Nepal’s geographical location and historical ties have linked the Nepalese economy irrevocably with India. The prospect for developing export markets with India towards south is easy as there are minimal transportation constraints as compared to the mountainous north.
Moreover, many of Nepal’s agricultural and industrial centers are concentrated in the Terai region. In the 1950s, over 90% of the foreign trade was carried on with India but over the years the total amount of trade between India and Nepal has reduced substantially. Nevertheless, despite several attempts to diversify foreign trade and make it less dependent on India, India remains the main trading partner of Nepal.
Most of Nepal’s basic consumer goods and industrial machinery and equipment are imported from India whereas agricultural goods are exported to India. Apart from the legal trade between the two countries, there is a huge unrecorded trade, which is carried on between the two countries.
Nepal’s trade with other countries other than India involves the transit of goods to and from foreign countries through Indian territory.
Therefore, the smooth transit of goods over India depends on the friendly relations between the two countries. In 1950, under the Treaty of Trade and Commerce between India and Nepal, India agreed to provide transit facilities to Nepal.
Subsequently, custom duties on goods transited through India was waived, 21 border transit points provided and a warehouse in Calcutta port was made available to Nepal for storing goods in transit. India and Nepal signed of Trade and Transit treaties in 1960 and in 1971.
These treaties provided for most favoured nation status to each other on a reciprocal basis and also extension of some preferences by India on a nonreciprocal basis. In 1978, separate treaties for trade and transit were signed between the two governments. In March 1983, this treaty was renewed, which subsequently expired in March 1988. Since a new treaty could not be agreed upon between the two countries, India closed all but two border entry points to Nepal.
The 1989 stalemate in trade negotiations between the two countries, adversely affected the Nepalese economy. Nepal’s exports were subjected to high tariffs and import from India also carried increased costs. There was an overall shortage of essential commodities like fire, baby food, medicines, etc.
Eventually, with political changes taking place in both the countries, the trade and transit dispute was finally resolved in June 1990. In order to avoid any economy difficulties, it is therefore, important for Nepal to maintain a friendly relation with India.