Commercial and Eocnomic Relations

India is Nepal’s largest trade partner and source of foreign investment; India is also the major transit providing country for Nepal.

(a)       Trends in trade and investment

(i)         Bilateral Trade

Bilateral trade was US$ 2.28 billion during Nepalese fiscal year 2005-06 (begins on July 16). Nepal’s import from India amounted to US$ 1652.16 million and exports to India aggregated US$ 627.82 million with India. During fiscal year 2006-07, Nepal’s total trade with India was about US$ 2.46 billion; Nepal’s exports to India were about US$ 645.71 million; and imports from India were about US$ 1.81 billion. While exports to India increased by about 2.8%, its exports to the rest of the world declined by 0.9%; its imports from India grew by 9.9%, while imports from rest of the world grew by 10.3%.

There has been strong growth in bilateral trade since the revised Trade Treaty was signed in 1996. Since the revision of India-Nepal trade treaty in 1996, Nepal’s exports to India have grown over 8 times and total bilateral trade has grown over 5 times. Over 96% of increase in Nepal’s total exports worldwide since 1996 has been on account of India.

This period has also seen an increase in India’s share in Nepal’s foreign trade. During the early 1970s, India absorbed almost all of Nepal’s exports and accounted for nearly 90% of Nepal’s imports. However, India’s share in Nepal’s foreign trade dropped below 30% by mid-1990s. Since the 1996 Treaty, India’s share in Nepal’s export has grown from 18.5% in 1995-96 to 68.9% by July 2007. India’s share in Nepal’s imports has also reached nearly 61.4% by July 2007, from 32.8% in 1995-96. Today, India accounts for nearly two-third of Nepal’s foreign trade.

Nepal’s main imports from India are petroleum products (29%), motor vehicles and spare parts (8.3%), M. S. Billet (4%), medicines (4%), machinery and spares (3%), cement, and chemicals. Nepal’s export basket to India mainly comprises vanaspati (10%), and range of other semi-processed and processed food products. Other major exports include toiletries, twines, pulses, sacks, polyester yarn, cardamoms, readymade garments, etc. Steel strips and sheets, processed from raw material imported from India, are also emerging as major exports from Nepal to India.

Indian firms are the biggest investors in Nepal, accounting for about 44% of total approved foreign direct investment of IRs 22.5 billion (a little over US $ 346 million) and also for 28.2% of 1281 operating ventures with foreign investment. China is the second largest investor with 12% share in cumulative investments and Japan is third with 10% share.

          Nepalese financial year (July 16 - July 15)

          Growth in trade with India (in %)

(ii)        Investment

Indian ventures in Nepal are found in manufacturing, services (banking and insurance) and tourism industries. UTL, a consortium of VSNL, TCIL and MTNL, together with a Nepali partner is the first private sector player in the telecommunication sector in Nepal. Other large Indian investors include Dabur, ITC, Hindustan Lever, CONCOR, SBI, PNB, LIC, Oriental Insurance, Asian Paints, and Colgate-Palmolive. The prevailing picture about investment by Indian ventures in Nepal is summarized below:

Indian Investments in Nepal: NRs in Million

Nepal’s transit trade is routed through the port of Kolkatta/Haldia and fifteen designated transit routes between Kolkatta and India-Nepal border. In addition, Nepalese trade traffic to Bangladesh also transits through India. 

(b)       Bilateral Framework

The bilateral framework for trade and transit is provided by the India-Nepal Treaties of Trade, of Transit, and Agreement for Co-operation to Control Unauthorised Trade 1991. The Trade Treaty valid for five years was renewed through an exchange of letters on December 3, 1996 and March 5, 2002 and automatically renewed for another five years in March 2007. Under the Treaty of Trade, India provides, on a non-reciprocal basis, duty free access, to the Indian market for all Nepalese-manufactured articles barring a short negative list (cigarettes, alcohol and cosmetics), subject to the conditions, since March 2002, that the exports meet the domestic value addition requirement of 30% and change in HS classification at the four-digit level in the course of manufacture or processing in Nepal. After the March 2002 revision, annual quotas have been prescribed for duty-free exports to India for four sensitive items - vegetable fats (100,000 tonnes) acrylic yarn (10,000 tonnes), copper products(10,000 tonnes) and zinc oxide (2,500 tonnes).

