Historical Development of Nepal-India Trade Treaty:

Provisions, Problems and Challenges, and Revisions

A Thesis

Submitted to
Department of International Relations and Diplomacy
Faculty of Humanities and Social Sciences
Tribhuvan University

In fulfillment of the requirement for MIRD 526 Thesis of

Master’s Degree in International Relation and Diplomacy

Submitted by:
Ajay Rajbanshi
Symbol Number: 2838048
Registration Number: 4-2-34-114-2013

Aug 2024
 Letter of Recommendation

I certify that this dissertation entitled “Historical Development of Nepal-India Trade

Treaty: Provisions, Problems, Challenges and Limitations China” has been prepared
by Mr. Ajay Rajbanshi under my supervision. I hereby recommend this dissertation
for final examination by the research committee at the Department of International
Relations and Diplomacy, Faculty of Humanities and Social Sciences, Tribhuvan
University in the fulfillment of the requirements for MIRD 526 Thesis for the
MASTER’S DEGREE IN INTERNATIONAL RELATIONS AND DIPLOMACY.

________________

Prof. Dr. Krishna Raj Acharya

Research Supervisor

Date: 2024 Aug 15

i
 Declaration

I hereby declare that the work has been done by myself and no portion of the work
contained in this document has been published or submitted in support of any
application for any other degree or qualification of this or any other university or
institution of learning. In case of other authors’ information, ideas and arguments, the
sources have been duly cited and acknowledged as per the requirements. The
copyright of this research work belongs to the author.

________________

Ajay Rajbanshi

Date: 2024 Aug 15

ii
Approval Sheet

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 Acknowledgements

I have invested considerable effort in this project, but it would have been impossible
to accomplish without the assistance and support of the institution and numerous
individuals. I would like to express my heartfelt gratitude to all of them.

First of all, I am eternally grateful to the Department of International Relations and

Diplomacy for providing me opportunity to study and write this thesis.

I am highly indebted to my supervisor, Prof. Dr. Krishna Raj Archarya Coordinator of

DIRD, who not only supported me throughout my research journey but provided me
with constant motivation throughout my time in the department. Your willingness to
share your expertise, insightful feedback, and constructive criticism has helped me to
improve the quality of my work.

I also take this opportunity to thank the dissertation's external examiner, Dr. Ram Raj
Pokharel, and internal examiner Mr. Indivar Poudel for their important comments and
feedback.

I also express my sincere thankfulness to all the teachers and the administrative staff
members of the Department of International Relations and Diplomacy, Tribhuvan
University for their assistance in two-years of the journey in the institution. I thank
my classmates for encouraging and assisting me in my research works.

At last but not least, I express my sincere thanks to my parents and friends for their
unwavering love and support during my research project. Your constant
encouragement and belief in me have been a driving force throughout this journey.

iv
 Abstract

The historical and contemporary trade relations between Nepal and India have been
fundamental to both nations' economic development. This study meticulously traces
the evolution of the Nepal-India Trade Treaty, highlighting its significance in
fostering economic cooperation. Recognizing the pivotal role of trade, the research
delves into the barter system's origins and the transformation towards modern
economic transactions, emphasizing mutual benefits and comparative advantages. In
the interconnected global economy, nations depend on each other for imports and
exports, driving economic growth. Historical accounts underscore that foreign trade
has always been integral to economic progress. By examining the unequal distribution
of resources and the concept of comparative advantage, this study elucidates how
nations specialize in efficient industries, trading their outputs for goods produced
more economically elsewhere. This dynamic is essential for economic development,
bringing vital resources, technological know-how, and capital flow from developed to
developing countries. Nepal's trade history is rich, yet its challenging terrain and
geographic positioning have posed obstacles, especially during the British East India
Company's dominance. Despite these challenges, Nepal has maintained a harmonious
trade relationship with its neighbors, including India. The study explores how Nepal's
trade policies and economic activities have evolved, adapting to modern economic
frameworks while overcoming infrastructure and political challenges. Employing a
qualitative approach, the research combines descriptive and analytical methods to
assess data collected from various secondary sources, including government
publications, academic articles, and international reports. The analysis spans historical
perspectives to contemporary contexts, aiming to provide a comprehensive
understanding of the trade treaty's foundations, evolution, and associated challenges.
Ethical considerations are paramount in this research, with a systematic and
transparent data selection approach to mitigate biases. Secondary sources were chosen
impartially, ensuring neutrality and preventing any skewed conclusions. The research
adheres to academic integrity principles, meticulously citing and referencing external
data to avoid plagiarism. The study concludes with respect for the sovereignty and
cultural sensitivities of Nepal and India, aiming to serve as a resource for
understanding trade treaties without undermining national interests. It highlights the
potential of economic cooperation to enhance the welfare of the common man on both

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sides of the border, laying the foundation for future economic development. This
comprehensive analysis of the Nepal-India Trade Treaty underscores the importance
of historical context in understanding contemporary trade relations. It provides
insights into how economic policies and treaties can evolve to foster stronger
economic ties and mutual prosperity. The research serves as a valuable resource for
policymakers, economists, and scholars interested in international trade and economic
development.

Keywords: Trade treaty, Nepal-India, Historical Development, Economy

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 Table of Contents

Letter of Recommendation ............................................................................................. i

Declaration .....................................................................................................................ii

Approval Sheet............................................................................................................. iii

Acknowledgements ....................................................................................................... iv

Abstract .......................................................................................................................... v

Table of Contents .........................................................................................................vii

List of Tables ................................................................................................................. x

List of Figures ............................................................................................................... xi

Abbreviations and Acronyms ......................................................................................xii

Chapter 1 ........................................................................................................................ 1

Introduction .................................................................................................................... 1

1.1 Background of the Study ................................................................................. 1

1.2 Statement of the Problem ................................................................................ 3

1.3 Research Questions ......................................................................................... 4

1.4 Research Objectives ........................................................................................ 4

1.5 Significance of the Study ................................................................................ 4

1.6 Limitation of the Study ................................................................................... 6

1.7 Organization of the Study ............................................................................... 6

Chapter 2 ........................................................................................................................ 8

Literature Review........................................................................................................... 8

2.1 Review on Nepal-India Relations ................................................................... 8

2.2 Review on Nepal-India Trade Relations ....................................................... 10

2.3 Review on Nepal-India Trade Treaty ............................................................ 12

2.4 Research Gap................................................................................................. 15

Chapter 3 ...................................................................................................................... 16

Research Methodology and Conceptual Framework ................................................... 16

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 3.1 Research Methodology.................................................................................. 16

3.1.1 Research Design..................................................................................... 16

3.1.2 Data Collection Method ......................................................................... 16

3.1.3 Analysis Method .................................................................................... 16

3.2 Ethical Concern ............................................................................................. 17

3.3 Conceptual Framework ................................................................................. 18

Chapter 4 ...................................................................................................................... 20

Review of Nepal-India Trade....................................................................................... 20

4.1 History of Nepal-India Trade: Contextual Development .............................. 20

4.2 Historical Development of Nepal-India Trade: Volume ............................... 23

4.2.1 Nepal-India Trade before Rana Period (1846)....................................... 23

4.2.2 Nepal-India Trade during Rana Period (1846-1950) ............................. 24

4.2.3 Nepal-India Trade between 1950-1990 ................................................. 26

4.2.4 Nepal-India Trade between 1991-2008 ................................................. 29

4.2.5 Nepal-India Trade between 2009-2023 ................................................. 30

Chapter 5 ...................................................................................................................... 32

Nepal-India Trade Treaty............................................................................................. 32

5.1 Background ................................................................................................... 32

5.2 Historical Development of Trade Treaty ...................................................... 34

5.2.1 The Treaty of Trade and Commerce, 1950 ............................................ 34

5.2.2 The Treaty of Trade and Transit, 1960 .................................................. 36

5.2.3 The Treaty of Trade and Transit, 1971 .................................................. 38

5.2.4 The Treaty of Trade, 1978 ..................................................................... 40

5.2.5 The Treaty of Trade, 1991 ..................................................................... 41

5.2.6 Treaty of Trade 2009 ............................................................................. 43

Chapter 6 ...................................................................................................................... 46

Findings, Problems and Challenges, and Revisions .................................................... 46

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 6.1 Findings ......................................................................................................... 46

6.1.1 Connecting Trade Treaty and Trade Statistics ....................................... 47

6.2 Problems and Challenges .............................................................................. 48

6.3 Revisions ....................................................................................................... 52

Chapter 7 ...................................................................................................................... 55

Conclusions .................................................................................................................. 55

7.1 Conclusions ................................................................................................... 55

References .................................................................................................................... 57

Appendices ................................................................................................................... 63

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 List of Tables

Table 1: Nepal-India Trade Statistics before 1846 ...................................................... 23

Table 2: Nepal-India Trade Statistics Jung Bahadur's Period (1860-63 and 1877/78) 24

Table 3: Nepal-India Trade Statistics during Rana Period (1846-1951) ..................... 25

Table 4: Nepal-India Trade Statistics from 1951-1990 ............................................... 27

Table 5: Nepal-India Trade Statistics form 1991-2008 ............................................... 29

Table 6: Nepal-India Trade Statistics from 2009-2023 ............................................... 30

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 List of Figures

Figure 1: Conceptual Framework of the Study ............................................................ 19

Figure 2: Ancient Trade Routes Connecting Himalayas and Trans-Himalayas .......... 21
Figure 3: Nepal India Trade Trend (1956/57 to 2022/23) ........................................... 46

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 Abbreviations and Acronyms

AD Anno Domino

BS Bikram Sambat

CBS Central Bureau of Statistics

DIRD Department of International Relations and Diplomacy

INA Indian National Archive

LDCs Least Developed Countries

MFN Most Favored Nation

NRB Nepal Rastra Bank

SAWTEE South Asia Watch on Trade, Economics and Development

SITC Standard International Trade Classification

UN United Nations

WTO World Trade Organization

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 Chapter 1
Introduction
1.1 Background of the Study
In ancient times, prior to the introduction of currency, people relied on a method
known as the barter system to acquire goods (Liam, 2021). Instead of using money,
individuals would exchange items directly (Pomfret, 1991). For instance, if someone
desired a particular item but possessed something else of value, they would seek out
someone who had the desired item and was in need of what they had to offer. This
bartering system facilitated trade and enabled people to obtain the goods they needed
without using currency. In basic terms, trade involves a voluntary exchange between
two parties who need each other's resources, such as goods and services (Liam, 2021).
It operates on the principle of mutual benefit, forming a symbiotic relationship where
both parties gain.
In our contemporary interconnected world, the economies of nations are deeply
intertwined, making prolonged isolation untenable for any country. Each nation
inevitably relies on others for imports and exports, underscoring the significance of
foreign trade in driving economic progress. According to Hari Bansh Jha (1987), a
Professor of Economics, the history of economic development of the world is in fact,
the history of trade. Recognizing the vital role of foreign trade in fostering economic
development, nations across various economic systems have made concerted efforts
to enhance their trade volumes.

International trade offers opportunities and risks to countries (Martin, 2015). Kenen
and Lubitz (1971) argued in their book 'International Economics', the framework and
advantages of international trade stem from the unequal allocation of both natural and
human-made resources. Each nation's possession of land, minerals, skills, and
machinery enables it to excel in particular tasks more effectively than others. Trade is
based on the comparative advantage not absolute advantage. They further adds, free
trade enables a nation to focus on its areas of comparative advantage, allowing it to
specialize in the industries where it is most efficient. In turn, it can then exchange the
goods produced in these industries for those that other countries produce more
economically (Kenen & Lubitz, 1971).

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Foreign trade significantly contributes to the economic advancement of nations. It
furnishes essential resources crucial for development, serves as a primary conduit for
the dissemination of technological expertise, facilitates the international flow of
capital from developed nations to less developed countries, and promotes healthy
competition while curbing inefficiencies within industries (Pant B. , 1994).
International trade is a fundamental aspect of all nations' economic activities, a
practice that has been entrenched for a considerable period. In many market-driven
economies, a significant portion of domestic production is geared towards exports,
while a substantial proportion of total expenditure is allocated to imported goods
(Pomfret, 1991). Consequently, governments prioritize international trade in their
economic policies due to its pivotal role in shaping economic dynamics.

Nepal's trade and commerce boast a history as rich as its cultural heritage. It's widely
acknowledged that Nepal maintained a harmonious trade relationship with its
neighboring countries (Jha, Foreign Trade and The Ailing Nepalese Economy, 1985).
However, due to its challenging terrain and unique geographical position, Nepal
struggled to maintain its trade dominance when confronted with the better-organized
British East India Company (Dahal, 1987). Shortcomings in transportation and
communication infrastructure, along with domestic political instability and persistent
conflicts, further exacerbated Nepal's challenges. Despite being fragmented into
numerous independent principalities with varying administrative structures, concerted
efforts were made to enhance both internal and external trade within Nepal (Jha,
Strategy in Nepal's Foreign Trade, 1987).

Historically and currently, India has stood as Nepal's primary trading ally. This is
attributed to their geographical proximity, shared socio-economic characteristics, and
the accessibility of transportation infrastructure, which have predominantly channeled
Nepal's foreign trade towards India (Dahal, 1987). India and Nepal share a border,
fostering longstanding traditional, historical, and cultural bonds marked by mutual
respect (Dahal, 1987). Over time, both nations have engaged in the exchange of goods
and services, exporting and importing what they need from each other's markets.

The consistent exchange of goods between countries stems from systematic disparities
in cost and price structures: items cheaper to produce domestically are exported, while
those cheaper to produce abroad are imported (Kenen & Lubitz, 1971). This

2
foundational concept, integral to foreign trade theory, is termed the principle of
comparative advantage.

1.2 Statement of the Problem

For centuries, Nepal has maintained a direct trade connection with India. Prior to the
19th century, imports from India encompassed commodities like scrap metals,
precious stones, spices, tobacco, and luxury items such as Do-potta and Malmal,
alongside European goods. Meanwhile, Nepal primarily exported rice, timber, hides,
honey, wax, ghee, artistic metal wares, and some Tibetan-origin goods to India during
this era (Acharya R. , 1985). Despite Nepal's significant strides in international
relations in the 1950s, its foreign trade has largely remained focused on India. Even
today, the composition of Nepali exports has not seen much diversification, with only
a few new products like handicrafts, spices, and paper and paper products being
added. However, the composition of imports from India has undergone significant
changes over time.
The initiation of trade between Nepal and India dates back to 1923, during the period
when India was under British rule. This initial agreement allowed Nepal to import
arms, ammunition, and other British-origin goods from British India. However, with
India's transition to democracy in 1947, significant shifts occurred in its internal and
external policies, necessitating a revision of the treaty with Nepal that was established
during the British colonial era. In July 1950, a new Trade and Commerce Treaty
between Nepal and India was signed. Because of the resentment expressed by Nepal
over the previous Trade and Commerce Treaty, a new Trade and Transit Treaty was
signed in 1960. Since then, Nepal and India have undergone several revisions of their
trade agreements.

Nepal has faced challenges in modernizing its agreements to reflect contemporary

requirements and changing global circumstances. Consequently, Nepal has often
found itself at a disadvantage during the negotiation and revision of these treaties. The
Nepal-India Trade Treaty holds significant significance in shaping the economic and
logistical ties between Nepal, a landlocked nation, and India, its primary trading
partner. However, it is imperative to assess the treaty's efficacy amidst evolving
geopolitical dynamics, economic frameworks, and emerging global complexities.

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The objective of this paper is to analyze the present influence of the treaty on Nepal's
trade dynamics, pinpointing areas where it deviates from the current economic
objectives, technological advancements, and sustainability priorities of both nations.
The challenge lies in comprehending the extent to which the existing treaty meets the
contemporary needs and aspirations of Nepal and India, tackles the complexities of
modern trade demands, and determines how its provisions might require updates and
modernization to promote a fairer, more effective, and forward-thinking bilateral trade
partnership.

1.3 Research Questions

The research is primarily aimed at tracing the historical development of Nepal-India
Trade Treaty along with finding out provisions, problems, challenges, and limitations.
To achieve this, the research questions have been broken down into following sub-
questions:
1. What are the historical developments and key milestones along with provisions in
the evolution of the Nepal-India Trade Treaty?
2. What are the problems and challenges has Nepal faced under the current terms of
the Trade Treaty with India?
3. What revisions are necessary to modernize the Trade Treaty in line with current
global trade practices and technological advancements?

