September 2005
COVER STORY

BY Madan Lamsal & Keshav Gautam

Once upon a time, Nepal thrived as the transit point for trade between India and China. Now that lost advantage seems to be regained. Or is it?

Massive growth in both Indian and Chinese economies registered in the last decade or so has prompted these economic giants to explore each other’s territories to expand the market for their respective products. Situated strategically between them, Nepal has opportunity to benefit from this commercial expansionism of the old military adversaries now turned trade allies to take on the traditional economic superpowers.

But how real are the expected benefits for Nepal?

Though there can be a number of other opportunities for Nepal to benefit from the massive growth of its two neighbours, the immediately identified one is in being a transit point to facilitate trade between them.

The idea got a boost after India asked Nepal for a transit passage for its exports to the Tibet Autonomous Region of China about a year ago. China too showed its interest in using Nepal as a transit route for its exports to India. As India made the proposal first, it was viewed with scepticism as is customary in Nepal.

But when His Majesty the King, arriving home after attending the Bangdung conference in Indonesia and the Boao Forum in China, publicly announced that Nepal intends to be a transit point for India-China trade, the bureaucracy stirred and the government set up a task force to study the feasibility of the idea. A couple of months later, the Finance Minister announced, making public the government budget for the fiscal year 2005-06, that provisions have been made to develop a number of north-south roads that would link India with Tibet through Nepal. Though the provision is very small (Rs. 5.57 billion for overall programmes under the road sector), the mention of the idea in the budget document gives it an official look.

However, going by the debate on the pros and cons of the idea, the Nepali side seems to be still confused about the important aspects of the issue. Though a lot of debate is going on through the media, it has not become fruitful in the absence of sufficient and right information.

What can be seen is that both in favour as well as against the idea in Nepal are concentrating on only one aspect of the issue – boosting the existing trade between China and India as well as between Nepal and China.

Obviously, Nepal as a transit point is not going to give a boost in the bilateral trade of these countries. They are quite happy with the way their bilateral trade is growing – estimated to be about 80 percent per annum. Going by the population, the market size of Tibet is not something that India would be so desperate to gain entry into to sell consumer goods.

What is interesting for the Indians is the massive investment that China is making in the construction works in Tibet. A study by the Confederation of Indian Industries (CII) made a couple of years ago identified the opportunity to supply construction material to Tibet as one very big business prospect for India as the supply of such material from the eastern coastal provinces of China will be very costlier than sourcing such material from India.

The second reason for the sudden increase in India’s interest in Tibet is due to the step taken by China to set up free trade zones along the Eastern Indian border. India wants to tap this opportunity as well. Indian businesses could like to set up manufacturing facilities in those free trade zones.

Still more importantly, China wants to develop Western China and the regions around Tibet, which means much more construction activities to speed up in this region in the next several years.

China is now moving fast with its campaign of Going West. India wants to prepare itself to get the advantage of this Chinese growth ambition for this western region. When Tibet and other western Chinese regions are taken together, the market size becomes really attractive. Most interestingly, this region is much more landlocked than Nepal. Moreover, the geography of western India is not considered easy for a road connection to Western China. The traditional trading routes across the Himalayas between these countries fall in areas over which both of the countries are still making their sovereignty claims. Thus these routes still lack the transport and other infrastructure. Pending the settlement of the border dispute, the access to these markets through Nepal becomes attractive for India.

“As a transit point, Nepal’s bargaining power will increase” - Badri P Ojha (Secretary General, FNCCI) Badri P Ojha (Secretary General, FNCCI) What opportunities and challenges do you perceive if Nepal becomes a transit point for India-China trade? It is a misconception that Nepal might become a dumping site for Indian and Chinese products as a result. With Nepal as a transit point, Indian goods will be taken to China, particularly to western Tibet, and Chinese goods will go to Bihar, UP and Northwest India via Nepal. The challenge for Nepal’s businesses is that they may have to face more competition in selling goods in Tibet. The Nepali goods exported to India may face similar competition when Chinese goods reach Indian markets at lower costs via Nepal. Any advantages? As a transit point, Nepal can benefit from the service it renders. Those services include transportation, warehousing, restaurant services, recreation services etc. When people notice Nepal’s attractions, they might come on a visit with family and friends. So, tourism might benefit. Indians might be attracted to Hindu religious sites and Chinese people to Buddhist stupas. In China, there are more than 10 crore Buddhists. Chinese tourists are steadily growing especially in the South East Asian countries. If we could introduce at least a package to Lumbini, we may attract a significant number of Chinese tourists. For this, transportation infrastructure will have to be enhanced . If it is done, the flow of Indian tourists visiting Mansarobar may also grow as it will be much easier for them to go there via Nepal. What advantages do you see for the manufacturing sectors/industries? It depends upon what sort of bilateral agreement is signed. Flow of Nepali goods to Tibet has increased these days. Export has already reached Rs. 2.5 billion. Export to mainland China and Hong Kong is, however, nominal. Increasing our export to mainland China and Tibet depends on whether China gives a preferential access to us. Will this attract Chinese or Indian investors here? Even today, Nepal is seen as a “beggar” country and there is some truth in it. When we provide transit facility, Nepal will be a “giver”. This will help increase our bargaining power. This bargaining power can be utilised in other issues of national interest. It is said that if Nepal doesn’t show an interest, there are other options for India and China. There are other possible routes via Sikkim or Karakoram. If we are not interested, they will be forced to go for those options. I have seen this as an opportunity for Nepal. The flow of people plays a very important role in enhancing the economic activity of any area. Previously the transit point between Pokhara and Kathmandu was Bandipur. Now the road connecting these cities has bypassed Bandipur. The same applies for Bhadrapur, which is bypassed by the East-West Highway. So, where there is an increased flow of people, that area becomes economically active. Look at places between Pokhara and Kathmandu. See how people in these places are benefiting. Nepal can get similar benefits from this opportunity. What other potential problems do you see that Nepal should try to avoid? If governance/monitoring is weak, there can be problems. Nepal cannot levy duty on the goods that are in transit to the other countries. The only benefit that Nepal can take is by providing services. If those goods do not go out of Nepal and remain here, then Nepal will lose tax that it would have earned from such goods. We should be careful about that. Such things can be controlled very easily if our governmental mechanism is a bit more careful. For those goods that come to Birgunj ICD from Calcutta, there is a one-time lock system to ensure that these goods don’t get sold in Indian market. Similar precaution can be applied by Nepal in case of goods from India and China moving via Nepal.

