The basic structure of trade agreement between India and Nepal remains the Indo-Nepal Treaty of Trade, 1991, as modified by letters of exchange of February 16, 1993; December 3, 1996; March 2, 2002; and October 28, 2009. Several Protocols to the treaty up to December 3, 1996, were aimed to provide Nepal more favourable access to the Indian market. This resulted in a phenomenal increase in Nepalese exports to India from 1996-2002. However, imports of certain products such as hydrogenated oil, copper wire, acrylic yarn, etc, took place merely taking advantage of the marked differential in the customs duties on such products in the two countries. The surge in imports of such products adversely affected the livelihood of small-scale manufacturers of such products in India. Reacting to the affected lobbies, India in its letter of exchange of March 2, 2002, imposed twin rules of origin criteria on Nepalese imports as also set quota restrictions on four products, canalising them through public sector agencies.
* Indra Nath Mukherji, Revision of India-Nepal Treaty of Trade and Its Implications for Strengthening Bilateral Trade and Investment Linkages, RIS-DP 161, RIS, January 2010