Nepali Budget Indian Policy

By CA subhash khandelwal

The count down for Nepali budget has begun. The eight-party interim coalition government is going to present its first budget in the second week of July. As per the Nepal Rastra Bank (Central Bank of Nepal), the growth rate for the current financial year is expected to be around 2.5 percent. India's economy is growing at an average rate of 8 percent and expected to have the double digit growth rate while Nepal's stands at 2.5 percent which is lower than the population growth.

In fact, India's economy is driving Nepal's economy. India's budget proposal and any decision on the Indian economy policy taken in New Delhi largely affect Nepal's economy. Most of the export-oriented industries have become unviable after India's budget, and Nepali industrialists are demanding for the revision of treaty with India regarding abolition of the DRP system and full implementation of Indo-Nepal Treaty 1996 in its original form without any restriction.

As per the statements of revenue secretary reported in the media, there is not much policy change in the budget proposal as Nepal is still in the transition phase and the budget has to be presented with the consensus of all the political parties.

On the other hand, the business community is demanding relief and concessions in duty structures for the reconstruction of economy and revival of the sick units. They have demanded new industrial policy for speeding up the economic growth, generating employment opportunities and for raising living standards of the Nepali people.

"Nepal's import from India amounts two-thirds of the total imports and export from Nepal to India has been increased by 11 times after trade treaty signed between India and Nepal in 1996." The consulate of India has quoted the data during inauguration ceremony of Nepal Youth Entrepreneur Forum (NYEF) organized in Economic Capital of Nepal at Birganj, Nepal while quoting the bilateral trade between Nepal and India.

As per one of the experts of Nepal export by India is not what is reflected in the official figures. Almost an equal value shown as formal imports is coming to Nepal through informal channels. The latest data estimates that Nepal's trade deficit with India is over Rs 65 billion per year.

There is huge trade deficit between India and Nepal. The Indo-Nepal Trade Treaty signed in 1996 and revised in 2002 is restrictive. In March 2007 too, it has been renewed but the trade deficit is increasing due to over-restrictions.

As per the statistics of Nepal Rastra Bank, Nepal has purchased 41 billion Indian currency during nine months of the current financial year by selling its hard currency. Due to nature and volume of trade with India, Nepal has to make Indian currency stable. As a result, Nepali currency has become stronger compared to dollars and other currencies though the growth of Nepali economy is declining due to the political instability. These facts and figures are self-explanatory of dominance of Indian economy in Nepal.

The major exports from Nepal are vegetable ghee. Countervailing duty (CVD) levied while exporting goods from Nepal are the major concern of the Nepali business community. Though India has exempted more than hundred items from CVD, it is inadequate. The demand of Council Member of the Chamber of Commerce is to waive the excise duty on raw materials exported to Nepal and to levy India's CVD on Nepal's exports to India only on the transaction value.

India's main concern in trade with Nepal is the possibility of trade deflection, i e. goods (Indian & third country) being re-exported to India. So, there is a DRP system. Nepal can import Indian finished products directly from manufacturing company on DRP and there is no need to pay in foreign hard currency to purchase these products. Amount can be paid in Indian currency and Indian excise duty is already levied on those products in India will be refunded to Nepal.

The amount of excise duty paid in India of goods imported under DRP shall be deducted from the customs duty chargeable as per tariff. This procedure is against the worldwide accepted principles of the unjust enrichment. It elaborates the duty should be refunded to only that person who bore the tax burden. And the refunding cannot be given to any third party, which has in principle been reiterated by the apex court of India time and again in various cases as per the legal expert of Nepal. The amount paid by Nepali businessmen also is not fully refunded to the government of Nepal since the average import duty has been decreased and the Nepali products are becoming uncompetitive due to the discriminatory DRP system.

One of the interesting features of the Indo-Nepal trade is that export from India is sometimes treated as home consumption and sometimes export and there is a separate rigorous excise and customs procedure for export to Nepal. In case the goods are imported in Nepal in Indian currency, it is not treated as export by India.

As per one of the members of FNCCI, trade deflection and possibility of re-export is solely due to lack of the improper mechanism of the Indian counter part and only on that ground, export to Nepal not being considered as the export is unfair trade agreement. Illegal trade between India and Pakistan is more than 100 percent as per the data and estimates published in one of the reports.

The trade negotiations and trade treaty should be done with proper homework and should be in the mutual interest of both the countries. The correct policy decisions can only benefit Nepal and India. That will provide free flow of resources between the two countries as per the principles of free trade which will be helpful for improving the living standards of the peoples of both the countries