Bilateral trade takes place generally in Indian rupees, but Nepal's central bank maintains a list of items that can be imported from India in dollars. Currently, there are about 100 items on the list. Indian rupee is legal tender in Nepal and is freely convertible. The exchange rate has been maintained at NRs. 1.6 per Indian rupee.

India and Nepal have also negotiated a bilateral cooperation agreement on standards between Bureau of Indian Standards and Nepal Bureau of Standards and Meteorology.

The India-Nepal Treaty of Transit, renewed every seven years, provides for port facilities to Nepal at Kolkatta and specifies 15 transit routes between Kolkatta and the India-Nepal border. As requested by the Nepalese side, a separate Customs Cell at Haldia has become operational from 16 August 2004. For bilateral trade, 22 entry/exit points are provided along the Indo- Nepal border. The Transit Treaty was last renewed in March 2006. The Agreement for Cooperation between India and Nepal to Control Unauthorised Trade was automatically renewed for five years in March 2007.

The two governments are negotiating a Bilateral Investment Protection and Promotion Agreement. The two countries already have a double taxation avoidance agreement since 1987.

India and Nepal signed a Rail Services Agreement in May 2004, to extend cargo train service to the Inland Container Depot (ICD) at Birgunj in Nepal. ICD has been constructed with World Bank Assistance of US$ 17 million, while India has constructed the rail tracks which link the ICD with the Raxaul railway station in India. The ICD became operational on 16 July 2004. A Container Corporation of India-led joint venture Himalayan Terminal Private Ltd. is operating the ICD.

A Motor Vehicles Agreement for passenger vehicles, initialled on 23 February 2004 awaits formal signature. The agreement envisages bus services between India and Nepal on 14 routes through 5 border points on reciprocal basis. 53 buses will operate under this agreement everyday. Individuals travelling to either country in their personal vehicles would also be able to cross over into the other country without payment of any charge for the first five days.

In accordance with the provisions of the bilateral Air Services Agreement signed in 1997, in addition to Indian Airlines and Nepal Airlines Corporation, private airlines from the two countries have been designated to provide air services between the two countries. Jet Airways and Jet Lite (Air Sahara) from the Indian side and Cosmic Air from the Nepalese side also operate air services between the two countries.

Government of India is committed to improving cross-border trade related infrastructure. These include upgrading the four major custom checkpoints at Birgunj-Raxaul, Biratnagar-Jogbani, Bhairahawa-Sunauli and Nepalgunj-Rupediya to international standards; building an oil pipeline between Raxaul and Amlekhgunj, through a joint venture between Indian Oil Corporation and Nepal Oil Corporation; upgrading approach highways to the border on the Indian side; upgrading and expanding the road network on the Nepalese side; and, broad gauging and extending rail links to Nepal. An Inter-Governmental Committee on Trade, headed by Commerce Secretaries, meets every year to consider policy, regulatory and infrastructure issues in India-Nepal trade.

(c)       India – Nepal Co-operation in Water Resources:

Rivers flowing from Nepal into India constitute an important part of the Ganges River System. They are a major source of irrigation in the Gangatic plains but also of devastating floods in north Bihar and Uttar Pradesh. Nepal’s enormous hydropower potential, estimated at 83,000 MW, of which 44,000 MW is considered economically feasible, could transform Nepal’s economy. There is enormous scope to augment Nepal's current about 600 MW installed hydropower generation capacity for meeting Nepal's own growing needs and earning valuable foreign exchange.

Bilateral cooperation is aimed at mutual benefits in the areas of irrigation, flood control and power generation. However, after a promising start with the Kosi and Gandak projects between independent India and Nepal, there has been little progress in bilateral cooperation for harnessing the rivers for hydropower and irrigation. Indian assistance helped create about 20% of Nepal’s irrigation potential and over 10% of its installed hydropower capacity (through 3 small projects, besides power from Kosi and Gandak).

India’s decision to fund the INR 30 crore rehabilitation project for Devighat HEP, offer to provide financial support for the 250 MW Naumure Storage Power Project in Nepal, Government of Nepal’s decision to utilise the USD 100 million line of credit from Government of India for the construction of the 27 MW Rahughat HEP and to part-finance the construction of four high voltage cross-border transmission lines on the Nepalese territory represent further Indian assistance for the development of Nepal’s water resources.

Cooperation for flood control and management has also made modest progress. In addition, the two governments engage on issues relating to cross-border inundation problems that result from creation of local-level assets in border regions, such as embankments, diversion schemes, etc. During the visit of Hon'ble Prime Minister of Nepal H. E. Shri Pushpa Kamal Dahal to India from 14-18 September 2008, both sides expressed concern over the large-scale damage caused by the breach of embankment by the river in the Kosi barrage area and decided to launch relief and rehabilitation measures for the victims and the reconstruction of the damaged infrastructure, and other measures as per the agreements, immediately, and take up preventive measures to avoid the recurrence of such events in the long term.  They decided to take up preventive measures for the Gandak and other barrages under existing bilateral arrangements. They also discussed the problem of inundation in the border areas between Nepal and India and agreed to take up necessary work for its effective prevention on the basis of bilateral consultation. The Government of India decided to provide Rs. 20 crores as immediate flood relief to the people in Nepal and rebuild the segments of the East-West Highway, damaged in the August 2008 Kosi floods. 

In accordance with the agreement reached during the visit, Government of India set up a camp office in Biratnagar on 23 September 2008 for facilitating movement of Nepali vehicular traffic through Bihar for improved access to other parts of Nepal till the Highway is repaired.

Institutional structure for cooperation:

The two sides have wide-ranging dialogue architecture for discussion and cooperation on water resources. Joint Committee on Water Resources (JCWR), set up at prime ministerial initiative of the two countries in March 2000 as the apex bilateral organ for cooperation in this sphere, had its first meeting in October 2000 and the second in October 2004. It is chaired by Water Resources Secretaries of the two countries.

During the visit of the Prime Minister of Nepal to India in September 2008, it was decided to set up a three-tier mechanism at the level of Ministers, Secretaries and technical experts to rationalize and raise the efficacy of the existing bilateral mechanisms in order to push forward discussions on the development of water resources in a comprehensive manner, including hydro-power generation, irrigation, flood control and other water related cooperation. As per the decision taken by the two Prime Ministers, JCWR met in Kathmandu from 29 September - 1 October 2008. (Please click here to view the relevant press release.)

The two sides also have a Standing Committee on Inundation Problem (SCIP), a short-term High Level Consultation Committee (HLTC) for two specific inundation problems, a Standing Committee on Embankment Construction (SCEC), Standing Committee on Flood Forecasting (CFF), Committee on Flood Management and Control and a Joint Group of Experts for Pancheshwar, a Joint Team of Experts on Sapta Kosi-Sun Kosi Project, a Power Exchange Committee, and a Joint Committee on Kosi and Gandak Projects. The JCWR, set up as prime ministerial initiative of the two countries in March 2000, had its first meeting in October 2000 and the second one in October 2004. Other forums have met at regular intervals.

Major Multipurpose Projects:

There are currently two major multipurpose projects (encompassing power, irrigation and flood control) on the agenda of the two countries.

(i)                     Pancheshwar Multipurpose Project: The 1996 Mahakali Treaty between Indiaand Nepal provides for the implementation of the Pancheshwar Multipurpose Project. The project, conceived as a peaking power project, will have 5600 MW of installed capacity and create irrigation potential for 130,000 hectares in Nepal and 240,000 hectares in India. The Detailed Project Report (DPR), to be prepared jointly by the two countries, has not been finalised, since certain issues remain pending. The two countries are pursuing their dialogue through the Joint Group of Experts on Pancheshwar.

(ii)                    Sapta Kosi-Sun Kosi Multipurpose Project: The project, located in Nepal,involves a high storage dam on Kosi River; 3000 MW power plant; a barrage downstream to feed irrigation canals in Nepal and India; a diversion structure on Sun Kosi River to channelise water through a tunnel into Kamala River; a small dam on Kamala River with a powerhouse of 50 MW and barrage downstream for irrigation purposes. The project is designed to provide flood control, power, irrigation and navigational benefits to both countries. India and Nepal opened the Joint Project Office for Sapta Kosi-Sun Kosi Investigations in Biratnagar on 16 August 2004 to prepare the joint DPR for the project. Government of India is providing about Rs. 70 crores as grant for the work of the JPO. This project, if implemented, will provide flood control benefit to Nepal and India, create power capacity of 3000 MW and irrigate 1.0 million hectares in India and 0.5 million hectares in Nepal.

Hydropower generation and trading:

There is considerable scope for mutually beneficial cooperation between India and Nepal in developing small and medium sized hydropower projects in Nepal for internal use in Nepal or exports to India. Nepal's hydropower development policy permits private and foreign investment in generation of hydropower, including for exports.

In what constitutes a significant new development, Power Trading Corporation has signed a Power Purchase Agreement with an Australian company (Snowy Mountain Engineering Corporation), which is developing a 750 MW West Seti Hydro Power Project in Nepal. Nepal has several other small and medium sized project proposals that can be developed by the private sector, including companies in India.

A Power Trade Agreement was signed in the presence of the two Prime Ministers in June 1997. This Agreement was to promote private sector participation in the field of power infrastructure. In addition, power exchange takes place in areas contiguous to the border between the two countries on the basis of decisions taken by the Power Exchange Committee. Currently, 50 MW of power is exchanged between the two countries, with Nepal being a net importer of power. Under the Mahakali Treaty, India also supplies 70 million units of power annually free of charge to Nepal.

On the sidelines of the Power Summit 2008, a Memorandum of Understanding for supply of additional 60 MW of electricity by Power Trading Corporation of India Ltd (PTC) to Nepal Electricity Authority (NEA) was signed on 24th September 2008.

Flood Forecasting and Control:

There are ongoing discussions between India and Nepal in respect of flood forecasting and prevention. The two sides are cooperating since 1989 on flood forecasting and warning through data collection and transmission from 42 sites along rivers in Nepal. Government of India has provided equipment to Nepal to collect hydrological and meteorological data from a number of sites in Nepal for the purpose of flood forecasting. The bilateral Committee on Flood Forecasting, set up during the October 2000 JCWR meeting, prepared a Comprehensive Flood Forecasting Master Plan (CFFMP), which was adopted by the JCWR in October 2004. The Committee has now been entrusted with the task of implementing the plan. Key features of the revised plan includes expansion of the number of stations from 42 to 47, upgrading and modernisation of five key sites and real time data transmission from key sites in Nepal.

In October 2004, the JCWR also established a Joint Committee to prepare a longterm and comprehensive plan on flood management and control. Given the severity of floods in Nepal and Bihar in recent years, the Joint Committee's immediate focus is to identify short-term measures for flood management and control.

To control floods in north Bihar and adjoining Nepalese territory from four rivers – Lalbakeya, Bagmati, Kamala and Khando – Government of India has sponsored a scheme of raising, strengthening and extending the embankments along these rivers in Bihar and is also providing assistance for constructing embankments along certain stretches of these rivers in Nepal. Pursued through the Sub-Committee on Embankment Construction (SCEC), the phase I of project has been completed on Lalbakeya river, is in progress on Bagmati River and is being planned for the Kamala and Khando rivers.