1.4 Research Objectives

The primary objective of this research is to chart out the historical and temporal
development of Nepal's trade relation (both in terms of treaty provision and volume of
trade) with India and to elucidate the major provisions and limitations of the treaty. In
the completion of the study, this research aims:
 To map the historical development of the Nepal-India Trade Treaty.
 To identify and analyze the challenges and limitations faced by Nepal under
the current Trade Treaty.
 To explore specific revisions needed to modernize the treaty.

1.5 Significance of the Study

India and Nepal, despite being some of the closest neighbors globally, exhibit
significant differences. While they share numerous similarities, they often struggle to
resolve key issues, including those related to trade. Trade relations between India and
Nepal are governed by treaties concerning trade and transit, along with agreements

4
aimed at curbing unauthorized trade (Subedi, 2004). Since the initial treaty was signed
in 1950, there have been significant changes. The Trade and Transit Treaty of 1960
replaced the 1950 Treaty of Trade and Commerce. When this treaty expired in 1971,
Nepal sought to establish separate treaties for trade and transit. However, the two
countries ultimately agreed on a combined trade and transit treaty (Lama M. P.,
2004). It wasn't until 1978 that a distinct trade treaty was established for the first time,
with the most recent renewal occurring in November 2023.
The examination of the Nepal-India Trade Treaty is of utmost importance as it can
provide valuable insights to policymakers, stakeholders, and the public regarding the
treaty's impacts and the necessity for its updates and modernization. By highlighting
the treaty's deficiencies and the challenges Nepal encounters under its current
provisions, the research can provide practical insights for policymakers in both Nepal
and India. This guidance can help them develop more effective trade policies that
benefit both countries. Additionally, comprehending the economic impact of the
treaty and pinpointing areas for improvement can aid in promoting sustainable
economic development in Nepal. It can also help optimize trade routes and strengthen
economic cooperation between the two nations.

Enhancing bilateral relations, promoting regional stability, aligning with global trade
practices, and incorporating environmental sustainability considerations are additional
dimensions through which this study can drive positive change. Ultimately, by
addressing the necessity for revisions and modernization of the treaty, the research
aims to promote a more inclusive, equitable, and sustainable trade regime between
Nepal and India. This has significant implications for regional cooperation and global
trade dynamics. The study aims to provide a detailed overview of the treaty provisions
governing Nepal's trade with India, covering the period from 1950 to 2023. Data has
been collected from key central authorities, including the Ministry of Industry,
Commerce and Supplies, the Ministry of Foreign Affairs, the Trade Promotion
Center, the Department of Industry, and Nepal Rastra Bank.

Additionally, these analyses are anticipated to offer a new perspective on the Nepal-
India trade regime. This will serve as an effective tool for Nepalese diplomats,
policymakers, leaders, and especially scholars of international relations, enabling
them to assess the situation within the evolving context.

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1.6 Limitation of the Study
The study faced several limitations. The individual researcher encountered numerous
obstacles during the research process. This research primarily relied on both published
and unpublished secondary data, making it somewhat challenging to locate relevant
materials. Further, the limitations are:
 The analysis may be hindered in its depth and accuracy due to restricted
access to comprehensive and up-to-date data on government documents and
stakeholders' perspectives.
 The complex interplay of political, economic, and social factors within trade
dynamics presents challenges in fully capturing and analyzing the multifaceted
nature of the issues at hand.
 Relying heavily on secondary data sourced from various organizations and
agencies presents a challenge in locating pertinent material for the research.

1.7 Organization of the Study

This study is divided into seven chapters:
Chapter 1: Introduction
This chapter provides the background of the study, statement of the problem,
objectives of the study, significance of the study, limitations of the study, and
organization of the study.

Chapter 2: Review of Literature

In this chapter, relevant literature from books, papers, articles, and theses related to
the subject matter of the study is reviewed.

Chapter 3: Research Methodology and Conceptual Framework

This chapter outlines the detailed framework of the study, including research design,
nature and sources of data, data collection procedures, data processing procedures,
and variables used in the analysis.

Chapter 4: Nepal-India Trade

This chapter includes details of Nepal's trade relations with India and outlines the
historical perspective of Nepal-India foreign trade both in context and volume.

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Chapter 5: Nepal-India Trade Treaty
This chapter presents various trade treaties between Nepal and India covering the
background, historical developments, and provisions.

Chapter 6: Findings, Problems, Challenges, and Revisions

This chapter analyzes the study presents findings along with problems, challenges and
proposed specific revisions of Nepal-India trade treaties in details.

Chapter 7: Conclusions
The final chapter summarizes the findings of the study and draws conclusions.

At the end of the study, references and appendices are also included.

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 Chapter 2
Literature Review
2.1 Review on Nepal-India Relations
The relationship between Nepal and India is notably intricate. Interactions and
communications between the citizens of the two nations frequently occur
independently of governmental oversight, often necessitating that governments be
encouraged to overcome their usual reluctance and collaborate for the benefit and
advancement of their populations (Lama M. P., 2004). This multifaceted relationship
is influenced by historical factors, including remnants of colonial rule and the
dynamics of the Cold War. Nepal's strategic position has resulted in a substantial
dependence on India, which in turn has demonstrated a keen interest in influencing
Nepal's internal matters.
The historical ties between Nepal and India date back to ancient times, establishing a
deep and mythical connection between the two countries. Unique historical and
geographical elements have contributed to the distinct nature of their relationship
today. Hindu scriptures, such as the Dharma Sastras, describe Nepal and India as
sanctuaries for those in distress. This idea is illustrated in the epic Mahabharata,
which recounts the temporary refuge taken by the five Pandava brothers within
Nepal's borders. The longstanding relationship between India and Nepal is
exceptional in its breadth and character, possessing a distinct vibrancy. The legendary
marriage between King Ram of India and Princess Sita of Nepal remains a celebrated
example of enduring values in personal relationships, resonating even in modern
times (Upreti, 2009).

Few countries globally maintain an open international border, but India, an important
neighboring nation, shares boundaries with Nepal on three sides. Nepal, almost
entirely surrounded by India, often finds itself perceived by New Delhi as part of its
sphere of influence. This situation has heightened Nepal's awareness of its
geographical constraints. The degree of interconnectedness between Nepal and India
hinges on the preservation of open borders and the regulation of exchange rates.

Nepal and India, as close neighbors, share numerous commonalities. Through

cooperation and mutual understanding, both nations can significantly benefit their
respective populations. In addition to a long, open border, they share a rich cultural

8
history. A substantial number of people of Indian descent reside in Nepal and vice
versa. The "Roti-Beti" relationship, symbolizing the longstanding marital ties between
Nepalese and Indians, highlights the enduring bond between the two countries. This
heritage encompasses the exchange of culinary traditions and cultural practices. The
open border, geographical proximity, and ease of access have promoted strong
economic connections and collaborative development efforts. Nepal's economic
prosperity and democratic progress are closely linked to India's policies toward the
country (Subedi, 2004).

The open border between Nepal and India adds a unique dimension to their
relationship, distinguishing them from other countries. Geographically and socio-
culturally, the two nations are deeply intertwined. Their connection is particularly
unique and genuine, stemming from shared religious and cultural ties. This deep-
rooted bond makes it challenging to understand their bilateral relations solely through
formal political and diplomatic perspectives (Sangraula, 2019). The extensive and
profound interactions between the people of both countries introduce an informal
aspect to their relations. Therefore, it is essential to consider the various informal
channels that contribute to the Nepal-India relationship.

India and Nepal are arguably the closest neighboring countries, despite having
numerous differences. The social and economic structures of both nations, defined by
caste, class, and religion, bear a superficial similarity. This uniqueness, shaped by
various factors and forces, has fostered a closer relationship and a mutually beneficial
partnership (Upreti, 2009). Their interactions span all areas of human activity,
including economic, commercial, political, cultural, religious, familial, and social
connections. The bilateral relationship between Nepal and India is marked by a
committed and harmonious partnership. The constant intermingling of people from
both nations creates a grand harmony of races and faiths, interests and emotions,
values and aspirations.

India's long-standing influence has often restricted Nepal's ability to fully pursue its
own foreign policy objectives. It is crucial to recognize the periodic challenges that
emerge in their bilateral relationship. Despite numerous commonalities, both
countries frequently struggle to resolve key issues such as border disputes, trade and
transit conflicts, and water cooperation concerns (Dahal, 1987). The diplomatic

9
relationship between Nepal and India has been strained by India's significant
involvement in Nepal's political affairs. India maintains a somewhat outdated
patronizing approach towards Nepal, while Nepal grapples with the difficulties of
being a smaller nation trying to progress in its relations with its larger neighbor.

The relationship between India and Nepal has always been marked by challenges and
complexities, despite their open border and shared cultural and linguistic ties. A
significant root of these issues can be traced back to the Ranas' approval of the 1950
agreement with India, which permitted their continued governance in Nepal. There
are substantial differences between the two countries in terms of size, resources,
development levels, scientific and technological progress, industrialization, and
overall capabilities (Subedi, 2004). This intricate relationship has led to the
characterization of the two nations as uneasy partners or friends. India has sometimes
employed stringent measures, such as blockades, to show its dissatisfaction.
Following the adoption of Nepal's constitution in 2015, India imposed a blockade on
Nepal, highlighting the tensions in their relationship.

A thorough evaluation of the bilateral relationship between Nepal and India is

especially important given the current decline in diplomatic relations. Nepal's
strategic position on the southern slopes of the Himalayas is a significant
consideration for India (Pant, 1994). As a landlocked country with a developing
economy, Nepal relies on India to some extent, and there are substantial mutual
economic interests between the two nations. Furthermore, this dynamic has played a
crucial role in fostering meaningful people-to-people connections. Encouragement for
stronger ties can best emerge from the civil societies of both countries, which
understand that increased cooperation and a more robust, harmonious relationship are
essential for their own prosperity and progress.

2.2 Review on Nepal-India Trade Relations

Despite Nepal being a closed society until the late 1940s, foreign trade has always
been significant in the country. Kishor Dahal (1987) concludes in the book 'Indo-
Nepal Trade: Problems and Prospects', due to its unique geography, Nepal's trade
history and traditions differ considerably from those of most other developing nations.
The country has engaged in trade with India and Tibet since ancient times. As per
Y.P. Panta (1991), the structure of Nepal's foreign trade reflects its low level of

10
development and can be divided into two main categories: trade with India and trade
with the rest of the world, including overseas countries.
Nepal's trade was largely limited to India and Tibet due to the absence of political
relations with other countries. However, following the political changes in 1951,
Nepal began establishing diplomatic relations with many nations. The introduction of
a bonus system in the 1960s significantly contributed to diversifying Nepal's trade
with other countries. This system played a crucial role in broadening and diversifying
Nepal's trade and economic relationships. Despite this progress in the 1950s, Nepal's
foreign trade remained predominantly with India. By the start of the first Five Year
Plan in 1956/57, 97.7 percent of Nepal's trade was still with India, while only 2.3
percent was with other countries (Poudyal, 1988).

The trade relationship between Nepal and India dates back to the very inception of
these nations. Due to their close geographical proximity, citizens of both countries
enjoy free movement without the need for travel permits, and trade transactions are
largely unimpeded. This closeness, combined with similar socio-economic and
cultural conditions and the availability of transport facilities, has led to Nepal's
foreign trade being heavily oriented towards India. A renowned scholar in
International Relations, Yubaraj Sangraula, (2019) concludes that India is a crucial
trading partner for Nepal, with trade being almost unrestricted and generally not
requiring licenses or permits, except for items that are either banned or subject to
quotas in India. These factors have established India as a major trading partner of
Nepal for a considerable period.

The economic relationship between Nepal and India can be described as one between
a dominant center, India, and a dependent periphery, Nepal. With India being more
economically developed and significantly larger in both size and resources, the
economic and trade interactions between the two countries often result in
disadvantages for Nepal. Bhubanesh Pant (1994), in his book "Trade and
Development: Nepal's Experiences," argued that Nepal's landlocked status, its close
ties to the Indian market, and its dependence on India for transit routes have created a
unique trade relationship between the two nations.

Geography plays a crucial role in Nepal's predominant trade with India. Nepal's
landlocked status makes trade routes with India more accessible compared to other

11
countries. In the book 'Indo-Nepal Trade; Problems and Challenges' Kishor Dahal
(1987) writes that Nepal's international trade is unique due to its geography, history,
culture, and tradition. These factors, along with the disproportionate trade transactions
between the two nations, where Nepal exports only a small fraction to India, make
India both a monopolist and monopolist for Nepal. Consequently, a significant portion
of Nepal's trade has long been centered on India, and currently, India remains Nepal's
principal trading partner.

Nepal has a unique history of maintaining its independence, successfully repelling

invasions from Tibet and China to the north, as well as from Britain and other
potential invaders to the south. This fierce independence, however, came at the cost of
isolation from the global trade market. Nepal's trade began to diversify beyond India
following the introduction of the Exporters' Exchange Entitlement Scheme (EEC) in
1961. According to Haribansha Jha (1985), a economic professor, despite this
expansion, Nepal's foreign trade sector has been marked by significant deficits due to
weak export performance and steadily increasing imports. The country's exports are
predominantly primary products. Up until 1959/60, trade with Tibet constituted only a
small fraction of Nepal's total trade in the overseas category.

2.3 Review on Nepal-India Trade Treaty

The initial Anglo-Nepal Commercial Treaty of 1792, although signed and ratified,
ultimately did not take effect due to various unfortunate circumstances (Sarup, 1972).
Historically, Nepal has maintained trade relations with India for centuries. However,
there was no formalized agreement specifically regulating trade between the two
nations until the Treaty of 1923. This Nepal-India Treaty, primarily one of Friendship,
contained seven articles, only two of which pertained to trade and related matters.
These provisions remained the basis for trade relations between Nepal and India until
1950, when they were supplanted by the Nepal-India Treaty of Trade and Commerce.

The 1950 Nepal-India Treaty of Trade and Commerce was Nepal's first bilateral
commercial agreement with India, aiming to enhance trade between the two nations.
This treaty remained in effect until it was superseded by the Nepal-India Treaty of
Trade and Transit in. During the interim period, significant political and economic
transformations occurred within Nepal, highlighting the shortcomings of the 1950
treaty. Consequently, with Nepal's evolving foreign policy, the new treaty was signed

12
and implemented on November 1, 1960, for an initial period of five years, with an
automatic extension for another five years unless either party opted to terminate it
with a one-year notice (Taneja & Chowdhary, 2010). This new trade agreement
abolished the need for a customs union, allowing Nepal to establish its own tariff and
trade policies, which facilitated broader trade diversification with other countries.

The Nepal-India Treaty of Trade and Transit did not conclude peacefully on October
31, 1970, marking the end of its validity (Mukherji, 2011). The two nations faced
disagreements over transit facilities and import regulations to India, which delayed the
formation of a new treaty. Following ten days of intensive negotiations, during which
both countries reconciled their differing interests, a new treaty was signed on August
13, 1971, and became effective two days later. Initially, it was valid for five years and
was subsequently extended for another five-year period (Pant B. , 1994). The August
1971 trade treaty allowed for the bilateral export of primary products without basic
customs duties. It also provided Nepal with favorable treatment for imports into India
on a non-reciprocal basis. Specifically, products manufactured in Nepal, comprising
at least 90 percent Nepalese and/or Indian materials, were given preferential treatment
regarding customs duties and quantitative restrictions typically applied to them.

The Nepal-India Treaty of Trade and Transit, 1971, was initially set to expire in
August 1975. However, it was extended through mutual agreement via letter
exchanges between the two countries until three new agreements were established and
implemented on March 25, 1978 (Jha, 1987). Following the adoption of the 1965 New
York Convention on Trade and Transit of Landlocked States, this acknowledged
transit as a right for landlocked nations, Nepal aimed to negotiate two separate
treaties: one focused on transit rights and the other on bilateral trade. In August 1978,
India agreed to this arrangement, resulting in the signing of two distinct treaties—a
treaty on trade and a treaty on transit—thus addressing a long-standing request from
Nepal. Additionally, to address India's concern about preventing unauthorized trade,
an Agreement on Cooperation to Control Unauthorized Trade was also signed.

