India's Bilateral Relationships : Nepal

Historical Background:

Skanda Purana’ has a separate volume known as ‘Nepal Mahatmya’, which explains in more details about the beauty and power of Nepal.
Nepal is also mentioned in Hindu scriptures such as the Narayana Puja and the Atharva Siras (800-600 BC).
Around 1000 BC, small kingdoms and confederations of clans arose in the region.
From one of these, the Shakya confederation, arose a prince named Siddharta Gautama (563–483 BC), who later renounced his royalty to lead an ascetic life and came to be known as the Buddha ("the enlightened one").
The 7th Kirata king, Jitedasti, was on the throne in the Nepal valley at the time.
By 250 BC, the region came under the influence of the Mauryan empire of northern India, and later became a vassal state under the Gupta Dynasty in the fourth century AD. In the fifth century, rulers called the Licchavis governed the majority of its area.
There is a good and quite detailed description of the kingdom of Nepal in the account of the renowned Chinese Buddhist pilgrim monk Xuanzang, dating from c. 645 AD.
Indo-Nepalese relations particularly economic relations can be traced back to ancient times.
Kautilya (400 B.C.), great economist of that time, mentions Nepal as the principal exporter of woolen goods.
Increased trade activities were seen between northern India and Nepal during the golden age of Guptas (beginning in 320 A.D.)
During the Nepal-Tibet war of 1791, the East India Company proposed a 7-clause treaty under which imports and exports of goods between India and British India would be subject to 2.25 per cent customs duty.
A peace treaty of Sugauli in 1816 enabled the British to enter the Nepalese markets. In the early days, foreign trade of Nepal was limited mainly with India and Tibet.
Nepal’s trade with India continued till 1923 without having a trade agreement with British India.
Prior to the signing of this trade agreement, British East India Company was interested to have trade relations with Nepal, for expansion of its own exports.
The opening of direct India -Tibet route via Gyantse routes further promoted Nepal to develop trade with India.
Moreover, the development of good transportation system and the creation of many trade centers in the northern India further helped to enhance the trade turnover between Nepal and India.

India Nepal Trade Treaty 1923:

The Article VI of the first Trade Treaty between Nepal and India signed in 1923 provided that “No customs duty shall be levied at British Indian Ports as goods imported on behalf of the Nepal government for immediate transport to that country.”
Provision of this Article in Trade Treaty 1923 led to the development of Nepal-British trade freely through the port of British India for Nepal could not import goods from other overseas countries.
Nepal was compelled to purchase goods manufactured in Britain Nepal was very much isolated from other countries, especially from the developed Western countries prior to the political change of 1951.
Before 1950, Nepal had an open interaction with Tibet where Nepalese currency was on circulation. Trading arrangements between Nepal and Tibet too was unrestricted. As a result there was an easy movement of man and materials. There appeared a break in all these, however, after 1951 when Nepal tilted more towards the southern India.

Treaty of Peace and Friendship

Prior to 1950s, India and Tibet were the major trade partners of Nepal. Virtually, the country had a closed economy.
The signing of Treaty of Peace and Friendship, and Treaty of Trade and Commerce between Nepal and an independent India in July 1950 can be seen as the landmark towards the external trade of Nepal.
Treaty of Peace and Friendship 1950 formalized close relations between the two countries.
This Treaty can be seen as a non-reciprocal treaty. The Treaty symbolizes a balanced document and served for more than five decades to keep harness between the two countries.
Formal trade relation between the two countries was established in 1950 with the signing of the Treaty of Trade. This Treaty was modified and renewed in 1961 and 1971, and incorporated provisions regarding transit facilities extended by India for Nepal’s trade with a third country, as well as on cooperation to control unauthorized trade.
Duty free access to Nepalese imports on a non-reciprocal basis was first given in 1971 but with a Nepalese/Indian material content requirement of 90 per cent. This was gradually reduced when the Trade Treaty was periodically renewed and in 1993, it was brought down to 50 per cent of Nepalese/Indian material content and Nepalese labor content.
In 1978, instead of a single Treaty, three different agreements were signed. These treaties were modified significantly in 1991, after the advent of democratic government in Nepal.
India signed two treaties on trade and transit with Nepal in 1991.
Indo-Nepal Treaty of Trade 1991 made the provisions of extending substantial concessions. The Treaty of Trade, valid for five years, was revised and renewed through an exchange of letter on 3rd December 1996.
The Treaty was renewed in December 1996 for a further period of five years with the provisions for further periods of five years, at a time, by mutual consent subject to such modifications as may be agreed upon.
The Protocol to the India -Nepal Treaty of Trade was renewed with some modifications in February 2002. The Treaty of Transit, 1991 came up for renewal in December 1998 and following bilateral talks, a renewed Transit Treaty was signed on January 5, 1999.
The renewed Treaty contains liberalized procedures of the transit of the Nepalese goods. The Government of India accepted Nepalese request for “automatic renewal” of the Treaty for further seven-year periods. However, the Protocol and Memorandum to the Treaty, containing modalities and other would be subject to review and modification every seven years or earlier if warranted.
The Nepalese request for an additional transit route to Bangladesh via Phulbari was accepted 28 in June 1997. Operating modalities for the transit were accordingly worked out. And, the route was operationalised from 1 September 1997.
A review of the working of the route was held in March 1998 at Commerce Secretary-level talks in Delhi when several relaxations of the operating modalities requested by the Nepalese were agreed to. These included Nepalese request to keep the route open on all days of the week.

