| Artwork: Sworup Nhasiju
Economists have long made the case for diversification as key to a country’s export competitiveness. In line with this, Nepal has made considerable progress in diversifying markets for its specialised products. Nepali agro-based products such as tea, cardamom and herbs, as well as carpets, pashmina and wool, have found markets as far afield as Europe and North America. Unfortunately, however, most of Nepal’s non-specialised goods, which constitute the bulk of its trade, have yet to penetrate into the Southasian market beyond India.
Trade and transit routes of course decide the nature of export diversification. Yet these have received little attention from policymakers in Nepal, possibly for fear of getting entangled in larger regional politics. More or less any dialogue on trade and border-crossing turns into ultranationalist media hype about sovereignty, both in India and Nepal, and thus it should come as no surprise that Kathmandu has been reluctant. Most Nepali exports still exit the region via the Kolkata port, despite high costs and unreliable services owing to port congestion. The economics of trade are such that Nepal’s specialised exports can remain competitive only if the country can keep up with its rivals by securing faster and more reliable transit for its products. Thus, it is time that Nepal makes serious efforts to access new trade routes.
It is simple common sense that Nepal should break into new markets within the neighbourhood, going beyond India. Against the backdrop of the recent transit concessions by both India and Bangladesh (see cover article, ‘The India-Bangladesh land bridge’), leading Nepali businessman Rajendra Khetan claims that the mountain economy of Nepal can be complementary to the coastal economy of Bangladesh. There are also opportunities for the two countries to climb up the supply chains involving their domestic and export industries, through sourcing of higher-quality inputs at cheaper rates and in diverse varieties. For example, Nepal currently buys inputs for its handicrafts from abroad, while Bangladeshi cotton, chemicals and processing equipments would have been cheaper. Meanwhile, Bangladeshi producers of packaged foods are also losing out by not importing cheap and high-quality grains, lentils and fruits from Nepal.
The need for regional integration is especially urgent when we compare Southasia with Southeast Asia. Whereas 25 percent of trade of ASEAN countries is with each other, in Southasia this figure stands at a dismal four percent; this represents a colossal inefficiency, and an ongoing failure on the part of policymakers and entrepreneurs. In the Nepal context, this is as important for imports as for exports. Nepal needs to ensure that its imports are not held hostage to the monopoly of a select few producers, but are instead received through rigorous international competition.
Lethargy and mistrust
Even though the economic logic in strengthening trade and transit relations between Nepal and Bangladesh is clear enough, little has happened so far other than policy concessions that seem out of touch with the ground reality. For example, the two countries exchanged a list of 146 products for tariff negotiation without a clear understanding as to which of those had real trade potentials, nor did they consider non-tariff barriers preventing trade. According to the Ministry of Industry and Commerce, Nepal’s trade with Bangladesh is around USD 11 million per year, less than one percent of Nepal’s trade with India. Furthermore, Nepal-India trade grew significantly in the past five years, while Nepal’s trade with Bangladesh remained stagnant despite some well-meaning gestures by both countries at the policy level. The reason for this has much to do with an inability on the part of Kathmandu and Dhaka to bring India on board for a meaningful trade-and-transit programme that can benefit all three sides.
In this context, the India-Bangladesh trade agreement of January 2010, which offers use of two Bangladeshi ports – Mongla and Chittagong – for the transit of Nepali and Bhutanese exports, is a critical development. But this agreement has failed to trigger a new wave of exports or imports, though it has already been a year since the signing. Likewise, there has been no significant diversion in Nepal’s existing trade routes for its transactions outside Southasia; rather, three-fourths of Nepali exports continue to exit Nepal through the Birgunj border and on to the Kolkata port. In this regard, this agreement has not been substantially different from earlier policy measures offered by Bangladesh, including offering Nepal a 50 percent discount in fees for its use of the Mongla port. What gives trade analysts slightly more hope this time around is that Bangladesh has secured an agreement with India involving the access granted to the India-locked countries. It is now advisable that Nepal follows suit to secure an agreement with India on the use of transit routes to these ports, and to negotiate an infrastructural upgrade that would turn such an agreement into business reality.
For the smaller Southasian countries, bilateral and multilateral trade dialogue with India has proven extremely difficult. The reason for this lies as much in India’s conservative bureaucracy as in the distrust for India within the national establishments of these countries. This tendency is seen in abundance in Bangladesh and Nepal. The Indian bureaucratic machine is yet to open up as the country’s private sector has done, following a decade of impressive economic growth. It does not help that both Nepal and Bangladesh remain politically unstable and, hence, unable to rise above India-bashing as a popular form of nationalism-building, particularly in oppositional politics. In such a situation, if there is to be a depoliticised and pragmatic trade dialogue between India, Nepal and Bangladesh, it is vital to seize the opportunity offered by the India-Bangladesh agreement of last January.