The establishment of a separate trade treaty with India marked a historic milestone for
Nepal, fulfilling its long-held aspiration. This achievement was the culmination of
decades of concerted efforts and symbolized Nepal's independence (Sarup, 1972). The
Treaty of Trade and the Agreement of Cooperation to Control Unauthorized Trade

13
were both set for five-year duration, with the option for renewal for an additional five
years upon mutual consent. The 1978 Transit Treaty acknowledged Nepal's need for
access to and from the sea as a landlocked nation, essential for promoting its
international trade.

Following the expiration of the treaty in 1988, as per Nisha Taneja & Subhanil
Chowdhary (2010), Nepal and India experienced a trade deadlock that lasted until the
establishment of a democratic government in Nepal in 1990. Subsequently, a new
agreement was signed in December 1991 and renewed in December 1996 with a
revised protocol concerning Article V. However, due to disagreements between the
two governments regarding the issue of trade deflection, the 1996 trade treaty,
initially set to expire in December 2001, was only renewed starting March 5, 2002,
for another five-year period. The agreement includes a clause ensuring its automatic
extension for additional five-year periods unless either party provides a written notice
of termination three months in advance.

The most recent amendment to the Indo-Nepal Treaty was made on October 28, 2009.
There had been ongoing efforts, particularly from the Nepalese side, including the
government and various stakeholders, to revise and modernize the nearly 60-year-old
trade treaty, especially since the treaty's extension in March 2007 (Rajbahak, 1992).
The push for revising all treaties with India gained momentum, especially after the
formation of the Maoist-led coalition government in August 2008. On March 5-6,
2009, trade talks were held in Kathmandu with the aim of updating the treaty.
Following intense negotiations, Nepal and India signed an amended Treaty of Trade
on October 28, 2009. This treaty came into effect immediately upon signing,
replacing the Treaty of Trade and its protocols that were signed on December 6, 1991.

Trade in Nepal was constrained by the country's frugality and the poverty of its small
population. Surya Subedi (2004), an international law professor, emphasized that, as a
landlocked nation, Nepal had the right to engage in trade with other countries via land
routes and expected India to provide similar facilities to those enjoyed by other
landlocked countries, such as Afghanistan. He highlighted that the terms and
conditions offered by India were inadequate for fostering economic development and
expanding Nepal's trade. Nepal argued that India aimed to monopolize the Nepalese

14
market and exert control over Nepal's foreign trade, proposing impractical and
entirely unfeasible measures.

2.4 Research Gap

Indo-Nepal trade agreements have been in operation long before the rise of free trade
agreements in the 1990s. India first extended preferential treatment to Nepalese
exports in 1971. Following this, the trade treaties of 1971, 1991, 1993, 1996, 2002,
and 2009 have included various tariff and duty concessions for Nepalese exports
(Mukherji, 2011). However, it is argued that a significant limitation of Indo-Nepal
trade and economic cooperation is that these treaties have primarily focused on tariff
concessions. These concessions are temporary and do not foster long-term economic
growth or sustainable trade between the two countries. Despite the benefits provided
by the India-Nepal trade treaties, they have not been sufficient to eliminate Nepal's
trade deficit with India.

Few studies have been conducted on the Nepal-India trade regime since the signing of
the amended Trade Treaty in 2009. Although there have not been significant changes
since then, it is crucial to examine the trade treaty regime from an academic
perspective. Indra Nath Mukherji's 2011 work, ‘Revision of Indo-Nepal Treaty of
Trade: Implications for Strengthening Bilateral Trade and Investment Linkages’, and
RK Khanal's 2023 study, ‘Nepal-India Trade: Pre and Post Globalization
Comparisons’, are among the most relevant and insightful contributions to this field.
Further research is needed to understand the evolving dynamics of this trade
relationship and its impact on regional economic integration.

There is not any significant research and studies have done after the conclusion of
trade treaty in 2009. Nepali side has been continuously seeking for update in the
treaty but has always failed to accomplish. This research hence updates activities on
the realm of Nepal-India Trade Treaties and Agreements.

15
 Chapter 3
Research Methodology and Conceptual Framework
3.1 Research Methodology
3.1.1 Research Design
The mix of both qualitative and quantitative research methodology has been adopted
for this research. The study has employed a qualitative research design, conducting a
detailed and in-depth analysis of the stated problem in a qualitative manner. For this,
the research predominantly relies on secondary sources such as books, government
data, scholarly publications, articles, conference reports, quotations, speeches,
interviews, and newspaper articles. Additionally, various interviews—both aired and
available in print—have been utilized to validate the study. Definitions, concepts, and
electronic and internet media sources are also extensively used.
Further, the study is descriptive and analytical, with a focus on comparative studies
found in research papers, journals, and articles. The collected data are analyzed
accordingly. The research adopts a subjective approach, relying on interpretations of
historical events related to the research topic to draw conclusions. Employing a
deductive approach, it analyzes the relevant topics from a broad historical perspective,
gradually narrowing down to draw appropriate conclusions.

3.1.2 Data Collection Method

As mentioned earlier, this study also has used statistics of trade between Nepal and
India to back up the arguments. The study gathers secondary data from various
sources, including government portals, websites, archives, and international sources.
Books, dissertations, journal articles, news articles, reports, press releases, interviews,
official documents, and statements serve as the sources for this research.
The Quarterly Economics Bulletin, a routine publication by Nepal Rastra Bank, has
been extensively referenced to obtain information on the SITC classification of
Nepal's export and import trade. Additionally, other publications from NRB,
including monthly and annual reports, as well as occasional papers, have been
consulted as sources of information. Data collection has also been conducted through
the Trade Promotion Center and CBS Publications.

3.1.3 Analysis Method

Data collection for this research was conducted through secondary sources, including
books, journal articles, government publications, international reports, web sources,

16
and newspapers. The collected data underwent analysis spanning from a historical
perspective to the present context. This approach aimed to comprehend and draw
conclusions regarding the foundations of provisions within the trade treaty, its
historical evolution, and the challenges and reservations associated with it.
A qualitative approach was employed, with a focus on content analysis. This research
utilizes both descriptive and analytical methods for data analysis to derive
conclusions. Where applicable, the research findings are presented using charts,
figures, and diagrams. A thorough description and explanation of the findings are
provided to meet the research objectives.

3.2 Ethical Concern

The primary aim of this research is to trace the historical evolution of the Nepal-India
Trade Treaty. Recognizing the potential for biases and compromised objectivity, the
researcher has taken proactive measures. A systematic and transparent approach to
data selection has been implemented to mitigate bias at every stage of the research
process, encompassing design, analysis, interpretation, and conclusion drawing. The
researcher approaches the study without predetermined outcomes or biases, ensuring
that conclusions are not skewed. Secondary sources were chosen impartially to
maintain neutrality throughout the research process.
The research incorporates data collection from diverse sources, aiming for a
comprehensive analysis that enhances accuracy. However, while striving for
extensive sourcing, the research ensures that sensitive and confidential content is not
included in the analysis. The data collection sources encompass published
government documents, press releases, scholarly papers, books, and magazine
articles, readily accessible online or in academic libraries. Adhering to the essential
principles of academic integrity, the research meticulously cites and references all
external data or information to prevent plagiarism.

The research respects the intellectual property right of every researcher and content
creator and steers away from all types of plagiarism, including direct, mosaic,
paraphrasing, and patchwork. Finally, the conclusion acquired from the historical
development analysis has no intention to disturb or question the happily existed
relation between Nepal and India. Instead this research serves as an additional
resource for understanding trade treaties through comprehensive analysis. It does not
aim to advocate for any potential impact on Nepal's relationship with India. The study

17
is conducted with utmost respect for the sovereignty and cultural sensitivities of the
involved countries and their people, with no intention to undermine any national
interests.

3.3 Conceptual Framework

In the realm of International Law (IL), a treaty is operationally defined as an
agreement among parties within the international arena (Shaw, 1997). While the term
"treaty" is the most commonly utilized to denote such agreements, there exists a range
of alternative names that may express the same concept. These include terms like
protocol, act, charter, covenant, pact, and concordant. The research employs the
precise operational definition to delineate the historical development. Prior to delving
into the diagram illustrating the overall research progression, it is essential to define
some fundamental terminologies. This elucidation aims to demonstrate how these
terms have been utilized in the research.
1. Trade Treaty: Any agreement concerning trade related matters and
concluded among parties in the international scene.
2. Parties: Parties includes Nepal and India
3. Historical Development: Examination of the past events and trends to
understand their impact on the present and future. It also refers to the process
of evolution and change over time within a particular context or subject. It
encompasses the chronological progression of events, actions, and decisions
that shape and influence the current state of a particular field, practice, or
entity.
4. Provisions: Treaty provisions are specific clauses, stipulations, or articles
within a treaty that outline the rights, obligations, and responsibilities of the
parties involved. These provisions detail the terms and conditions agreed upon
by the signatories, including the scope of the agreement, procedures for
implementation, mechanisms for dispute resolution, and any other relevant
details necessary for the treaty's execution and enforcement.
5. Reservations: A unilateral statement, regardless of its phrasing or
designation, made by Nepal when signing, ratifying, accepting, approving, or
acceding to a treaty, which aims to exclude or modify the legal effect of
specific provisions of the treaty in their application to Nepal.

18
The operational definition of a trade treaty forms a crucial foundation for this
research. It is essential to link this information with the various aspects of the
study.

Figure 1: Conceptual Framework of the Study

19
 Chapter 4
Review of Nepal-India Trade
4.1 History of Nepal-India Trade: Contextual Development
In the Kirati period, Nepal experienced a flourishing of art, culture, and trade,
becoming a hub for traders from far-off regions such as India, Tibet, and China
(Thapa, 1973). Despite its initial success, trade with Tibet eventually declined to a
minimal level. The Malla period saw a significant enhancement in trade and industry.
Nepal imported precious metals like gold and silver from Tibet, and items such as
cotton, salt, and herbs from India and other regions. The country also exported high-
quality goods, including brassware, bronze statues, silver, and gold ornaments
(Regmi, 1965). The malla kings minted coins for commercial transactions, fostering
trade and enriching merchants, which drew the attention of Nepal’s neighbors.
As per D. R. Regmi (1965), a renowned historian of Nepal, Ansuvarma's economic
strategies ushered prosperity into his realm by nurturing trade between Nepal and
Tibet, while also facilitating transit trade between India and Tibet. Throughout the
medieval era, trade flourished alongside cultural endeavors. Nevertheless, despite this
affluence, deficiencies in the policing system and the absence of credit, attributed to
weak legal structures and widespread dishonesty, significantly hindered commercial
activities (Kirkpatrick, 1811). Although Nepal boasted notable trade, its territories
yielded limited export goods, primarily iron, copper, and medicinal substances.
Moreover, the dearth of adequate infrastructure and financial institutions further
hampered the expansion of commerce during this period.

By the eve of the Gorkha conquest, the economic condition of the Kathmandu Valley
had worsened due to persistent conflicts among local rulers (Thapa, 2023). Nepal
imported a variety of goods from India, including buffaloes, goats, broadcloth,
cutlery, glassware, Indian cotton textiles, mother of pearl, pearls, coral, beads, spices,
pepper, betel nut and leaf, camphor, tobacco, and phagu (the red powder used during
Holi) (Rose & Scholz, 1980). The incessant conflicts and political intrigues among the
rulers led to a significant reduction in trade with Tibet and other regions beyond the
valley.

In the Rana period, external trade experienced significant transformations. Trade with
India, previously of minor importance, expanded considerably and became a

20
dominant force in Nepal's economy (Halimton, 2007). Although Jang Bahadur
maintained a favorable political and diplomatic stance towards the British government
in India, he was cautious about British commercial involvement, fearing it might lead
to political domination. This era was marked by British complaints regarding
inadequate transportation infrastructure and market facilities, as well as various
restrictions placed on British nationals conducting business in Nepal (Thapa, 1973).
Additionally, the British expressed concerns over the limited freedom their merchants
had in trading within the country, leading to strained economic relations.

Source: Vashuda Pande (2017), Borderlands, empires and nations: Himalayan and trans-himalayan
borderlands, Economic and Political Weekly 52(15), 68-78

Figure 2: Ancient Trade Routes Connecting Himalayas and Trans-Himalayas

K.B. Thapa (1995) concludes in his book 'Main Aspects of Social, Economic and
Administrative History of Modern Nepal', during Jang Bahadur's tenure, there were
significant tensions due to his opposition to granting commercial rights to the British.
A notable instance of this can be observed in the case of Mr. Norris, a British
merchant. Although Norris sought a timber selling agency from Jang Bahadur on two

21
separate occasions, his efforts were subtly thwarted, causing him to abandon the plan
(Thapa, 1995). Jang Bahadur was convinced that British trade was a guise for political
infiltration, symbolized by his belief that they brought the Bible alongside trade, with
the Bible ultimately paving the way for armed dominance.

At the time of Jang Bahadur, British-Indian nationals, including Telis, Agrawals,

Khatris, and Iraqis, were actively engaged in commerce within Nepal (Halimton,
2007). The British-Indian government raised concerns regarding inadequate
transportation and market infrastructure, as well as the limitations imposed on their
traders (Kirkpatrick, 1811). Despite these complaints, some British-Indian merchants
successfully conducted their business activities in Nepal. The persistent efforts of
these traders underscored their determination to maintain trade relations, even in the
face of regulatory and logistical challenges (Halimton, 2007). This dynamic
contributed to a complex interplay between local governance and colonial commercial
interests.

The Nepalese benefited significantly from the trade treaty orchestrated by Bhim Malla
with Tibet, leading to Kathmandu's commercial dominance over the region. Despite
this, trade with Tibet faced significant disruptions during this period. To facilitate
commerce, Nepal established markets near the Tarai border, but this arrangement was
met with disapproval from the British-Indian government, which voiced numerous
complaints against it (Thapa, 1995). Furthermore, the system implemented for Iraqi
traders in Kathmandu, mandating cash-only transactions, sparked controversy. Jang
Bahadur introduced this measure to reduce court caseloads stemming from credit
disputes, but the British perceived it as a strategy to arbitrarily exclude them (Rose &
Scholz, 1980). The friction between local trade policies and British interests
highlighted the complexities of maintaining sovereignty while engaging in
international commerce (Halimton, 2007). This tension was a persistent theme in
Nepal's trade relations during Jang Bahadur's tenure, reflecting broader struggles
between traditional governance and colonial pressures.

Nepal's industrial expansion owes much to its strategic foreign-trade strategies. The
development of industries necessitated access to broader markets and crucial imports
such as steel, cement, petroleum, and machinery, predominantly sourced from British-
India (Rose & Scholz, 1980). As time progressed, Nepal's reliance on goods from

22
British-India intensified, exerting a profound influence on the nation's economic
structure. This dependency underscored the intricate interplay between trade policies
and industrial growth, shaping Nepal's economic trajectory in profound ways (Regmi,
1965). Consequently, it underscores the nation's intricate economic evolution and its
ties to regional trade dynamics.

In the nineteenth century, Nepal emerged as a pivotal bridge linking China and India,
fostering regular cultural and trade interactions owing to shared customs and
geographical proximity (Halimton, 2007). However, Nepal's trade dynamics took a
tumultuous turn in the aftermath of Indian independence, sparking significant
conflicts between the two nations over various issues (Kirkpatrick, 1811). This period
marked a crucial juncture in the evolution of their bilateral relations, shaping the
trajectory of trade policies and diplomatic engagements. Despite historical ties,
diverging interests and emerging challenges posed complexities in the economic
interactions between Nepal and India, underscoring the intricacies of their intertwined
destinies.

4.2 Historical Development of Nepal-India Trade: Volume

4.2.1 Nepal-India Trade before Rana Period (1846)
Before 1846 A.D., detailed information regarding the trading goods and the volume of
trade between Nepal and India is scarce and fragmented. However, it is known that
Nepal primarily imported cloths, animals, and food grains from India. Conversely, the
goods exported from Nepal to India included masks, wax, honey, borax, medicinal
herbs, tea, cannabis products (ganja and bhang), elephants, copper pieces, ivory,
chiraito (herbal medicine), cardamom, and stag horns, among others. Despite the lack
of comprehensive records, these trade patterns illuminate the exchange of
commodities between the two countries during that period.
Table 1 Nepal-India Trade Statistics before 1846

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 1830 2,703,600 N/A N/A

Source: Krishna Bahadur Thapa (1995); Main Aspects of Social,

Economic and Administrative Historu of Modern Nepal

23
In 1830 AD, there were 52 native trading agencies and 34 foreign (Indian) trading
agencies stationed in Kathmandu. Their trading capital amounted to NRs. 5,018,000
and NRs. 2,305,000 respectively. The total value of Indian exports to Nepal in that
year was NRs. 2,703,600. However, the precise value of Nepali goods exported to
India during the same period remains unknown.

