG, pharmaceutical and textiles. A few respondents were 100% EOUs, while others were domestic companies.

6.1.1. Exports to Nepal have become irregular in the last few years

More than 44% of the firms surveyed said that exports to Nepal have become irregular in the last three years. Another 33% of the respondents said exports were on a decline in the last three years. Only 22% of the respondents reported exports growth to Nepal in the said period.

6.1.2. Competition from third countries, lack of export benefits and uncertain demand in Nepal are hampering Indian exports growth to Nepal

Over 45% respondents said that cheaper imports from third countries, particularly China, in the Nepalese market are pushing out Indian exports. 30% of the firms feel that uncertain demand in the Nepalese economy is another important reason why exports have declined. Most respondents feel that exports in Indian rupee and payment of excise duties have made their exports uncompetitive as no export benefits are given. A few respondents also raised the fact that, unlike India and other countries, where they use anti-dumping duties and other safeguard measures, especially against cheap iron and steel imports from China, Nepal does not exercise any safeguard measures (due to lack of domestic producers) making it difficult to compete against Chinese exports.

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6.1.3. DRP withdrawal and treatment of exports in rupee payment at par with convertible currency expected to make exports competitive in Nepal

DRP withdrawal in the revised trade treaty would likely benefit Indian exports as 75% of the respondents were looking forward to its removal. Most respondents also said that allowing exports in rupee payment to receive export promotion benefits would help them export to Nepal, particularly the 100% EOUs. Some respondents already export in hard currency to Nepal and they currently utilize the export benefits schemes like Duty Entitlement Pass Book (DEPB), Advance license and Duty Free Import Authorisation (DFIA). Only 25% respondents felt that allowing bilateral trade through air would benefit their exports, mostly due to the bulky nature of exports. However, around 38% respondents were positive that they could benefit from the provision to allow re-exports from Nepal to third countries, like EU and other SAFTA members.

6.1.4. Transportation time and charges needs to be reduced through multi-modal transport and reduction in clearance time at the border

All the respondents said that export consignments are sent through trucks, where charges vary between Rs. 50000 per 9 MT to Rs. 140000 per 9 MT to Kathmandu, depending upon the source of supply. These charges are very high considering truck freights between the farthest Indian cities (Mumbai to Guwahati) is Rs. 45000 per 9 MT truck, approx. A consignment may take between one to two weeks from the source to destination, with respondents saying that customs clearance may take between one to four days. Some respondents also noted damages to the consigned goods caused by poor roads that add to cost of goods. According to most respondents, the major issue is that exports to Nepal are not considered as part of export turnover since the transactions are in Indian rupees. Incentives similar to other export transactions are expected to boost exports to Nepal. Hence, the revised trade treaty has the potential to benefit Indian exports.

6.2. Responses from Importers in Nepal Highlights of the responses from importers in Nepal are given as below:

6.2.1. Imports are mainly used as inputs for production

Out of the total respondents, approximately 55% import raw materials or use the goods as inputs in their production. About 20% import to re-export to third countries, including India, while 25% of the respondents import to sell directly in the domestic market.

6.2.2. Destination of imports and share of total firm imports are predominantly from India

More than 36% of the respondents import from India. The survey reflects Nepal’s import scenario, in that 15% imports are sourced from China and a sizeable 17% imports come from

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ASEAN countries like Indonesia, Thailand, Singapore and Malaysia. About 11% of the respondents also import from Gulf Cooperation Council (GCC) countries like Saudi Arabia, Qatar and UAE. Respondents also Imports from EU and other countries like US, Japan and South Korea, which forms 20% of the responses. Regarding share in total firm imports, over 31% of the respondents said that imports from India form more than 75% of their total imports. Another 38% of the respondents said that imports from India form between 50 to 75% of their imports. Only 31% of the respondents said that imports from India form less than 50% of their total firm imports. Out of the respondents whose firm imports are less than 50% from India, nearly 60% import engineering goods like base metals, project goods and articles of iron and steel.

6.2.3. Higher unit cost and non-availability of goods from India are the major reasons for importing from third countries other than India

Nearly 40% of the respondents feel that the unit cost of importing from India is higher than other countries. These respondents mainly import chemicals and engineering goods. 34% of the respondents say that non-availability of goods in India and disallowing re-imports from India are also reasons that Nepalese importers are importing from third countries other than India. Another 26% respondents feel that quality of imports from third countries are better, particularly importers involved in construction projects, printing and man-made textiles.

6.2.4. Withdrawal of DRP and provision to allow re-exports to third countries of imports from India would be beneficial

Regarding feedback on changes in the revised trade treaty, 42% of the respondents felt that they could take advantage of the provision to allow re-exports to third countries of imports from India. Most of these respondents are from trading houses while a few are manufacturers of FMCG products. About 33% respondents felt that their firms may not be able to benefit from the policy change and the remaining respondents felt that this was not applicable to their firms either because they do not export to third countries other than India or due to high costs involved. More than 66% respondents felt that the withdrawal of the DRP mechanism would boost imports from India. From the responses above, we can infer that higher unit cost of import and non-availability of materials is making Nepalese importers look for sources other than India. Allowing re-imports of third country products through India also figures highly, as this would bring down the overhead expenses for most importers. Amongst other issues delays in verification of shipping bills leading to delay in release of export benefits, congestion at LCSs due to different working days in Nepal and Indian customs offices, unnecessary hassles in customs clearances figure prominently. Finally, respondents, both exporters to Nepal and importers from Nepal, note that the DRP withdrawal would boost exports from India to Nepal in the coming years.

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6.3. Results of Consultations with various Stakeholders17 Consultations with sectoral and regional industry associations reiterate some of the above survey results. In addition, during the consultations certain pertinent issues regarding bilateral trade were raised that have been categorized as under;

6.3.1. Trade related Issues

DRP is fraught with transaction costs: The so called “Nepal Invoice” or ARE-1 form, required to be produced by an Indian exporter to Nepal, has to be given clearance by Indian customs authorities. Obtaining the customs clearance often involves unofficial transactions that add up substantially to the transaction costs. The DRP mechanism also makes Indian commodities uncompetitive, vis-à-vis, imports from third countries as Nepalese customers effectively pay Indian excise duties for goods that are not consumed in India unlike imports from other countries. However, withdrawal of DRP needs to be substituted with a system that keeps the checks and balances in place. For instance, an exporter, after getting the excise duty rebates on exports to Nepal, may sell the goods in the domestic market or due to the long and porous Indo-Nepal border goods may get re-routed back to India. Mutual Recognition Agreements (MRA) Needed: There have been many instances where technical barriers have prevented trade prospects. For instance, cement manufacturers in Nepal import the raw materials from India and can export finished cement goods competitively to markets in east India. However, due to the requirement of Bureau of Indian Standards (BIS) certification this has not been possible. Similarly, Nepalese exports of processed food and agriculture items stop at the BCPs for days before the samples are tested in laboratories based in Calcutta or Patna. Again, certification requirements for foreign medicines to market in Nepal from the Department of Drug Administration, GON, have restricted imports from India. During consultations with government officials from both India and Nepal, it was revealed that MRAs could be worked upon and accreditation of designated authorities is under consideration. This could provide new market expansion opportunities for both Indian and Nepalese exporters. “Local Stock Points” in Nepal for Indian Exports: Consultations with Indian industry bodies revealed that Local Stock Points within Nepal should be allowed, in the nature of Vietnam and China. Exports including petrochemical and chemical products, pharmaceuticals and certain iron and steel products could benefit by cutting down time and cost of transporting goods from factory sources to various destinations in Nepal by having local stock points.

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Consultations were held with Chemicals and Petrochemicals Manufacturers Association (CPMA), Indian Machine Tools Manufacturers Association (IMTMA) and North Bengal Exporters Association in India. Consultations were held with Federation of Nepalese Chamber of Commerce and Industries (FNCCI), Nepal Freight Forwarders Association (NEFFA) and Birgunj Chamber of Commerce and Industries (BiCCI) in Nepal.

