(Article) India & Nepal: Civil Services Mentor Magazine November 2011

Relations in New Light

India - Nepal relations are ‘unique’ for reasons ranging from geographical contiguity to close cultural ties, and extensive institutional and social relationships. Cultural, economic and geographical factors along with the common bond of a shared religion  have had a great influence on bilateral relations. As two sovereign nations,
both India and Nepal are naturally guided by their national interests.  These interests are related to cultural, economic and security areas. Despite  some turbulence in the past, India- Nepal relations have remained close, stable andmutually beneficial. Cultural bond provides moral strength to the relationship, while respect for each
others political identity as independent, sovereign countries provides the political base for meaningful interaction. Nepal recognizes and admires India’s position as the largest democracy and an emerging economic  and strategic power which is striving to find its rightful place in the comity of nations. article-india & nepal It
appreciates the support accorded to Nepal in the spirit of Panchsheel. There exist vast areas of complimentarity and mutuality of benefits between the two countries.
Economic reforms in both countries have opened up new avenues of cooperation in trade and commerce, investment and joint collaboration projects. Nepal can benefit tremendously from such bilateral interaction. Greater creativity is required, however, to take full advantage of the complimentarity of economies between the two countries. Security issues are the most vital questions that determine the tenor and content of the relationship between the two countries at present. It determines the trust, endurance and sustainability of the relationship. There have been strong commitments to each other in the past like assurances not to allow their territory to be used for undertaking unlawful activities against the other. Formation of  governmental committees and frequent consultations aim at bettering the security scenario. Despite these efforts, perceptions about Nepal not being adequately appreciative of India’s sensitivities has caused sufferings to Nepal in the form of criticism and lack of help at times. As a result, mutual trust and confidence are sometimes shaken and put to  stress. Promoting regional cooperation is another way of indirectly improving bilateral relations. A few areas marked for the purpose include trade and transit, energy, water resources, investment and combating terrorism. The biggest problem troubling the  Himalayan kingdom is the Maoist insurgency. There are diverse opinions depending upon ones vantage point about where the blame lies for the present crisis. A number of measures are urgently needed to tackle the present situation. Security related establishments have to be strengthened to tackle the rising tide of Maoist attacks and to maintain the fabric of the State. But this should not be misconstrued as remilitarization of Nepal. The move is solely for the
purpose of facing the Maoist threat forcefully and adequately. The Maoist problem is not a problem of Nepal alone. It has ramifications on India as well in the form of growing linkages with the Naxals in India and even Bangladesh. Ever since the confrontation between the Maoist-led government and the Nepal Army in 2009 led to the resignation of Mr. Prachanda as Prime Minister, India has been dead-set against the Maoists leading any kind of coalition government in Kathmandu. Indeed, the officials running India’s Nepal policy made it clear the Maoists should ideally not even be allowed to join a coalition headed by someone else, that they be “punished” — a word Indian diplomats in Kathmandu have used with their counterparts from other countries — for having dared to presume they could call the shots in the wake of their victory in the April 2008 CA elections. During the wasted year of Madhav Kumar Nepal’s premiership, which India backed to the hilt, New Delhi hoped the Maoists would either split or come under pressure to accept a  unilateralist reading of theTwelve Point Understanding and theComprehensive
Peace Agreement — two documents which paved the way for the constitutional and political transformation of Nepal. Though the Maoists see themselves as creating a new mainstream, India wants them to stick to the old mainstream and abandon the hope of restructuring the Nepali state and its institutions in any
fundamental way. This Maoists are  not prepared to do.

Historical Background

Nepal’s trade with India continued till 1923 without having a trade agreement with British India. Prior to the signing of this trade agreement, British East India Company was interested to have trade relations with Nepal, for expansion of its own exports. The opening of direct India - Tibet route via Gyantse routes further
promoted Nepal to develop trade with India. Moreover, the development of good transportation system and the creation of many trade centers in the northern India further helped to enhance the trade turnover between Nepal and India.

India Nepal Trade Treaty 1923

The Article VI of the first Trade Treaty between Nepal and India signed in 1923 provided that “No customs duty shall be levied at British Indian Ports as goods imported on behalf of the Nepal government for immediate transport to that country.” Provision of this Article in Trade Treaty 1923 led to the development of Nepal-British trade freely through the port of British India for Nepal could not import goods from other overseas countries.  Nepal was compelled to purchase
goods manufactured in Britain Nepal was very much isolated from other countries, especially from the developed Western countries prior to the political change of 1951.

Treaty of Peace and Friendship

The signing of Treaty of Peace and Friendship, and Treaty of Trade and Commerce between Nepal and an independent India in July 1950 can be seen as the landmark towards the external trade of Nepal. Treaty of Peace and Friendship 1950 formalized close relations between the two countries. This Treaty can be seen as a non-reciprocal treaty. The Treaty  symbolizes a balanced document and served for more than five decades to keep harness between the two countries. Formal trade relation between the two countries was established in 1950 with the signing of the Treaty of Trade. This Treaty was modified and renewed in 1961 and
1971, and incorporated provisions regarding transit facilities extended by India for Nepal’s trade with a third country, as well as on cooperation to control  unauthorized trade.Duty free access to Nepalese imports on a non-reciprocal basis was first given in 1971 but with a Nepalese/ Indian material content requirement of 90 per cent. India’s influence over Nepal increased throughout the 1950s. The Citizenship Act of 1952 allowed Indians to immigrate to Nepal and acquire Nepalese citizenship with ease—a source of some resentment in Nepal. And, Nepalese were allowed to migrate freely to India—a source of resentment there. (This policy was not changed until 1962 when several restrictive clauses were added to the Nepalese constitution.) Also in 1952, an Indian military mission was established in Nepal. In 1954 a memorandum provided for the joint coordination of foreign policy, and Indian security posts were established in Nepal’s northern frontier. At the same time, Nepal’s dissatisfaction with India’s growing influence began to emerge, and overtures to China were initiated as a counterweight to India. King Mahendra continued to pursue a nonaligned policy begun during the reign of Prithvi Narayan Shah in the mid-eighteenth century (see The Expansion of Gorkha , ch. 1). In the late 1950s and 1960s, Nepal voted differently from India in the UN unless India’s basic interests were involved. The two countries consistently remained at odds over the rights of landlocked states to transit facilities and access to the sea. Following the 1962 Sino-Indian border war, the relationship between  Kathmandu and New Delhi thawed significantly. India suspended its support to India-based Nepalese  opposition forces. Nepal extracted several concessions, including transit rights with other countries through India and access to Indian markets (see Foreign Trade , ch. 3). In exchange, through a secret accord concluded in 1965, similar to an  arrangement that had been suspended in 1963, India won a monopoly on arms sales to Nepal. In 1969 relations again became stressful as Nepal challenged the existing mutual security arrangement and asked that the Indian security checkposts and liaison group be withdrawn. Resentment also was
