The eight-party government is presenting its first national budget in the second week of July. Meanwhile, Nepal Rastra Bank (NRB) has predicted a 2.5% growth rate for the new fiscal year, which is lower than Nepal’s population growth. At the same time, the Indian economy is growing at an average of 8%. In fact, Indian economy is also driving Nepal’s economy since Indian economic policy decisions affect Nepal. Most of the export-oriented industries here have become unviable after the new Indian budget. Nepali industrialists are demanding abolition of the Duty Repaid (DRP) system and full implementation of Indo-Nepal Trade Treaty, 1996.

As per the statements of finance ministry officials, there are not going to be major policy changes in the new budget as Nepal is still in a transition phase and the budget has to be presented with consensus of all parties. On the other hand, the business community is demanding relief and concessions in duty structures for reconstruction of the economy and new industrial policy for speeding up growth, generating employment and increasing living standards of the people.

“Nepal’s import from India is approximately two-thirds of the total imports and export from Nepal to India has increased 11 times since the 1996 treaty,” said the consulate of India in Birgunj recently. But according to experts, Nepal’s import from India is not reflected in official figures: Import that is taking place through informal channels equals import through formal channels. Nepal’s trade deficit with India is over Rs. 65 billion a year. Due to quote restrictions, the Indo-Nepal Trade Treaty, 1996, revised in 2002 and renewed in March 2007, is restrictive.

As per NRB, Nepal has purchased 41 billion of Indian currency during nine months of the current fiscal year by selling hard currency. Due to the nature and volume of trade with India, Nepal has had to make Indian currency stable. As a result, Nepali currency has become stronger than the dollar and other currencies.

Export of items like vegetable ghee has also suffered due to proposed reduction of customs duty as per WTO agreement. Similarly, countervailing duty (CVD) levied while exporting goods from Nepal is a major concern of Nepali businessmen. The FNCCI is demanding a waiver in excise duty on raw materials exported to Nepal and levying CVD on Nepal’s exports only on transaction value.

India’s main concern in trade with Nepal lies in the probability of trade deflection, i.e. goods being re-exported to India. That is why the DRP system is in place. But this system is discriminatory and goes against the principle of ‘just enrichment’, which states that duty should be refunded only to the person who has borne tax burden and the refund cannot be given to a third party.

One interesting feature of the 1996 Treaty is that export from India is sometimes treated as goods for home consumption and at other times as export. Besides, there is a separate excise and customs procedure for export to Nepal. In case the goods are exported in Indian currency, it is not treated as export. This clearly shows the lack of proper mechanism and unfair trade agreement. Thus trade negotiations should be concluded only after proper homework and they should be in the mutual interest of both parties. Only then will India and Nepal benefit from free trade.