4.2.2 Nepal-India Trade during Rana Period (1846-1950)

Trading activities took place throughout the reign of Jang Bahadur, but
comprehensive records of trade volume, including exports and imports, are largely
unavailable. Data exists only for the years 1860 to 1863 and 1877/78, and even this
information is incomplete. The year 1877 marked the end of Jang Bahadur's rule.

Table 2 Nepal-India Trade Statistics Jung Bahadur's Period (1860-63 and 1877/78)

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 1860 1000 24,040 24,040

2. 1862 1000 23,640 24,640

3. 1862 1000 25,140 26,140

4. 1863 1000 25,140 26,140

5. 1877/78 1,764,752 3,522,280 5,287,032

Source: National Archive of India (NAI); Campbell (1864); Dispatch From the
Deputy Commiossinor of Darjelling to the Under Secretary to the Government of
Bengal
To provide an overview of the trade volume between Nepal and India during the
period of Jung Bahadur's rule, the above table presents the export and import data for
the years 1860 to 1863 and 1877/78.

One source indicates that in the year 1877-78 A.D., Nepal's trade volume,
encompassing both exports and imports, amounted to Rs. 5,287,032. Specifically,
Nepal imported goods valued at Rs. 1,764,752 from the North-Western Province and
exported goods worth Rs. 3,522,280 during this period (INA, Foreign Dept. Oct.
1879, Nos. 132-142.).

24
Using this data as a benchmark for assessing the trade conditions during Jang
Bahadur's period, it is evident that Nepal had a favourable balance of trade.

Table 3 Nepal-India Trade Statistics during Rana Period (1846-1951)

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 1895/96 17,653,414 12,721,339 30,374,753

2. 1896/97 14,894,831 14,046,666 28,941,497

3. 1897/98 19,141,942 14,914,038 34,055,980

4. 1904/05 14,986,511 26,406,493 41,393,004

5. 1905/06 15,427,000 33,288,000 48,715,000

6. 1906/07 13,843,000 29,726,000 43,569,000

7. 1919/20 29,046,000 52,013,000 81,059,000

8. 1920/21 28,203,000 59,693,000 87,896,000

9. 1921/22 24,927,000 50,803,000 75,730,000

10. 1922/23 27,536,000 50,803,000 78,339,000

Source: Krishna Bahadur Thapa (1995); National Archive of

India (2012 )

The available figures suggest a significant increase in trade activity immediately

following Jang Bahadur's reign. Although detailed information on the amounts and
values of exports and imports is sparse, data from the year 1882-83 A.D. supports this
perspective. In that year, the total value of exports and imports amounted to Rs.
6,093,536.

However, in subsequent years, the balance of trade shifted in favour of British India.
The development of import trade during this period was likely influenced by Nepali
prime ministers seeking British assistance to consolidate their power. To secure

25
British support, they may have addressed and accommodated all British demands and
grievances related to trade.

At the onset of the 20th century, the trade balance with British India began to shift in
Nepal's favour. The table below presents selected import and export data for the
periods 1895/96-1897/98, 1904/05-1906/07, and 1919/20-1922/23 between Nepal and
the East India Company during the Rana regime.

Towards the end of the Rana regime, the outbreak of World War II led to a scarcity of
industrial goods in the market. As the situation stabilized, Nepalese industries
struggled to progress and meet contemporary demands, increasing Nepal's
dependence on British-Indian goods. By 1949/50, the total trade volume between
Nepal and India had surged to Rs. 204,000,000. Despite this heavy reliance on
imports, Nepal managed to maintain a favourable trade balance during this period.
This reliance on British-Indian goods highlighted the challenges faced by Nepalese
industries in modernizing and becoming self-sufficient in the post-war era.

4.2.3 Nepal-India Trade between 1950-1990

After the dismantling of the Rana regime and the advent of modernization in the
country, the trajectory of foreign trade in Nepal shifted significantly (Shakya, 1991).
Up until the late 1960s, India accounted for over 95% of Nepal's foreign trade (Jha,
1987). With the ongoing modernization, the volume of trade surged remarkably. From
1956/57 to 1989/90, Nepal's trade with India saw an average annual growth rate of
24.6 percent.
From the late 1970s to the mid-1980s, the growth rate of trade remained relatively
stable. However, the latter half of the 1980s witnessed a significant surge in overall
trade volume (Jha, 1987). By the fiscal year 1989/90, the total trade value with India
had risen sharply, exceeding Rs. 666.6 million, reflecting a 12.8% increase.

Between 1956/57 and 1989/90, Nepal experienced significant growth in trade volume
with India. In 1956/57, the total trade volume with India was Rs. 259.2 million. This
(Shakya, 1991)2120.8 million in 1975/76, and Rs. 546 million in 1989/90.

In 1956/57, India held a dominant share of 98% in both Nepal's export and import
trade. However, by 1982/83, this share had decreased significantly to 74% for exports
and 41% for imports (Jha, 1985). Over the period from 1956/57 to 1983/84, Nepal's

26
imports from India saw a staggering 18.5-fold increase, rising from Rs. 165,832
thousand in 1956/57 to Rs. 3,058,031.

Due to the sluggish expansion of exports alongside a surge in imports, Nepal has
maintained a trade deficit with India for an extended period (Shakya, 1991). In recent
years, the trade deficit between Nepal and India has become increasingly worrisome,
primarily due to the sluggish export growth and a significant uptick in imports (Dahal,
1987).

Table 4 Nepal-India Trade Statistics from 1951-1990

Rs. (in thousands)

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 1951/52 N/A N/A N/A

2. 1952/53 N/A N/A N/A

3. 1953/54 N/A N/A N/A

4. 1954/55 N/A N/A N/A

5. 1955/56 N/A N/A N/A

6. 1956/57 169,891 95.472 169,986.472

7. 1957/58 158,365 73.307 158,438.307

8. 1958/59 223,393 117,934 341,327

9. 1959/60 287,527 131,740 419,267

10. 1960/61 397,982 209,737 607,719

11. 1961/62 444,414 265,221 709,635

12. 1962/63 604,025 287,653 891,678

13. 1963/64 604,557 291,171 895,728

14. 1964/65 818,867 440,562 1,259,429

15. 1965/66 781,989 375,106 1,157,095

16. 1966/67 481,268 426,321 907,589

27
 17. 1967/68 477,776 392,980 870,756

18. 1968/69 747,882 572,159 1,320,041

19. 1969/70 864,641 489,459 1,354,100

20. 1970/71 699,081 400,645 1,099,726

21. 1971/72 888,284 519,828 1,408,112

22. 1972/73 983,761 631,493 1,615,254

23. 1973/74 1,163,164 685,621 1,848,785

24. 1974/75 1,814,617 889,628 2,704,245

25. 1975/76 1,981,717 1,185,777 3,167,494

26. 1976/77 2,008,028 1,164,759 3,172,787

27. 1977/78 2,470,574 1,046,142 3,516,716

28. 1978/79 2,884,709 1,296,823 4,181,532

29. 1979/80 3,550,417 964,715 4,515,132

30. 1980/81 2,179,047 992,390 3,171,437

31. 1981/82 2,280,877 994,348 3,275,225

32. 1982/83 2,499,595 843,314 3,342,909

33. 1983/84 3,058,031 1,160,668 4,218,699

34. 1984/85 3,895,750 1,601,725 5,497,483

35. 1985/86 3,970,889 1,241,142 5,212,031

36. 1986/87 4,262,024 1,302,563 5,564,587

37. 1987/88 4,595,739 1,567,605 6,163,344

38. 1988/89 4,238,663 1,034,851 5,273,514

39. 1989/90 4,072,000 602,500 4,674,500

40. 1990/91 7,772,400 1,701,200 9,473,600

Source: Krishna Bahadur Thapa (1995); National Archive of India (2012 ); Arun
Kumar Singh & Avindra Dutt Mishra (2008), Indo-Nepal Economic Relations;
Nepal Rastra Bank (NRB), (1991),Quarterly Economic Bulletin
28
4.2.4 Nepal-India Trade between 1991-2008
Table 5 Nepal-India Trade Statistics form 1991-2008
Rs. (in millions)

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 1991/92 11,245.5 1450 12,695.50

2. 1992/93 12,542.1 1621.7 14,163.80

3. 1993/94 17,035.4 2408.9 19,444.30

4. 1994/95 19,615.9 3124.3 22,740.20

5. 1995/96 24,398.6 3682.6 28,081.20

6. 1996/97 24,583.3 5226.2 29,809.50

7. 1997/98 27,331 8794.4 36,125.40

8. 1998/99 32,119.7 12530.7 44,650.40

9. 1999/00 39,660.1 21220.7 60,880.80

10. 2000/01 45,211 26030.2 71,241.20

11. 2001/02 56,622.1 27956.2 84,578.30

12. 2002/03 70,924.2 26430 97,354.20

13. 2003/04 78,740 30777 109,517.00

14. 2004/05 88,676 38917 127,593.00

15. 2005/06 107,143 40175 147,318.00

16. 2006/07 115,872 41729 157,601.00

17. 2007/08 142,377 38556 180,933.00

18. 2008/09 162,438 41006 203,444.00

Source: Nepal Rastra Bank (2009), Annual Reports; Nepal Rastra Bank (NRB),
(1991),Quarterly Economic Bulletin; Rajesh Kumar Khanal (2023), Nepal-India
Trade: Pre and Post Globalization Comparisions

The establishment of multi-party democracy in Nepal in April 1990 has led to more
amicable and cooperative relations with India (Pant Y. , 2001). Both countries have
29
adopted liberalization policies, which have significantly enhanced the conditions for
boosting trade cooperation.
Table 5 illustrates the direction of Nepalese foreign trade, specifically highlighting the
total volume of Nepal's exports to and imports from India. The data indicates a
declining share of India in Nepal's total exports since 1992/93. However, the table
also reveals a rising trend in the overall trade volume between Nepal and India from
1991/92 to 2008/09. The trade volume, which was Rs. 12,695.50 million in 1990/91,
escalated to Rs. 203,444.00 million by 2008/09. Additionally, Nepal's trade deficit
with India increased from Rs. 9,795.5 million in 1991/92 to Rs. 121,432 million in
2008/09.

4.2.5 Nepal-India Trade between 2009-2023

India is Nepal's predominant trading partner, constituting over 65 percent of Nepal's
total trade. Data from the Nepal Rastra Bank reveals that imports from India surged to
Rs 1920.45 billion in the 2021-22 fiscal year, but a significant decrease to Rs 1027.85
billion in 2022-23 has occurred.
Table 6 Nepal-India Trade Statistics from 2009-2023
Rs. (in millions)

S.N. Year (AD) Import (Rs.) Export (Rs.) Total (Rs.)

1. 2009/10 217,114 39,994 257,108

2. 2010/11 261,925 43,360 305,285

3. 2011/12 299,390 49,616 349,006

4. 2012/13 367,031 51,000 418,031

5. 2013/14 477,947 59,614 537,561

6. 2014/15 491,656 55,865 547,521

7. 2015/16 477,213 39,494 516,707

8. 2016/17 633,670 41,449 675,119

9. 2917/18 814,102 46,720 860,822

10. 2018/19 917,922 62,732 980,654

30
 11. 2019/20 735,295 70,109 805,404

12. 2020/21 971,604 106,372 1,077,976

13. 2021/22 1,200,150 155,220 1,355,370

14. 2022/23 1,027,840 106,690 1,134,530

Source: Nepal Rastra Bank (2023), Annual Report 2022-23, Nepal Rastra Bank
(2022), Annual Report 2021-22; Nepal Rastra Bank (NRB), Nepal Rastra Bank
(2019), Economic Bulletin and Indicators; Rajesh Kumar Khanal (2023), Nepal-
India Trade: Pre and Post Globalization Comparisions

The import volume soared past the trillion mark in 2021-22, peaking at Rs 1.20
trillion, the highest ever recorded. However, this figure declined to Rs 1.02 trillion in
the fiscal year ending mid-July 2023. Similarly, Nepal's exports to India, which stood
at Rs 155.22 billion in 2020-21, dropped to Rs 106.69 billion by 2022-23. Notably,
exports reached a record high of Rs 155.22 billion in 2021-22, marking a 45.9 percent
increase. The trade deficit with India is currently Rs 921.16 billion.

31
 Chapter 5
Nepal-India Trade Treaty
5.1 Background
During the mid-eighteenth century, the area now known as the Kingdom of Nepal was
divided into numerous principalities. The Newar merchants of Nepal played a
significant role in the Nepal-Tibet trade, primarily by exporting goods that Indian
traders had brought to Kathmandu (K.C., 1989). In the western region, stretching
from the Kathmandu Valley to the Mahakali River, there were at least 46 distinct
principalities. In August 1765, the British East India Company entered into a treaty
with the Mughal emperor, gaining control over Bengal, Bihar, and Orissa. This
expansion brought the East India Company's influence close to several principalities
in the eastern and central regions of Nepal (Kant, 1976). Consequently, trade
flourished in Kathmandu, with the city becoming a crucial hub for the East India
Company's trade with Tibet.
In 1769, Prithivi Narayan Shah, the Raja of Gorkha, successfully overthrew the
Mallas in the Kathmandu Valley and embarked on the mission of unifying Nepal,
stretching from the Sutlej River in the west to Sikkim in the east, within a span of
forty years (K.C., 1989). After taking control of Kathmandu, Prithivi Narayan Shah
strictly enforced a policy of excluding and expelling Europeans. He emphasized that
his kingdom was "sandwiched between two giant powers" and advised his followers
to avoid forming close ties with either of them (Sanwal, 1956).

The financial difficulties faced by the East India Company in Bengal, coupled with
the devastating Bengal Famine of 1770, drove the company's directors to seek new
opportunities (Tyagi, 1974). The Industrial Revolution further intensified the need for
broader markets for England's emerging industries. As a result, the company's
leadership became increasingly interested in expanding trade into the less developed
and largely unexplored hilly regions to the north of India (Kant, 1976). This shift in
focus aimed to open up new avenues for commerce and secure additional resources,
thereby stabilizing the company's financial standing and supporting Britain's growing
industrial economy (Singh & Mishra, 2008).

In the late 1780s, a conflict erupted between Nepal and Tibet, prompting China to
intervene by sending a formidable force of seventy thousand soldiers under a general

32
to aid the Tibetans (Regmi, 1971). This conflict provided a chance for the British to
forge an Anglo-Nepalese Trade Agreement on March 1, 1792, marking a gesture of
friendship (Kant, 1976). However, the commercial treaty was largely a token effort,
lacking genuine intent to enhance trade, and as a result, it was never put into practice.

From 1793 to 1800 relations between Nepal and the company were nearly of a formal
nature.

In March 1799, Maharaja Rana Bahadur Shah abdicated the throne, placing his young
son, Girwan Juddha Bikram Shah, in power with the junior queen acting as regent
(Singh & Mishra, 2008). Confounded by court intrigues, Rana Bahadur Shah went to
Banaras, which marked a significant turning point in Anglo-Nepalese relations and
led to a new treaty between the two nations (K.C., 1989). The British viewed Rana
Bahadur's presence in Banaras as a prime opportunity to advance the East India
Company's political and commercial interests. Consequently, negotiations took place
between the two governments, resulting in a Treaty of Commerce and Alliance on
October 26, 1801.

The treaty, though framed under the guise of commerce, was fundamentally political
in nature. The 1801 treaty marked a significant development in Anglo-Nepalese
relations, initiating formal political and commercial ties through the establishment of
a British Residency in Kathmandu (K.C., 1989). However, in January 1804, Lord
Wellesley formally repudiated the treaties of 1792 and 1801, reflecting shifting
priorities and strategies within the British administration (Singh & Mishra, 2008).
This renouncement underscored the complex and often turbulent nature of early
Anglo-Nepalese interactions, highlighting the fragile and evolving dynamics between
the two nations (K.C., 1989). Despite the formal withdrawal from these treaties, the
groundwork for future diplomatic and commercial engagements had been laid, setting
the stage for ongoing relations.