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Unprofessional Attitude of Indian Exporters: Consultations in Nepal revealed that some exporters from India do not honour their commitments to importers in Nepal. For instance, there have been cases where Indian exporters do not accept Nepalese bank L/Cs. Importers often make advance payment without receiving any delivery commitments and manufacturers in India have to be constantly reminded. Some exporters also increase their pricing after having received payments. In contrast, consultations revealed, their experience of importing from China and other countries in Southeast Asia are much better, with timely delivery of goods and exporters honour Nepalese L/Cs. Exporters from these countries are also particular about pricing, container handling and follow up on delivery of goods. The unprofessional behaviour of some Indian exporters coupled with long documentation procedures to be followed to import from India adds to the loss of competitiveness of Indian exports in Nepal.

6.3.2. Trade Facilitation and Other Issues

Simplification and Harmonisation of Customs Procedures: The current requirement of various sets of documents for export, import and transit is a major issue between Nepal and India. Consultations, both in India and Nepal revealed that Electronic Data Interchange (EDI) system needs to be put in place along the major LCSs between India and Nepal. Currently there is no EDI connectivity between LCSs in India and LCSs/ ICDs in Nepal. India already has a proven and full-proof EDI system where all sea and air-ports and ICDs in India are connected through ICEGATE. This system can be extended to the major LCSs in the India – Nepal border. Since EDI is linked to the excise department, exports under excise bond can also be linked to the EDI. This could bring down clearance time immensely. The second phase is the connectivity between LCSs in India with the Nepal side ICDs. Although, Nepal uses the ASYCUDA system, developed with the help of UNCTAD, once connectivity is extended it could support the ICEGATE system in India. The gains from aligning trade documents and procedure between the two countries electronically could be immense. ICPs and Infrastructure Development in Consultation with Stakeholders: GOI and Nepal are undertaking various projects to improve bilateral and transit trade flow at the border. Since, regional bodies like BiCCI understand the local ground realities they could provide valuable suggestions on improving the effectiveness of ICPs and other trade infrastructure development projects. Greater B2B Contact could Improve Trade Prospects: In various consultations it was recognised that the treaty is a ‘facilitator’ for enhanced trade between India and Nepal and is not the only means. For increased trade and investments Business to Business level cooperation and recognizing the synergies that exist between both the economies are very important. The vision should be broadened towards ‘regional exports’ and ‘regional investments’. Industry bodies like CII with its national outreach could collaborate with trade bodies in Nepal in organizing bilateral trade fairs and business delegations at the state-level in India. Besides the above issues, corruption in the LCSs emerged in all the consultations, particularly with the regional industry bodies in Nepal and India. For releasing an export or import consignment, as much as INR 30,000 is demanded by Indian customs present in the LCSs.

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7. Indian Investments in Nepal: Prospects and Issues The following section provides an overview of the current investment scenario in Nepal. Despite the inherent bottlenecks in the Nepalese economy, the study identifies certain sectors and areas where Indian investment can look for viable prospects in the long term.

7.1. Investment Climate in Nepal Since the change in regime in Nepal in August 2008, the GON has signaled to foreign investors that Nepal is open for business. However, continuing bureaucratic delays and inefficiency, political instability, pervasive corruption, labour difficulties and persistent insecurity send a different message. By 2009, there were over 1,700 foreign investment projects in Nepal, with foreign investment commitments of US$ 634 million, according to official GON statistics. With over 430 ventures, India accounts for nearly 44% of total foreign investment amounting to US$ 277 million. Nevertheless, significant problems remain. Basic infrastructure needed to support investment is woefully inadequate. The supply of power, especially outside of Kathmandu Valley, and water is insufficient. Transport is difficult, a problem compounded by the fact that Nepal is landlocked. Nepal also lacks trained personnel and basic raw materials (Embassy of the United States, 2009). Added to these challenges Indian investors often cite that Nepal’s tax administration is non-transparent and capricious, commercial legislation is inadequate and obscure, rules governing labour relations are vague and changeable. Furthermore, there is often a wide discrepancy between the letter of the law and its implementation. Given these institutional bottlenecks, the study attempts to identify certain sectors that could be viable investment areas in the long run.

7.1.1. Potential Sectors for Institutional Investments

In 2005, the GON opened some service sectors to foreign investment. Progress has been made in allowing private operations in sectors that were previously government monopolies, such as telecommunications and civil aviation. Licensing and regulations have been simplified, and 100% foreign ownership is now allowed in some sectors. New banking institutions provide alternative sources of investment capital. The GON is moving slowly toward open competition in most sectors of the economy. Former public monopolies in banking, insurance, airline services, telecommunications and trade have already been eliminated, and the remaining restrictions on private and foreign operations in other areas are being scaled back. Investments in certain “national priority industries” have been identified, where foreign investments receive more favourable treatment than investments in other sectors. These sectors are;

i. Agro and forestry-based industries ii. Engineering industry (producing agricultural and industrial machine)

iii. Industry manufacturing fuel saving or pollution control devices

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iv. Solid waste processing industry v. Road, bridge, tunnel, ropeway and flying bridge constructing and operating industry,

and trolley bus and tram manufacturing and operating industry vi. Hospital and nursing home (only outside the Kathmandu valley)

vii. Industries producing ayurvedic, homoeopathic and other traditional medicine, and industries producing crutch, seat belt, wheel chair, stretcher and stick and so on to be used in aid of the disabled and orthopaedic

viii. Cold storage installed for the storage of fruits and vegetables The approval for foreign investment in these sectors is relatively easy and is also accompanied by the provision of certain income tax rebates. However, automatic approval of priority sector investments and more incentives are needed to attract FDI into these sectors. While not all these sectors may be feasible for investments, areas such as hydropower, infrastructure projects, education and health, apart from agri-business, tourism and other financial sectors could hold the key for viable investments from India.

7.2. Investment-led Trade One of the major reasons that GON is confident of attracting FDI is its liberal policies, including low tariff rates and a liberal foreign exchange regime (UNDP-Nepal, 2009). Nepal, as a LDC member of the WTO, also receives a host of tariff concessions from the developed economies. Indian industry can boost its exports by investing in Nepal and taking advantage of the DFQF benefits that Nepal receives from most developed countries. Due to stringent ROO requirements direct re-exports may not be feasible, however, investors can benefit from backward linkages that some sectors in Nepal enjoy in order to take advantage of Nepal’s DFQF market access benefits.

Agriculture and Agro-based Industries

There is increasing demand for flowers, flowering seeds, tea, coffee and high-value horticulture products in the international market. Both the tea and coffee markets have not developed due to lack of long-term investments and poor marketing in Nepal. Indian agro-based industries are ideally suited to make use of its forward linkages and source its exports from Nepal. The advantages in exports of these products from Nepal are two-pronged; a) diverse agro-climatic and topographical conditions offer good prospects for the production of wide variety of flowers and horticulture products for exports, and b) DFQF status in markets like the US and EU. Japan has also expanded its preferential treatment to LDCs to include many agricultural products. With the revision of the Air Service Agreement between India and Nepal, and better connectivity with the developed markets, this sector could offer long-term investment potential.

Textiles and Clothing Industry

Stiff competition in the international market, end of quotas in the US market for Nepalese products and closing of Indian investments that were established to benefit from Nepalese quotas have hit the Nepalese textiles industry hard in the past few years. Nevertheless, some potential exists in particular segments like production of terry towels, bed linen, and some specialized items of readymade garments.

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The ever-expanding EU could be the focus market for textiles and garment exports. FDI is also possible in specialized machine-made pashmina products that are Nepal’s third largest export item.

Light Engineering Items

Nepal offers a sizable semi-skilled and unskilled labour force at competitive wages. It also provides a minimum technological base for the production of light engineering goods, like machine tools, automotive spare parts, and products of base metals like brass, copper and aluminium. Production of assembly goods like certain electronic goods, machine components and electrical equipments could also be done at competitive costs in Nepal. Market access for light engineering goods from LDCs in developed countries is also high. For instance, Japan, after it revised its GSP benefits to LDCs in 2007, provides DFQF market access to over 99% of industrial imports from LDCs. EU, under its EBA scheme already provides preferential market access to all LDC imports. However, the US is still well short of providing the 97% DFQF market access to LDC imports and, once revised, could hold the key to greater market access for LDCs like Nepal (UNOHRLLS, 2008).

