Ministry of Commerce And Supplies - Enhanced Integrated ...

Chapter 3Access to the Indian MarketN T I S20103.1 IntroductionThe objective of this and the following chapter is to analyse some of the key constraints and opportunitiesrelated to market entry by Nepalese exporters in the country’s two giant neighbouring markets, India andChina, and provide advice on how to address some of the constraints, including capacity development throughtechnical assistance.This chapter looks at access to the Indian market. The chapter focuses first on a detailed review of non-tariffbarriers (NTBs) and, then, on impediments that are not traditionally considered as NTBs but are incidentalor essential to trade (i.e. transportation and/or distribution issues, infrastructural facilities, political stability,rule of law, etc.). Much of this analysis is based on information collected through extensive discussions withrelevant Nepalese businesses, trade associations, traders, GoN officials, and other stakeholders in Nepal aswell as in India. To the extent possible, this part of the analysis also seeks to identify issues specific to the 19export potential sectors reviewed in Chapter 2. These two sections are followed by a short one that describesthe views of Indian businesses and officials with respect to Nepalese export opportunities in their market.On the basis of sections, the chapter identifies key challenges and opportunities before Nepalese exportersin entering key destination markets in India and provides a number of specific recommendations andconclusions.3.2 Background: Nepal-India Trade and Transit AgreementsNepal is a landlocked country, surrounded by India on three sides (east, west and south) and Tibet(AutonomousRegion of China) in the north. International trade before the 1950s was mainly with thesecountries, with nearly 90 per cent conducted with India. The essentially open border of 1,800 km facilitatestrade, but also makes it hard to control. It also makes unquantifiable the enormous amount of informal tradeand smuggling.Nepal’s trading relationship with India was first codified in 1950 with the Treaty of Trade and Transit, whichlowered tariffs and tax duties on goods passing between Nepal and India. In successive modifications andrenewals of the treaty (notably in 1960), transit facilities for trade between Nepal and other countries wereestablished in India at the port of Kolkota (formerly Calcutta.) The treaty was renewed till March 1989 whendelayed negotiations led to its expiration, and all but two trading points were closed for a year. This blockadecrippled the Nepalese economy. The resulting strife was partly responsible for the downfall of the Panchayatpolitical system and the establishment of parliamentary democracy with constitutional monarchy. The 1990Interim Government successfully reinstated the treaty. As a result, a five-year Treaty of Trade was signed inDecember 1991.Duty-free (customs) access for Nepalese exports to India on a non-reciprocal basis was first given in 1971,but with 90 per cent Nepalese/Indian material content requirements. This was gradually reduced when thetreaty was periodically renewed, and, in 1993, it was brought down to 50 per cent of Nepalese/Indian materialcontent and Nepalese labour content. Under the 1996 Trade Treaty, India agreed to provide access, free ofcustoms duties and quantitative restrictions, to all articles manufactured in Nepal, with the exception of threegroups of items (alcohol, tobacco, and cosmetics). The value addition (material content) norm for such dutyfreeentry was removed in 1996. It was alleged that this had resulted in a surge of imports into India of someproducts from Nepal with little or no value addition such as acrylic yarn, zinc oxide, vanaspati (vegetable fat),and copper products. The Government of India (GoI), therefore, notified the GoN in September 2001 of itsintention to seek some modifications in the treaty before extending its validity.NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT127