Nepal Prime Minister Sher Bahadur Deuba arrived in India on April 1 for his three-day visit. It is his first such visit abroad after assuming office in July 2021. He met his Indian counterpart Narendra Modi and inaugurated many projects together in an online mode in a summit aiming at deepening bilateral relations. The visit is significant in two ways. First, it has come just a week after a visit by Chinese Foreign Minister Wang Yi to Nepal. Second, as Nepal is trying to accelerate its post Covid-19 economic recovery and the Chinese projects alone are not not proving sufficient alone, it is looking up to its long tested development partner India for enhanced trade and investment.
Inauguration of projects
- After the meeting, the Prime Ministers of two countries inaugurated the Himalayan nation’s only railway link between the two countries on April 2. They jointly flagged off Nepal’s only railway link between Janakpur in Nepal and the border town of Jaynagar in India. The 35-km (22-mile) railway was reconstructed by India as a grant. It was built by the colonial British Indian government as a narrow-gauge line to transport logs from Nepal.
- They also remotely inaugurated an electricity transmission line that will supply hydroelectric power generated in the Solukhumbu area, where Mount Everest is located, to Nepal’s national power grid.
The two sides also signed some agreements:
- The two countries agreed to speed up the Pancheswar hydroelectric project on their border in west Nepal, which Modi said would be a “game changer” for the development of the region.
- Nepal agreed to use the Indian RuPay card which would strengthen “financial connectivity,” and promote Indian tourist flows, India said in a statement.
- Both sides also signed agreements that include cooperation in railways and sharing technical expertise between the Indian Oil Corporation and Nepal Oil Corporation.
The Nepal PM was accompanied by his wife Arzu Deuba, Foreign Minister Narayan Khadka, Energy and Water Resources Minister Pampha Bhusal and Health Minister Mahendra Rai Yadav during the meeting. PM Deuba also met BJP President JP Nadda at the B.J.P headquarters.
The Prime Minister of India said in a news briefing after the meeting, “The friendship between India and Nepal and mutual relationship between our people … cannot be found anywhere in the world.Threads of our civilization, culture and mutual exchanges have been linked since ancient times.” Deuba said Nepal’s ties with India were “highly important” and Kathmandu was “eager to benefit from India’s progress through a mutually beneficial economic partnership.”
A bird’s eye view of Indo-Nepal economic ties
India is Nepal’s largest trade partner and the largest source of foreign investments, besides providing transit for almost entire third country trade of Nepal. India accounts for over two-third of Nepal’s merchandise trade, about one-third of trade in services, one-third of foreign direct investments, almost 100% of petroleum supplies, and a significant share of inward remittances on account of pensioners, professionals and workers working in India. The two countries have several mechanisms to deepen their economic ties.
The bilateral framework for trade is anchored on the India-Nepal Treaty of Trade and Agreement of Co-operation to Control Unauthorised Trade – 2009 which was automatically renewed for a further period of 7 years in October 2016. The Trade Treaty allows Nepal unilateral duty-free access to the Indian market. It has been decided by the two Governments to carry out comprehensive review of the Treaties of Trade and Transit between the two countries. Review process has commenced since August 2018.
India is Nepal’s largest export destination, receiving an overwhelming 74% of its total exports. By comparison, the 2nd largest export destination is the United States with 10% share, followed by Germany (3%), the UK (2%), Turkey (1.5%), France (1%) and Japan (1%).The two countries also have a Treaty of Transit, which confers transit rights through each other’s territory through mutually agreed routes and modalities. Its revised version was signed on 6 January 1999 and has since been auto-renewed every seven years, the last being in 2020. The Treaty and the LoEs associated with it allow Nepal’s merchandise to move seamlessly through India’s road, railway and ports network.
India exports petroleum products, iron, steel, cement, machinery and pharmaceuticals and imports tea, black cardamom, juices and jute products. Haldia port handles most of Nepal’s trade and is 848 km away from Birgunj dry port. Negotiations are on to facilitate trade through inland waterways from Haldia to Nepal through rivers Koshi and Gandak. India accounts for 64 percent of Nepal’s total volume of trade, according to data sourced from Economic Survey of 2018-19.
Prognosis
Analysts said the visit would help further promote the multi-faceted relations between India and Nepal. Nepal, a natural buffer between India and China, traditionally balances its ties with Beijing and New Delhi. The two giant neighbours are Nepal’s natural choice for aid and investment for development of infrastructure and trade. But India has an added advantage as the country that is crucially important to provide transit to the landlocked Nepal. Nepal is dependent on Indian ports for most of its trade. About 60% of its exports and imports are handled by Haldia and Vishakhapatnam ports. Proximity to Birgunj helps Haldia to cater to most of Kathmandu’s trade needs. Landlocked Nepal shares a 1,868-km boundary with India, which has 20 entry and exit points for trade.
Nepal has advantage to use Indian ports vis-à-vis Chinese ports. Nepal’s 1,415 km border with China in the north faces geographical challenges. The Nepal-China trade deal allows people living within 30 km on either side of the border to travel freely by merely providing residence proof to engage in barter trade. Tatopani-Zhangmu and Rasuwagadhi-Kerung are two major trade points between Nepal and China. Tatopani has been the closest trade point with China since 1960s but it was closed in 2015 after a severe earthquake and reopened only in 2019, impacting exports and imports.
Although China has become the largest source of FDI to Nepal in recent years, India remains the largest source of FDI on cumulative basis. China committed the largest share of foreign direct investment (FDI) received by Nepal with investment pledges of 22.5 billion Nepali rupees (188 million U.S. dollars) in the 2020-21 fiscal year that ended in mid-July, according to the latest data released by Nepal’s Department of Investment. It was the sixth year in a row that China has topped the chart in terms of FDI pledges. According to the department, Nepal received FDI pledges of 32 billion Nepali rupees (268 million U.S. dollars) in the last fiscal year, with China accounting for around 71 percent of the total.
According to a survey of Nepal Rashtra Bank, in terms of paid up capital, the highest FDI in Nepal is from India. When total stock of FDI is taken into consideration by including reserves and loans, India happens to be the major source region with FDI. Nepal received foreign investment from 52 different economies as of mid-July 2020. In terms of total FDI stock, India ranks top position with Rs.62.45 billion followed by China (Rs.30.97 billion), Saint Kitts and Nevis (Rs.15.27 billion) , Ireland (Rs.12.93 billion), and Singapore (Rs.12.43 billion).
Nepal and India cooperation is crucial for economic development of India. Nepal needs to come out of an artificially created dilemma of choosing between the two giant neighbours. It could go along with both the countries until it does not give strategic space to one at the cost of the other. This is important.