India is Nepal's largest trade partner as well as source of foreign investment; India is also the only country providing trade transit for the landlocked Nepal through twenty two designated routes between India-Nepal border to the port of Kolkata/Haldia. The Birgunj-Raxaul corridor accounts for transit of around two thirds of total trade of Nepal. Government of India is providing assistance for development of cross-border trade related infrastructure by setting up four major Integrated Check Posts at Birgunj-Raxaul, Biratnagar-Jogbani, Bhairahawa-Sunauli and Nepalgunj-Nepalgunj Road.
Some information on the economy & foreign trade of Nepal and bilateral trade and investment relations with India are given in the links below:
For further information, please visit the following web sites:
Nepal is a country of 147,181 sq km and 26.6 million people. Agriculture sector employs majority of the population. Around 2.3 million Nepalese are working overseas and this number is growing annually by around 250,000 for the past few years.
Nepal had a GDP of NRs 1347 billion (US$ 19 billion). Total Foreign Trade of NRs 535.92 billion (US$ 6.62 billion) during the financial year 2011-12 (16 July to15 July) compared to NRs. 459.5 billion (US$ 6.36 billion) in the previous year. During the year 2010-11, agriculture sector, with a growth of 4.1%, had the largest 33% share in GDP. Industry Sector grew by 1.39% and services by 3.60%. Real GDP growth declined to 3.5% from 4.5% last year and is expected 3.7% in current year.
During 2011-12, merchandise import increased by 16.5% to NRs. 461.66 billion (US$ 5.70 billion) and exports increased by 15.4% to NRs. 74.26 billion (US$ 0.92 billion). In the previous two years, imports had increased by 6.3% and 31.6% while the overall exports had declined by 4.5% and 10.2% respectively.
During the year 2010, the remittance income from Nepalese workers abroad increased over 10% to NRs 206.6 billion. Cumulative direct investment more than doubled to NRs. 5.7 billion with approval to 209 projects having total investment commitment of NRs. 10.05 billion. The number of tourists increased by 21.7% to 500,750. The gross foreign-exchange reserves at US$ 3.6 billion are sufficient for 7.1 months’ of imports of goods and services. Consumer prices increased by 9.5% year on year.
The budget for 2011-12 proposed expenditure of NRs 384.9 billion (US$ 5.5 billion), representing a 14% increase on last year. Total income of NRs 317.8 billion will be derived from NRs 241.7 billion in revenue, NRs 5.9 billion from principal repayment and NRs 70.1 billion in foreign grants, leaving a fiscal deficit of NRs 67 billion. The budget outlined focus on co-operatives, promotion of the information-technology as a priority sector through measures including 80-90% income tax exemptions; 50-100% income tax exemptions for industries in Special Economic Zones (SEZs); and 100% income tax exemption over seven years for firms engaged in oil and gas exploration.
Investment opportunities in Nepal
Foreign direct investments in Nepal are allowed under specified industry categories, which include agriculture and forestry, manufacturing, electricity (water and gas), construction, hotels and resorts, transport and communication, housing etc. Many joint ventures were established in the 1990s, following introduction of liberal economic reforms and liberal fiscal incentives in Nepal. As on 15 July 2011, 2108 foreign investment projects have been approved in Nepal. Indian ventures lead the list with 501 projects and about 47.5% of total foreign investment. China ranks second with 401 ventures and 10.3% of total FDI commitments, followed by USA (174 projects and 7.2% of FDI commitments), South Korea (149 projects and 6.3% of FDI commitments) and Mauritius (5 projects and 4.1% of FDI commitments). FDI approvals have registered impressive growth during the last three years raising cumulative FDI commitments from NRs. 48 billion as on 15 July 2009 to 68 billion on 15 July 2011.
Bilateral trade takes place either in Indian rupees or convertible currency. The Duty Refund Procedure (DRP) which earlier governed imports from India to Nepal has been scrapped w.e.f. March 1, 2012. Consequently, the export from India to nepal has become at par with export to any other countries. All exports benefits are thus available to the exporters irrespective of the currency of payment. Nepalese goods entering India enjoys full exemption from imposition of basic customs duty and additional customs duty in India. On the other hand, Nepal provides a rebate of 7% ad valorem on goods chargeable to customs duty upto 30%; and 5% rebate on goods echargeable to customs duty over 30% on Indian goods entering Nepal. Since 1993, the Nepal Rashtra Bank maintains a fixed exchange rate with Indian Rupee (1 INR = 1.6 NRs).
