India-Nepal Commercial Relations
India is Nepal's largest trade partner and source of foreign investments; India is also only transit providing country for Nepal.  India accounts for about 60% of Nepal’s merchandise trade, one-third of trade in services and 44% of FDI commitments.

Bilateral Trade
The trends in India-Nepal merchandise trade over the last few years (Nepalese fiscal year: July 16-July15) are as under

• Duty free access to each other’s primary products as per agreed list, which has been expanded in 2009 Treaty.
• Nepalese manufactured products are allowed non-reciprocal access to the Indian market, free of basic customs duty, on the basis of Certificate of Origin issued by a GoN designated authority – FNCCI, if the goods are manufactured in Nepal with Nepalese and/or Indian inputs; or, with at least 30% local value addition, if third country inputs are used; and, involves substantial manufacturing process leading to change in HS classification at four-digit level;
• Annual quotas for duty free access in respect of four items – vegetable fats (100,000 tonnes) acrylic yarn (10,000 tonnes), copper products (10,000 tonnes) and zinc oxide (2,500 tonnes);
• MFN list of three items – cigarettes, alcohol (excluding beer) and cosmetics with non-Nepalese and non-Indian brands;
• Nepalese goods attract Countervailing Duty (CVD) equal to excise duty on similar products in India;
• Goods manufactured by small scale units in Nepal enjoy the same benefits as SSIs in India with regard to tax exemption;
• The exports and imports of goods not subject to prohibitions or duties are also allowed to move through the traditional routes on common border.

The main changes introduced in the 2009 Trade Treaty are:

• The validity of the Treaty has been increased from five to seven years, along with the provision of automatic extension for further periods of seven years at a time. 
• No discrimination will be made in respect of tax, including central excise, rebate and other benefits to exports merely on the basis of payment modality and currency of payment of trade.
• The time limit for temporary import of machinery and equipment for repair and maintenance has been raised from 3 to 10 years.
• Several new items of export interest to Nepal have been added to the list of primary products giving these items duty free access to India without any quantitative restrictions. These include floriculture products, atta, bran, husk, bristles, herbs, stone aggregates, boulders, sand and gravel. 
• Criterion for calculating value addition for gaining preferential access to India has been changed from ex-factory basis to FOB basis.
• India will consider waiver, on request from GON, of any additional duty that may be levied over and above CVD.
• Both sides will exempt exports of goods, which are already covered under forward contract, from imposition of restrictions on exports.
• Both sides will grant recognition to the sanitary and phyto-sanitary certificates issued by the competent authority of the exporting country based on assessment of their capabilities.
• Articles manufactured in Nepal, which do not fulfil the criteria for preferential access will be provided MFN access to the Indian market.  The certificate of origin in case of such exports has been prescribed.
• The provisions regarding safeguard measures in case of serious injury to the domestic industry have been streamlined.
• A joint mechanism, comprising local authorities will be established to resolve problems arising in clearance of perishable goods.
• An Inter-Governmental Sub-Committee (IGSC) at the joint secretary-level has been established. Existing Inter-Governmental Committee (IGC) at the Secretary level will meet once in six months and the IGSC will meet at the interval of the two IGC meetings.
• Four additional Land Customs Stations (LCSs) will be established to facilitate bilateral trade: Maheshpur/Thutibari (Nawalparasi); Sikta-Bhiswabazar; Laukha-Thadi; and Guleria/Murtia, bringing the total number of Stations to 26.
• Bilateral trade will be allowed by air through international airports connected by direct flights between Nepal and India (Kathmandu/Delhi, Mumbai, Kolkata and Chennai).
• India will review and simplify the existing administrative arrangements for operationalisation of fixed quota for acrylic yarn, copper products and zinc oxide.
• Several additional products will be considered as wholly produced or manufactured in Nepal for the purpose of gaining preferential access to the Indian market. It includes articles collected in Nepal fit only for recovery of raw materials and waste and scrap resulting from manufacturing operations in Nepal. It also includes products taken from seabed/ ocean floor/ sub-soil for which Nepal has exclusive rights under UNCLOS.
• India will assist Nepal to increase its capacity to trade through improvement in technical standards, quarantine and testing facilities and related human resource capacities.

 
Agreement of Cooperation to Control Unauthorised Trade

A revised Agreement of Cooperation to Control Unauthorised Trade between India and Nepal was signed on 27 October 2009. The new Agreement removes restriction imposed in the previous Agreements on export of goods imported by one party from the other to the third countries, without involving any manufacturing activity.