expressed against the Treaty of Peace and Friendship of 1950. India grudgingly withdrew its military checkposts and liaison group, although the treaty was not abrogated. The 1978 agreements incorporated Nepal’s demand for separate treaties for trade and transit. The relationship between the two nations improved over the next decade, but not steadily. India continued to support the Nepalese opposition and refused to endorse Nepal as a zone of peace. In 1987 India urged expulsion of  Nepalese settlers from neighboring Indian states, and Nepal retaliated by introducing a work permit system for Indians working in Nepal. That same
year, the two countries signed an agreement setting up a joint commission to increase economic cooperation in trade and transit, industry, and water resources.
Relations between the two countries sank to a low point in 1988 when Kathmandu signed an agreement with Beijing to purchase weapons soon after a report that China had won a contract for constructing a road in the western sector to connect China with Nepal. India perceived these developments as deliberately
jeopardizing its security. India also was annoyed with the high volume of unauthorized trade across  the Nepalese border, the issuance of work permits to the  estimated 150,000 Indians residing in Nepal, and the imposition of a 55 percent tariff on  Indian goods entering Nepal. In retaliation for these developments,
India put Nepal under a virtual trade siege. In March 1989, upon the expiration of the 1978 treaties on trade and transit rights, India insisted on negotiating a single unified treaty in addition to an agreement on unauthorized trade, which Nepal saw as a flagrant attempt to strangle its economy. On March 23, 1989, India
declared that both treaties had expired and closed all but two border entry points. The economic consequences of the trade and transit deadlock were  enormous. Shortages of Indian imports such as fuel, salt, cooking oil, food, and other essential commodities soon occurred. The lucrative tourist industry went into recession. Nepal also claimed that the blockade caused ecological havoc since people were compelled to use already dwindling forest resources for energy in lieu of gasoline and kerosene, which came  mostly via India. To withstand the renewed Indian pressure, Nepal undertook a major diplomatic initiative to present its case on trade and transit matters to the world community. The relationship with India was further strained in 1989 when Nepal decoupled its rupee (see Glossary) from the Indian rupee which previously had circulated freely in Nepal. India retaliated by denying port facilities in Calcutta to Nepal, thereby preventing delivery of oil supplies from
Singapore and other sources. A swift turn in relations followed the success of the Movement for the Restoration of Democracy in early 1990. In June 1990, a joint Kathmandu New Delhi  communiqué was issued pending the finalization of a comprehensive arrangement covering all aspects of bilateral relations, restoring trade
relations, reopening transit routes for Nepal’s imports, and formalizing respect of each other ’s security concerns. Essentially, the communiqué announced the restoration of the status quo ante and the reopening of all border points, and Nepal agreed to various concessions regarding India’s commercial privileges. Kathmandu also announced that lower cost was the decisive factor in its purchasing arms and personnel carriers from China and that Nepal was advising China to withhold delivery of the last shipment. The communiqué declared that Kathmandu and New Delhi would cooperate in industrial development, in harnessing the  waters of their common rivers for mutual benefit, and in protecting and managing the environment. This was gradually reduced when the Trade Treaty was periodically renewed and in 1993, it was brought down to 50 per cent of Nepalese/Indian material content and Nepalese labor content.