Depoliticising a trade-and-transit dialogue requires coming up with a conceptual framework that is technically sound and respectful of mutual needs. There are three components to such a framework: forging a clear policy framework that unambiguously spells out the terms and conditions under which preceding agreements allow Nepali and Bangladeshi businessmen to trade and transit via India; constructing what can be thought of as strong ‘hardware and software’ necessary for actualising the opportunities offered by such agreement; and coming up with sector-specific national policies that address bottlenecks in building export capacity, particularly in sectors with high potential.
First off, it is obvious that Nepal cannot access the Bangladeshi market, let alone effectively use Mongla and Chittagong ports, until India takes up an enabling role in actually materialising the recent agreements. In principle, India has opened up the Fulbari route in Dinajpur, but its position on the use of Indian territory from Birgunj and Biratnagar towards Bangladesh remains unclear. Currently, there is no explicit ban on the use of Indian territory, but equally there is no commitment from New Delhi in facilitating transit between Nepal and Bangladesh. The latter two now need to bring India on board for a technical trilateral agreement on this, or else the status quo will prevail.
The second point is directly related to this. A recent study by the Nepali government found that Nepal-Bangladesh trade might best be facilitated through the construction of a direct railway connecting Nepali border towns with those in Bangladesh. The existing road links mean that the distance is more and transport costs substantially higher, for example, from Rajshahi, in western Bangladesh, to Nepal than from Kolkata, though this need not be the case. The construction of a direct railway line connecting Bangladesh’s Singhabad-Rohanpur railway line with Biratnagar and Birgunj would forge a new and important connectivity. Katihar in India, about a hundred kilometres south of Biratnagar in the eastern Nepali plains, is already handling Indian trade to Bangladesh, and a new rail link would make trade both more viable and economically attractive for all three parties.
The same is true for Nepal’s potential use of the Chittagong and Mongla ports. Mongla in particular is underutilised, and can offer much lower charges. There is an added advantage of faster turnaround time, which might be crucial for Nepal’s export of products that require expert handling and timely delivery. Currently, delays in meeting export commitments owing to congested ports and unreliable land transport links cost Nepal huge foreign-currency losses. A reliable land link to Mongla has the potential of reducing such costs. Further, Dhaka had for years been offering a 50-percent discount on Mongla port charges for Nepali trade, but this remained underutilised due to the absence of a direct transport link, and was withdrawn a few years back. The India-Bangladesh agreement of 2010 now offers a new window of opportunity for reviving this route.
Nepal and Bangladesh also need to review the administrative structures and procedures in place for customs clearance at checkpoints. According to a World Bank study, it takes a Nepali exporter an average of 41 days to do the necessary paperwork before a Nepali consignment can be loaded onto a ship in Kolkata. The same paperwork takes only 17 days for Indian and 25 days for Bangladeshi consignments. It can be argued that it is unfair to compare landlocked Nepal with India and Bangladesh, who have their own ports, but this added challenge further necessitates rigorous administrative reform.
Tripartite bilateral trade
The most direct way to spread the impressive economic growth of India across the region is to open multiple channels of trade. While Nepal has long had an open border with India, the way it is negotiated by businessmen on the ground for customs and logistics is complex. Nepali policymakers might not have the appetite to deal with the complexities of trade at a time when the practicalities of the India-Nepal open border are increasingly being contested. Amid such adversities, however, last year’s India-Bangladesh agreement does offer a window of opportunity for getting new policies and infrastructure right. India’s political flexibility sharing in the case of the January 2010 communiqué needs to be translated into bureaucratic release, and this will ipso facto benefit Nepal’s ambitions.
Nepal and Bangladesh now need to work to bring India fully on board in helping to develop new trade and transit routes. They also need to follow up any trilateral agreement with a comprehensive package that combines infrastructure-building with customs and administrative reforms. In this, sector-specific trade policies are a necessary component if Nepal is to truly pursue export competitiveness. Despite challenges ahead, there is some hope in that the obvious merits of the argument to open new and more trade and transit routes is slowly gaining ground – even against the ultra-nationalist demagoguery and bureaucratic sluggishness that have long kept these economies hostage.
Mallika Shakya is Wolfson Research Fellow at Oxford University, presently based in New Delhi.