Indo-Nepal Treaty of Trade, 1991

In order to expand trade between Nepal and India and also to encourage collaboration in economic development, Treaty of Trade, 1991 was signed on 6 December 1991. It was explicitly expressed in the Treaty to promote mutual trade between the two countries for the benefits of mutual sharing of scientific and technical knowledge and experience.

Treaty of Transit, 1991

Recognizing the fact that Nepal is a land-locked country and its need to have access to and from the sea to promote its international trade, the Treaty made the provision in its Article I that the contracting parties shall accord to ‘traffic in transit’ freedom of transit across their respective territories through routes mutually agreed upon. No distinction shall be made which is based on flag of vessels, the places of origin, departure, entry, exist, destination, ownership of goods or vessels. Further, exemption from customs duties and from all transit duties or other charges were made except reasonable charges for transportation and such other charges as needed to commensurate with the costs of services. In addition, for the convenience of traffic in transit the contracting parties agreed to provide point or points of entry or exist warehouses or shed and open space for the storage of traffic in transit awaiting customs clearance before onward transmissions. As such the requirements in course of import and export of goods and articles from Nepal was well established in this Treaty.

Agreement of Cooperation to Control Unauthorized Trade. 1991:

An Agreement of Cooperation to Control Unauthorized Trade was signed between the Government of India and Government of Nepal on 6 December 1991. This Agreement well recognized that there is a long and open border between the two countries and there is free movement of persons and goods across the border.

Revision in Indo-Nepal Trade Treaty, 1991 and Treaty of Transit, 1991:

At the end of the official visit of Prime Minister of India, Mr. P.V. Narasimha Rao on October 21, 1992, a joint communiqué was issued in Kathmandu, which considerably enhanced India’s bilateral trade preferences to Nepal and further improvement in its transit 31 facility.
In accordance with the communiqué, India and Nepal signed three letters of exchange on 16 February 1993. One of the letters related to trade while the other two related to transit. The letter relating to trade replaced Part V of the Protocol of the Treaty of Trade 1991. One notable feature of the amendment was the eligibility of the Nepalese labor content along with Indian and Nepalese materials qualifying as inputs while estimating their content in the ex-factory value of Nepalese manufactured output. Henceforth the Government of India provide access to the Indian market free of basic and auxiliary customs duty and quantitative restrictions for all articles manufactured in Nepal which contain not less than 50 per cent of the Nepalese labor content, Nepalese material content and the Indian labor content. Thus the requirement of Nepalese raw material content for duty free access to the Indian market was reduced from 55 per cent to 50 per cent.

Indo-Nepal Trade Treaty, 1996:

This Treaty, signed on December 3, 1996 at Kathmandu, sets a landmark in bilateral trade relation between Nepal and India. It gave a new direction in the trade related areas as well as a scope for the trade improvement especially to Nepal. Some of the provisions made in the earlier treaties were replaced and modified. It made the procedures simple and straight so as to remove the procedural delays.

Agreement of Cooperation to Control Unauthorized Trade, 1996:

An Agreement of Cooperation (AoC) between Government of Nepal and the Government of India was also signed to control unauthorized trade.

Treaty of Transit:

Modifications in 1996 In order to facilitate the provisions made in the renewed Treaty of Trade 1996, it was felt some modifications in the Treaty of Transit too. As such some Articles and clauses were modified as well as revised in the Treaty of Transit, 1991.