Hydropower

Touted as the key sector that could boost Nepal’s exports, hydropower has immense strategic as well as economic potential. The theoretical hydropower potential of Nepal’s rivers has been estimated at 83,000 MW. The technically feasible sites could yield an estimated 44,000 MW of installed capacity. Currently, Nepal has been able to harness roughly 700 MW. Further, developing the grid interconnections and transmission lines with India, where Nepal’s surplus could be exported, are likely to benefit a lot from the development of prime sites at relatively low capacity factors. Power trade with India, as has been highlighted by various authorities, still suffers due to internal politics, monopoly trading rights and above all the slow pace in power generation. The current power trade between the two countries is less than 100 MW of which 50 MW is under the India – Nepal Power Exchange Arrangement. Hydropower could become a watershed in India – Nepal economic relations and the opportunities arising out of it should not be delayed into uncertainty.

Special Economic Zones (SEZs)

Nepal has, in the last decade, launched its SEZ project with the twin objectives of attracting foreign investments and increasing its trade competitiveness. Although, the project is still in the development stage, SEZs in Nepal will have a huge potential of attracting Indian investments and technologies. SEZs would also institutionalize investments and investment-led exports to effectively capture Nepal’s preferential market access in developed countries.

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7.3. Investments from India Although India accounts for 44% of FDI into Nepal, investments have had setbacks in the past few years. According to data from the Embassy of India in Nepal, there were 31 projects approved in 2005-06 with an investment commitment of US$ 21.5 million, followed by 28 projects with FDI commitment of US$ 29 million in 2006-07, 37 projects with FDI commitment of US$ 70 million in 2007-08 and 34 projects with FDI commitment of US$ 32.4 million in 2008-09. India’s stock of FDI in Nepal would be reduced if the investments that have been withdrawn are taken into account (three industries closed down in the past few years). Indian investments in Nepal are in the form of Joint Ventures (JVs) and are engaged in a host of economic activities. Large scale investments are present in manufacturing, services (banking, insurance, dry port, education and telecommunications), power sector and tourism industries. Some large Indian investors include, ITC, Dabur India, Hindustan Unilever, VSNL, TCIL, MTNL, State Bank of India, Punjab National Bank, Life Insurance Corporation of India, Asian Paints, CONCOR, GMR India, Satluj Jal Vidyut Nigam Limited, IL&FS, Manipal Group, MIT Group Holdings, Nupur International, Transworld Group, Patel Engineering, Bhilwara Energy, Bhushan Group and Birla Corporation. Consultations with key Indian investors present in Nepal and regular correspondences by Indian investors in Nepal with the government of both the countries suggest that their investments have suffered the most in the past 4 to 5 years. The flow chart on Issues faced by Indian JVs in Nepal suggests that investments face three types of difficulties in Nepal: Entry Barriers, Institutional Hurdles and Operational Hurdles. However, the most pressing issue that has hurt Indian investments in Nepal is that of labour unrest in a politically polarized state. The government needs to address the present woes of Indian investors in Nepal, in order to sustainably attract investments from India.

Text Box 4: Special Economic Zones in Nepal: Current Status The SEZ Act, 2006 in Nepal that is awaiting approval from the Nepalese parliament would confer various fiscal and non-fiscal benefits to investors within SEZ and construction of various SEZs. Under the Act, an industry exporting 75% or more of its products would be entitled to apply for a space in a SEZ and import of raw materials and capital goods without payment of custom duties, excise taxes or sales taxes. The declared Export Promotion Zone (EPZ) in Bhairahawa (Western Nepal) and Special Economic Zones in Birgunj and Biratnagar areas are not only close to the Indian border but are also key developing industrial areas in Nepal. The SEZs are not yet operational although construction activities are carried out in Bhairahawa.

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Low Returns on

Investment (ROI)

Indian Investment into Nepal

Entry Barriers

a. “One Window Facility” non-operative: i. Licensing requirements ii. Delay & lack of transparency

in approvals iii. Complicated and long review

process for business proposal (6 ministries other than DOI)

iv. No automatic approval route for priority sector investments

a. Utilities: i. Frequent electricity cuts and

load-shedding- New connections take up to one month

ii. Poor telecommunications network & services- Requests have a huge back log and could take up to one year for a connection

iii. An Indian JV, providing telecommunication services, faced various problems regarding allocation of frequency spectrum, non-implementation of licensing provisions

Institutional Hurdles a. Enforcement of Contracts: i. Uncertainty and

unpredictability in policies and contracts- withdrawal of many incentives (like, reinvestment allowance and corporate tax rebate for high local content) and non-fulfillment of obligations leads to “investment trap”

ii. Lack of implementation of court orders and an unclear industrial dispute resolution mechanism leads to disruption of business activities

b. Taxation and financial regulations:

i. Finance Act of FY 2007-08

added a 5% tax on capital gains and an additional 5% to the existing tax on repatriation of foreign dividends

ii. Interest on bank deposits by industries is taxed as ‘investment income’ and is charged 25% tax rate

iii. No provision for loan in foreign currencies from domestic banks and FIs

Operational Hurdles

a. Transportation and Labour Strikes

i. Frequent transportation

and business closures (bandhs) have affected productivity of many Indian JVs

ii. Violent labour agitations, protests have forced many Indian JVs to suspend operations or reduce production

iii. Contract labour has been disallowed in Nepal

b. Trading Issues i. Trade in goods

manufactured by parent companies is disallowed under the FITTA Act, 1992

ii. Excise duty paid on inputs for export goods are not refunded under Nepal’s Excise Duty Act, 2058

iii. Nepalese banks sometimes do not honour irrevocable L/Cs and bank guarantees

FLOWCHART I: ISSUES FACED BY INDIAN JVs IN NEPAL

50

8. Key Findings and Policy Recommendations

This section summarizes the key findings of the study. The findings have been categorized into three sections; Exports, Trade Facilitation and Investment. Consultations with various stakeholders have also informed the recommendations provided in the following section.

8.1. Exports

Non-POL exports of India to Nepal are growing at below potential levels. Even within this category, exports of primary products of agriculture, motor vehicles, mineral ores or primary iron and steel products dominate the export basket. India needs to leverage its exports in value added engineering goods including industrial machinery, electronic goods and auto components. Nepal’s imports in these product categories are chiefly from China due to lower unit cost of import, better marketing strategy by China and hassle-free imports.

On account of the revisions in the trade treaty, potential for enhancing exports to Nepal has increased. Due to the provision of exempting Indian exports against Rupee payment from excise duty and the eligibility of Indian exports to Nepal to avail of export promotion schemes, certain product categories would become more competitive in Nepal, vis-à-vis imports from countries other than India. Exports of some chemical and related products, synthetic fibres, iron and steel products, articles of base metals, industrial machinery, cellular phones, transmission equipments and other electronic goods, vehicles and transport equipments and medical instruments could benefit from the revisions.

Exports also have the potential to benefit from the revisions in the Agreement on Cooperation to Control Unauthorised Trade where re-exports are allowed to third countries without the necessity of carrying out manufacturing activities. Potential export markets are the developed countries (Quad countries including the US, EU, Japan and Canada) that provide greater preferential access to exports from LDCs like Nepal. While the preference margins and the ROO requirements vary from country to country, the study identifies the ever-expanding EU as an important market. The EU allows from 100% preferential access to LDCs along with the benefit of ‘regional cumulation’ that allows for value addition across a sub-group of countries – Nepal and India falling under the same sub-group.

Allowing for re-exports from India to Nepal is also highly sought amongst importers in Nepal. The treaty indicates that this could be possible on ‘case to case’ basis. Keeping in mind the benefits that could accrue to manufacturers in Nepal, it is recommended that re-exports to Nepal be re-examined so that importers can take advantage of the liberalization of the Indian economy and the various free trade agreements that India is part of. This is particularly true in the case of high value low quantity intermediate goods that Nepalese manufacturers use in their production. The requirement is currently visible in the production of paints and emulsions, pharmaceuticals, industry raw materials, machinery parts, processed food and beverages, food processing additives, paraffin wax and inorganic chemicals amongst others.

The study also looked into the viability of exports to Nepal through SAFTA. Exports under SAFTA need to meet the ROO criteria through a preferential certificate of origin currently authorized to be issued by Various Export Development Authorities, Development Commissioners of

51

EPZs/SEZs and the Export Inspection Agencies. The study reveals that due to the low level of tariff commitments by Nepal only certain products in the processed agriculture sector, petrochemicals and plastics, engineering goods like industrial machinery and electrical equipments can be exported competitively under the SAFTA. Products like electronic goods, small machine tools, pump sets, heavy earth movers and grain processing mini plants could be better exported under the SAFTA than the bilateral treaty. The customs duty difference is very small, but the volume of untapped demand if met would offset the difference in favour of the exporter.

