History of Nepal-India trade dependency: Origin to Present

Summary

Nepal’s trade dependency on India has deep historical roots, with trade agreements dating back to 1950. As of 2022, India accounts for nearly two-thirds of Nepal’s trade, resulting in a significant trade deficit. Despite preferential trade agreements, Nepal struggles with bureaucratic hurdles and non-reciprocal terms that limit the benefits of these arrangements. The trade imbalance, combined with the lack of industrial competitiveness in Nepal, has left the country heavily reliant on Indian imports, particularly low-value agricultural products. To address these issues, Nepal must diversify trade partners, improve local industries, and seek a more balanced trade relationship with India.

Takeaways

• 😀 Nepal's trade dependency on India is high, with around two-thirds of its total trade reliant on Indian exports and imports.
• 😀 In 2022, Nepal exported goods worth NPR 1.21 billion to India, and imported goods worth NPR 1.82 billion, leading to a trade deficit with India.
• 😀 Nepal's trade relationship with India has historical roots, with the two countries sharing an open border since the 18th century and formalizing ties through treaties like the 1950 Treaty of Friendship.
• 😀 Trade dependency is described as 'asymmetric interdependence', meaning Nepal's economy suffers more if the trade relationship with India is disrupted, while India would face fewer consequences.
• 😀 Nepal's historical dependence on India for trade was reinforced after the 1950 treaty, which granted Nepal access to Indian ports and trade routes, significantly shaping Nepal's trade policies.
• 😀 The liberalization of Nepal's trade policies in the 1980s and 1990s led to an increase in imports from India, but also intensified competition and contributed to growing trade imbalances.
• 😀 While preferential access to Indian markets has been granted for many Nepalese products, complex regulations and barriers often limit the actual benefits of this access, especially for small-scale producers.
• 😀 Nepal's trade deficit with India is compounded by its limited export capacity, especially in agricultural products, which tend to be low in value compared to imports.
• 😀 Nepal's trade agreements, including the 1991 and 1996 trade treaties with India, have given Nepal some advantages, such as tariff-free access to Indian markets, but these benefits have not been sufficient to curb the trade deficit.
• 😀 The presence of large Indian multinational companies in Nepal, supported by favorable trade agreements, has contributed to the dominance of Indian goods in the Nepali market, making it harder for local businesses to compete.
• 😀 Nepal faces the challenge of balancing its dependence on India while trying to diversify trade relationships with other countries, especially as global trade dynamics and competition in the region evolve.

Q & A

What is the primary reason for Nepal's high trade dependency on India?

Nepal's trade dependency on India is largely due to its geographical location, historical ties, and the open border between the two countries. This makes India the main trade partner for Nepal, accounting for two-thirds of Nepal's total trade.

What is the significance of the 1950 Treaty of Friendship between Nepal and India?

The 1950 Treaty of Friendship marked the beginning of close economic cooperation between Nepal and India. It provided provisions for trade, commerce, and transit, facilitating Nepal's access to international markets through India, and laid the foundation for Nepal's reliance on Indian trade routes.

How does Nepal's trade imbalance with India affect its economy?

Nepal faces a significant trade deficit with India, meaning it imports far more from India than it exports. This trade imbalance puts pressure on Nepal's economy, as it leads to a continuous outflow of foreign exchange and exacerbates the country’s dependence on India for essential goods.

What role does the geographical location of Nepal play in its trade dependency on India?

Nepal is a landlocked country, bordered by India on three sides and China to the north. Due to the lack of direct access to sea ports, Nepal relies heavily on India for trade and transit, which makes it dependent on Indian infrastructure and market access.

Why is Nepal's export to India often at a disadvantage, leading to a trade deficit?

Nepal's exports to India are often at a disadvantage because many of the products are low-value agricultural goods. Furthermore, while Nepal benefits from preferential trade access to India, non-tariff barriers, complex paperwork, and trade restrictions limit the competitiveness of Nepalese goods in the Indian market.

How did the trade agreements between Nepal and India evolve over the decades?

The trade agreements between Nepal and India evolved through various treaties, starting with the 1950 Treaty of Friendship. Subsequent agreements in 1961, 1971, 1991, and 1996 made provisions for duty-free access, preferential treatment, and improved trade relations, although Nepal’s dependency on India remained a key issue.

What impact did the liberalization of trade policies in Nepal in the 1990s have on its trade with India?

Nepal's liberalization of trade policies in the 1990s, especially after adopting an open market policy, led to increased imports from India. This exacerbated Nepal's trade deficit, as Indian goods became more competitive in the domestic market due to the reduction of trade barriers and the influx of multinational companies.

What challenges did Nepal face in terms of export growth despite trade agreements with India?

Despite receiving preferential access to the Indian market, Nepal’s export growth remained slow due to barriers such as bureaucratic hurdles, complex customs procedures, and a lack of value-added products. Additionally, the low value of Nepal’s exports and increased competition from Indian goods hindered Nepal’s ability to capitalize on trade agreements.

How did the political and economic shifts in Nepal affect its trade dependency on India?

Political changes in Nepal, including the move toward liberalization and privatization in the 1990s, increased its trade dependence on India. Economic liberalization led to more competitive Indian products flooding the Nepali market, while the country struggled to diversify its trade and reduce its reliance on India.

What are the current challenges Nepal faces due to its trade deficit with India?

Nepal’s trade deficit with India continues to be a significant challenge. It contributes to economic instability, as the country relies on imports from India for essential goods, and struggles to boost exports. Additionally, the appreciation of the Indian rupee and fluctuating exchange rates make Indian goods more expensive for Nepali consumers.