The war between Nepal and East India Company during 1814-16 resulted in Sugauli
Treaty in 1816 but this treaty did not deal with any commercial matters between two
countries government began to station its resident in Kathmandu under the provision
of the 1816 treaty (Regmi, 1971). The commercial relations between India and Nepal
again resumed in fresh vigor.

33
The trade relations between Nepal and British India were governed by the treaty
signed in 1923 (Tyagi, 1974). Article 6 of this treaty stipulated that goods imported on
behalf of the Nepalese government for direct transport to Nepal would not be subject
to customs duty at British Indian ports (Sanwal, 1956). Additionally, the treaty
facilitated free import and export between the two nations without requiring
registration. The Nepalese government also lifted the ban on luxury goods imported
from India. Although trade relations between British India and Nepal were largely
smooth, the influx of inexpensive Indian and British goods into the Nepali market
severely harmed local cottage industries (K.C., 1989). This situation discouraged
entrepreneurs from investing in new industries, as fledgling businesses struggled to
compete with the well-established foreign industries.

Since the beginning of the 19th century, the dynamics of commercial exchange
gradually shifted, resulting in an unfavorable balance of trade for Nepal in the first
quarter of the century (Shakya, 1991). However, the advent of democracy in India
forced the British to grant numerous economic concessions, reversing the trade
balance in Nepal's favor until 1950.

Nepal exports a limited variety of agricultural products to India, while importing

primarily manufactured goods, textiles, and chemicals (Singh & Mishra, 2008). Due
to Nepal's agricultural economy being dependent on India's more advanced industrial
economy, the trade balance has consistently been unfavorable for Nepal. Despite
vocal commitments to diversifying its trade and economy, Nepal has struggled to
lessen its substantial reliance on India (Thapa, 1973). One significant factor
contributing to Nepal's competitive disadvantage in trade and economic development
is its landlocked geography. Additionally, logistical challenges and high
transportation costs further exacerbate Nepal's dependence on its neighbor for
economic stability and growth (Tyagi, 1974).

5.2 Historical Development of Trade Treaty

5.2.1 The Treaty of Trade and Commerce, 1950
Following the British departure from the Indian subcontinent, Nepal and India forged
a fresh Trade Treaty on July 31, 1950, comprising ten articles. This treaty delineated
two separate sets of clauses. The trade arrangement outlined in this Treaty closely
resembled that of the British era (Singh & Mishra, 2008). It affirmed Nepal's

34
entitlement to engage in commerce with foreign nations via Indian ports and
territories.
Provisions within Articles 1-5 of the treaty addressed Nepal's commercial interactions
with other nations via Indian Territory and ports, while Articles 5-7 focused on trade
between India and Nepal (Rawat, 1974). Under this treaty, the Government of India
acknowledged Nepal's complete and unrestricted transit rights for all goods and
products through agreed-upon locations without imposing any duty at Indian ports. In
return, the Government of Nepal consented to impose export duties on Nepalese
goods exported to India equivalent to the excise duties applicable to corresponding
Indian products (Lama, 2004). This measure aimed to prevent Nepalese goods from
being sold in India at more favorable prices, thus balancing the competitive landscape
and mitigating disadvantages for Indian manufacturers due to excise duty imposition
(Rawat, 1974).

Under the treaty, both administrations pledged mutual assistance by supplying

essential commodities crucial to each other's economies. Additionally, the agreement
aimed to foster interactions between the trade sectors of both nations and facilitate the
utilization of cost-effective and convenient transportation routes and methods.

To usher in a fresh era for Indo-Nepalese Trade and Commerce, both nations pledged
mutual support by ensuring the availability of essential commodities crucial to each
other's economies (Article 6). Emphasizing continuous engagement in trade affairs,
they committed to fostering connections between trade interests, offering reasonable
facilitation for the export and import of goods, and notably, streamlining the
utilization of more cost-effective and convenient transportation routes and methods
(Article 7) (Singh & Mishra, 2008).

Yet, the treaty faced various disputes on political and economic fronts. Its inequitable
terms, perceived as emblematic of India's economic hegemony, drew consistent
criticism in Nepal. Nepal voiced grievances over discriminatory taxation on its
products in India, insufficient allocation of railway wagons for Nepali traders,
challenges in road transport, and sporadic and insufficient provision of vital
commodities such as iron and steel (Singh & Mishra, 2008).

As per Article 5, Nepal was obligated to adhere strictly to India's tariff policy,
effectively stripping Nepal of its autonomy in trade policy (Baskota, 1995). This

35
provision barred Nepalese products from being sold in third countries at prices lower
than those in India, hindering their competitiveness in the Indian market.
Consequently, Indian goods continued to flood Nepal, benefiting from tariff
advantages secured by the Government of India over third-country goods (Dahal,
1987). These uniform customs duties inflated the prices of imported goods in Nepal.

India expressed dissatisfaction with the diversion and redirection of trade, particularly
the re-export of petroleum, petroleum products, salt, mica, and jute to Tibet (Rana,
1971). Additionally, India criticized Nepal's discriminatory tariff policies toward
certain Indian goods compared to those of third countries. India frequently defended
the elaborate procedural requirements and customs security measures concerning
Nepali goods as necessary safeguards against smuggling, leakage, and trade diversion
(Singh & Mishra, 2008).

The Indian government implemented a significant policy aimed at substituting

imports by imposing high tariffs on goods from industrialized nations to foster
domestic industrial growth (Rawat, 1974). In 1950, near the end of the Rana rule,
Nepal and India signed a treaty that effectively integrated Nepal into India's protected
market. This treaty allowed for unrestricted trade between the two nations. However,
for Nepal to maintain unrestricted transit rights through India, it was required to
match its import and export tariffs on overseas trade to those of India (Rose & Scholz,
1980). This measure was enforced by India to prevent Nepal from taking advantage of
lower global market prices to import goods and then selling them within India's
shielded market.

5.2.2 The Treaty of Trade and Transit, 1960

The 1950 Indo-Nepal trade treaty underwent revision, accompanied by various
initiatives aimed at advancing Nepal's national interests (Dahal, 1987). Despite being
crafted and agreed upon in good faith by both governments, the treaty's provisions
became insufficient to meet Nepal's evolving trade and industrial demands after a
decade. Consequently, a new agreement was signed on September 11, 1960, to
enhance and broaden the exchange of goods between the two countries, foster
economic collaboration, and facilitate trade with other nations (Lama, 2004).
At the conclusion of the ten-year period, a new Trade and Transit Treaty were signed
between Nepal and India in 1960, replacing the previous 1950 agreement. This treaty,

36
established during a time of mutual trust between India and Nepal's elected
government, allowed Nepal to implement protective tariffs on certain Indian imports
(Ghialdial, 1992). It proposed a customs union between the two nations and granted
mutual duty-free and license-free access to each other's markets for goods produced in
either country and intended for consumption in the other (Acharya, 1985). This
agreement enabled Nepal to formulate its own tariff and trade policies, facilitating the
diversification of its trade with other countries.

The 1960 Trade Treaty reinforced the longstanding trade connections between Nepal
and India and eliminated Nepal's unequal and disadvantageous position in their
bilateral trade relations (Singh & Mishra, 2008). According to Article I of the treaty,
both countries committed to enhancing the growth of trade in goods produced within
their respective borders.

Nepal gained direct control over its foreign exchange reserves and secured the right to
establish its own tariff policies. The treaty included distinct sections on Trade and
Transit. It allowed Nepal to impose duties and quantitative restrictions on Indian
goods to protect its nascent industries. India defined the term "goods originating in
Nepal" as those made entirely from Nepali raw materials, a definition that later caused
interpretive issues (Baskota, 1995). This interpretation aimed to prevent materials
from third countries from entering the Indian market. Additionally, disagreements
emerged regarding the duty rates (Singh & Mishra, 2008). India asserted that Nepal
could not increase the duties on Indian exports to Nepal.

The 1960 Treaty aimed to create a common market, expanding on the 1950 Treaty's
goal of establishing a customs union. The new treaty took further steps by including
provisions intended to move towards a common market (Ghialdial, 1992). India
committed to opening its market to Nepalese goods without duties or quantitative
restrictions. Meanwhile, Nepal was permitted to impose revenue and protective duties
as well as quantitative limitations. The treaty acknowledged the imbalances of the
previous agreement, allowing Nepal to adopt an independent economic policy tailored
to its specific needs (Rose & Scholz, 1980).

Nepal frequently encountered difficulties importing quota goods from India. Despite
India's agreement to the unrestricted flow of goods under Article II of the 1960
Treaty, it imposed restrictions on items such as iron, steel, and galvanized iron sheets

37
destined for Nepal (Trade and Export Promotion Center, 2009). The treaty did not
clearly define goods produced in India and Nepal for mutual trade. Issues such as
delays in the movement of goods to and from third countries, trade deflection, and
Nepal's Gift Parcel Scheme and Bonus Voucher Scheme became increasingly
contentious (Acharya, 1985). Nepal reported instances where it did not receive goods
according to the allocated quotas and where factories failed to supply the quota goods
on time.

Trade between Nepal and India was to be regulated according to each country's
respective laws, rules, and regulations. Nepal could obtain necessary imports for its
development programs from overseas markets at world prices and transport them
duty-free through India (Singh & Mishra, 2008). Additionally, Nepal was allowed to
establish its own foreign-currency reserves, thus ending the Indian government's
direct control over its foreign trade accounts. The 1960 Treaty also stipulated that
goods originating in either country and intended for consumption in the other would
enjoy free and unrestricted entry (Lama, 2004). This treaty aimed to facilitate
smoother trade relations and economic cooperation between the two nations,
recognizing the importance of each country's sovereignty over its trade policies
(Baskota, 1995). It marked a significant step towards enhancing mutual economic
benefits and addressing some of the previous treaty's limitations.

5.2.3 The Treaty of Trade and Transit, 1971

With the Indo-Nepal trade and transit agreement of 1960 set to expire on October 31,
1970, negotiations commenced between the two nations in June of that year,
alternating between Kathmandu and New Delhi. Unfortunately, the final round of
talks collapsed on October 31, 1970 (Sarup, 1972). By mid-1971, Nepal's trade and
economy had suffered severe setbacks, prompting the Government of Nepal to
reluctantly sign the less advantageous Treaty of Trade and Transit with India on
August 15, 1971 (Baskota, 1995).
The latest treaty represented a clearer and more lenient approach compared to its
predecessors, despite encountering operational challenges (Dahal, 1987). Signed with
the intent to bolster the longstanding economic ties between both nations, enhance
economic cooperation, and foster economic development measures, this agreement
was grounded on reciprocal most favored nation treatment.

38
According to the treaty, both nations discarded the notion of a unified market
proposed in the 1960 treaty. This new agreement omitted any mention of protective or
revenue-oriented duties. Nevertheless, India and Nepal opted to extend preferential
treatment to each other concerning customs duties and related charges associated with
imports and exports, including regulations on quantity limitations (Ghialdial, 1992).
India exempted duties on 16 commodities and lifted quantitative restrictions, yet some
of these goods were in high demand in countries requiring hard currency. The
drawbacks stemming from the treaty stem from Nepal's rejection of the Common
Market proposal (Mukherji, 2011).

The trade agreement finalized in August 1971 enabled both countries to engage in
reciprocal export of primary goods exempt from fundamental customs duties (Singh
& Mishra, 2008). This pact extended special treatment to Nepal under non-reciprocal
terms, allowing duty-free access to Indian markets for Nepalese-manufactured
products comprising at least 80% Nepalese and/or Indian materials, circumventing
usual customs duties and quantitative restrictions (Sarup, 1972). India, under this
accord, granted tariff-free entry for Nepal's primary products as long as they were
manufactured within Nepal.

Nepalese exporters consistently raised concerns about significant delays in obtaining

necessary approvals from the Indian government for exporting manufactured goods
(Dahal, 1987). India should expedite the acceptance of Nepalese-manufactured
articles containing at least 80% Nepalese or Nepalese and Indian materials. The
primary gains achieved by Nepal in the 1971 Treaty included expanded warehouse
capacity under Indian oversight at the port of Calcutta, along with improved facilities
for operating barges and transporting commercial goods in sealed container trucks
from the port area to destinations within Nepal (Baskota, 1995).

In 1974, the announcement from the Organization of Petroleum Exporting Countries

(OPEC) regarding a four-fold increase in crude oil prices prompted India to reduce its
oil exports to neighboring countries (Katti, 1992). India's limitations on petroleum
product exports sparked considerable concern in Nepal, given the challenges Nepal
faced in importing these products from other nations. Nepalese reactions should have
been more mindful, considering India's own status as a developing nation severely

39
impacted by the unprecedented price surge of these essential resources (Mukherji,
2011).

In April 1975, tensions escalated in the Indo-Nepalese trade ties when India opted to
impose international prices on certain commodities like coal, cement, iron and steel,
and printing paper provided to Nepal under quotas (Katti, 1992). Simultaneously,
India also enforced a ban on the supply of goods that were previously allocated to
Nepal under quota arrangements.

5.2.4 The Treaty of Trade, 1978

Although the Nepal-India Treaty of Trade and Transit, 1971, was initially set to
expire in August 1975, it was extended through an exchange of letters until March 23,
1978, when three new agreements were signed. In March 1978, Nepal and India
formalized a series of treaties and agreements that took effect on March 25, 1978
(Ghialdial, 1992). Despite an increase in trade volume between the two nations, Nepal
felt that the trade could have grown significantly more if certain treaty clauses had
been drafted differently (Katti, 1992). Nevertheless, the establishment of separate
treaties on trade and transit in 1978 helped to significantly reduce mutual tensions.
In August 1978, India agreed to Nepal's long-standing request to sign two distinct
agreements: a trade treaty and a transit treaty (Bahadur & Lama, 1995). The trade
treaty consisted of 12 articles. Within this treaty, the governments of Nepal and India
committed to exploring and implementing all necessary measures to facilitate,
expand, and diversify trade between the two nations.

In March of 1978, Nepal and India entered into an Agreement on Cooperation aimed
at curtailing unauthorized trade, a step driven by India's initiative to prevent diversion
of such trade (Baskota, 1995). The agreement underscores the sovereignty of both
nations in setting their own foreign trade policies and emphasizes the importance of
safeguarding each country's economic interests against the negative impacts of
unauthorized trade across their shared open border (Dahal, 1987).

On March 17, 1983, the Indo-Nepal Treaty of Trade from 1978 and the Agreement on
Unauthorized Trade Control were extended for an additional five years, incorporating
several revisions. This updated trade agreement offered Nepal a chance to broaden its
trade relations with India through the inclusion of fresh clauses.

40
Under the Treaty of Trade, Nepal and India ensured mutual treatment not less
favorable than that granted to third countries concerning customs duties and other
charges on goods imported from such nations (Lama, 2004). The treaty facilitated the
movement of bulk cargo by rail and road. Additionally, India committed to providing
Nepal with an overland route for trade with Bangladesh and other third countries via
Bangladesh (Singh & Mishra, 2008). Essential goods, in turn, received duty-free entry
into the Indian market, subject to reciprocal arrangements. India also pledged to
prioritize Nepalese industrial products. In return, Nepal agreed to allow duty-free and
unrestricted imports from India.

Furthermore, the treaty stipulated that each nation must prohibit the re-exportation to
the other party of goods imported from third countries, including products where
imports from third countries accounted for more than 50 percent of the ex-factory
value of those goods (Trade and Export Promotion Center, 2009).

Nepal voiced discontent with India's trade policies, criticizing them for being
predominantly unilateral, aimed at safeguarding its own industries while sometimes
neglecting international trade principles (Baskota, 1995). Specifically, in sectors like
stainless steel and synthetic textiles, Nepal observed that Indian authorities were
unhappy with the increasing market presence and competitiveness of these products,
which often fetched higher prices in India. Conversely, India lodged objections and
raised concerns about Nepal's imposition of additional customs duties on Indian
goods, labeling them as discriminatory measures (Bahadur & Lama, 1995).

Trade diversion and smuggling have been significant challenges in the Indo-Nepalese
trade relationship. Smuggling is a global issue, but across the Indo-Nepalese border, it
reached alarming levels during those years, causing concern for the Indian
government (Singh & Mishra, 2008). This problem is largely enabled by the open
border and unrestricted movement of citizens between the two countries.