8.2. Trade Facilitation

The study identifies the major trading routes between India and Nepal. Of the five major LCSs in India that account for 95% of exports, Raxaul is the most important. However, certain trade facilitation services were non-existent in the two LCS pairs, Raxaul-Birgunj and Panitanki-Kakarvitta, between India and Nepal that were examined, particularly in the latter. Differences in working days between Nepal and Indian customs offices effectively cut down customs clearance to five days. Physical as well as non-physical infrastructure in the LCSs were found wanting. Congestions in the BCPs are very high due to lack of parking area, warehouses, cold storage and trans-shipment facilities to name a few.

Due to improper dissemination of information on trade documents and procedures and the requirement to produce original documents in physical form traders are virtually at the mercy of customs authorities. Traders also relent to the demands of customs officials for clearance of goods. These add up significantly to the consignment value. Currently none of the LCSs in India and ICDs in Nepal is connected through any EDI system.

The GOI is taking significant steps to improve the trade infrastructure in the India-Nepal border by building four ICPs along select routes. However, the ICPs will take at least another three to four years from being fully operational. During this time, measures need to be taken up to improve the trade flow, cut down transportation costs and time, and minimize transaction costs by adopting international standards of best practices.

8.3. Investments

Indian investments to Nepal have not kept pace with increased overseas investments from India in the past few years. Inherent bottlenecks in the Nepalese economy due to a weak governance structure and infrastructure deficits are no doubt the prime reasons that foreign investments have stayed out of Nepal. However, immense potential remains to be explored in the long run given the country achieve a stable political and economic regime in the near future.

Nepal could attract investments from India to benefit from the DFQF market access it receives as an LDC in the developed markets. Investment-led exports could take advantage of the natural endowments of Nepal in such sectors as, agri-business and horticulture, certain garments industries and manufacturing industries like machine components, electrical equipments where assembly production is required.

Indian investors could also take advantage of the SEZ policy, which Nepal is committed to. The agreed SEZs in Birgunj, Biratnagar and Bhairahawa are close to the Indian economic centres and can evolve as manufacturing hubs for the neighbouring Indian states as well as exports to third countries.

52

Investments in certain “national priority industries” are favoured through a host of financial and tax rebates. Certain key sectors that could emerge as potential investment prospects are: hydropower, infrastructure projects, education and health, apart from agri-business, tourism and the financial sector. Investment in hydropower is expected to be the key sector in Nepal and while Indian companies have started investments in certain plants, they have experienced many hurdles including delays in decision making, lack of single-window policies and disincentives such as local unrest and political instigations against power companies.

The study enumerates the issues that existing Indian JVs face in Nepal (see, Flow chart I) and contends that attracting Indian FDI would necessarily rest upon how well these issues are tackled by the present governance structure of Nepal. The focus should be on the immediate conclusion of the Bilateral Investment Protection and Promotion Agreement (BIPPA) between India and Nepal so that Indian investments are on a sound footing with assured national treatment and a guarantee against expropriation by current or future governments.

While the study examines goods exports from India, exports of services is also a major component of India – Nepal trade. Services is currently not in the ambit of the bilateral trade treaty, however, both the countries could look to institutionalize this important aspect of the India – Nepal economic relationship.

8.4. Recommendations to take forward the Bilateral Treaty 1. Dissemination of Trade and Treaty Information: It is well recognised that lack of

dissemination of trade information is one of the hurdles that has impeded India – Nepal bilateral trade. During the course of the study, the authors observed that regional and sectoral industry associations are unaware of provisions and benefits of the bilateral trade treaty and more importantly the export opportunities that both the countries provide.

a. Government Agencies in India and Nepal: The provisions of the revised treaty and benefits and opportunities arising from it should be disseminated to traders/ manufacturers through all important sectoral and regional industry associations. The government must take into account the role that sectoral and regional associations play in disseminating trade information. Moreover, exporters and manufacturers are often caught unawares when it comes to customs procedures and availability of trade facilitation measures due to which they rely blindly on Customs House Agents (CHAs) and customs officials. These act as disincentives largely to SME exporters who are necessarily not near large exporting clusters to better understand trade benefits.

b. Industry Associations of India and Nepal: It has also been observed that trade with Nepal is carried on through certain pockets in India, mainly north Indian exports hubs like Delhi-Haryana and Punjab and on the eastern India, through the iron and steel belt. Besides certain chemical, pharmaceutical and other exports from South and West India, exporters from these regions have not explored the Nepalese market to its full potential. Since both these regions have some of the biggest industrial hubs for value-added items, dissemination of export opportunities and trade benefits would likely create linkages for greater export penetration into Nepal.

c. Trade Promotion Councils in India and Nepal: The study recommends that ‘Nepal Shows’ in strategic hubs in West and South India, like Surat-Vadodara, Mumbai-Pune, Bengaluru-Mysore and Hyderabad-Vishakhapatnam industrial belts,

53

would help in bringing traders and manufacturers from both countries under one platform to explore trade opportunities. It has been observed that current trade and business delegations limit themselves to the capital cities in both the countries. While this is important, the business delegations from Nepal should explore other vibrant Indian cities in the South and West to increase trade linkages.

2. Improving Export Competitiveness: The study identifies that Nepal’s balance of trade needs to become sustainable, in order for Nepal to continue its current growth levels of imports. Export competitiveness can be derived by linking its productions to the global supply chain, and India’s assistance through trade-related investments and facilitation activities are of vital importance to the Nepalese economy.

a. Trade Promotion Councils in India and Nepal: The study recommends that shows like ‘Industrial Machinery Expo’, ‘Electronics Expo’ be held in Nepal to showcase India’s capacities and quality. Given the boost in SEZ policy in Nepal, Indian manufacturers in small machine tools, industrial safety gadgets, construction equipment, packaging industry amongst others can look to set up shops in Nepal.

b. Trade Research Institutions in India and Nepal: A study on the export competitiveness of Nepalese products in the Quad countries could be undertaken to identify the products where ‘regional cumulation’ can be undertaken with Indian producers. Currently, the EU offers the possibility for such cumulation that could help benefit niche exports such as carpets, wool, silk and textile products and jewellery items.

c. Standards and Certifying Agencies in India and Nepal: MRAs between Indian and Nepalese standards implementing bodies, recognition of certificates from authorized agencies could go a long way in increasing trade. The study recommends that meetings between the standards implementing bodies of both the countries, Bureau of Indian Standards (BIS) and Nepal Bureau of Standards and Metrology (NBSM), be held to recognize the key areas of work required to move towards a harmonization in traded goods.

3. Improving Trade Facilitation: Trade facilitation has become acutely important

in the current global trade context. Due to the geo-political location of Nepal as a landlocked country transaction costs are generally high. This can be mitigated through cooperation with India in facilitating Nepal’s trade.

a. Customs and Excise Agencies of India and Nepal: The study recommends the harmonisation and simplification of customs procedures between India and Nepal at the inter-ministerial level. India has a proven and full-proof EDI system where all sea and air-ports and ICDs in India are already connected or in the process of full connectivity through ICEGATE. This system can be extended to the major LCSs in the India – Nepal border. Since EDI is linked to the excise department, exports under excise bond can also be linked to the EDI. This could bring down clearance time immensely.

The second phase is the connectivity between LCSs in India with the ICDs in the Nepalese side. Although, Nepal has another system (ASYCUDA) once connectivity is

54

extended it could support the ICEGATE system in India. Aligning trade documents and procedure between the two countries electronically would result in efficiency gains translating into greater trade volumes.

b. Ministry of External Affairs and Ministry of Home Affairs, Government of India: The timely conclusion of the ICPs along the India – Nepal border at Raxaul – Birgunj, Nautanwa (Sunauli) – Bhairahawa, Jogbani – Biratnagar, and Nepalgunj Road – Nepalgunj is crucial to facilitating trade between India and Nepal. The first phase of the ICPs, which includes the Raxaul – Birgunj and Jogbani – Biratnagar, is expected to be completed by 2012. The efficiency gains could be felt through faster customs clearance, faster certification clearance, better transportation, better warehousing and importantly through reduced transaction costs of exports for exporters from India and Nepal.

55

Annexure I

Major Revisions in the India – Nepal Treaty of Trade and the Agreement for Co-operation to Control Unauthorised Trade, October, 2009

The validity of the Treaty has been increased from five to seven years, along with the

provision of automatic extension for further periods of seven years at a time. No discrimination will be made in respect of tax, including central excise, rebate and other

benefits to exports merely on the basis of payment modality and currency of payment of trade. This will bring the bilateral trade conducted in Indian Rupees at par with trade in convertible currency and will end the existing mechanism of Duty Refund Procedure (DRP) which was procedurally cumbersome. It will provide Nepal a direct control on the customs duty revenues on import of manufactured goods from India. It will also allow Indian exports to avail benefit of export promotion schemes prevailing in India, making these products more competitive for further sale or value addition in Nepal. (This change would be made effective from the date to be mutually agreed to. Modalities will be developed for smooth transition from the existing to the new system.)

The time limit for temporary import of machinery and equipment for repair and maintenance

has been raised from 3 to 10 years. Several new items of export interest to Nepal have been added to the list of primary products

giving these items duty free access to India without any quantitative restrictions. These include floriculture products, atta, bran, husk, bristles, herbs, stone aggregates, boulders, sand and gravel.

Criterion for calculating value addition for gaining preferential access to India has been

changed from ex-factory basis to FOB basis. India has agreed to consider waiver, on request from GON, of any additional duty that may

be levied over and above CVD. Both sides have agreed to exempt exports of goods, which are already covered under

forward contract, from imposition of restrictions on exports. Both sides will grant recognition to the sanitary and phyto-sanitary (SPS) certificates issued by

the competent authority of the exporting country based on assessment of their capabilities. Articles manufactured in Nepal, which do not fulfill the criteria for preferential access will be

provided MFN access to the Indian market. The certificate of origin in case of such exports has been prescribed.

The provisions regarding safeguard measures in case of serious injury to the domestic

industry have been streamlined.

56

A joint mechanism, comprising local authorities has been established to resolve problems

arising in clearance of perishable goods. An Inter-Governmental Sub-Committee (IGSC) at the joint secretary-level has been

established. Existing Inter-Governmental Committee (IGC) at the Secretary-level will meet once in six months and the IGSC will meet at the interval of the two IGC meetings.

Four additional Land Customs Stations (LCSs) will be established to facilitate bilateral trade:

Maheshpur/Thutibari (Nawalparasi); Sikta-Bhiswabazar; Laukha-Thadi; and Guleria/Murtia, bringing the total number of LCSs to 26.

Bilateral trade will be allowed by air through international airports connected by direct flights

between Nepal and India (Kathmandu/Delhi, Mumbai, Kolkata and Chennai). The Indian side has agreed to review and simplify the existing administrative arrangements

for operationalisation of fixed quota for acrylic yarn, copper products and zinc oxide. India has agreed to consider several additional products as wholly produced or manufactured

in Nepal for the purpose of gaining preferential access to the Indian market. It includes articles collected in Nepal fit only for recovery of raw materials and waste and scrap resulting from manufacturing operations in Nepal. It also includes products taken from seabed/ ocean floor/ sub-soil for which Nepal has exclusive rights under UNCLOS.

India has agreed to assist Nepal to increase its capacity to trade through improvement in

technical standards, quarantine and testing facilities and related human resource capacities. The 2009 Agreement of Cooperation to Control Unauthorized Trade will allow export of

goods imported by Nepal from India to the third countries without necessity of carrying out any manufacturing activity in Nepal. Similarly it will allow export of the goods imported by India from Nepal to third countries.

Source: Embassy of India in Nepal

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Annexure II

QUESTIONNAIRE FOR EXPORTERS TO NEPAL January, 2010

The objective of this questionnaire is to assess the impact of the 2009 India – Nepal Treaty of Trade and the Agreement of Cooperation to Control Unauthorised Trade, on Indian exports to Nepal. It focuses on market expansion for Indian goods in Nepal and in third countries via Nepal. The questionnaire is divided into sections related to various aspects of exporting to Nepal. Section I, contains company/firm specific questions; Section II, contains export-related questions; Section III, contains questions on logistics/infrastructure to export to Nepal. All information collected will remain anonymous and be used for statistical and analytical purposes only.

I. Company Details:

a. Company/Firm Name: ……………………………………………………………………………..

b. How would you best describe your company’s primary business activity? ............................................................................................................................................................................................................................................

c. What is the share of exports in your total sales? i. We are a 100% EOU ………………………….

ii. 50-75% …………………………. iii. 25-50% …………………………. iv. <25% ………………………….

Section I: General Company Information and Trade Profile

58

I. Company/Firm Exports:

a. What are the main product (s) that your company exports? (Rank in terms of

value of exports) i. …………………………………………………………………..

ii. ………………………………………………………………….. iii. …………………………………………………………………..

b. What is/are the principal destination(s) of your exports? (Rank in terms of

value of exports) i. …………………………………………………………………

ii. ………………………………………………………………… iii. …………………………………………………………………

c. What share of your total exports goes to Nepal? (Please specify commodity

wise break-up) i. ………………………………………………………………….

ii. ……………………………………………………………………. iii. …………………………………………………………………….

d. Have your exports to Nepal experienced growth/decline over the period 2006-

09? (Please specify the range of growth/decline, e.g., 20-25%)

□ Growth □ Decline

□ Irregular e. If your exports are facing decline or low growth in Nepal, what are the likely

reasons? (Select all that apply) i. Uncertain demand in the Nepalese economy

ii. Competition from exports from China iii. Competition from exports of other countries iv. Problems related to transport/customs v. Other (please specify)

f. Products your company/firm would like to export to Nepal in the future

i. ……………………………………………………………………. ii. …………………………………………………………………….

II. Exports through Bilateral/Regional Arrangement

a. Does your company/firm avail of the benefits available through the India – Nepal Treaty of Trade while exporting to Nepal?

□ Yes □ No

Section II: Exports

59

b. Does your company/firm avail of the benefits available through South Asian

Free Trade Agreement (SAFTA) while exporting to Nepal?

□ Yes □ No

c. Are you currently entitled to any export promotion schemes on exports to Nepal? If yes, please specify.

..........................................................................................................

d. The 2009 Treaty of Trade between India and Nepal will end the existing

mechanism of Duty Refund Procedure (DRP) on exports to Nepal by bringing bilateral trade conducted in Indian Rupees at par with trade in convertible currency. This will allow Indian exports to Nepal to avail benefits of export promotion schemes like any other exports.

i. Do you expect this policy change will make your exports more competitive in Nepal, vis-à-vis, exports from other countries?

□ Yes □ No

e. The 2009 Treaty of Trade will allow bilateral trade by air through international airports connected by direct flights between Nepal and India (Kathmandu/Delhi, Mumbai, Kolkata and Chennai).

i. Do you expect bilateral trade through air will enhance your exports to Nepal?

□ Yes □ No

f. The 2009 Agreement will allow re-export of goods imported by Nepal from India to third countries without necessity of carrying out any manufacturing activity in Nepal. This is expected to enhance Indian exports to third countries via Nepal where Nepal has better market access (as a Least Developed Country or as part of an FTA).

i. Do you expect your company/ firm can use Nepal as a base to export to third countries markets, like EU or Pakistan?

□ Yes □ No

I. Transport

a. How does your company/firm currently export to Nepal? i. By Train …………………..

ii. By Road (please specify routes) ………………….. …………………………………………………………………………………..

Section III: Logistics/Infrastructure Related to Exports to Nepal

60

b. What is the average cost of transportation and handling in exporting a consignment of goods to Nepal? …………………………………………………………………………………………

II. Customs a. How many documents are required to be prepared to export to Nepal?

………………………………………………………………………………………….

b. What is the duration for your exports to get customs clearance? ………………………………………………………………………………………….

c. Does your exports face any undue delays, in terms of documentation, customs clearance, safety certification etc? (please specify) ...............................................................................................

III. Infrastructure

a. If your exports go by road, are the roads to the Border-crossing Points (BCPs)

properly metalled and maintained? ……………………………………………………………………………………………

b. In the Land Customs Stations (LCSs), are the following facilities available:

i. Computerised customs clearance: …………. ii. Banks with forex facility: ………….

iii. Warehousing and Cold Storage: …………. iv. Testing and Quarantine Facilities: ………….

IV. Any other issues you would like to flag relating to exports to Nepal:

……..……………………………………………………………………………………………………………………….

