The right balance in Indo-Nepal trade treaties

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India and Nepal forged a bilateral treaty of trade way back in July 1950. The treaty envisaged a customs union between the two countries. The trade treaty of September 1960 removed the requirement of a customs union, enabling Nepal to adopt its own tariff and trade policy, which led to its trade diversification with third countries.

The trade treaty signed in August 1971 exempted Nepal’s exports of primary products to India free of basic customs duties. This treaty offered to grant Nepal, on the basis of non-reciprocity, favourable treatment to imports into India of products manufactured in Nepal, containing not less than 90% of Nepalese and/or Indian materials manufactured in Nepal in respect of customs duty and quantitative restrictions normally applicable on them.

For other manufactured articles in which third country material are used, if value of Nepalese and/or Indian materials and Nepalese labour added in Nepal is at least 50% of the ex-factory price of the product, the government of India will provide favourable treatment to imports of such products in India.

In August 1978 India agreed to sign two separate treaties, a treaty on trade and a treaty on transit, fulfilling a long-standing Nepalese demand. In addition, the Indian demand to prevent deflection of unauthorised trade was also satisfied with the signing of an Agreement on Cooperation to Control Unauthorised Trade.

After the expiry of this treaty in 1988, a trade deadlock ensued between the two countries until a democratic government was set up in Nepal in 1990. Following this, a new agreement was signed in December 1991, which was renewed in December 1996, under a revised protocol with reference to Article V. A notable feature of this treaty was that it provided, for the first time, the Nepalese access to the Indian market free of customs duties and quantitative restrictions for all articles manufactured in Nepal on the basis of certificates of origin issued by the then HMG of Nepal (or by its designated agency, the Federation of Nepalese Chambers of Commerce & Industry), waiving the rules of origin requirement entirely.