Trade and politics

Print edition : December 08, 2001

The future of the Indo-Nepal Preferential Trade Treaty hangs in the balance.

WHEN T.K. Gupta stepped forward to receive, on behalf of Dabur Nepal, the annual Nepal-India Chamber of Commerce and Industry (NICCI) award for excellence at a function in Kathmandu, he was depressingly aware that the year 2001 could well see the end of Nepal as an expanding base for export to India. The company, among others, has been using Nepal as a base to export to India its products including fruit juices, manjan, chawanprash, hajmola and amla hair oil.

Less than a fortnight away is the moment of reckoning for the five-year 1996 Indo-Nepal Preferential Trade Treaty. Zero duty rates and removal of quantitative restrictions had brought companies such as Dabur and Nepal Lever to set up operations in Nepal with an eye on the neighbouring north and eastern Indian markets. The treaty had led to a five-fold jump in Nepal's exports to India and a doubling of India's exports to Nepal. But it is not a win-win situation, and sections of Indian industry view the treaty as a scam for funnelling third country exports to India. The treaty makes no stipulation about the level of material and labour content of the export items, but only requires that a certificate of origin be provided by the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

With the countdown to the December 5 deadline for the expiry of the treaty nearing and trade talks after four successive rounds still bogged down in mutual misperceptions about value addition, country of origin and technical confusion about safeguards, hopes increasingly hinge upon a decisive political intervention. After all, the treaty's preferential script was inspired by the Gujral Doctrine of non-reciprocity. Would India let the 1996 trade regime lapse and with it risk undermining the "special relationship" it sought to build politically with Nepal? Nepali bureaucrats and businessmen drew comfort from the statement of visiting Foreign Minister Jaswant Singh that the "spirit of the treaty" would be maintained. But it is India's Commerce Ministry that disposes. With elections to the Uttar Pradesh Assembly round the corner, the Bharatiya Janata Party is particularly attentive to the aggrieved vanaspati lobby in the State. Nepal's Minister for Forests Gopal Srestha at the NICCI event had reason to hope for a political intervention to resolve the trade tangle.

Only on November 9 did the Nepalese negotiators table a concrete proposal drawing upon the joint recommendations of the Confederation of Indian Industry (CII) for a 30 per cent value addition. Indeed it was only a week before the deadline that panic set in. In Kathmandu it is being recalled that the treaty was allowed to lapse once before: there was no treaty in 1989-90 - a time of blockade that people in Nepal would prefer to forget.

THE uncertainty that overshadows the fate of the treaty has resulted in the producers of vanaspati in Nepal shelving further imports of palm oil from Indonesia and Malaysia. Plans for doubling their capacity also have been put on hold. Vanaspati tops the list of Nepal's exports to India. Exports have jumped from an insignificant level in 1996 to a quantity worth Nepali rupees 1.6 lakhs in 1997-98 and 2.9 lakhs in 1998-1999. With the duty on imports of palm oil having been doubled from a rate of 35 per cent in this year's budget, producers in Nepal have been reaping a bountiful harvest from the widening differential in duty rates in the two countries. Vanaspati exports for 2000-2001 have climbed to 1.25 lakh tonnes and for April-September 2001, they are already 87,000 tonnes.

Palm oil producers of Andhra Pradesh have through Chief Minister N. Chandrababu Naidu's influence with the coalition government at the Centre, lobbied the Commerce Ministry to raise high tariff walls on imports of palm oil. However, zero-duty exports of vanaspati from Nepal have breached that wall. Indian producers of vanaspati are crying foul about a "surge". One hundred and twenty-six units have shut down in U.P. and Bihar and the overall capacity utilisation is down by 30 per cent. A quantity of 15 kg of Nepali vanaspati is cheaper in India by Rs.190 and Indian producers are turning protectionist. Vanaspati producers in Nepal protest that their exports account for a minuscule share of the huge Indian market. "In any case, the differential rate in duty will be soon wiped out when India ascribes to the WTO regime," says Hulas Chand Golcha, a major vanaspati producer. His son Diwakar Golcha adds that States such as U.P. have already introduced a 20 per cent sales tax on imports of vanaspati thus squeezing the likes of him out. On top of that, Nepali-produced vanaspati has to compete with branded premium names such as Dalda, further undermining its competitive edge, Golcha explained. The fate of about 10 units is at stake. Purshottam Ojha, the Joint Secretary involved in the trade talks, says that some 15 units are implicated in the context of exports, which are said to have "surged". Involved here is an investment of 10 billion Nepali rupees and a labour force of 50,000. However as the Indian Ambassador to Nepal said in an interview to Nepali Times, "Nepal's interests were served by large dollar imports and selling goods with marginal value addition to India."