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Annexure III

QUESTIONNAIRE FOR IMPORTERS FROM NEPAL January, 2010

The objective of this questionnaire is to assess the impact of the 2009 India – Nepal Treaty of Trade and the Agreement of Cooperation to Control Unauthorised Trade, on bilateral trade between Nepal and India. The focus of the questionnaire is to identify the scope for further market expansion between India and Nepal. The questionnaire is divided into two sections. Section I, contains company/firm specific questions; Section II, contains import-related questions. All information collected will remain anonymous and be used for statistical and analytical purposes only.

II. Company/ Firm Details:

a. Company/Firm Name and Address: ........................................................... ………………………………………………………………………………………………………………….

b. How would you best describe your company/ firm’s primary business activity? ............................................................................................................................................................................................................................................

c. The reasons for imports. i. We are a Trading House ………………………….

ii. For inputs in our production …………………………. iii. To sell in the domestic market …………………………. iv. For re-export to third countries …………………………. v. Other (please specify) ………………………….

II. Company/Firm Imports:

g. What is/ are the main product (s) that your company/ firm imports? (Rank in

terms of value of imports) i. …………………………………………………………………..

ii. ………………………………………………………………….. iii. …………………………………………………………………..

Section I: General Company Information and Trade Profile

Section II: Imports

62

h. What is/ are the principal countries(s) of your imports? (Rank in terms of value

of imports) i. …………………………………………………………………

ii. ………………………………………………………………… iii. …………………………………………………………………

i. What share of your total imports comes from India?

ii. …………………………………………………………………….

j. Is there a growing/ or declining market for your imports in the Nepalese market? (Please specify the range of growth/decline, e.g. 20-25%)

□ Growth ……… □ Decline ……… □ N.A. ……..

k. If your imports come from countries other than India, what are the major reasons? (Select all that apply)

i. No links with Indian exporters …………. ii. No production in Indian markets ………….

iii. Higher unit cost of import from India …………. iv. Better quality imports from third country …………. v. Other (please specify) …………………………………………….

l. Products your company/firm would like to import from India in the future

i. ………………………………… ii. ………………………………………

m. The 2009 Agreement will allow re-export of goods imported by Nepal from India to third countries without necessity of carrying out any manufacturing activity in Nepal and vice-versa. This is expected to enhance exports from Nepal to third countries where it has a better market access as compared to India. Do you think your company/ firm can take advantage of this policy change? ............................................................................................................................................................................................................................................

n. Any other issues you would like to flag regarding imports from India? ………………………………………………………………………………………………………………….

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References

Asian Development Bank, Key Indicators for the Asia and Pacific 2009, 2009 De P., Khan A. R. and Chaturvedi S., "Transit and Border Trade: Barriers in South Asia", World Bank, 2010 Embassy of the United States in Nepal, 2009 Investment Climate Statement, 2009 Maizels A. and Nissanke M.K., “Motivations for aid to developing countries”, World Development, Volume 12, Issue 9, 1984, Pages 879-900 Ministry of Industry, Commerce and Supplies, Industrial Statistics 2007-08, Government of Nepal Ministry of Home Affairs, Development of Integrated Check Posts, Government of India, http://www.mha.nic.in/pdfs/BM_IntCheck%28E%29.pdf, retrieved on 20/03/2010 Nepal Rastra Bank, Economic Report 2007-08, 2009 Ratna R. S. and Sidhu G., "Making SAFTA a Success: The Role of India", The Commonwealth Secretariat, 2008 Roy J and Banerjee P, Nepal at the Crossroads: Implications of an Indo-Chinese Trade Route through the Nepal Transit Corridor, Confederation of Indian Industry, 2005 UNDP-Nepal, Nepal: Foreign Investment Opportunities, 2009 UNOHRLLS, LDC Briefing Book: Brief on Duty Free Quota Free Market Access to LDCs, 2008 World Bank (a), Doing Business Report, 2010 World Bank (b), Doing Business 2010: Nepal, 2010 World Bank (c), Connecting to Compete 2010: Trade Logistics in the Global Economy, 2010 http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E, retrieved on 08/03/2010 http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/preferential/article_781_en.htm http://www.htpldryport.com/monthly_rep.htm http://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)--2009-10_Report-NEW.pdf

64

http://www.seznepal.gov.np/fdi.htm Data Sources Asian Development Bank CMIE, India Trades DGCI&S, Ministry of Commerce and Industries, Govt. of India ITC, Trade Map Ministry of Commerce, Industry and Supplies, Government of Nepal Ministry of Finance, Government of Nepal Nepal Rastra Bank World Bank WTO, Trade and Tariff Profiles

65

Appendix I

Table: Top Nepalese Imports, Benefits of DRP Withdrawal and India’s Share in Nepal’s Imports

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

Agricultural and Allied Products:

1 7131000 Dried peas 0 9.3 -9.3 9.7 0.5 9.2 No

2 7132000 Chickpeas 0 9.3 -9.3 6.0 0.1 5.9 No

3 8029000 Betelnuts 0 13.95 -13.95 57.1 0.2 4.1 No

4 9101000 Ginger 0 0 0 4.9 1.2 3.7 No

5 10063000 Semi milled or wholly milled rice, whether or not polished or glazed

0 0 0 23.1 18.7 4.4 No

6 17011110 Sugar, raw not containing added flavouring or colouring matter

10.3 0 10.3 10.2 9.1 1.1 No

7 17019100 Sugar, raw containing added flavouring or colouring matter

10.3 0 10.3 4.42 4.42 0.00 No

8 21069040 Concentrate of non-alcoholic soft drinks 10.3 23.25 -12.95 16.3 3.4 12.9 Yes

9 23099000 Animal food 0 9.3 -9.3 7.2 4.3 2.9 No

10 24012000 Tobacco, partly or wholly stemmed/stripped

51.5 13.95 37.55 17.2 17.2 0.1 No

Chemicals, Pharmaceuticals & Petrochemicals

11 28151100 Solid caustic soda 10.3 4.65 5.65 8.4 6.3 2.1 Yes

12 28321000 Sodium sulphides 10.3 9.3 1 4.68 4.38 0.30 Yes

13 29420000 Organic compound 10.3 4.65 5.65 9.4 7.7 1.7 Yes

14 30022000 Vaccines for human medicine 0 0 0 15.6 6.9 8.7 No

66

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

15 30039010 Homoeopathic medicaments (pure ayurvedic and yunani)

10.3 9.3 1 4.74 4.73 0.01 No

16 30039090 Homeopathic medicaments not put up in measured doses or in forms or packings for retail sale

10.3 13.95 -3.65 76.8 65.8 11.0 No

17 30042000 Medicaments containing antibiotic for therapeutic or prophylatic uses

10.3 13.95 -3.65 6.2 1.1 5.1 No

18 30049090 Homeopathic medicaments, put up in measured doses or in forms of packings for retail sale

10.3 13.95 -3.65 13.5 1.4 12.0 No

19 34029010 Linear Alkyl Benzene sulphonic acids 10.3 9.3 1 3.58 3.20 0.38 Yes

20 38089300 Herbicides, anti-sprouting products and plant-growth regulators

10.3 4.65 5.65 2.83 2.52 0.31 No

21 38231900 Industrial monocarboxylic fatty acid 10.3 4.65 5.65 20.6 3.6 17.1 Yes

22 39011000 Polyethylene having a specific gravity of less than 0.94

10.3 9.3 1 14.4 0.0 14.4 Yes

23 39012000 Polyethylene having a specific gravity of 0.94 or more

10.3 9.3 1 25.5 1.1 24.4 Yes

24 39021000 Polypropylene 10.3 9.3 1 34.1 13.4 20.7 Yes

25 39041000 Polyvinyl chloride not mixed with any other substances

10.3 9.3 1 8.2 0.1 8.1 No

26 39076000 Polyethylene terephthalate 10.3 9.3 1 9.2 2.0 7.2 Yes

27 39202000 Plates, sheets, film, foil and strip of polymers of propylene

10.3 13.95 -3.65 10.6 5.7 4.9 Yes

28 39269090 Articles of plastic 10.3 27.9 -18.2 17.7 0.1 17.6 No

Paper & other products:

67

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

29 48010000 Newsprint, in rolls or sheets 0 4.65 -4.65 13.7 2.1 11.6 Yes

30 49070000 Unused postage, stamps, banknote, cheque forms

0 9.3 -9.3 8.6 1.5 7.1 No

Textiles & RMG:

31 51011900 Wool, greasy not carded or combed 0 4.65 -4.65 5.5 0.0 5.4 No

32 51012100 Shorn wool 0 4.65 -4.65 7.0 0.0 7.0 No

33 52051100

Cotton yarn (other than sewing thread), containing 85% or more by weight of cotton Measuring 714.29 decitex or more (not exceeding 14 metric number)

10.3 4.65 5.65 4.20 4.20 0.00 Yes

34 52053100 Multiple or cabled yarn, of uncombed fibres measuring per single yarn 714.29 decitex or more

10.3 4.65 5.65 5.2 5.2 0.0 No

35 55032000 Synthetic staple fibre of polyester not carded combed or otherwise processed for spinning

10.3 4.65 5.65 16.0 14.8 1.1 Yes

36 55033000 Synthetic staple fibre of acrylic or modacrylic not carded combed or otherwise processed for spinning

10.3 4.65 5.65 5.0 0.6 4.4 Yes

37 62032200 M&B cotton ensembles, not knitted 10.3 18.6 -8.3 6.3 0.0 6.3 No

38 62033300 M&B Jackets and blazer of synthetic fibres 10.3 18.6 -8.3 4.9 0.0 4.9 No

39 64029900 Footwear with outer soles and uppers of rubber or plastics

10.3 18.6 -8.3 6.1 0.3 5.9 No

68

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

Iron & Steel Products

40 72011000 Non-alloy pig iron containing by weight 0.5% or less of phosphorus

10.3 4.65 5.65 3.81 3.81 0.00 Yes

41 72031000 Ferrous products obtained by direct reduction of iron ore

10.3 4.65 5.65 19.6 19.6 0.0 Yes

42 72041000 Waste and scrap of cast iron 10.3 4.65 5.65 8.0 0.1 8.0 Yes

43 72071900 M.S Billet 10.3 4.65 5.65 110.3 94.7 15.7 Yes

44 72082700

Flat rolled product of iron or non alloy steel, in coils, not further worked than hot rolled, pickled, of a thickness of less than 3mm

10.3 4.65 5.65 21.5 18.7 2.8 Yes

45 72083600 Flat-rolled products or iron or non-alloy steel in coils of a thickness exceeding 10 mm

10.3 4.65 5.65 8.0 6.7 1.2 Yes

46 72083800

Flat rolled product or iron non alloy steel of a width of 600 mm or more, hot rolled, not clad, plated or coated of a thickness of 3mm or more but less than 4.75 mm

10.3 4.65 5.65 4.84 4.84 0.00 Yes

47 72083900 Flat rolled product of iron of a thickness less than 3mm

10.3 4.65 5.65 19.7 10.8 9.0 Yes

48 72091800

Flat rolled products of iron or non alloy steel, of a width of 600 mm or more in coils, not further worked than cold-rolled of a thickness of less than 0.5mm

10.3 4.65 5.65 57.2 54.7 2.5 Yes

69

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

49 72092700

Flat rolled products of iron or non-alloy steel, of a thickness of 0.5 mm or more but not exceeding 1 mm, not in coil not further worked than cold rolled of a thickness of 3mm or more

10.3 4.65 5.65 4.44 4.44 0.00 No

50 72139110

Bar and rods, hot rolled, in irregularly wound coils, of iron or non alloy steel, of circular cross-section measuring not more than 8 mm in diameter

10.3 4.65 5.65 53.4 26.7 18.3 Yes

51 74081100 Refined copper wire of which maximum cross-sectional dimension exceeds 6mm

10.3 4.65 5.65 10.8 3.1 7.8 Yes

Non-ferrous Metals:

52 76011000 Aluminium, not alloyed 10.3 4.65 5.65 2.84 2.70 0.14 Yes

53 76020000 Aluminium scrap 10.3 4.65 5.65 8.3 0.0 8.2 Yes

54 76051100 Aluminum wire of which the maximum cross-sectional dimension exceeds 7 mm

10.3 4.65 5.65 8.5 4.8 3.7 Yes

55 76072000 Aluminium foil, backed 10.3 13.95 -3.65 8.8 2.1 6.7 Yes

56 79011100 Unwrought zinc, not alloyed containing by weight 99.99% or more of zinc

10.3 4.65 5.65 9.9 7.3 2.6 Yes

Industrial machinery & Equipments

57 84071000 Aircraft engines 10.3 9.3 1 7.2 0.2 7.0 Yes

58 84295100 Front end shovel loader 10.3 4.65 5.65 37.3 0.8 36.5 Yes

59 84295200 Machinery with 360 degree revolving super structure

10.3 4.65 5.65 5.8 2.4 3.4 Yes

60 84295900 Mechanical shovels, excavators and shovel loaders

10.3 4.65 5.65 8.2 7.6 0.6 Yes

70

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

61 84342000 Dairy machinery 10.3 4.65 5.65 2.94 2.54 0.41 Yes

62 84431900 Offset printing machinery 10.3 4.65 5.65 5.2 0.8 4.4 Yes

63 84713000 Portable digital automatic data processing machines, weighing not more than 10kg.

10.3 0 10.3 14.4 0.5 13.9 Yes

64 84716000 Input or output units, whether or not containing storage units in the same housing

10.3 0 10.3 6.6 0.1 6.5 Yes

65 84733000 Parts and accessories of automatic data processing machines

10.3 0 10.3 15.9 0.3 15.6 No

66 84742000 Crushing or grinding machine 10.3 4.65 5.65 10.8 6.0 4.9 Yes

67 84749000

Parts of machine for sorting, screening, separating, washing crushing, grinding, mixing or kneading earth, stone, ores or other mineral substances, in solid form

10.3 4.65 5.65 3.31 2.75 0.56 No

68 84792000 Machinery for the extraction or preparation of animals or fixed vegetable fats or oils

10.3 4.65 5.65 2.68 2.68 0.00 Yes

69 84828000 Combined ball/roller bearings 10.3 4.65 5.65 5.1 5.1 0.1 Yes

Electrical Equipments & Electronic Goods

70 85021100 Generating sets with compression ignition internal combustion piston engines (diesel engines) of an output not exceeding 75KVA

10.3 13.95 -3.65 14.2 11.3 2.9 Yes

71 85030000 Parts of generating sets 10.3 4.65 5.65 5.3 0.3 4.9 No

71

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

72 85043300 Electrical transformers having a power handling capacity exceeding 16kVA but not exceeding 50 kVA

10.3 13.95 -3.65 6.0 0.2 5.8 No

73 85072000 Lead acid accumulators 10.3 13.95 -3.65 15.5 8.8 6.7 No

74 85171200 Telephone used for cellular or cordless networking

10.3 0 10.3 29.4 0.3 29.1 No

75 85176200

Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus

10.3 0 10.3 17.0 0.0 17.0 No

76 85176900 Apparatus for transmission or reception of voice, images or other data

10.3 0 10.3 23.0 0.9 22.1 No

77 85177000 Parts of apparatus for transmission or reception of voice, images or other data

10.3 0 10.3 5.8 0.3 5.6 No

78 85238000 Semiconductor media 10.3 0 10.3 7.0 1.0 6.0 No

79 85255000 Transmission apparatus 10.3 4.65 5.65 6.6 0.1 6.5 No

80 85256000 Transmission apparatus incorporating reception apparatus

10.3 0 10.3 8.6 0.0 8.5 No

81 85287200 Colour radio broadcast receivers 10.3 27.9 -18.2 6.4 0.8 5.6 No

82 85299010 Television receiver parts 10.3 0 10.3 4.64 3.28 1.36 Yes

83 85401100 Colour cathode ray television picture tube 10.3 9.3 1 3.92 2.50 1.42 Yes

84 85414000 Photosensitive semi conductor devices 10.3 0 10.3 7.6 2.5 5.1 No

Vehicles & Transport Equipments

85 87019000 Tractors, 10.3 4.65 5.65 40.1 38.9 1.2 No

72

S.N. H.S. Code Commodities

(A) Excise

Duty in India (%)

(B) Customs duty for India (%)

DRP Withdraw

al Benefits

(A-B)

Nepal's Imports

(USD mn)

India's Exports to Nepal(USD

mn)

Indicative Trade

Potential

Imports Allowed in US$

86 87032200

Motor car, vehicle of a cylinder capacity exceeding 1000cc but not exceeding 1500cc, with spark-ignition internal combustion reciprocating piston engine

22.66 76 -53.34 18.5 10.8 7.7 No

87 87032300

Motor car, vehicle of a cylinder capacity exceeding 1500cc but not exceeding 3000cc with spark-ignition internal combustion reciprocating piston engine

22.66 + INR 20000 P.U.