5.2.5 The Treaty of Trade, 1991

Following the restoration of multiparty democracy in Nepal, the interim Nepalese
government and the Indian government signed a new trade treaty in December 1991,
reaffirming the 1950 treaty between the two nations (Singh & Mishra, 2008). On
December 6, 1991, Nepal and India signed separate treaties on trade and transit and
established a new framework for cooperating to control unauthorized trade. The new

41
Trade Treaty included several additional facilities and concessions for Nepalese
exports to India (Mukherji, 2011).
After the treaty expired in 1988, a trade deadlock emerged between the two countries
until Nepal established a democratic government in 1990. Subsequently, a new
agreement was signed in December 1991 and later renewed in December 1996,
incorporating a revised protocol pertaining to Article V (Trade and Export Promotion
Center, 2009).

The new Trade Treaty comprised some new facilities and concessions for Nepalese
exports to India. A notable feature of this treaty was that it provided, for the first time,
the Nepalese access to the Indian market free of customs duties and quantitative
restrictions for all articles manufactured in Nepal on the basis of certificates of origin
issued by the Nepal (Bahadur & Lama, 1995). Taking advantage of Nepal’s low
customs tariff on a number of sensitive products, with minimal or no processing,
Nepalese companies made large inroads to the Indian market.

Article V of the trade treaty introduced new rules of origin criteria. Under the revised
trade agreement, Nepalese manufactured exports must meet two conditions to gain
preferential access to the Indian market without the usual customs duties and
quantitative restrictions (Trade and Export Promotion Center, 2009). These conditions
include lowering the Nepalese/Nepalese-Indian content requirement for duty-free and
quota-free entry of Nepalese goods into India from 65 percent to 55 percent, as well
as implementing a time-bound pro forma clearance for these exports (Mukherji,
2011).

The Trade Treaty of 1991 faced numerous criticisms. Despite 91 Nepalese products
being granted preferential entry into India, the actual number of products benefiting
from this turned out to be fewer than 25 (Baskota, 1995). Nepalese exporters
experienced uncertainty regarding the time required to process pro-forma forms,
despite the treaty's explicit promise of clearance within four months. Customs duties
for products eligible for preferential treatment were applied at discretion, assessed on
a case-by-case basis. Access to the Indian market varied depending on the product
type and the competitive landscape of Indian industries (Singh & Mishra, 2008).
Evidence indicated that even with the preferential treaty, Nepalese manufactured
goods struggled to penetrate the vast Indian market.

42
The procedures for Nepalese exports to India were revised under the October 1992
agreement. On October 20, 1992, Nepal and India reached an agreement to amend the
Trade Treaty of December 1991, aiming to streamline the export process for Nepalese
goods to India. The treaty underwent another renewal in 1996 (Mukherji, 2011).

Due to disagreements between the two governments regarding the trade deflection
issue, the Trade Treaty of 1996, which was set to expire in December 2001, was only
renewed for five years starting on March 5, 2002 (Pant, 1994). Despite the renewal of
the Nepal-India Trade Treaty in 2002, Nepal's exports to India did not see a
satisfactory increase.

The trade treaty's validity was extended for another five years, from March 6, 2007, to
March 5, 2012. However, with mutual agreement from both governments, the
amendment to the Indo-Nepal Treaty occurred on October 28, 2009 (Singh, 2011).

5.2.6 Treaty of Trade 2009

Trade discussions between India and Nepal took place in Kathmandu on March 5-6,
2009, with the goal of revising the existing treaty. Following intense negotiations, the
governments of Nepal and India signed an amended Treaty of Trade on October 28,
2009 (Mukherji, 2011). This new treaty came into effect immediately upon signing,
replacing the previous Treaty of Trade and the accompanying Protocols that were
established on December 6, 1991 (Republica, 2023). The updated treaty aimed to
address contemporary trade issues and improve economic cooperation between the
two nations.
The core framework of the trade agreement between India and Nepal continues to be
based on the Indo-Nepal Treaty of Trade of 1991, which has been modified by
exchanges of letters on February 16, 1993, December 3, 1996, March 2, 2002, and
October 27, 2009 (Ministry of Foreign Affairs, 2024).

The Article XII (b) of the Treaty states that the Treaty would remain in force for a
period of seven years and would be “automatically extended for further periods of
seven years at a time, unless either of the parties gives to the other a written notice,
three months in advance, of its intention to terminate the Treaty”. (Trade and Export
Promotion Center, 2009)

43
With reference to Article II of the Treaty, point 6 has been added. This point states
that both parties “shall grant recognition to the sanitary and phyto-sanitary certificates
(including health certificates) issued by the competent authority of the exporting
country, based on assessment of their capabilities, in the area of food and agriculture
product (including primary, semi-processed and processed) and shall allow entry of
these products into their markets on the basis of these certificates subject to meeting
the mandatory requirement of the importing country.” (Trade and Export Promotion
Center, 2009)

In accordance with Article IV, both parties mutually agree to exempt primary
products from basic customs duties and quantitative restrictions. Several primary
products that are of export interest to Nepal have been included in this exemption
(Trade and Export Promotion Center, 2009).

According to Article VII, both Contracting Parties must now formulate modalities for
transitioning from the current system to a new one. Article IX includes some
modifications to the safeguard clause. This clause, which comes into effect when
imports under the Treaty pose a serious threat to the domestic industry, now has more
clearly defined resolution mechanisms (Trade and Export Promotion Center, 2009).

Despite numerous amendments, the Treaty still does not eliminate quota restrictions
on four specific products, a long-standing demand of the Nepalese Government. A
review of the recent amendments shows that, apart from the request to remove these
quota restrictions, which was not addressed, most other changes reflect the concerns
of Nepalese exporters (Mukherji, 2011).

The Trade Treaty, originally signed in 1978, was amended in October 2016 for a
seven-year period without revising any provisions (Marasini, 2009). In Nepal, there
was considerable debate about updating the treaty to make it more relevant and
aligned with multilateral and regional trade agreements. However, the Nepal-India
Trade Treaty was extended without any modifications to the existing terms, which
were last revised on October 27, 2009 (Prasain, 2023).

Despite Nepal's long-standing calls for revising the treaty, it was renewed without
amendments on November 10, 2023 (Ministry of Foreign Affairs, 2024). This
automatic renewal of the Nepal-India trade agreement caused Nepal to miss the

44
chance to renegotiate and alter several Articles crucial for enhancing bilateral trade.
Emerging trade issues between Nepal and India include the growing trade deficit,
inability to engage in the value chain, existence of non-tariff barriers, erosion of trade
preferences, and the negative effects of the treaty on the primary and agricultural
sectors (Prasain, 2023).

Nepal missed the chance to negotiate amendments to some restrictive provisions

harming its trade because the Indian side did not prioritize the issue (Acharya, 2016).

45
 Chapter 6
Findings, Problems and Challenges, and Revisions
6.1 Findings
The following figure depicts the trend of Nepal-India Trade Trend from 1956/57 to
2022/23. The volume of trade remains low and static up to 1988/89 but after that the
volume has grown sharply.
4,000,418

3,500,418

3,000,418
Trade Volume (in Rs. Millions)

2,500,418

2,000,418

1,500,418

1,000,418

500,418

418

Years (4 yrs.)

Import Export Total

Source: Table 4; Table 5; Table 6

Figure 3: Nepal India Trade Trend (1956/57 to 2022/23)

46
Between 1956/57 and 1989/90, Nepal experienced significant growth in trade volume
with India. In 1956/57, the total trade volume with India was Rs. 259.2 million. This
is 2120.8 million in 1975/76, and Rs. 546 million in 1989/90.

Nepal has maintained a trade deficit with India for an extended period. In recent
years, the trade deficit between Nepal and India has become increasingly worrisome.

The above line figure reveals a rising trend in the overall trade volume between Nepal
and India from 1991/92 to 2008/09. The trade volume, which was Rs. 12,695.50
million in 1990/91, escalated to Rs. 203,444.00 million by 2008/09. Additionally,
Nepal's trade deficit with India increased from Rs. 9,795.5 million in 1991/92 to Rs.
121,432 million in 2008/09.

The imports from India surged to Rs 1920.45 billion in the 2021-22 fiscal year, but a
significant decrease to Rs 1027.85 billion in 2022-23 has occurred. The import
volume soared past the trillion marks in 2021-22, peaking at Rs 1.20 trillion, the
highest ever recorded. However, this figure declined to Rs 1.02 trillion in the fiscal
year ending mid-July 2023. Similarly, Nepal's exports to India, which stood at Rs
155.22 billion in 2020-21, dropped to Rs 106.69 billion by 2022-23. Notably, exports
reached a record high of Rs 155.22 billion in 2021-22, marking a 45.9 percent
increase. The trade deficit with India is currently Rs 921.16 billion.

6.1.1 Connecting Trade Treaty and Trade Statistics

Although Nepal and India have had trade relations since ancient times, they
formalized these relations by signing the Treaty of Trade and Commerce in 1950.
This was followed by the Treaty of Trade and Transit in 1960 and again in 1971.
Nepal later advocated for a separate Trade Treaty, which was successfully signed in
1978. The Trade Treaty of 1991 was subsequently amended and signed in 2009. Later
auto renewed in 2016 and in 2023.

Let's examine and analyze Figure 3 along with Tables 4, 5, and 6. The data clearly
indicate a growing trend in trade volume between Nepal and India. Figure 3, which
presents the cumulative trade volume from the fiscal year 1956/57 to 2022/23, reveals
only a modest increase in trade up to 1992/93. However, after this period, there was a
notable acceleration in trade volume. Alongside this surge in trade, there has been a
corresponding rise in the trade deficit. This pattern suggests that while the overall
trade activity has expanded significantly, Nepal has increasingly experienced a trade

47
imbalance with India. Further analysis could provide insights into the factors driving
this growth and its implications for bilateral economic relations.

What has driven the substantial increase in trade volume between Nepal and India is a
question that requires thorough analysis. It is unlikely that the Trade Treaty alone is
responsible for this growth. Identifying a single factor that explains the rise in trade
volume is challenging. Various elements, including changes in national policies,
infrastructural development, globalization, and technological advancements, have all
played significant roles in this expansion. While Trade Treaties have certainly
facilitated trade between the two countries, they are just one component of a broader
array of factors contributing to the increased trade volume. A comprehensive
examination of these factors is essential to fully understand the dynamics behind the
growing trade relationship.

Trade treaties are the primary tool for regulating the trade regime between Nepal and
India. Until the 1980s, Nepal was largely an inward-looking and closed economy. It
began to embrace a policy of laissez-faire in the mid-1980s, which marked a
significant shift. With the advent of liberalization, privatization, and Nepal's entry into
the World Trade Organization (WTO), the environment for increasing trade volume
has become more favorable. Consequently, while trade treaties play a crucial role,
they are not the only factor contributing to the growing trade between Nepal and
India. Other influences include economic reforms, improved infrastructure, and
broader global market access, all of which have facilitated stronger trade relations
between the two countries.

6.2 Problems and Challenges

Nepal, being a landlocked nation, lacks direct access to the sea, with the nearest port
located approximately 800 kilometers away at Calcutta. Consequently, all imports and
exports must pass through either India or China (Acharya, 2016). The stance of India
regarding Nepal's transit challenges profoundly influences the growth of Nepal's
international trade. Nepal has consistently raised objections about inadequate transit
provisions, which render its foreign trade unpredictable and less appealing to global
buyers (Dahal, 1987).
Nepal's lack of direct access to the sea, coupled with elevated transit expenses,
sluggish progress in agriculture and industry, high production costs, outdated

48
technology, and a shortage of skilled and semi-skilled labor, have all significantly
hindered achieving a balanced trade relationship between Nepal and India (Singh &
Mishra, 2008).

Nepal's annual export revenue is insufficient to cover even half a year of its import
expenses. Since 1979-80, the export-import ratio has hovered around just above 30
percent, resulting in a substantial foreign exchange deficit (Dahal, 1987). This
persistent underperformance in exports has consistently exerted significant pressure
on the balance of payments.

The trade structure between Nepal and India is imbalanced, with Nepal mainly
exporting primary goods while India exports manufactured products. India sends
high-value items such as stainless steel, coal, printing paper, petroleum, and cotton
textiles to Nepal, while importing less expensive products like rice, ghee, and jute
goods (Dharamdasani, 1976). This arrangement heavily favors India, leading to a
significant trade surplus and additional benefits. Moreover, Nepal has become a
reliable market for India's major manufacturing and engineering products (Dahal,
1987).

Nepal encounters difficulties when importing quota goods from India. The allocated
quota is not always met, and factories sometimes fail to supply these goods promptly.
The trade treaty stipulates that excise and other duties levied by the Indian
Government on products made in India and exported to Nepal should be refunded
(Baskota, 1995). However, in practice, Nepal often faces prolonged delays in
receiving these refunds on the imported goods.

Given the country's size and resource limitations, foreign trade remains crucial for
Nepal's economy. Addressing this, various fiscal, monetary, and foreign exchange
policies must be implemented to discourage the import of luxury items and to ensure
an adequate supply of development and consumer goods at reasonable prices (Dahal,
1987).

Importing certain materials from India can be costly and not always readily available.
When Nepal turns to third countries for these materials, and if the cost exceeds 20%
of the ex-factory price, the goods face various restrictions and quotas. This situation
pressures Nepal to produce all these materials domestically (Singh & Mishra, 2008).

49
Additionally, Nepal has expressed concerns about India's frequent bans on exporting
various food items, such as wheat, rice, sugar, and onions (Dahal, 1987). These bans
have contributed to inflation and increased smuggling activities in Nepal.

Nepal encounters transportation issues, such as a shortage of railway wagons, when

importing goods from India. These delays in receiving Indian goods directly impact
the country's price levels. Smuggling poses a significant challenge in Indo-Nepal
trade. India asserts that many foreign goods imported by Nepal are illegally funneled
into India, adversely affecting its industrial development (Acharya, 2021).

Nepal's imports from India have surged significantly, but its exports to India have not
met expectations (Baskota, 1995). To address the growing trade deficit with India,
Nepal seeks to boost its exports. Although the Indo-Nepal trade treaty allows Nepal to
export its manufactured products to India freely, the cumbersome procedures and
delays in acceptance by Indian authorities have deterred Nepalese exporters from
entering the Indian market (Dahal, 1987). The experience of these exporters indicates
that Nepal's capacity to sell manufactured goods in India largely depends on India's
willingness to accept them, which hampers the development of Nepal's manufacturing
sector.

A significant challenge facing Nepal's trade expansion efforts is the shortage of

adequately trained professionals in foreign trade operations. This constraint has posed
a serious problem as Nepal seeks to broaden its trade activities amidst the growing
complexities of the global market (Dharamdasani, 1976). Developing skilled
personnel well-versed in international trade practices is imperative for Nepal to
enhance its export capabilities and effectively navigate the intricacies of the global
economy (Singh & Mishra, 2008).

Under the terms of the most recent trade treaty amendment in 2009, Nepal grants
partial customs duty exemptions on imports from India (Dahal, 1987). However, the
excessive importation of agricultural products from India has been adversely affecting
Nepal's agricultural sector.

The economic reforms undertaken by both India and Nepal will bring about a mix of
beneficial and challenging outcomes for Nepal (Dharamdasani, 1976). India possesses
significantly more advanced technology and a larger economy compared to Nepal. As

50
India transitions from a high-cost to a low-cost economy, Nepal has experienced a
notable increase in its trade deficit with India.

India holds a pivotal role in Nepal's trade relations, whereas Nepal's significance to
India is comparatively limited. Both countries share a production structure
characterized by similar sectors of agriculture and manufacturing, with a narrow
scope of specialization (Dahal, 1987). India, being at a more advanced stage of
economic development than Nepal, has less demand for imports from Nepal,
particularly in high-technology goods that Nepal lacks the capacity to produce (Singh
& Mishra, 2008). Consequently, the trade relationship between India and Nepal tends
to skew towards imbalance, where the economic benefits are not equally distributed
between the two nations.

Under the Nepal-India Trade treaty, Nepali goods, categorized as primary goods
including agricultural products, enjoy duty-free and quota-free access to Indian
markets (Acharya, 2016). However, specific quantitative restrictions are imposed on
four items: vegetable ghee, acrylic yarn, copper products, and zinc oxide.

There is significant potential for enhancing trade between Nepal and India if current
trade issues are effectively addressed. For Nepal, the majority of exportable goods are
derived from the agricultural sector. Consequently, comprehensive initiatives should
be undertaken to boost agricultural productivity. Despite the continued dependence on
unpredictable monsoon rains, the associated uncertainties can be substantially reduced
through methods such as dry land farming (Dahal, 1987).

The procedures for obtaining the required approvals from the Indian government
should be streamlined and made more straightforward (Baskota, 1995). Additionally,
India should be more receptive to accepting goods produced in Nepal. To help lower
Nepal's growing trade deficit with India, India needs to offer opportunities by relaxing
the criteria for free access of Nepalese products into the Indian market.

Economic cooperation between Nepal and India is governed by bilateral treaties on

trade and transit, as well as agreements aimed at curbing unauthorized trade
(Dharamdasani, 1976). The 2009 Trade Treaty was beneficial for both nations.
However, concerns have arisen regarding the surge in imports and trade deflection
due to the lenient rules of origin. Thus, while maintaining the core structure of the

51
treaty, it is necessary to revise certain clauses to address these issues (Singh &
Mishra, 2008).

6.3 Revisions
The economic relationship between India and Nepal is distinctive and requires careful
nurturing (Dahal, 1987). Both nations must consider each other’s perspectives and
prioritize their mutual long-term interests. Nepal aims to shift from a state of
dependence to one of interdependence and seeks revisions in the Trade Treaty, last
amended in 2009 (Singh & Mishra, 2008). Swift and mutually acceptable solutions to
these issues are essential to promptly restore normalcy in Indo-Nepal trade relations.
A significant shortcoming of the current bilateral trade agreement between India and
Nepal is that, despite some necessary updates in the amended treaty, it remains
predominantly traditional, focusing solely on the exchange of goods (Dahal, 1987). A
thorough overhaul of the treaty is needed to transform it into a comprehensive
economic partnership. This new framework should incorporate investments, services,
standards, and trade facilitation measures as essential components to address the
shared concerns of both nations (Acharya, 1985). Without this broader approach,
which aims to boost Nepal’s export capacity, the measures already in place will fall
short of their potential to enhance bilateral trade.

Nepal has frequently raised concerns regarding the treaty, but these issues have not
yet been addressed in practice. Therefore, it is essential to examine the
implementation aspects of the trade treaty and identify the causes of its inadequate
execution (Acharya, 2021). In order to review the Treaty of Trade, Nepal has been
suggesting revisions to current agreements, proposing strategies to boost investment,
aligning standards, and coordinating the development of trade infrastructure
(Acharya, 2016).

An effective mechanism to resolve trade disputes within the treaty is lacking. The
private sector has also consistently emphasized the need to harmonize the provisions
of the bilateral trade agreement, particularly concerning the calculation of value
addition for goods and the criteria for rules of origin (Marasini, 2009).

Article III of the treaty includes a provision stating that any trade concessions granted
by Nepal and India to third countries will be mutually and automatically applied

52
(Acharya, 2016). As a result, if Bangladesh seeks specific concessions on its products,
granting these concessions would automatically extend the same benefits to India.

According to Article IV of the treaty, Nepal is required to offer reciprocal treatment

for Indian goods. This includes exempting customs duties and quantitative restrictions
on primary products. Consequently, Nepal has been unable to offer subsidies,
particularly for agricultural goods (Prasain, 2023). Eliminating duty-free market
access to India for primary agricultural products would enable Nepal to impose duties
on the heavily subsidized agricultural products from India.

Eliminating duty-free market access for primary agricultural products from India will
allow Nepal to impose tariffs on these heavily subsidized imports (Prasain, 2023).
Thus, certain primary agricultural products, including cereals, should be removed
from the list of items that currently enjoy reciprocal tariff-free access between the two
countries. Additionally, agricultural items such as horticulture, floriculture, forest
products, rice, pulses, milk, eggs, homemade goods, flour, livestock, poultry, fish,
bees, beeswax, and honey should also be excluded from the reciprocal tariff-free list
(Republica, 2023).

Apart from these provisions, there is a need to amend the treaty to tackle issues
concerning phyto-sanitary and sanitary measures, mutual accreditation of products,
and improving Nepal's quality infrastructure (Prasain, 2023). Additionally,
amendments should address rules of origin, allowing certain sensitive items entry into
India free of customs duties up to a specified quota, with imports beyond this quota
permitted only on Most Favored Nation (MFN) terms.

Nepal has raised a significant concern regarding the elimination of quantitative

restrictions. The current treaty includes tariff rate quotas on vegetable fats, acrylic
yarn, copper, and zinc oxide (Acharya, 2016). However, both Nepal and India are
members of the World Trade Organization (WTO), where tariff rate quotas on
manufactured goods are generally prohibited (Republica, 2023).

India, being a neighboring country and a significant power, should refrain from
exploiting its dominant position in trade relations with Nepal. Instead, it should adopt
fiscal measures aimed at stabilizing prices in Nepal (Acharya, 2016). Establishing
mechanisms like the 'Inter-Governmental Committee' could prove effective in

53
addressing issues within the trade treaty and fostering cooperation between the two
nations (Singh & Mishra, 2008).

According to SAWTEE, dumping occurs when exported goods are sold for less than
their domestic market price (Prasain, 2023). However, Nepali jute products have
faced anti-dumping duties in India for the past seven years (Acharya, 2016). This
issue requires attention and should be resolved through amendments to the treaty.

54
 Chapter 7
Conclusions
7.1 Conclusions
Geographical proximity has united India and Nepal. Their shared history, religious
ties, cultural exchanges, and artistic connections have further strengthened their bond.
Collaborative economic efforts are essential for enhancing the welfare of people in
both nations and establishing a strong foundation for future economic growth and
development.
The historical foundation of commercial ties between India and Nepal runs deep,
enduring regardless of the governments' dispositions in both nations. Over centuries,
these ties have thrived thanks to collaborative efforts between the people of the plains
and those from the highlands, with individuals from the terai regions of both countries
actively engaging in economic activities. Nepal's significance has long been evident
as a crucial link in facilitating trade and cultural exchanges between India and Tibet.
The potential for trade with Nepal has always been evident, mirroring the robust
cultural interactions between the two nations over the ages.

The historical analysis of the Nepal-India Trade Treaty reveals the evolving dynamics
and challenges of bilateral trade relations between the two countries. This study traces
the progression from early trade agreements to the most recent treaty updates,
highlighting the significance and impact of these treaties on both nations.

The treaties, starting from the 1950 agreement, have played a pivotal role in shaping
the trade policies and economic cooperation between Nepal and India. These
agreements have facilitated tariff concessions and duty-free access to each other's
markets, fostering economic collaboration. However, the treaties have also
encountered limitations, particularly in addressing the long-term economic growth
and sustainable trade development for Nepal. The focus on temporary tariff
concessions has not been sufficient to eliminate Nepal's trade deficit with India,
indicating a need for more comprehensive and sustainable economic strategies.

Nepal's strategic position as a landlocked country has necessitated a reliance on India

for trade routes and economic support. This dependency has influenced the nature of
trade agreements, often reflecting India's broader economic policies and strategic
interests. Despite this, the treaties have enabled Nepal to develop its own tariff

55
policies and diversify its trade with other countries, contributing to its economic
sovereignty.

The study underscores the importance of continuous updates and negotiations to adapt
to changing economic conditions and trade environments. The 2009 treaty, for
instance, marked a significant update, but further research and negotiations are
necessary to address ongoing challenges and enhance the effectiveness of the trade
agreements.

Ethically, the research has maintained a neutral stance, ensuring that the conclusions
drawn do not undermine the sovereignty or cultural sensitivities of Nepal and India.
The comprehensive analysis based on secondary data sources adheres to principles of
academic integrity, respecting intellectual property rights and avoiding any form of
plagiarism.

To enhance mutual benefits, Nepal and India should capitalize on their geographical,
economic, and ecological synergies. Relations must mirror the strong goodwill and
camaraderie between their peoples, fostering institutional frameworks that unlock
shared potential. Prioritizing principled and evidence-based discussions, both nations
should negotiate bilateral trade matters. Given the close and amicable ties between
Nepal and India, there are no issues beyond resolution, provided there's genuine
respect for each other's sentiments, needs, and aspirations, paving the way for
collaborative endeavors.

In conclusion, while the Nepal-India Trade Treaties have facilitated significant

economic interactions and cooperation, there remains a need for more robust and
forward-looking strategies to achieve sustainable economic growth and balanced trade
relations. This study contributes to the understanding of the historical context and
ongoing evolution of these treaties, providing a foundation for future research and
policy development. Although the Trade Treaties has contributed in increasing the
trade volume between Nepal and India it is not only the sole factor behind. Policies
such as privatization, liberalization and the accession of Nepal into World Trade
Organization have contributed considerably.

56
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Kathmandu: Makalu Publication House.

Trade and Export Promotion Center. (2009, October 27). Treaty of Trade Between
Government of Nepal and Government of India. Retrieved from Government
of Nepal, Trade and Export Promotion Center: http://tepc.gov.np/pages/treaty-
of-trade-india

Tyagi, S. (1974). Indo-Nepalese Relation (1858-1914). New Delhi: D.K. Publishing

House.

Upreti, B. (2009). India and Nepal: Treaties, Documents, Understandings. New

Delhi, India: Kalinga Publications.

62
 Appendices
APPENDIX I
TREATY OF TRADE AND COMMERCE
(Kathmandu, July 31, 1950)
The Government of Indian and the Government of Nepal being desirous of facilitating
and furthering trade and commerce between their respective territories have resolved
to conclude a Treaty of Trade and Commerce and have for this purpose, appointed as
their plenipotentiaries the following persons, namely,

The Government of India.

His Excellency Shri Chandreshwar Prasad Narain Singh,
Ambassador of India in Nepal,

The Government of Nepal

Mohun Shamsher Jung Bahadur Rana,
Maharaja, Prime Minister and Supreme Commander-in-chief of Nepal,

Who having examined each other's credentials and found them good and in due from
have agreed as follows:

Article I

The Government of India recognize in favor of the Government of Nepal full and
unrestricted right of commercial transit of all goods and manufactures through the
territory and ports of India as provided in Articles 2, 3 and 4 below.

Article II

Subject to such arrangements as may be agreed upon between the two Governments,
the Government of India agree to allow all goods imported at any Indian port and
intended for re-export to Nepal to be transmitted to such place or places in Nepal as
without payment of nay duty at nay Indian port.

Article III

Subject to such arrangements as may be agreed upon between the two Governments
the right of passage without payment of excise or import duties shall similarly extend

63
also to goods of Nepalese origin in transit through Indian territory from one approved
place to another within the territories of the Kingdom of Nepal.

Article IV

Subject to such arrangements as may be agreed upon between the two Governments,
the Government of Nepal shall enjoy full and unrestricted right of commercial transit,
from approved place or places in Nepalese territory, through the territories and ports
of India, •of all goods and manufactures of Nepalese origin for export outside India.

Article V

The Government of Nepal agree to levy at rates not lower than those livable, for the
time being, in India, customs duties on imports from and exports to countries outside
India. The Governments of Nepal also agree to levy on goods produced or
manufactured in Nepal, which are exported to India, export duty at rates sufficient to
prevent their sale in India at prices more favorable than those of goods produced or
manufactured in India which are subject to central excise duty.

Article VI

The Government of India and the Government of Nepal agree to assist each other, by
making available, to the maximum extent possible, commodities which are essential,
to the economy of the other.

Article VII

The two Governments agree to promote contacts between the trade interests of the
two countries and undertake to give every reasonable facility for the import and
export of commodities, and in particular to facilitate to use of the routes and methods
of transportation which are ntost economical and convenient.

Article VIII

Civil aircraft of either State shall be permitted to fly over the territory of the other in
accordance with normal international procedure.

64
Article IX

So far as matter dealt with herein are concerned this Treaty cancels all precious
treaties, agreements or engagements concluded between the British Government on
behalf of India and the Government of Nepal.

Article X

This Treaty shall come into force three months after the date of signature by both
parties. It shall remain in force for a period of 10 years, in the first instance and shall,
unless terminated by either party by giving no ice of not less than one year in writing,
continue in force for a further period of 10 years.

Done in duplicate at Kathmandu this 31st day of July 1950.

Sd/-
CHANDRESHWAR PRASAD NARAIN SINGH
For the Government of India

Sd/-
MOHAN SHAMSHER JANG BAHADUR RANA
For the Government of Nepal

65
 APPENDIX II
TREATY OF TRADE AND TRANSIT BETWEEN HIS MAJESTY'S
GOVERNMENT OF NEPAL
AND
THE GOVERNMENT OF INDIA
(November 01, 1960)
Whereas the Government of India and His Majesty's Government of Nepal
(hereinafter referred to as the contracting Parties).

Being animated by the desire to strengthen economic cooperation between the two
countries and convinced of the benefits likely to accrue from the development of their
economies towards the goal of a common market.

Have resolved to conclude a Treaty of Trade and Transit in order to expand the
exchange of goods between their respective territories encourage collaboration in
economic development and facilitate trade with third countries.

THE GOVERNMENT OF INDIA

HIS EXCELLENCY SHRI HARISHWAR DAYAL,
AMBASSADOR OF INDIA IN NEPAL

HIS MAJESTY'S GOVERNMENT OF NEPAL

HIS EXCELLENCY SHRI RAM NARAYAN MISHRA, MINISTER FOR
COMMERCE AND INDUSTRIES

Who having exchanged their full power and found them good and in due form have
agreed as follows:

TRADE
Article I
The Contracting Parties shall promote the expansion of mutual trade in goods
originating in the two countries and shall to this end endeavor to make available to
each other commodities which one country needs from the other. The Contracting
Parties shall further take care to avoid to the maximum extent practicable diversion of
commercial traffic or deflection of trade.

66
Article II

Subject to such exceptions as may be mutually agreed upon, goods originating in

either country and intended for consumption in the territory of the other shall be
exempt from customs duties and other equivalent charges as well as from quantitative
restrictions.

Article III

Notwithstanding the foregoing provisions, either Contracting Party may maintain or

introduce such restrictions as are necessary for the purpose of:

a) Protecting public morals;

b) protecting human, animal and plant life;
c) safeguarding national treasures;
d) safeguarding the implementation of laws relating to the import and export of gold
and silver bullion; and
e) Safeguarding such other interests as may be mutually agreed upon.

Article IV

Payment for goods and services between the two countries will continue to be made
as heretofore.

Article V

The trade of the Contracting Parties with third countries shall be regulated in
accordance with their respective laws, rules and regulations relating to imports and
exports.

Article VI

Payment for transactions with third countries will be made in accordance with the
respective foreign exchange laws, rules and regulations of the two countries. The
Contracting Parties agree to take effective steps, in co-operation with each other, to
prevent infringement and circumvention of the laws, rules and regulations of either
country in regard to matters relating foreign exchange

67
TRANSIT
Article VII
Goods intended for import into or export from the territories of either Contracting
Party from or to a third country shall be accorded freedom of transit through the
territories of the other party. No distinction shall be made which is based on the flag
of vessels, the place of origin, departure, entry, exit destination or ownership of
goods.

Article VIII

Goods (including baggage) shall be declared to be in transit across the territory of

Contracting Party when the passage across such territory, with or without
transshipment, warehousing breaking bulk or change in the mode of transport, is only
a portion of a complete journey beginning and terminating beyond the frontier of the
Contracting Party across whose territory the traffic passes. Traffic of this nature is
termed "traffic in transit".

Article IX

Traffic in transit shall be exempt from customs duty and from all transit duties or
other charges imposed in respect of transit, except reasonable charges for
transportation and such other charges as are commensurate with the costs of services
rendered for the supervision of such transit.

Article X

The procedure to be followed for traffic in transit to or from third countries is laid
down in the Protocol hereto annexed. Except in case of failure to comply with the
procedure prescribed, such traffic in transit shall not be subjected to unnecessary
delays or restrictions. Protocol emphasizes transportation of goods through Indian
territory.

Article XI

Traffic in transit through the territories of one Contracting Party from one place to
another in the territories of the other Party shall be subject to such arrangements as
may be mutually agreed upon.

