But some Indian businesses are not happy, and they are getting New Delhi to turn the screws.
It is a win-win situation for India and Nepal: this huge growth in bilateral trade after the 1996 treaty. In four years, Nepal's exports to India have grown a whopping seven-fold. India's exports to Nepal have trebled. So what's the problem? Why are the Indian government and business leaning on Nepal to change the rules, even re-negotiate the 1996 treaty that made all this possible?
Answer: some business lobbies along Bihar and Uttar Pradesh have been affected by Nepal's cheaper (and often better-quality) exports. They have convinced the powers that be in New Delhi that these exports have "surged" because Nepal is re-exporting third country goods to India. The lobbies have launched a media campaign vilifying Nepali business, accusing it of everything from being a hotbed of Pakistani intelligence to a conduit for smuggled Chinese goods.
A group of Nepali businessmen who visited New Delhi in mid-February got a stiff warning from Indian babudom: do something about value-addition, or else. "They were very tough," recalls Prabhakar SJB Rana, co-chairman of the Indo-Nepal Joint Economic Committee which is made up of the Confederation of Indian Industry (CII) and the Federation of Nepalese Chambers of Commerce and Industries (FNCCI). The JEC met on 13 February. Rana thinks the pressure was exerted not because the CII wanted to but because the government was taking a harder line on the CII.
In New Delhi, FNCCI agreed to look at the entire list of goods being exported from Nepal and examine the value-addition. Effectively there are less than ten main export items from Nepal to India: toothpaste, soap, ghiu, polyester yarn and jute goods, to name a few. But FNCCI is said to have made it clear it would be able to do little about the smuggling and security concerns that seem to be rattling the Indians.
Both Nepali and Indian businessmen agree that value-addition is a good concept, since it means more employment and genuine industrialisation. CII's Aloke Mookherjea told us during a recent visit to Kathmandu: "Manufacturing should not just merely be cutting, polishing, finishing or screw driving. The value addition norm should provide some benefits to the country and its people."
Although the CII has shown considerable understanding of the Nepali position, that does not seem to be the case with other trade groups, including the Federation of Indian Chambers of Commerce and Industry (FICCI) which represents the petty traders and industrial groups and which has taken its lobbying and media campaign into high gear to pressure Nepal.
The dilemma for Nepali business is: do we stick to our guns and risk losing the gains of the past five years, or compromise pragmatically and get what we really want-which is more Indian investment that will bring jobs, royalty and export revenue. There are indications that there may be a few symbolic gestures on value addition and "surge" control in the run-up to the automatic renewal of the 1996 treaty later this year.
A meeting of Indian and Nepali government officials slated for mid-February was postponed till end-March at India's request. There are indications the Indians will insist on changing the trading rules as a pre-condition to renewal. Nepali business sources tell us that specific rules for value addition-lower than the World Trade Organisation requirements-and stricter enforcement of the definition of manufacturing may be introduced by year-end, if only to keep India happy.
In 1995/96 Nepal's exports to India were NRs 3.68bn, by 1999/00 it had swelled to NRs 22.62bn. Indian exports, on the other hand, grew from Rs24.39bn to NRs 40.93bn in the same period. Nepal's trade deficit with India has remained about the same. But with the present bad blood generated in New Delhi, it may not be business as usual. If the concerns of Indian manufacturers in Bihar and Uttar Pradesh are not appeased, they will continue to clamour about the treaty and its automatic renewal. This is a difficult situation for Nepal: some inefficient and protectionist businesses in the border states want to turn on the heat on Nepal, and they are using the treaty as a scapegoat. And by all indications, New Delhi is listening to them because it fits in nicely with its own security threat perceptions from neighbours like Nepal.
What all this means is that the days of the Gujral Doctrine of non-reciprocity with India's smaller neighbours are over. Former Indian Prime Minister IK Gujral was the architect of the 1996 treaty, and his argument was trade would allow the neighbours to prosper and present less of a security threat to India.
So, to recap:
. India says there has been a "surge" (an unnatural growth in export of certain products). Nepal's response: yes, exports of some goods may have grown fast, but let's define "surge" and look at individual products.
. Indian investors in Nepal businesses want more industrial security and less delays in permits for non-Nepali staff. Nepal response: nil. Caught between a divided ruling party, an aggressive opposition, and the Maoists, the government has had little time to look into such matters.
. Indian businesses have also brought up the treaty clause on equal treatment, especially as regards the Nepali court ban on the import of Indian vehicles pending resolution of the emission standards issue. Nepali position: the ban applies only to vehicles that don't have Type Certification by the government of India and some Indian cars are still coming in.
. All Nepali business wants from India is predictability so that trade can continue to grow without obstacles from petty business lobbies, media and bureaucrats every time a Nepali product outsells an Indian one.
The 1996 treaty has a clause to address the issue of "surge". It stipulates that whenever there is a surge, "the two governments shall enter into consultation with a view to taking appropriate measures." (read: Kathmandu shall acquiesce and clamp down on any exports that India objects to). Surge is tricky, partly because it is entirely up to India to define what it is. Also, a product that surges in one market may be scarce in another and is often corrected by demand and supply. Again to sell more is what all business is about.
The issue of security hinges on the Maoist insurgency, and may be beyond anybody's control. But nitty-gritty labour issues have been a problem mainly because the government has been too distracted with trying to survive day to day. The court injunction on Indian vehicles because of litigation by environment groups here is the latest concern for India. A Nepali vehicle importer has also filed a writ questioning the ban, which is what FNCCI has been using to assuage Indian tempers. "Left to us we can resolve the economic and trade matters ourselves," another Nepali member at the JEC meeting told us. "But there also seem to be larger political issues at play about which we can do little."
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FNCCI officials say a value addition amendment to the 1996 treaty will not hurt genuine manufacturers. Those that will be hit are fly-by-night companies that have found loopholes to qualify for zero-duty exports. FNCCI has launched a study on the value addition in all Nepali exports to see if it comes within the 30 percent (Nepali and Indian inputs) that is the benchmark now being discussed. The study is to be completed by 13 March.
India has set 30 percent value addition for Sri Lankan exports and is also negotiating a similar treaty with Bangladesh, which is demanding a pact similar to that between Nepal and India. A 30 percent benchmark may affect some Nepali exports, wires made from scrap, for example, but other major products may still fall within the range. CII is also said to have assured FNCCI that it would do its best to ask the Indian Government to give products already being exported from Nepal, but which don't meet the value addition criteria, some more time to come within the acceptable range. Most importantly, these changes could be a wake-up call for Nepali businesses to turn more business-like because all trade favours will end after the World Trade Organisation regime takes over.