Transit Arrangements between India and Nepal

India and Nepal have a Treaty of Transit, which confers transit rights through each other’s territory through mutually agreed routes and modalities. The treaty of transit was last renewed for seven years in March 2006. The key features are:

• India offers 15 transit routes from Kolkata/Haldia to Nepal for its third country trade.
• Goods can move by road or rail.  The creation of ICD in Birgunj and extension of railway line from Raxaul to Birgunj has facilitated direct movement of goods in transit by rail to Nepal.
• A simple customs procedure has been put in place for Nepal’s third country traffic.
• Since 1993, India also allows movement of goods from one part of Nepal to another through a simple process of customs undertaking.
• India has extended Nepal direct transit routes to Bangladesh for bilateral and third country traffic. One road route and one rail route have been notified. The road route is through Kakarbitta-Panitanki-Phulbari-Banglabandha corridor. The rail route is through Radhikapur-Birol. 

In response to request from Nepal, India has agreed to allow an alternate rail route through Rohanpur-Sighabad as the Radhikapur-Birol route has been rendered unusable after the gauge conversion of the rail track on the Indian side.

India has also agreed to allow Vishakhapatnam port as an additional port for Nepal’s trade with other countries.

Other Bilateral Agreements in the economic field

India and Nepal signed a Double Taxation Avoidance Agreement (DTAA) in 1987.  The two countries are currently engaged in negotiating a revised DTAA. The two governments are also negotiating a Bilateral Investment Protection and Promotion Agreement. India and Nepal signed a Rail Services Agreement (RSA) in May 2004, which was modified in December 2008.  The two governments are currently engaged in a comprehensive review of the RSA. A Motor Vehicles Agreement (MVA) for passenger vehicles was initialled in February 2004. The two countries initiated a revised Air Services Agreement on September 9, 2009.

US$ 100 mln. line of credit from Exim Bank of India to Government of Nepal

India agreed to provide a USD 100 million Line of Credit (LoC) to Nepal in June 2006 for execution of infrastructure development projects as prioritized by Nepal. Exim Bank of India and GON signed an agreement in September 2007, following which, LoC was operationalised in January 2008. The projects identified for implementation under the LoC include ten road development projects, rehabilitation of 15 MW Devighat Hydro Power Project (HEP), development of 27 MW Rahughat HEP, Nepal portion of the Muzaffarpur- Dhalkebar cross-border transmission line and rural electrification projects.


Trade related infrastructure
 
The Government of India is providing extensive assistance to Nepal to develop its skill base and trade related infrastructure. During the visit of the Prime Minister of Nepal to India in August 2009, India has agreed to provide following additional assistance:

• Construction of a polytechnic at Hetauda at an approximate cost of IRs.22 crores.
• Construction of Integrated Check Posts (ICPs) at Birgunj-Raxaul and Biratnagar-Jogbani at an estimated cost of IRs.200 crores. These modern facilities would contribute to an effective and integrated border management system and considerably facilitate people-to-people contact and trade.
• To enhance connectivity of feeder and lateral roads in the Terai (hulaki roads), twenty roads of a total length of about 660 kms would be undertaken with Indian assistance in the first phase at an estimated cost of IRs.805 crores.   
• To improve rail connectivity between the two countries, two cross-border rail links would be constructed with Indian assistance at the following two points along the India-Nepal border at an estimated cost of IRs.680 crores:
  • (i)    Jogbani-Biratnagar ( 18 Kms)
  • (ii)    Gauge conversion of Jayanagar to Bijalpura (51 kms) and extension of the same to Bardibas (17 kms).
• For accelerated development of financial markets in Nepal the Government of India would provide technical assistance for establishment of a Central Depository System (CDS) in Nepal at an estimated cost of IRs.9.2 crores towards consultancy, development of application software and training.
• In order to further assist with human resource development in Nepal, the Government of India agreed to double the number of scholarships, and also increase the number of slots for training and exchange programmes for Government of Nepal officials to further strengthen capacity building and expand interaction between the civil servants of the two countries.

 

Institutional Arrangement

An Inter-Governmental Committee (IGC) headed by Commerce Secretaries considers all issues relating to trade, transit and cooperation to control unauthorised trade between the two countries.