68
GENERAL
Article XII
Nothing in this Treaty shall affect any measure which either of the Contracting Parties
may be called upon to take in pursuance of general international conventions to which
it is a party or which may be concluded hereafter relating to the transit, export or
import of particular kinds of articles such as opium or other dangerous drugs or in
pursuance of general conventions intended to prevent infringement of industrial,
literary or artistic property or relating to false' marks, false indication of origin or
other methods of unfair competition.

Article XIII

The Contracting Parties shall take appropriate measures to ensure that the provisions
of this Treaty are effectively and harmoniously implemented and to consult with each
other periodically so that such difficulties as may arise in its implementation are
resolved satisfactorily and speedily

Article XIV

This Treaty which replaces the Treaty of Trade and Commerce between the two
countries of 31st July, 1950, shall come into force on 1st November, 1960. It shall
remain in force a period of five years. It shall continue in force for a further period of
five years thereafter, subject to such modification as may be agreed upon, unless
terminated by either party by giving notice of not less than one year in writing.

Done in duplicate in Hindi, Nepali and English, all the texts being equally authentic,
at Kathmandu on the eleventh day of September, one thousand nine hundred and
sixty, corresponding to the twenty seventh day of Bhadra, Bikram Sambat two
thousand and seventeen. In case of doubt, the English text will prevail.
Sd/-
HARISHWAR DAYAL
For the Government of India

Sd/-

69
 RAM NARAYAN MISHRA
For His Majesty's Government of Nepal

1. The Government of India will similarly appoint, where necessary, Customs Liaison
Officers in Nepal for discharging similar functions particularly in respect of goods
carried to Nepal from a customs port in India in transit by air. His Majesty's
Government of Nepal shall extend similar courtesies and accord similar facilities to
such officers.

Sd/-
HARISHWAR DAYAL
For the Government of India

Sd/-
RAM NARAYAN MISHRA
For His Majesty's Government of Nepal

70
 APPENDIX III
TREATY OF TRADE BETWEEN
HIS MAJESTY'S GOVERNMENT OF NEPAL
AND
THE GOVERNMENT OF INDIA
(March 17th, 1960)
Article I

The Contracting Parties shall explore and undertake all measures, including technical
cooperation, to promoter, facilitate, expand and diversify trade between their two
countries.

Article II

The Contracting Parties shall endeavor to grant maximum facilities and to undertake
all necessary measures for the free and unhampered flow of goods, needed by one
country from the other, to and from their respective territories.

Article III

Both the Contracting Parties shall accord unconditionally to cach other treatment no
less favorable than that accorded to any third country with respect to (a) customs
duties and charges of any kind imposed on or in connection with importation and
exportation and (b) import regulations including quantitative restrictions.

Article IV

The Contracting Parties agree on a reciprocal basis, to exempt from basic customs
duty as well as from quantitative restrictions the import of such primary products as
may be mutually agreed upon, from each other.

Article V

Notwithstanding the provisions of Article Ill and subject to such exceptions as may be
made after consultation with His Majesty's Government of Nepal, the Government of
India agree promote the industrial development of Nepal through the grant on the
basis of non-reciprocity of specially favorable treatment to imports into India of

71
industrial products manufactured in Nepal in respect of customs duty and quantitative
restrictions normally applicable to them.

Article VI

With a view to facilitating greater interchange of goods between the two countries,
His Majesty's Government shall endeavor to exempt, wholly or partially, imports
from India from customs duty and quantitative restrictions to the maximum extent
compatible with their development needs and protection of their industries.

Article VII

Payments for transactions between the two countries will continue to be made in
accordance with their respective foreign exchange laws, rules and regulations. The
Contracting Parties agree to consult each other in the event of either of them
experiencing difficulties in their mutual transactions with a view to resolving such
difficulties.

Article VIII

The Contracting Parties agree to co-operate effectively with each other to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to foreign exchange and foreign trade.

Article IX

Notwithstanding the fore going provisions, either Contracting Party may maintain or
introduce such measures or restrictions as are necessary for the purpose of:

a) protecting public morals;

b) protecting human, animal and plant life;
c) safeguarding national treasures;
d) safeguarding the implementation of laws relating to the import and export of gold
and silver bullion;
e) Safeguarding such other interests as may be mutually agreed upon.

72
Article X

Nothing in this Treaty shall prevent either Contracting Party from taking any
measures which may be necessary for the protection of its essential security interests
or in pursuance of general international conventions. Whether already in existence or
concluded hereafter, to which it is a party relating to transit, export or import of
particular kinds of articles such as narcotics and psychotropic substances or in
pursuance of general conventions intended to prevent infringement of industrial
literary or artistic property or relating to false marks, false indications of origin or
other methods of unfair competition.

Article XI

In order to facilitate effective and harmonious implementation of this Treaty the

Contracting Parties shall consult each other regularly.

Article XII

This Treaty shall come into force on the 25th March 1978, and shall remain in force
for a period of five years. It may be renewed for further periods of five years, at a
time, by mutual consent, subject to such modifications as may be agreed upon.

Done in duplicate in Nepali, Hindi and English languages, all the texts being equally
authentic, at New Delhi on the seventeenth day of March one thousand nine hundred
and seventy-eight. In case of doubt the English text will prevail.

PITAMBER DHOJ KHATI

For His Majesty's Government of Nepal

MOHAN DHARIA
For the Government of India

73
 APPENDIX IV
TREATY OF TRADE BETWEEN
HIS MAJESTY'S GOVERNMENT OF NEPAL
AND
THE GOVERNMENT OF INDIA
(December 6th, 1991)
Article I

The Contracting Parties shall explore and undertake all measures, including technical
cooperation, to promoter, facilitate, expand and diversify trade between their two
countries.

Article II

The Contracting Parties shall endeavor to grant maximum facilities and to undertake
all necessary measures for the free and unhampered flow of goods, needed by one
country, from the other, to and from their respective territories.

Article III

Both the Contracting Parties shall accord unconditionally to each other treatment no
less favorable than that accorded to any third country with respect to (a) customs
duties and charges of any kind imposed on or in connection with importation and
exportation and (b) import regulations including quantitative restrictions.

Article IV

The Contracting Parties agree on a reciprocal basis to exempt from basic customs
duty as well as from quantitative restrictions the import of such primary products as
may be mutually agreed upon, from each other.

Article V

Notwithstanding the provisions of Article Ill and subject to such exceptions as may be
made after consultation with His Majesty's Government of Nepal, the Government of
India agree to promote the industrial development of Nepal through the grant on the
basis of non-reciprocity of specially favorable treatment to imports into India of

74
industrial products manufactured in Nepal in respect of customs duty and quantitative
restrictions normally applicable to them.

Article VI

With a view to facilitating greater interchange of goods between the two countries,
His Majesty's Government shall endeavor to exempt, wholly or partially, imports
from India from customs duty and quantitative restrictions to the maximum extent
compatible with their development needs and protection of their industries.

Article VII

Payments for transactions between the two countries will continue to be made in
accordance with their respective foreign exchange laws, rules and regulations. The
Contracting Parties agree to consult each other in the event of either of them
experiencing difficulties in their mutual transactions with a view to resolving such
difficulties.

Article VIII

The Contracting Parties agree to co-operate effectively with each other to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to foreign exchange and foreign trade.

Article IX

Notwithstanding the fore going provisions, either Contracting Party may maintain or
introduce such measures or restrictions as are necessary for the purpose of:

a) protecting public morals;

b) protecting human, animal and plant life;
c) safeguarding national treasures;
d) safeguarding the implementation of laws relating to the import and export of gold
and silver bullion; and
e) Safeguarding such other interests as may be mutually agreed upon.

75
Article X

Nothing in this Treaty shall prevent either Contracting party from taking any
measures which may be necessary for the protection of its essential security interests
or in pursuance of general international conventions. Whether already in existence or
concluded hereafter, to which it is a party relating to transit, export or import of
particular kinds of articles such as narcotics and psychotropic substances or in
pursuance of general conventions intended to prevent infringement of industrial
literary or artistic property or relating to false marks, false indications of origin or
other-methods of unfair competition.

Article XI

In order to facilitate effective and harmonious implementation of this Treaty the

Contracting Parties shall consult each other regularly.

Article XII

This Treaty shall come into force on the 6th December 1991 and shall remain in force
for a period of five years. It may be renewed for further periods of five years, at a
time, by mutual consent, subject to such modifications as may be agreed upon.

Done in duplicate in Nepali, Hindi and English languages, all the texts being equally
authentic, at New Delhi on the 6th December 1991. In case of doubt the English text
will prevail.

COPAL MAN SHRESTH

Minister of Commerce
For His Majesty's
Government of Nepal.

P. CHIDAMBARAM
Minister of State for Commerce
For the Government of India

76
 APPENDIX V
AGREEMENT OF CO-OPERATION BETWEEN
HIS MAJESTY'S GOVERNMENT OF NEPAL AND
THE GOVERNMENT OF INDIA
TO CONTROL UNAUTHORIZED TRADE
(December 6th, 1991)
Article I

The Contracting Parties, while recognizing that there is a long and open border
between the two countries and there is free movement of persons and goods across the
border and noting that they have the right to pursue independent foreign trade
policies, agree that either of them would take all such measures as are necessary to
ensure that the economic interests of the other party are not adversely affected
through unauthorized trade between the two countries.

Article II

The Contracting Parties agree to co-operate effectively with each other, to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to customs, narcotics and psychotropic substances, foreign
exchange and foreign trade and shall for this purpose assist each other in such matters
as consultation, enquiries and exchange of information with regard to matters
concerning, such infringement or circumvention.

Article III

Subject to such exceptions as may be mutually agreed upon, each Contracting Party
shall prohibit and co-operate with the other to prevent:

a) Re-exports from its territory to third countries of goods imported from the other
Contracting Party and products which contain materials imported from the other
Contracting party exceeding 50 percent of the ex-factory value of such products.
b) Re-exports to the territory of the other Contracting Party of goods imported from
third countries and -of products which contain imports from third countries
exceeding 50 percent of the ex-factory value of such goods.

77
Each Contracting Party will:

a) Prohibit and take appropriate measures to prevent import from the territory of the
other Contracting Party of goods liable to be re-exported to third countries from
its territory and the export of which from the territory of the other Contracting
Party to its Territory is Prohibited.
b) In order to avoid inducement towards diversion of imported goods to the other
Contracting Parry, take appropriate steps through necessary provision relating to
Baggage Rules, gifts and foreign exchange authorization for the import of goods
from third countries.

Article IV

The Contracting Parties shall compile and exchange with each other statistical and
other information relating to unauthorized trade across the common border. They also
agree to exchange with each other regularly the lists of goods the import of which
prohibited, or restricted or subject to control according to their respective laws and
regulations.

Article V

The respective heads of the Border Customs Offices of each country shall meet
regularly with his counterpart of appropriate status at least once in two months
alternately across the common border.

a) To co-operate with each other in the prevention of unauthorized trade.

b) To maintain the smooth and uninterrupted movement of goods across their
territories.
c) To render assistance in resolving administrative difficulties as may arise at the
field level.

Article VI

In order to facilitate effective and harmonious Implementation of this Agreement the

Contracting Parties shall consult each other regularly.

78
Article VII

This Agreement shall come into force on the 6th December 1991 and shall remain in
force for a period of five years. It may be renewed for further period of five years at a
time by mutual consent subject to such modifications as may be agreed upon.

Done in duplicate in Nepali, Hindi and English languages, all the texts being equally
authentic at New Delhi on the 6th December 1991. In case of doubt, the English text
will prevail.

GOPAL MAN SHRESTHA

Minister of Commerce for His Majesty's
Government of Nepal

P. CHIDAMBARAM
Minister of State for Commerce
For the Government of India

79
 APPENDIX VI
TREATY OF TRADE BETWEEN THE GOVERNMENTS OF NEPAL
AND
THE GOVERNMENT OF INDIA
(October 27th, 2009)
The Government of Nepal and the Government of India (hereinafter referred to as the
Contracting Parties),

Being conscious of the need to fortify the traditional connection between the markets
of the two countries,

Being animated by the desire to strengthen economic cooperation between them,

Impelled by the urge to develop their economies for their several and mutual benefit,
and

Convinced of the benefits of mutual sharing of scientific and technical knowledge and
experience to promote mutual trade,

Have resolved to conclude a Treaty of Trade in order to expand trade between their
respective territories and encourage collaboration in economic development, and

Have for this purpose appointed as their Plenipotentiaries the following persons,
namely,

RAJENDRA MAHATO
Minister of Commerce and Supplies
For the Government of Nepal

ANAND SHARMA
Minister of Commerce and Industry
For the Government of India

Who, having exchanged their full powers and found them good and in due form, have
agreed as follows:

80
Article I

The Contracting Parties shall explore and undertake all measures, including technical
cooperation, to promote, facilitate, expand and diversify trade between their two
countries.

Article II

The Contracting Parties shall endeavor to grant maximum facilities and to undertake
all necessary measures for the free and unhampered flow of goods, needed by one
country from the other, to and from their respective territories.

Article III

Both the Contracting Parties shall accord unconditionally to each other treatment no
less favorable than that accorded to any third country with respect to (a) customs
duties and charges of any kind imposed on or in connection with importation and
exportation, and (b) import regulations including quantitative restrictions.

Article IV

The Contracting Parties agree, on a reciprocal basis, to exempt from basic customs
duty as well as from quantitative restrictions the import of such primary products as
may be mutually agreed upon, from each other.

Article V

Notwithstanding the provisions of Article III and subject to such exceptions as may be
made after consultation with the Government of Nepal, the Government of India
agree to promote the industrial development of Nepal through the grant on the basis of
non-reciprocity of specially favorable treatment to imports into India of industrial
products manufactured in Nepal in respect of customs duty and quantitative
restrictions normally applicable to them.

Article VI

With a view to facilitating greater interchange of goods between the two countries, the
Government of Nepal shall endeavour to exempt, wholly or partially, imports from

81
India from customs duty and quantitative restrictions to the maximum extent
compatible with their development needs and protection of their industries.

Article VII

Payment for transactions between the two countries will continue to be made in
accordance with their respective foreign exchange laws, rules and regulations. The
Contracting Parties agree to consult each other in the event of either of them
experiencing difficulties in their mutual transactions with a view to resolving such
difficulties.

Article VIII

The Contracting Parties agree to co-operate effectively with each other to prevent
infringement and circumvention of the laws, rules and regulations of either country in
regard to matters relating to foreign exchange and foreign trade.

Article IX

Notwithstanding the foregoing provisions, either Contracting Party may maintain or

introduce such restrictions as are necessary for the purpose of: (a) Protecting public
morals, (b) Protecting human, animal and plant life, (c) Safeguarding national
treasures, (d) Safeguarding the implementation of laws relating to the import and
export of gold and silver bullion, and (e) Safeguarding such other interests as may be
mutually agreed upon.

Article X

Nothing in this treaty shall prevent either Contracting Party from taking any measures
which may be necessary for the protection of its essential security interests or in
pursuance of general international conventions, whether already in existence or
concluded hereafter, to which it is a party relating to transit, export or import of
particular kinds of articles such as narcotics and psychotropic substances or in
pursuance of general conventions intended to prevent infringement of industrial,
literary or artistic property or relating to false marks, false indications of origin or
other methods of unfair competition.

82
Article XI

In order to facilitate effective and harmonious implementation of this Treaty, the

Contracting Parties shall consult each other regularly.

Article XII

(a) This Treaty shall come into force on the date of its signature. It shall supersede the
Treaty of Trade concluded between the Government of Nepal and the Government
of India on 6th December 1991, as amended or modified from time to time.
(b) This Treaty shall remain in force for a period of seven years and shall be
automatically extended for further periods of seven years at a time, unless either
of the parties gives to the other a written notice, three months in advance, of its
intention to terminate the Treaty.
(c) This Treaty may be amended or modified by mutual consent of the Contracting
Parties.
(d) The Protocol annexed to this Treaty shall constitute its integral part.

Done in duplicate in Hindi, Nepali and English languages, all the texts being equally
authentic, at Kathmandu on 27th October 2009. In case of doubt, the English text will
prevail.

RAJENDRA MAHATO
Minister of Commerce and Supplies
For the Government of Nepal

ANAND SHARMA
Minister of Commerce and Industry
For the Government of India

83