If India’s interest is only to gain access to Tibet and other South Eastern Chinese provinces (such as Schezuan), the road through the Nathu-La pass in Sikkim will serve the Indian objective very well. Though the altitude of Nathu-La makes it difficult to use it throughout the year, India does not need to depend only on it. There are other alternate routes as well. One such route is provided by the Stilwel Road (or Ledo Road). Similarly, there are other points at Arunachal Pradesh through which India can conduct border trade, but at present this area too is under border dispute and the infrastructure is still lacking. Though the Stilwel Road was constructed during World War II and now it needs a lot of improvements, it can nevertheless be improved and made usable. It is learnt that a plan is already underway in India to improve this road.

Another important confusion gaining currency is about whether the conditions that will be put forward by India and China will be really beneficial for Nepal.

The simple answer to it can be found in the simple principles of economics. Neither China nor India will be interested in using the Nepal route if it is costlier than the alternates available.

This means that if Nepal wants to gain from the emerging opportunity, it has to make it less costly for these two countries to trade by using Nepal as a transit route. This requires, among others, improving the existing Nepali road (Birgunj-Kathmandu-Kodari) making it usable for containerised cargo, constructing a number of new north-south roads usable for container cargo, setting up other necessary physical infrastructure and making the regulations conducive for conducting such trade.

While doing so, Nepal has to look beyond Tibet. If Nepal has to maximise benefits from its unique geographical location, it should try to become a transit hub for entire central and south Asia – from eastern Kazakhstan, Kyrgyzstan and Tajikistan to Bangladesh.

This indicates that if played properly, this issue of transit facility for India can be used to bargain for still better transit facility for Nepal through the Indian territory to trade with other countries.

Benefits to Nepal

Opinions in Nepal are divided regarding the possible benefits from being a transit point. While those in favour of the idea say that it will boost tourism, the opponents say that the tourists will be only transport workers (drivers and their helpers). The supporters are of the view that it will trigger a positive chain effect in other sectors as well, while the opponents say that all the benefits, if any, will be confined only along the transport corridor. Similarly, the opponents say that if India gets easy transport access to Tibet, Nepali goods that are currently selling well in Tibet will face hard times competing with Indian goods.

But any development will bring about both positive as well as negative outcomes. It is the management that has to ensure that the positives are maximised and the negatives minimised. This requires proper planning and a right policy.

One important benefit will be the possibility of both Indian and Chinese investors being interested in setting up production facilities in Nepal to export to each other or even overseas. To benefit from this, however, Nepal needs to know what business they would be interested in and where.

Also to be resolved is the issue of who will invest in the road projects being proposed and how will such an investment be made. Will India and China invest? If they do, will it be a grant or a loan or a commercial private investment? What is the likely volume of traffic?

All these require a detailed study, but no such study has been conducted so far.

One thing is, however, certain. The benefits, if any, from such development will be gradual. It cannot be expected that there will be a sufficient flow of traffic from the day the roads are declared open. Therefore, a coordinated approach has to be taken by keeping in close contact with both India and China in whatever Nepal does for this purpose. Nepal also needs to be prepared with enough flexibility if anything unexpected develops and the entire plan needs to be abandoned. However, as constructing the north-south roads and making regulatory reforms is already a long-term agenda of Nepal, the additional benefit that can be reaped as a transit point should spur Nepal to hasten. When these transport corridors are ready and available for use, the neighbours may not bother digging their own roads.