Indo-Nepal Treaty of Trade, 1991

In order to expand trade between Nepal and India and also to encourage collaboration in economic development, Treaty of Trade, 1991 was signed on 6 December 1991. It was explicitly expressed in the Treaty to promote mutual trade between the two countries for the benefits of mutual sharing of scientific and
technical knowledge and experience. Treaty of Transit, 1991 Recognizing the fact that Nepal is a land-locked country and its need to have access to and from the sea to promote its international trade, the Treaty made the provision in its Article I that the contracting parties shall accord to ‘traffic in transit’ freedom of transit
across their respective territories through routes mutually agreed upon. No distinction shall be made which is based on flag of vessels, the places of origin, departure, entry, exist, destination, ownership of goods or vessels. Further, exemption from customs duties and from all transit duties or other charges were made except reasonable charges for transportation and such other charges as needed to commensurate with the costs of services. In addition, for the convenience of traffic in transit the contracting parties agreed to provide point or points of entry or exist warehouses or shed and open space for the storage of traffic in transit awaiting customs clearance before onward transmissions. As such the requirements in course of import and export of goods and articles from Nepal was well established in this Treaty.

Indo-Nepal Trade Treaty, 1996

This Treaty, signed on December 3, 1996 at Kathmandu, sets a landmark in bilateral trade relation between Nepal and India. It gave a new direction in the trade related areas as well as a scope for the trade improvement especially to Nepal. Some of the provisions made in the earlier treaties were replaced and modified. It made the procedures simple and straight so as to remove the procedural delays. This Treaty is seen more often as the turning point in the history of Nepal- India trade relations leading to several policy changes. Government of India provided access to the Indian market free of customs duties and quantitative restrictions for all products manufactured in Nepal on the basis of the certificate of origin. The negative list of product imported to India were shortened from seven to three items
which are alcoholic liquors/beverages and their contents except industrial spirits, perfumes and cosmetics, cigarettes and tobacco. Export of Nepalese consignments with the certificate of origin would not be delayed at the Indian customs border/ check-post. Indian investment in Nepal in Indian Rupees for up to 25 crores would get fast track clearance. It was decided to increase the air seat capacity from 4000 to 6000 per week. Also two more points in India would be opened for Nepalese airlines. The governments of the two countries also agreed to have open sky policy. f. The government of India opened the transit route to Bangladesh through Phulbari. Nepal amended its foreign investment policy, company law and transfer of technology act. h. Nepal decided to open Nepali Stock Exchange to
overseas investors. India and Nepal signed the power trade agreement and allowed private investment in hydropower project. India was the first country to welcome the restoration of democracy in Nepal. Government of India welcomed the roadmap laid down by the historic Comprehensive Peace Agreement of
November 2006 towards political stabilization inNepal through peaceful  reconciliation and inclusive democratic processes. A comprehensive economic package worth Rs.1000 crores was announced during the visit. A soft credit line of USD 100 million for infrastructure development projects was extended, and outstanding dues on defence purchases worth NRs. 1.6 billion waived. Government of India also agreed to doubling the number of GOI scholarships for Nepalese students and to supply of 25,000 metric tons of fertilizers to Nepal at subsidized prices.PM Pushpa Kamal Dahal ‘Prachanda’ paid an official visit to India from 14-17 September 2008, A Joint Press Statement was issued at the conclusion of the visit,  reiterating the special features of the bilateral relationship and committing
both sides to work towards further improving relations.India agreed to implement the Naumure hydro-electric project on Rapti river besides the Rs.20 crores assistance for Kosi breach relief. Credit of up to Rs 150 crores was also provided to GON to ensure uninterrupted supplies of petroleum products. Prime Minister Madhav Kumar Nepal paid an official visit to India from August 18 – 22, 2009 at the invitation of the Prime Minister of India. The two leaders had also met
earlier on the sidelines of the XVth NAM Summit in Sherm-el-Sheikh, Egypt. The two Prime Ministers expressed their satisfaction on the age-old, close, cordial and multifaceted relations between Nepal and India and agreed to expand them further. India expressed full support for the ongoing peace process and the efforts
to bring about economic transformation in Nepal.2009 India- Nepal Treaty of Trade and Agreement of Cooperation to Control Unauthorized Trade The 2009 Trade Treaty revises the 1996 Trade Treaty between the two countries. The 1996 Treaty has been a turning point in the trade relations between the two countries and resulted in phenomenal growth of bilateral trade fromRs. 28.1 billion in 1995-96 to Rs.204.8 billion  in 2008-09. While the Nepalese exports to India increased  from Rs.3.7 billion to Rs. 40.9 billion, the Indian exports to Nepal increased from Rs.24.4 billion to Rs. 163.9 billion during the period -1995- 2009.The 2009 Agreement of Cooperation to Control  Unauthorized Trade will allow export of goods imported by Nepal from India to the third countries without necessity of carrying out any manufacturing activity in Nepal. This will enhance exports from Nepal to third countries where it has a better market access as compared to India.
Similarly it will allow export of the goods imported by India from Nepal to third countries. This will help Nepalese exporters to take advantage of the third country market access developed by the Indian export houses. The relations and agreements institutionalised in the 20th century may not be enough to meet the needs
of the 21st century. Hence, the emphasis should be to develop bilatersl relations further, clear misgivings and misunderstandings that we have against each other, and sort out the problems left by history. When the subcontinent was colonised by the British, they left behind a legacy which has created friction among the nations
of South Asia. Both the nations will have to overcome that, and develop mutual relations in the changed time and context. Instead of harping on old disputes, India and Nepal will have to look forward, and create an atmosphere of cooperation. There are certain political issues, which would need more discussions. We can
engage on it freely and frankly, but they can be postponed for the future. The major thing is to build trust between two countries, two governments, and two peoples. Once there is trust, and we are sensitive and empathise with each other, even the most difficult issues can be resolved amicably.