Total trade between the two countries in 2011-12 amounted to NRs. 349.0 billion (US$ 4.31 billion), registering a growth of 14.6% over the previous year in NRs terms and a 65.1% share in Nepal's total trade. Nepal sold US$ 2.74 billion during the period to Indian banks to meet the Indian currency deficit. Since 1995-96, total external trade of Nepal increased from NRs. 94.33 billion to NRs. 535.92 billion and 72.7% of this increase is on account of increase in the bilateral trade between India and Nepal, which grew from NRs. 28.08 billion (29.8% of total) in 1995-96 to NRs. 349.0 billion (65.1% of total). During this period, Nepal's exports increased from NRs.19.88 billion to NRs. 74.26 billion and bulk of this increase was also on account of increase in Nepal's exports to India.
Total imports from India during 2011-12 amounted to NRs 299.38 billion (US$ 3.7 billion) - an increase of 14.4% in NRs. terms, while imports from other countries increased by 20.9%. About 18.2% of these imports were against payment in US dollars and the balance in Indian rupees. India accounted for 64.8% share in Nepal's imports. The rise in Nepal's imports from India was due to increase in imports of petroleum products; coal, rice M. S. wire (including rods and bars) and chemical fertilizers. The increase in Nepal’s imports from third countries was due to increase in imports of gold, crude soyabean oil, edible oil, polythene granules and electrical goods.
Total exports to India from Nepal during 2011-12 amounted to NRs 49.61 billion (US$ 0.62 billion) and accounted for 66.8% of Nepal's total exports. While exports to India increased by 14.4%, exports to other countries also increased by 17.5%. The increase in the exports to India was mainly ascribed to the increase of textiles, cardamom polyster yarn, copper wire rod and G.I. pipes. Export to other countries increased due mainly to an increase in the export of readymade garments, woolen carpets, tanned skin and tea.
Nepal's main imports from India are petroleum products (30.8%); motor vehicles and spare parts (5.7%); M. S. Billet (6.5%); machinery and spares (2.8%); cold rolled sheet in-coil (2.5%); medicines (3.5%) and electrical quipment (2.3%), coil (2.4%). Nepal's export basket to India mainly comprises textiles (10.2%), threads (8.3%), jute goods (8.0%), polyster yarn (7.3%), zinc sheet (6.6%), juice (6.0%), large cardamon (6.5%) and other threads (5.2%).
Indian ventures lead the investment list of Nepal with 501 projects and about 47.5% of total foreign investment. In 2008-09, 34 Indian Joint ventures with foreign investment commitment of about NRs. 2.4 billion were registered in Nepal; in 2009-10 there were 27 Indian JVs with FDI commitment of NRs. 3.9 billion and in 2010-11, 38 Indian JVs with FDI commitment of NRs. 7 billion. Indian joint ventures in Nepal have contributed significantly to increase in Nepal's exports to India. They provide direct employment to around 30000 Nepali citizens and indirect employment to more than twice that number. They contributed nearly NRs. 15 billion to the Nepali exchequer in 2009-10.
There are about 150 operating Indian ventures in Nepal engaged in manufacturing, services (banking, insurance, dry port, education and telecom), power sector and tourism industries. In recent years, Hydropower sector has emerged as an attractive sector for Indian investments. Government of Nepal has issued 28 survey licenses for hydropower projects in Nepal having generation capacity of 8249 MW to Indian companies/ joint ventures. Other potential areas for investments in Nepal are cement, aviation industry, fertilizer, infrastructure projects, agriculture and food processing, light engineering industries, mineral exploration and mining; and service industries including tourism, healthcare, education, software, banking, and reinsurance.
Some large Indian investors include, ITC, Dabur India, Hindustan Unilever, VSNL, TCIL, MTNL, State Bank of India, Punjab National Bank, Life Insurance Corporation of India, Asian Paints, CONCOR, GMR India, IL&FS, Manipal Group, MIT Group Holdings, Nupur International, Transworld Group, Patel Engineering, Bhilwara Energy, Bhushan Power & Steel, Feedback Ventures, Pepsi Co. India, KSK Energy, Berger Paints, Essel Infra Project Ltd. and Tata Power.
However, Nepal's attractiveness as a manufacturing base for India is eroding, on account of political and security situation in Nepal, poor infrastructure and investment environment, inadequate power supply, increasing competitiveness of locations in India, reduction in Indian tariff levels and India’s growing web of FTAs, as well as increasing productivity and declining cost of production in India.
Officially there are no major Nepalese investments aborad. However, several Nepalese have reportedly invested in India and other countries using hawala routes and intermediate companies. GoN has drafted a new law intending to repeal the restrictions on ivestments abroad in the current law.
The bilateral framework for trade and transit is provided by the India-Nepal Treaty of Trade, Treaty of Transit and Agreement of Co-operation to Control Unauthorized Trade.
Trade Treaty: A revised Trade Treaty signed in October 2009 builds on the previous Treaty of 1996 to provide further access to Nepalese products into India and to enhance and expand bilateral trade between the two countries. The Treaty of 1996 had been a turning point in the trade relations between the two countries as it helped diversify and expand Nepal's industrial base, and attract Indian investments. It resulted into phenomenal growth of bilateral trade from IRs 17.55 billion in 1995-96 to IRs 161.30 billion in 2009-10. The highlights of the 2009 Treaty are: (i) addition of several new primary product items viz. floriculture products, atta, bran, husk, bristles, herbs, stone aggregates, boulders, sand and gravel for duty free access to India wothout any quantitative restriction; (ii) Extension of time limit for temporary import of machinery and equipments for repair and maintenance in India from earlier 3 years to 10 years; and (iii) Used articles fit only for recovery of raw materials and collected in Nepal to be treated as Nepalese manufactured products thereby enjoying access to India which hitherto was prohibited.
Transit Treaty: India and Nepal have a treaty of transit, which confers transit rights through each other's territory via mutually agreed routes and modalities. The treaty was last renewed for seven years in March 2006. India offers 15 transit routes to Nepal to and from Kolkata/Haldia ports in India, two transit routes to and from Bangladesh and three transit routes to and from Bhutan. Goods can move by road or rail. The creation of ICD in Birgunj by extension of railway line from Raxaul to Birgunj has facilitated direct movement of goods in transit by rail to Nepal. India also allows movement of goods from one part of Nepal to another through Indian territory by means of a simple process of customs undertaking.
Agreement for Cooperation to Control Unauthorized Trade: A revised Agreement to Control Unauthorized Trade was signed on October 27, 2009. The new Agreement removes the restriction imposed in the previous Agreement on export of goods imported by one party from the other to the third countries, without involving any manufacturing activity.
Bilateral Investment Protection and Promotion Agreement (BIPPA): The two governments signed a Bilateral Investment Protection and Promotion Agreement (BIPPA) on 21st October 2011 during the visit of Prime Minister of Nepal to India. The agreement shall come into force from the date of exchange of diplomatic notes between the two countries.
Double Taxation Avoidance Agreement (DTAA): India and Nepal had first signed a Double Taxation Avoidance Agreement (DTAA) in 1987. After further negotiations aimed at reflections the changes in domestic and international environment, the two countries signed a fresh Double Taxation Avoidance Agreement (DTAA) on 27th November 2011 in Kathmandu during the visit of Finance Minister Shri Pranab Mukherjee of India. The Agreement shall come into force upon completion of domestic legal formalities by the two countries.
Air Service Agreement (ASA): A technical agreement was signed between Airport Authority of India and Civil Aviation Authority of Nepal in September 2009. A revised ASA was signed in February 2010, which significantly liberalizes air services between the two countries. It also allows all-cargo services between each other’s territory with any type of aircraft with full 3rd, 4th, and 5th freedom traffic rights.
Rail Services Agreement (RSA): RSA governs Nepal's in-transit and bilateral traffic to and from ICD Birgunj. The two countries amended the RSA in December 2008 to allow bilateral and in-transit oil/liquid traffic in tank wagons and use of flat wagons for bilateral break bulk cargo. In the second review meeting held in March 2012 at Kathmandu, the two countries agreed to allow movement of (i) open boxes (BOXN wagons) for bilateral and in-transit traffic of coal and clinkers etc.; (ii) flat wagons for in-transit break-bulk cargo like HR coils and heavy equipment/machinery etc. and (iii) Reefer Containers for both in-transit and bilateral trade to and from ICD, Birgunj.
Motor Vehicles Agreement: A Motor Vehicles Agreement (MVA) for passenger vehicles, initialled in February 2004 is awaiting formal signature. The agreement envisages direct bus services between India and Nepal on designated routes and will also facilitate individuals travelling to either country in their personal