Cutting the deficit with India

  • The erosion of preference margins, more than non-tariff barriers, is the key issue
- Bijendra Man Shakya

Aug 12, 2014-

The issue of Nepal’s trade imbalance with India has been raised with greater emphasis in the joint press statement issued at the end of the Indian prime minister’s official visit to Nepal and at a recent meeting of the Nepal-India Joint Commission in Kathmandu. Underscoring this problem, India has agreed to take account of the non-tariff barriers that have been opposed by Nepali exporters. And India has agreed in principle to relax the rules of origin, quantitative restrictions and stringent standard requirements for Nepali products entering the Indian market.

These moves are generally expected to promote Nepal’s exports to India and narrow the trade deficit with the southern neighbour which has been ballooning at an alarming rate. Between 2003 and 2013, the deficit swelled more than six-fold to Rs 346 billion. The figure represents more than 60 percent of Nepal’s entire trade deficit in 2012-13. Throughout the last decade, India has accounted for approximately 50 percent of Nepal’s annual trade deficit. Therefore, addressing the deficit with India means taking care of half of Nepal’s overall trade imbalance problem.

However, it is pertinent to examine whether non-tariff barriers are central to the problem of the unprecedented rise of Nepal’s trade deficit with India. It is conventional thought to consider that non-tariff barriers are the only impediments to our trade with India. In the changed context, there is more to it than non-tariff barriers. There are two critical factors which are gradually transforming the bilateral trade pattern with India which have been influencing our trade competitiveness and resulting in an unexpected rise in the trade gap.

One important factor is that Nepal has been importing more from India than third countries in recent years. As a growing number of global companies have established their production bases in India, Nepal has been inclined to source its requirements from these manufacturers attracted by low prices and transportation costs. Moreover, India is a major and traditional supplier to Nepal of a whole range of products. An enormous growth in the import of a range of international brand automobiles and consumer durables from India is evidence of this tendency. Consequently, this has distinctly focused our import trade on India with an understandable impact on our trade balance.

On the other hand, our exports to India have not been increasing as per our expectations despite enjoying the facility of preferential market access. This is because our exports have been gradually losing the advantage of tariffs as India has liberalized its trade policy and reduced the generally applicable tariff rates. Although no formal study has been done about the impact of preference erosion with India, a cursory look at this incidence reveals that exports of key products from Nepal have suffered a significant loss of preference margins. This erosion of preference, which is often overlooked by our side, is gradually affecting the competitiveness of our exports to India and ultimately intensifying the problem of trade imbalance.

India is likely to continue to liberalize its trade and tariff regimes with the intention of promoting regional and global integration in exchange for broadened access for its exports to global markets besides attracting foreign investment. If this is any indication, Nepal is certain to lose the preference margins it enjoyed under the bilateral trade agreement with India. As a consequence, Nepal will continue to lose its competitive edge unless it improves its supply capacity and diversifies its product line with more value addition.

At the same time, we shouldn’t underestimate the importance of the Indian market for Nepal’s exports. Nepal has a unique trade relation with India. Their bilateral trade ties are characterized by the system of open borders, a fixed exchange rate system and partially non-reciprocal preferential market access for Nepal’s exports to India. To some extent, the economic relations between the two countries reflect a common market system which is more than a free trade agreement.

All these special features coupled with the advantages of geographical proximity and lower transport costs have made India the single largest trading partner of Nepal. The privilege of preferential access for Nepal’s exports to India has contributed to the development of Nepal’s industrial and trade structure. But the time has come to assess whether the advantage of tariffs should continue to be the only basis for the promotion of our exports to India. It is important to delve into the impact of the erosion of preference margins besides finding ways to overcome the non-tariff barriers in Nepal’s exports to India. While an adept trade negotiation capacity can lessen the non-tariff barriers to a great extent, the capacity to adapt to India’s liberal trading attitude depends on building our own trade capability and efficiency.

Shakya specializes in economics and trade interests of Nepal and LDCs.

Published: 13-08-2014 10:25

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