Presented at Public-Private Dialogue on Nepal-India trade and SAFTA SATISKathmandu, March 23, 2012

Presentation prepared by: Ratnakar Adhikari and Chandan Sapkota

on behalf of SAWTEE Research Team

Introduction

Assessment of Nepal-India trade potentials

Critical barriers to export growth

Emerging issues

Analysis of major provisions of trade-related treaties/agreement ◦ Nepal-India trade treaty

◦ Nepal-India transit treaty

◦ Agreement on the Control of Unauthorized Trade

◦ Cross-cutting issues

Recommendations

Introduction

Share of Nepal’s exports to and imports from India in fiscal year 2010/11 was 67.39 percent and 66.11 percent respectively.

Trade deficit with India is increasing at an alarming pace, reaching 65.87 percent of total trade deficit of Rs 331.84 billion in 2010/11. As a percentage of GDP: ◦ Total trade deficit : 25%

◦ Trade deficit with India: 16%

This study assesses the current trade dynamics, the existing treaties, and the potential Nepalese export products that could do well in the Indian market

Identifies challenges facing Nepal in terms of broadening and deepening its exports to India

Identifies flaws/lacunae in the provisions of trade-related treaties from the perspective of Nepal

Discusses emerging dynamics in Nepal – India trade relations

Recommends practical short term and long term measures the GoN and private sector could take to boost exports to India

Qualitative as well as quantitative

Primary sources of information ◦ Field visits India and Bangladesh (Kolkata, Fulbari-Banglabandh)

Nepal and India (Kakarbhitta/Pantanki; Biratnagar-Jogbani; Birgunj-Raxual; Bhairahawa-Sunauli; Nepalgunj-Rupedia)

◦ Interviews with stakeholders and experts ◦ Focus group discussions ◦ On-site observations

Secondary sources of information ◦ Published/online materials from government (TEPC; DOC);

autonomous (NRB) and international (WB, ITC, IMF, WITS, UN Comtrade, etc) sources

Limitations: no services sector and investment, focus mainly on exports; interviews with “people in the know” only

Assessment of Nepal –India trade potentials

In South Asia, Bhutan, followed by Nepal, has the highest degree of trade intensity with India.

Nepal’s export basket is heavy with low-value products, including minerals and agriculture products (textiles, ferrous metals, chemicals, crops and food products).

Nepal has not been able to diversify production into and exports of core manufacturing goods that yields relatively stable export earnings, employment creation, infrastructure development, backward and forward linkages, and development of new products in the same range of sectors.

The low export penetration index, which is used to measure the extent to which a country is utilizing market available opportunities, of Nepal indicates that Nepal has been unable to exploit market opportunities for the existing set of export items.

Items with relatively inelastic import demand such as petroleum and coal products, ferrous metals, chemical rubber and plastic, mineral products and food products weigh heavy on Nepal’s import basket.

From among the products Nepal exported with comparative advantage in 2010, considering the existing demand and supply, competitiveness, protection and intra-industry trade dynamicsbetween the two countries, the list of products having export potential to India are shown in the table

Looking at the share of Nepal’s export to India in total export of each product, it appears that Nepal is close to exhausting its existing supply capacity

Nepal is under-utilizing its potential in export of the products on which it has comparative advantage because of the inability to scale up production

There exits huge potential for intra-industry trade of processed agriculture, light manufactured and heavy manufactured goods

ChapterProduct name (HS2007 2-digit)

'08Edible fruit, nuts, peel of citrus fruit, melons

'09 Coffee, tea, mate and spices

'23Residues, wastes of food industry, animal fodder

'33Essential oils, perfumes, cosmetics, toiletries

'34Soaps, lubricants, waxes, candles, modeling pastes

'53Vegetable textile fibers nes, paper yarn, woven fabric

'55 Manmade staple fibers

'64Footwear, gaiters and the like, parts thereof

'72 Iron and steel

'73 Articles of iron or steel

'74 Copper and articles thereof

'76 Aluminum and articles thereof

57 percent of respondents are optimistic about future export prospects to India, 30 percent were pessimistic, and the remaining 13 percent were indifferent about export prospects to India

Optimism hinges on the assumption that there would be favorable political environment, investment climate, and favorable treatment of exports by India

Optimist

57%

Neutral

13%

Pesimist

30%

Critical barriers to export growth

Countervailing duty is the major concern, followed by special additional duty (withdrawn now)

More than duties, non-transparent and discriminatory applications were cited as major problems

4%

4%

7%

12%

14%

20%

44%

State level charges

Parking charge

Off-time service fee

Others/can't specify

Education cess

Special additional duty

Countervailing duty

Standard–related barriers (quarantine and TBT) are the most severe ones (as suggested by 50% respondents)

Problems lie on both Nepal side (poor labs and lack of accreditation) as well as India (non-transparent application, best-endeavour clause in the treaty regarding technical assistance)

Informal trade and payment are rampant due to these barriers

4%

7%

11%

11%

15%

16%

17%

39%

Transit state permit

Domestic support

Quantitative restriction

Technical barriers to trade

Transport hassle

Others

Rules of orgin

Quarantine-related

Nepal does not have enough production and exportable surplus mainly on industrial products (as the figures on the growth of industrial value-added in the past decade show)

Domestic value addition is extremely limited

-4

-2

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ind

ust

rial

val

ue

add

ed g

row

th (

%)

Bangladesh

India

Nepal

South Asia

Infrastructure ◦ Electricity; road-transport; standard-related

Human capital ◦ Skill deficit; high wages; labour militancy

Access to finance ◦ Collateral and high interest rates as major deterrents

Access to technology ◦ Weaknesses in technology acquisition and adaption and limited

investment in R&D

Trade facilitation measures ◦ Despite some progress, customs formalities remain way below

regional standards

Pegged exchange rate and competitiveness ◦ Real effective exchange rate seems to have revalued, eroding

competitiveness of exports to India ◦ Debate over changing the peg – no decisive conclusion◦ Points to consider: weak economic

fundamentals, institutional and political fluidity, weak tradable sector and industrial base, speculative attacks, limited links to global financial markets, less diversified production and export structure, undeveloped financial markets, and one prone to bouts of high inflation

Confusion over payment on US$ in imports from India

Illegal trade (the betel nut saga)

Analysis of major provisions of trade-related treaties and their

implementation

Quantitative restrictions are still in place without sunset clause

Rules of origin requirements are stringent

Constrains Nepal’s ability to enter into preferential trade agreements with third countries

Does not address non-transparent and discriminatory application of non-tariff and para-tariffs barriers

Mutual recognition of sanitary and phyto-sanitary certificates excludes forest products

Provisions on technical assistance “best endeavour”

Treaty covers “goods” only

Scope of freedom of transit has been restricted by the provision relating to movement of private vehicles

Need for Nepalese importers/exporters to furnish insurance or bank guarantee or any such legally binding undertaking is burdensome

In practice the importer/exporter has to submit original copies of documents, although submission of copies should suffice

The available infrastructure on long-term lease at Kolkata and Haldia are not adequate to cater to the needs of Nepalese containerized cargoes as there is no separate container yard to store Nepalese containers

Nepalese vehicles are allowed only limited entry into India, whereas Indian vehicles can spend 72 hours in Nepal and also carry goods with them on their return

Contrary to popular perception, the study found that the additional one-time lock provides additional benefits to Nepal

There is no systematic mechanism for the identification of the major points of smuggling, the reason for smuggling and identification of articles of smuggling and addressing these problems

The issue that responsibility for controlling unauthorized trade lies with authorities on both side of the border has been under-appreciated so far

Prohibition on re-export of small consignments of third country goods from India causes problems mainly for the industrial sector in Nepal; the problem may occur in other sectors as well

Treaties/agreement need to be periodically renewed, which puts relatively weaker partner in a vulnerable position

Inter Governmental Committee meetings are not held regularly; even when they are held they are bogged down with procedural issues not “trade promoting” policy-related issues

There is no mechanism for “fast track” settlement of trade disputes

According to stakeholders, there is a considerable scope for improvement on consultation/preparation on the Nepalese side

Recommendations

Accelerate enactment of SEZ Bill

Expand coverage of export incentives scheme (cash incentives) to exports to India as well

Commit internal resources to address standard-related barriers

Increase budgetary allocations to public sector research institutions such as NAST and NARC

Enhance access to credit and provide refinancing facility at subsidized interest rate for products identified by NTIS

Reduce cost of trading across the border by timely implementation of Customs Reform and Modernization Action Plan

Improve investment climate to attract investment in sectors with high export potential to India, including sectors with intra-industry trade potential

Conduct studies on: ◦ Comprehensive Economic Partnership Agreement (CEPA) with

India

◦ Addressing the challenges after the complete phase out of Agriculture Development Fee (ADF)

Relax binding constraints to economic activities such as lack of infrastructure (hydropower, road network)

Enhance human capital and R&D

Control political strikes and labor strikes that cripple export-oriented sector

Ban transport cartels through effective implementation of competition law

Upgrade testing infrastructure such as laboratories; and provide incentive to establish them on joint venture basis

Treaties/agreement should be made permanent Value addition criteria on exports to India should be

reduced to 20 percent for a period of 10 years Protocol IV of the Trade Treaty should be amended

and the list of eligible products should be replaced by HS chapters, with appropriate exception for the items included into the negative list

The Article III of the Treaty on Control of Unauthorized Trade, should provide for the following exception: “goods imported for use in agricultural, manufacturing and services sectors”

India should make a commitment to permanently waive SAD

India should allow Nepalese transporters to travel to India upto 168 hours (7 days) of entry due to (occasionally large) distance to be covered

India should provide aid for trade in addressing its supply-side constraints

India should provide moratorium on the application of non-tariff barriers

India should accept third party standard certification

Comments/questions are welcome

THANK YOU