In October, vanaspati manufacturers from India aired their grievances at a seminar in Kathmandu. Joining them were representatives from four other industries, which were also affected by the alleged "surge" - those producing acrylic yarn, zinc oxide, steel pipes and copper winding wires. Producers in Punjab (Ludhiana) and Haryana say that the raw material for acrylic yarn, acrylonitrile, attracts 46 per cent duty in India, but none in Nepal. The international price of acrylic fibre is Rs.65 a kg and Nepal exports acrylic yarn at Rs.68. That would mean spinning had cost only Rs.3 a kg. Producers in Punjab and Haryana have pushed the government to initiate anti-dumping measures despite Nepal's protests. The 1996 treaty does provide for consultations in the matter of disputes over surges and dumping, but evidently the consultations have not been enough. Consequently, producers lobbied with State governments for redress. The result is a special sales tax on vanaspati, a notification on anti-dumping measures on imports of zinc oxide and acrylic yarn and the levying of countervailing duty on the maximum retail price rather than the transaction price. The latter has virtually wiped out exports of two of Nepal Lever's toothpaste brands. Toothpaste had been the second biggest item in Nepal's export basket.

INDIAN embassy sources in Kathmandu feel that had timely action been taken on the complaints of Indian industry about the "surge", the series of unilateral actions which have been initiated could have been avoided. "Since August 2000 the government has been asking for consultations on surge, and it has taken Nepal a year to begin talks when in fact the treaty was coming up for review. In the interim we are seeing hydra-headed provisions in response to industry grievances, provisions which will not be easy to roll back, whatever happens to the treaty," embassy sources said.

For over a year, sections of Indian industry, in a high-profile media campaign, have been targeting the "surge" in exports from Nepal. Along the way the campaign had picked up security concerns, with accusations of Pakistan's Inter-Services Intelligence using Nepali businessmen to under-invoice exports to finance its money-laundering operations. One example was the report in an Indian financial daily titled, "Himalayan blunder: Treaty with Nepal turns nightmare as imports threaten security." Also clubbed with the authorised trade was unauthorised trade, especially the smuggling of Chinese goods across the open border. The Nepali media countered it with the charge that India indulged in Nepal bashing. Significantly, a year later these concerns have peeled away, and the focus is back on the authorised trade - facilitated by the 1996 treaty.

"There have been two differing interpretations of the treaty," Rukum Rana, the outgoing NICCI president, candidly acknowledged. He said that while India saw it as a push to developing a broad base for Nepali manufacturing to respond to an integrated market, Nepal saw it as opening the door to the Indian market. Reconciling the two interpretations and perceptions has not been easy. India had expected that sourcing would be with Indian raw material, but discovered later that there was third country sourcing with very little value added. It took an economic analyst who writes under the pseudonym Artha Beed to call a spade a spade - "Overnight, businessmen engaged in informal trade with India became industrialists." And if the treaty regime collapsed - "trade would not stop; it would go on through smuggling", senior industrialist, Padma Jyoti said.

His colleague in the FNCCI, Ram Bhakta Srestha, explained that if Nepal had benefited from the treaty, so had India, equally. There were disappointments on both sides. Large Indian investments had not come to Nepal. The incentives offered paled into insignificance when compared with Myanmar or States at home, say embassy sources. Equally, there was the impact of the six-year-old Maoist insurgency in Nepal. The collapse of the talks between the Maoists and the government after a four-month ceasefire, threatens a civil war situation with the Maoists attacking army posts for the first time. More particularly, the Maoists had in an earlier 13-point memo to industrialists called upon them to get rid of Indian employees. Also in the first spate of renewed strikes by the Maoists, a bomb was found outside the Nepal Lever factory in Heutada.

Is there room for a mutually agreed, revised treaty regime? India takes a tough stand at the talks: it proposes a 50 per cent cap on origin of material or value added and enforceable safeguards. Nepal, though belatedly, seems to have awakened to the seriousness of it. A suggestion for suo motu temporary extension of the treaty was doing rounds. "It cannot be on the same terms," say embassy sources. Will exigencies of the "special relationship" win out, or politics at home?

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