Treaty of Trade, 1996 Major Policy Changes

This Treaty is seen more often as the turning point in the history of Nepal- India trade relations leading to several policy changes. Some of the changes can be viewed as follows: a. Government of India provided access to the Indian market free of customs duties and quantitative restrictions for all products manufactured in Nepal on the basis of the certificate of origin. b. The negative list of product imported to India were shortened from seven to three items which are alcoholic liquors/beverages and their contents except industrial spirits, perfumes and cosmetics, cigarettes and tobacco. c. Export of Nepalese consignments with the certificate of origin would not be delayed at the Indian customs border/check-post. d. Indian investment in Nepal in Indian Rupees for up to 25 crores would get fast track clearance. e. It was decided to increase the air seat capacity from 4000 to 6000 per week. Also two more points in India would be opened for Nepalese airlines. The governments of the two countries also agreed to have open sky policy. f. The government of India opened the transit route to Bangladesh through Phulbari. Nepal amended its foreign investment policy, company law and transfer of technology act. h. Nepal decided to open Nepali Stock Exchange to overseas investors. i. India and Nepal signed the power trade agreement and allowed private investment in hydropower project.

Treaty of Transit, 1999 :

This Treaty was signed on 5 January 1999 between the Government of India and Government of Nepal with a desire to maintain, develop and strengthen the existing friendly relations and cooperation between the two countries recognizing the need to facilitate the traffic-in-transit through their territories. It was stated in the Treaty that it will remain in force up to the 5th January 2006 and will, thereafter, be automatically extended for a further period of seven years at a time unless either of the parties gives to the other a written notice, six months in advance.

Indo-Nepal Treaty of Trade, 2002:

This treaty is a continuation of the Treaty of Trade, 1996 rather in a revised form with the inclusion and exclusion of some of the provisions in the Articles.

Transit Provisions:

There are 22 land border points specified as agreed routes for mutual trade between India and Nepal under the terms of the Indo-Nepal Treaty of Trade. Under the Treaty of Transit and the Protocol to the Treaty of Transit, the Calcutta-Haldia port complex has been specified as port of entry for Nepal’s third-country trade by sea. However, 15 land-border points have been specified for the passage of Nepal’s third- country trade.
The transit facilities provided by India to Nepal under the Treaty of Trade and Treaty of Transit include the following: i. India allows freedom of transit for Nepalese third-country trade across its territories through routes mutually agreed upon, ii. Permission for the movement of Nepalese trucks to and from the merest railway stations to pick up the export and transit cargo to Nepal, iii. Traffic in transit is exempted from customs duty and from all transit duties or other charges, except charges for transportation and service charges, iv. Facilities are provided for warehousing and for storage of goods in transit awaiting customs clearances before inward transportation to Nepal, through Indian territory

Trade Points in Nepal :

The Trade Point Program was launched in 1992 by United Nations Conference on Trade and Development (UNCTAD) as a part of larger initiative to improve trade efficiency and designed to establish, operate and interconnect trade points across the globe for providing trade information, trade facilitation and trade transaction services. Trade points are designed to have the unique combination of national and international support system and trade implementation tools including the service users mainly SMEs, local enterprises, government agencies and the strong physical and on line network of trade points and their associate enterprises worldwide.

India & Democracy in Nepal

India was the first country to welcome the restoration of democracy in Nepal.
Beginning with the 12-Point Understanding reached between the Seven Party Alliance (SPA) and the Maoists in Delhi in November 2005. Government of India welcomed the roadmap laid down by the historic Comprehensive Peace Agreement of November 2006 towards political stabilization in Nepal through peaceful reconciliation and inclusive democratic processes.
India has consistently responded with a sense of urgency to the needs of the people and Government of Nepal in ensuring the success of the peace process and institutionalization of multi-party democracy through the framing of a new Constitution by a duly elected Constituent Assembly.
India has also provided material assistance to strengthen the government machinery in Nepal and for successful CA elections. Overall, over Rs.170 crores of assistance in the form of supply and equipment has been extended as part of India’s support to the peace process in Nepal in response to requests from the Government of Nepal.

After Democracy:

The visit of Prime Minister G.P. Koirala to India one month after the restoration of multi-party democracy in Nepal saw India extend a comprehensive package of assistance to help Nepal tide over immediate financial needs and support peace, democracy and stability.
A comprehensive economic package worth Rs.1000 crores was announced during the visit.
A soft credit line of USD 100 million for infrastructure development projects was extended, and outstanding dues on defence purchases worth NRs. 1.6 billion waived.
Government of India also agreed to doubling the number of GOI scholarships for Nepalese students and to supply of 25,000 metric tons of fertilizers to Nepal at subsidized prices.
PM Pushpa Kamal Dahal ‘Prachanda’ paid an official visit to India from 14-17 September 2008, and met President, Vice President, Prime Minister, and External Affairs Minister as well as Chairperson of UPA and the Leader of Opposition.
A Joint Press Statement was issued at the conclusion of the visit, reiterating the special features of the bilateral relationship and committing both sides to work towards further improving relations.
India agreed to implement the Naumure hydro-electric project on Rapti river besides the Rs. 20 crores assistance for Kosi breach relief. Credit of up to Rs 150 crores was also provided to GON to ensure uninterrupted supplies of petroleum products.
We have also permitted export of 10,000 tonnes of wheat and 15,000 tonnes of rice to Nepal, along with lifting of ban on other food items. PM Prachanda visited India again from November 12-14, 2008 to attend the BIMSTEC Summit.
The Foreign Minister of Nepal, Sujata Koirala visited India from 5-10 August 2009 where she held fruitful discussions with their counterparts.
Foreign Secretary of India visited Nepal on 14-15 September 2009 to exchange views on the future course of cooperation between the two countries.
Prime Minister Madhav Kumar Nepal paid an official visit to India from August 18 – 22, 2009 at the invitation of the Prime Minister of India.
The two leaders had also met earlier on the sidelines of the XVth NAM Summit in Sherm-el-Sheikh, Egypt. The two Prime Ministers expressed their satisfaction on the age-old, close, cordial and multifaceted relations between Nepal and India and agreed to expand them further.
India expressed full support for the ongoing peace process and the efforts to bring about economic transformation in Nepal. The two Governments decided to reinvigorate bilateral relations by ensuring effectiveness of all established institutional mechanisms.
The two sides also agreed to enhance bilateral trade on a sustainable basis.
To facilitate Nepalese foreign trade, India agreed to utilization of Vishakhapatanam port for movement of transit traffic to and from Nepal.
A MoU was signed for continuation of Indian grant assistant for “Goiter Control Programme” in Nepal.
Nepal assured India that it will not allow its territory to be used for any activity against India and India also gave the same assurance to Nepal.
A number of projects with Government of India assistance with a total outlay of over Rs. 1600 Crores were agreed upon including, construction of National Police Academy in Nepal, construction of poly-technique at Hetauda, construction of two integrated check-posts, construction of 660 kilometres of roads in the Terai region, construction of two cross-border rail-lines and continuing provision of Indian faculty to B.P. Koirala Institute of Health Sciences, Dharan.
The two Governments also agreed to take up preventive measures and consultations to address the problem of inundation to border areas between Nepal and India.
The Government of India also agreed, in principle, to double the number of scholarships offered to Nepalese students and to increase the number of slots offered for training of Nepalese Government officials.
The two sides also agreed to facilitate increased Indian public and private sector involvement to harness Nepalese hydro-power potential.
It was also decided to cooperate bilaterally in areas such as culture, science and technology, tourism and sports and to facilitate contact and cooperation among the parliamentarians of the two countries.

Latest Updates:

2009 India-Nepal Treaty of Trade and Agreement of Cooperation to Control Unauthorized Trade

Shri Anand Sharma, Union Minister of Commerce and Industry and Mr. Rajendra Mahto, Nepalese Minister of Commerce and Supplies on October 27, 2009 signed the 2009 India-Nepal Treaty of Trade and Agreement of Cooperation to Control Unauthorized Trade.
The 2009 Trade Treaty revises the 1996 Trade Treaty between the two countries.
The 1996 Treaty has been a turning point in the trade relations between the two countries and resulted in phenomenal growth of bilateral trade from Rs. 28.1 billion in 1995-96 to Rs. 204.8 billion in 2008-09. While the Nepalese exports to India increased from Rs. 3.7 billion to Rs. 40.9 billion, the Indian exports to Nepal increased from Rs. 24.4 billion to Rs. 163.9 billion during the period -1995- 2009.

The changes introduced in the Treaty are:

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. This will provide more stable framework for bilateral trade and promote investments in Nepal based on preferential access provided by the Treaty to Nepalese products.
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 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.
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 Stations 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.
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.

Main Features of 1996 Trade Treaty :

Duty free access to each other’s primary products as per agreed list.
Nepalese manufactured products are allowed non-reciprocal access to the Indian market, free of basic customs duty, provided the goods are manufactured with Nepalese and/or Indian inputs. If third country inputs are used, at least 30% value addition is required to attract duty free access.
Annual quotas for duty free access in respect of four items – vegetable fats (100,000 tons) acrylic yarn (10,000 tons), copper products (10,000 tons) and zinc oxide (2,500 tons);
MFN access for three items – cigarettes, alcohol (excluding beer) and cosmetics with non-Nepalese and non-Indian brands
Goods manufactured by small scale units in Nepal enjoy the same benefits as SSIs in India with regard to tax exemption
Designates twenty two points on India-Nepal border for bilateral trade.

Impact of The 2009 Agreement :

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. This will enhance exports from Nepal to third countries where it has a better market access as compared to India. Similarly it will allow export of the goods imported by India from Nepal to third countries. This will help Nepalese exporters to take advantage of the third country market access developed by the Indian export houses.