76 - 5.3 0.4 4.9 No

88 87042110

Double-cab pickup principally designed for the transport of goods and having more than 2 seats including driver`s for the transportation of persons, not exceeding 5 tonnes

10.3 27.9 -18.2 5.2 2.5 2.8 No

89 88024000 Aeroplane, of an unladen weight exceeding 15000kg

10.3 9.3 1 22.5 0.0 22.5 No

90 88033000 Parts of aeroplane and helicopters 10.3 9.3 1 17.4 1.0 16.4 No

Medical & Precision Instruments

91 90189000 Electro-medical instruments and appliances

10.3 4.65 5.65 14.7 2.1 12.6 No

Where;

DRP Withdrawal Benefits

Indicative Trade Potential> US$ 2.5 m

Both

73

Appendix II

Table: Top Imports of Nepal that attracts less Customs Duty under SAFTA

S.N. H.S. Code Commodities Value (USD mn)

Customs duty for

India

Customs Duty for SAARC

Benefits for exports

under SAARC

India's Exports to Nepal(US

D mn)

India's share in Nepal

imports

Sector

1 19019000 Malt extracts 7.1 13.95 10.5 3.45 7.0 98.8 Agriculture and allied products

2 23040000 Oil cakes 13.4 9.3 7.5 1.8 13.4 100 Agriculture and allied products

3 23099000 Animal food 7.2 9.3 5 4.3 4.3 59.6 Agriculture and allied products

4 28321000 Sodium sulphides 4.7 9.3 7.5 1.8 4.4 93.3 Chemicals and Plastics

5 39011000 Polyethylene having a specific gravity of less than 0.94

14.4 9.3 7.5 1.8 0.0 0.0 Chemicals and Plastics

6 39012000 Polyethylene having a specific gravity of 0.94 or more

25.5 9.3 7.5 1.8 1.1 4.5 Chemicals and Plastics

7 39021000 Polypropylene 34.1 9.3 7.5 1.8 13.4 39.3 Chemicals and Plastics

8 39041000 Polyvinyl chloride not mixed with any other substances

8.2 9.3 7.5 1.8 0.1 1.0 Chemicals and Plastics

9 39076000 Polyethylene terephthalate 9.2 9.3 7.5 1.8 2.0 22.0 Chemicals and Plastics

10 48042900 Bleached sack kraft paper in rolls or sheets

2.6 13.95 10.5 3.45 2.6 99.0 Paper& paper goods

11 48239000 Paper and Paperboard 3.0 13.95 10.5 3.45 2.9 98.0 Paper& paper goods

12 49070000 Unused postage, stamps, banknote, cheque forms

8.6 9.3 7.5 1.8 1.5 17.7 Other manufactures

74

S.N. H.S. Code Commodities Value (USD mn)

Customs duty for

India

Customs Duty for SAARC

Benefits for exports

under SAARC

India's Exports to Nepal(US

D mn)

India's share in Nepal

imports

Sector

13 52121100 Woven fabric of cotton, unbleached, weighing not more than 200g/m2

3.6 13.95 5 8.95 3.5 97.1 Textiles

14 52121300 Woven fabric of cotton, dyed, weighing not more than 200g/m2

2.9 13.95 5 8.95 2.8 98.2 Textiles

15 70109000 Carboys, bottles, flasks, jars, pots and phials of glass

8.7 13.95 10.5 3.45 8.3 95.1 Other manufactures

16 73110000 Container for compressed or liquefied gas, of iron or steel

6.3 13.95 10.5 3.45 4.8 75.7 Iron and Steel

17 76072000 Aluminium foil, backed 8.8 13.95 10.5 3.45 2.1 23.6 Non-ferrous metals

18 84071000 Aircraft engines 7.2 9.3 7.5 1.8 0.2 3.0 Machinery and Mechanical Eq

19 84138100 Pump for liquids not fitted with measuring device

5.3 13.95 7.5 6.45 3.3 63.6 Machinery and Mechanical Eq

20 85021100 Generating sets… of an output not exceeding 75KVA

14.2 13.95 10 3.95 11.3 79.5 Electrical Equipments

21 85021200 Generating sets … of an output exceeding 75 KVA but not exceeding 375KVA

4.4 13.95 10 3.95 3.8 86.9

Electrical Equipments

22 85021300 Generating set …of an output exceeding 375 kva

4.8 13.95 10 3.95 3.4 71.4 Electrical Equipments

23 88024000 Aeroplane, of an unladen weight exceeding 15000kg

22.5 9.3 7.5 1.8 0.0 0.0 Vehicles and Transport Eq

24 88033000 Parts of aeroplane and helicopters 17.4 9.3 7.5 1.8 1.0 5.5 Vehicles and Transport Eq

75

Appendix III

Table: Major Imports of Nepal from Countries other than India and their Share, 2008

Nepal's Imports in 2008 Sourcing of Imports Sourcing of Imports Sourcing of Imports

S. No.

HS Code

Description Value (in US$ million)

Country 1 % Share

Country 2 % Share

Country 3 % Share

1 710812 Gold in unwrought forms non-monetary 87.41 UAE 98 Hong Kong 2.3

2 620343 Men/boys trousers and shorts, of synthetic fibres, not knitted 25.59 China 99.4 Thailand 0.3 Hong Kong 0.1

3 710813 Gold in semi-manufactd form n-monetary(inc gold platd w platinum) 24.69 Australia 100

4 852520

Transmission apparatus,for radioteleph incorporatg reception apparatus 23.38 China 44.6 Singapore 16.2 Republic of Korea 10.3

5 851750 Apparatus for carrier-current/digital line systems 19.65 China 87.3 Germany 5.2 Sweden 3.4

6 620333 Mens/boys jackets and blazers, of synthetic fibres, not knitted 18.45 China 99 Republic of Korea 0.7 Hong Kong 0.1

7 640419 Footwear o/t sports,w outer soles of rubber/plastics&uppers of tex mat 17.63 China 98.4 India 1.1 Singapore 0.4

8 080290 Nuts edible, fresh or dried, whether or not shelled or peeled, nes 16.08 Thailand 48 Indonesia 44 Singapore 4

9 300420 Antibiotics nes, in dosage 15.73 Belgium 70 France 18.3 India 9.4

10 620323 Mens/boys ensembles, of synthetic fibres, not knitted 15.20 China 99.9 Hong Kong 0.1

11 640299 Footwear, outer soles/uppers of rubber or plastics, nes 14.75 China 97.6 Hong Kong 0.8 India 0.7

12 852540 Still image and other video cameras 14.18 Singapore 81 Hong Kong 13.2 China 3.2

76

Nepal's Imports in 2008 Sourcing of Imports Sourcing of Imports Sourcing of Imports

S. No.

HS Code

Description Value (in US$ million)

Country 1 % Share

Country 2 % Share

Country 3 % Share

13 611030 Pullovers, cardigans and similar articles of man-made fibres, knitted 13.51 China 98.2 Republic of Korea 1.1 India 0.4

14 551219 Woven fabrics,containg>/=85% of polyester staple fibres,o/t unbl or bl 12.47 China 99.6 India 0.4

15 847330 Parts&accessories of automatic data processg machines&units thereof 12.30 Singapore 46.6 Malaysia 20.9 China 14.5

16 610910 T-shirts, singlets and other vests, of cotton, knitted 11.96 China 86.3 Thailand 8.1 India 3.6

17 550330 Staple fibres of acrylic or modacrylic, not carded or combed 11.29 Thailand 95.7 Republic ok Korea 4.3

18 510121 Degreased shorn wool, not carded, combed or carbonised 10.29 New Zealand 59 China 41

19 870322 Automobiles w reciprocatg piston engine displacg > 1000 cc to 1500 cc 10.10 Japan 33.7 Republic of Korea 30.8 India 28.7

20 080810 Apples, fresh 10.09 China 85.2 India 14.8

Source: Trade Map, ITC