Embassy of India, Kathmandu, Nepal : Commerce Wing Brief (2024)

COMMERCE WING UNCLASSIFIED BRIEF

As on 21 June, 2022

AboutCommerce Wing

1. CommerceWing looks after India-Nepal exchanges in trade, transit and investments. Italso looks after bilateral cooperation in water resources sector and power sector.In addition, it oversees cooperation in civil aviation and tourism sectors.Commerce Wing also monitors the implementation of infrastructure projectsfinanced by Government of India’s Lines of credit (through EXIM Bank of India).

Commercialand Economic Relations:

2.India is Nepal's largest trade partner and the largest source of foreigninvestments, besides providing transit for almost entire third country trade ofNepal. India accounts for about two-third of Nepal’s merchandise trade, aboutone-third of trade in services, one-third of foreign direct investments, almost100% of petroleum supplies, and a significant share of inward remittances onaccount of pensioners, professionals and workers working in India.

BilateralFramework for Trade and Transit

3.The bilateral framework for trade is anchored on the India-Nepal Treaty ofTrade and Agreement of Co-operation to Control Unauthorized Trade - 2009. Therevised Trade Treaty, valid for seven years, was signed on October 27, 2009.Both Treaties were automatically renewed for a further period of 7 years inOctober 2016. The Trade Treaty allows Nepal unilateral duty-free access to theIndian market.

4.India and Nepal also have a Treaty of Transit, which confers transit rightsthrough each other’s territory through mutually agreed routes and modalities.Its revised version was signed on 6January 1999 and has since beenauto-renewed every seven years, the last being in 2020. The Treaty and the LoEsassociated with it allow Nepal’s merchandise to move seamlessly through India’sroad, railway and ports network.

5. TheIndia-Nepal Rail Services Agreement (RSA) 2004 governs the rail-freighttransport between the two countries. An LoE to the RSA was signed in June 2021to liberalize the India-Nepal rail-freight traffic and bring it in linewith latest operational andinfrastructure status of Indian and Nepali Railways.. The LoE has allowedmarket forces to come up in the rail freight segment and increased efficiencyand cost-competitiveness, eventually benefiting Nepalese traders, transportersand the consumer.

6.During the last Indian financial year that ended in March 2022, bilateral tradebetween India and Nepal saw a 41% increase over the previous financial year. Further,Nepal’s exports to India increased more than 100% over the previous financialyear, and constituted three quarters of Nepal’s total exports. By comparison, Nepal’s2nd largest export destination was the United States with 10% share, followedby Germany (2.3%), the UK (1.1%), Turkey (0.9%), France (0.8%) and Australia (0.7%).Nepal is also India’s 11^th largest export destination, up from 28^thposition in 2014. Main exports from India are POL, iron & steel,automobiles, machinery, cereals, etc. Nepal’s exports mainly constitute edibleoil, coffee, tea, spices and jute.

7. India-Nepal merchandise trade statistics overthe past few years are given below.

In US$ million

Indian Financial Year (April toMarch)

Source: DGFT, Govt. of India

8. Open border and connectivity projectshave been major facilitators of increased India-Nepal trade. In last Financial Year,important developments like improvements in border infrastructure, enabling of IndianRuPay payments in Nepal, signing of LOE to bilateral Rail Services Agreement,signing of MoU on G2G supply of fertilizers from India to Nepal and progress inbilateral power sector cooperation are likely to further boost bilateral trade.

9. An Inter-Governmental Committee (IGC)meeting on trade, transit and cooperation to control unauthorized trade betweenIndia and Nepal at Secretary-level is held on regular intervals. It is aplatform to discuss and resolve issues relating to bilateral trade betweenIndia and Nepal, transit facilities provided by India to Nepal to facilitatetrade with third countries, investment promotion, improvement of infrastructureat land customs stations, day-to-day problems in regulation of Nepalesetraffic-in-transit, issues related to Indian investment in Nepal, etc. Anothermechanism, the Inter-Governmental Sub-Committee (IGSC, Joint Secretary-level)is also held regularly and usually precedes the IGSC.Thelastmeetings of the IGC and IGSC were held via videoconferenceon 7 Dec 2020 and 3-4 Dec 2020, respectively.

Transitof Nepal’s 3^rd Country Trade

10.Nepal’s transit trade is routed through twenty-twodesignated routesbetween India-Nepal border and the ports of Kolkata/Haldia and Vishakapatnam.In addition, Nepal’s trade with and through Bangladesh also transits throughIndia. Government of India is providing assistance for development ofcross-border trade related infrastructure. It includes upgradation of fourmajor Integrated Check Posts at Birgunj-Raxaul, Biratnagar-Jogbani,Bhairahawa-Sunauli and Nepalgunj-Rupaidiha to international standards;upgrading approach highways to the border on the Indian side; upgrading andexpanding the road network in the Terai region of Nepal; and, broad gauging andextending rail links to Nepal. Integrated Check Posts at Birgunj and Biratnagarare fully functional and works on ICP Nepalgunj have commenced.

11. LoEon Operationalisation of Vishakhapatnam Port (Amendment in the Treaty ofTransit) for traffic-in-transit between Vishakhapatnam Port and Nepal wassigned in February 2016 during the visit of Prime Minister of Nepal to India.Commensurate amendments in the Railway Services Agreement were also made. Sincethen, it has facilitating movement of transit traffic between VishakapatnamPort to Nepal (ICD Birgunj) and providing additional transit facilities. Boththe Governments have now operated ECTS mechanism for transit cargo on a pilotbasis and discussions are going on to make it permanent.

Trade and Transit during thePandemic

12. When most borders around the worldremained closed, the India-Nepal trade routes continued to be open and robust.In fact, after an initial slowdown in April 2020, the trade flows between Indiaand Nepal quickly picked up, and steadily began to exceed even long-termaverages. As per Nepal Custom’s data for Fiscal Year 2020-21 (ending in July2021), which nearly coincided with the pandemic period, India-Nepal traderegistered a growth of 34% of the previous Fiscal year.

13. During the pandemic, almost 100% ofNepal’s overland trade – with India and rest of the world – took place throughcustoms stations on the Indian border, which remained open throughout and inboth directions. Even during the pandemic’s 2^nd and 3^rdwaves we were able to keep the flows open, which included large quantities ofCovid-19 related medicines, critical supplies and equipment.

IndianInvestments in Nepal

14.Indian Investment in Nepal: India is the largest source of investmentinto Nepal, accounting for more than 32% of the total FDI stock of Nepal, whichis worth nearly USD 520 million, as per NRB data until mid-2020. There areabout 150 Indian ventures operating in Nepal engaged in manufacturing, services(banking, insurance, dry port, education and telecom), power sector and tourismindustries. Indian companies and investments have played a key role in Nepal’snational economic journey by contributing to industrialization, employmentgeneration, government revenue and export earnings.

15.A Bilateral Investment Protection and Promotion Agreement (BIPPA) was signed on21st October 2011. A model Bilateral Investment Treaty (BIT) is being discussedbetween the two countries. India and Nepal also signed a Double TaxationAvoidance Agreement (DTAA) on 27thNovember 2011.With thesigning of this agreement, bilateral trade and investment from India has gotfurther boost.

CustomsCooperation

16.A mechanism of Director General Level Talks on Customs Cooperation and exchangeof information between the Customs Administrations of two countries in placesince 1994. This mechanism provides an institutionalized arrangement to discussissues relating to enforcement, trade, transit and cooperation between the twoCustoms Administrations. The talks in the past have led to improved cooperationin the field of enforcement and facilitation of trade. 20 rounds of talks havebeen held so far, the last of which was held virtually on 19-20 April 2021.

WaterResources Sector

17.Cooperation in water resources primarily concerning the common rivers is animportant area of cooperation. A large number of small and large rivers flowfrom Nepal to India and constitute an important part of the Ganges basin. Theserivers have the potential to become major sources of irrigation and power forNepal and India. A three-tier bilateral mechanism established in 2008, todiscuss cooperation in water resources, flood management, inundation-controland hydropower development between the two countries, has been working well.

18.The Koshi Agreement (signed in 1954 and revised in 1966) and Gandak Agreement(signed in 1959 and revised in 1964) represent the first major agreements onIndia-Nepal cooperation in water resources sector. These were aimed atflood-control, irrigation and power generation for the benefit of both Indiaand Nepal. Last India-Nepal Joint Committee on Kosi and Gandak projects (JCKGP)took place in Patna, India from 12-13 April 2022. Another landmark agreement,The Mahakali Treaty signed in 1996 between India and Nepal provides forequitable use of the waters of the Mahakali river for both countries, includingthrough implementation of Pancheshwar Multi-purpose Project which will provideirrigation, flood-control and power to both India and Nepal.

19.As part of bilateral cooperation on flood-management, river training works onKamala, Bagmati and Lalbakeya rivers were completed under Indiangrant-assistance amounting to NRs 4.85 billion (more than INR 300 crores). Theseworks benefit several millions of people inhabiting in the watersheds of theserivers in India and Nepal. Mutually-agreed emergency works have also beenfunded by Govt. of India on other rivers to minimize the danger of inundation.Government of India has also been proactive in providing relief material toflood-affected areas in Nepal, constituting yet another area of India-Nepalcooperation in this sector.

20.In the last meeting of Joint Standing Technical Committee on Water Resourcesheld in January 2019, Government of India has agreed to support the rivertraining works in three more rivers i.e. Khando, West Rapti and Banganga, undertheJoint Committee on Inundation and Flood Management(JCIFM)framework. The last meeting of the JCIFM took place in Kathmandu on 13-14 March2022.

Power Sector Cooperation

21. TheJoint Vision Statement on Power Sector Cooperation issued on 2 April 2022 duringvisit of Prime Minister of Nepal to India, laid out a comprehensive roadmap forbilateral cooperation in the sector. Its key pillars include joint developmentof power generation projects in Nepal, development of cross-border transmissioninfrastructure, bi-directional power trade, coordinated operation of thenational grids and institutional cooperation in sharing latest operationalinformation, technology and know-how. The Vision Statement acknowledged therole Indian investment can play in Nepal's renewable power sector to benefitboth the countries. The Statement also directed concerned officials on bothsides to expedite the bilateral discussions towards early finalization of thePancheshwar Multipurpose project’s DPR.

22.The 9^th meeting of bilateral Joint Steering Committee (JSC) andJoint Working Group (JWG) mechanisms in power sector cooperation, established atSecretary/Joint Secretary levels, respectively, took place on 23-24 February2022 in Kathmandu. The meetings covered issues related to power trade, buildingof cross-border transmission lines, development of new power projects and alsoprospects for cooperation in renewable energy.

23.Power trade is one of the three main pillars of India-Nepal power sectorcooperation as envisaged in the Joint Vision Statement issued on 2 April 2022. InFebruary 2021, India issued the Procedure for Approval and FacilitatingImport/Export Cross Border of Electricity by the Designated Authority (CBETProcedure), thereby streamlining the regulatory regime and procedure forelectricity trade with and through India. In May 2021, Nepal became the firstcountry to benefit from this Procedure when Nepal Electricity Authority enteredinto an arrangement with NTPC Vidyut Vyapar Nigam Ltd. to buy power in realtime from Indian Energy Exchange.

24. In October 2021, Central ElectricityAuthority, which is the Designated Authority under the CBET Procedure, approvedthe sale of up to 39 MW of power from two generating stations in Nepal toIndia. In 2022, the approved quantum was increased to 364 MW through additionof four more generating stations. This is the first time that Nepal isexporting such large quantities of surplus electricity. The start of theseexports from Nepal to India under the CBET Procedure marks a crucial milestonein bilateral cooperation and is likely to bring significant economic benefitsto both the countries.

25. India exported about 2200 MUs ofelectricity to Nepal in 2021. During FY 2021-22, Nepal sought imports of up to600 MW of power from India during the dry season (winter) which is more than1/3^rd of Nepal’s peak demand. Nepal also receives 70 MUs of freeelectricity annually under the Mahakali Treaty, and additional free electricityunder the Koshi and Gandak Agreements.

26.Power Transmission Lines: An India-Nepal Joint Technical Team(JTT) was constituted in 2014 for preparation of a long-term integrated powertransmission plan covering projects up to 2035. The 10^th JTT meetingtook place on 17 January 2022. There are around 11 transmission lines betweenthe two countries but the bulk of power trade takes place throughMuzaffarpur-Dhalkebar 400KV Double Circuit line.

27.Muzaffarpur-Dhalkebar 400KV line: This line was launched by Prime Ministers ofIndia and Nepal during the latter’s state visit to India in February 2016. TheNepal portion of the 140 km long line was built under an Indian LoC (line ofcredit) of USD 13.5 million. On 11 November 2020, the line was successfullycharged to its full capacity. However, due to low distribution capacity ofDhalkebar substation and limited integration with rest of the grid, the actualpower transmitted was less (up to 350 MW). With the operationalizing ofDhalkebar substation on 1 Feb 2021, the line can now operate at its fullcapacity. Dhalkebar has thus acquired the potential to become the major gatewayfor cross-border electricity trade in South Asia.

28.Two additional 132 kV cross-border transmission lines between Kataiya (India) -Kusaha (Nepal) and Raxaul (India) - Parwanipur (Nepal), built with GoI grantassistance, were completed in 2017. Both sides have decided to increase thecapacity of these two lines through stringing of additional circuits. Severalnew cross-border lines are also under various stages of planning and execution,such as the Gorakhpur-New Butwal 400 kV Quad Moose line (the 2^ndmajor cross-border transmission line being built under joint venture betweenPOWERGRID India and NEA Nepal), the New Nautanwa-Mainhiya line theNanpara-Kohalpur line, etc.

29.India has also supported the construction of power transmission lines withinNepal through Lines of Credit funding via the EXIM Bank. These include major projectslike Koshi corridor and the Modi-Lekhnath line & substations which arenearing completion. The 132 KV Solu Corridor project was jointly inaugurated on2 April 2022 by both the Prime Ministers of India and Nepal during visit ofPrime Minister of Nepal to India. Solu Corridor is a 90 km long, 132 kV DoubleCircuit power transmission line and substation project connecting parts ofNorth-Eastern Nepal with the national electricity grid. It is a USD 29 millionproject financed by Government of India’s Line of Credit, funded by EXIM bankof India and executed by India’s Mohan Energy Corporation Private Limited underEPC model.

30.Arun III Project (900 MW) is a flagship project between India and Nepalin the power sector. It is a peaking run-of-river project located on the ArunRiver in Sankhuwasabha district of Province 1 in eastern Nepal. It is anexport-oriented project and was awarded to India’s SJVN Limited onbuild-own-operate-transfer basis for a period of 30 years includingconstruction period. The foundation stone of the Project was laid by the twoPrime Ministers in May 2018.Since then, the construction of theProject has progressed in full swing, with nearly 60% physical progress, and islikely to be completed ahead of schedule. Once complete, it will be Nepal’slargest power project.

31.In July 2021, SJVN Ltd. signed a MoU with Investment Board of Nepal for thedevelopment of Lower Arun HEP (679 MW) proposed to be located downstream ofArun III and expected to be built as a cascade project. On 16 May 2022, duringthe visit of Prime Minister of India to Nepal, SJVN Ltd signed an MoU withNepal Electricity Authority for joint development of Arun-4 HEP which would belocated upstream of Arun 3 HEP.

32.The 900 MW Upper Karnali HEP was awarded to India’s GMR. The project iscurrently in pre-construction phase and the developer is undertaking activitiesrelated to land acquisition, compensation, financing and power purchasediscussions, in close supervision of the Investment Board of Nepal.

Petroleum

33.The Raxaul-Amlekhgunj across border petroleum pipeline project is a 41-kilometerpipeline to transport petroleum products from India to Nepal.Theproject aims to connect Indian Oil Corporation’s regional depot at thebordering Indian city of Raxaul with Nepal’s biggest fuel storage based inAmlekhgunj. An inter-governmental MOU was signed on 24 August 2015. Indian OilCorporation and Nepal Oil Corporation also signed an MOU on 25 August 2015. Itis South Asia’s first cross-border petroleum products pipeline.

34.Constructed and funded by Indian Oil Corporation Ltd., the pipeline wasremotely inaugurated by the two Prime Ministers on 10 September 2019. Within ashort span of being made operational, the pipeline is able to save Nepal OilCorporation nearly NRs. 15 crores a month. The pipeline created a record bysupplying 100 million liters of diesel to Nepal in a single month in December2020.

35. India is the main supplier of petroleumfuel to Nepal. The 3^rd India – Nepal JWG meeting on Petroleum andGas took place on 07 March 2022 through videoconference. On 23 March 2022, a GeneralSupply Agreement was signed between Indian Oil Corporation Ltd and Nepal OilCorporation Ltd for supply of POL products for the period 01 April 2022 to 31March 2027.

Civil Aviation

36.The bilateral cooperation in this sector is governed by the India-Nepal AirServices Agreement which was signed on 16th February 2010 to facilitate airtraffic between the two countries. 30000 seats per week have been allocated toeach side in each direction. The last structured bilateral discussions on CivilAviation cooperation were held on 21 December 2016 in New Delhi at the JointSecretary-level.

Tourism

37.India is the largest source country for tourism into Nepal. Indians visit Nepalfor its lofty mountains, hospitality and cultural diversity. A large numbers ofIndians are also attracted to Nepal for religious tourism. The same is true forthe Nepalese who visit tourist places, shrines and temples located in thefarthest corners of India.

38.A Memorandum of Understanding (MoU) on Cooperation in the field of Tourism wassigned between the two Governments on 25 November, 2014 in Kathmandu. The MoUaimed to deepen and broaden cooperation in the field of tourism and alsopromote cooperation and direct communication between the stake holders oftourism and hospitality industry for enhancing tourism cooperation andstrengthening economic development and employment generation.

39.The 2^nd meeting of the joint Working Group (JWG, JointSecretary-level) on Tourism was held on July 6, 2018 in Kathmandu. The JWGdiscussed a series of initiatives to boost tourism in both countries, includingthrough development of the Ramayana Circuit, the Buddhist Circuit and severalothers.

Lines of Credit

40.Government of India supported Lines of Credit (LOC) extended by the ExportImport Bank of India to Government of Nepal. GOI has agreed to provide fourlines of credit to the Government of Nepal for US$ 100 million, US$ 250 million,US$ 550 million and US$ 750 million. These lines of credit were signed in June2006, September 2007 and September 2016, for execution of infrastructuredevelopment projects and post-earthquake re-construction projects asprioritized by Government of Nepal. Last India-Nepal LOC Review Meeting tookplace in Kathmandu on 29 March 2022.

41.India’s Lines of Credits have financed 44 road projects, another 7 projects inhydropower and transmission lines and several others in housing andreconstruction, which are spread all across Nepal. A large number of theseprojects are either completed or are nearing completion, including some iconicand major projects such as Solu Corridor Transmission Line, Koshi CorridorTransmission Line, Muzzaffarpur - Dhalkebar Transmission line, RahughatHydroelectric project, Devighat hydroelectric project etc. Both sides areundertaking regular discussions to identify projects under the LOC amount ofnearly US$ 1 billion that currently remains unutilized.

***