India: the political economy of its transit trade partners

By M. Zafar Haider Jappa

The article under your lens is basically a part of the series of articles upon I am working on all 38 UNCTAD declared landlocked countries of the world. Major emphasis will be on 31 less-developed landlocked countries. In my previous article published on 27th April in The News International. I had discussed a trading block comprising Pakistan, Afghanistan, India and Iran. This one will focus Nepal and Bhutan two landlocked countries and the political and trade agendas of India, China, Bangladesh and Pakistan.

Nepal is a tiny landlocked state; given the gigantic size of India and China, the two bordering countries, its significance diminishes considerably. But in South Asian political context, Nepal has its importance in many ways. Historically, Nepal is more attached with India than any other country, being a neighbour, predominately Hindu state and culturally contiguous. But things are not so straight and simple. India and Nepal’s relation are based on two core treaties. In July 1950 India signed” The Treaty of Peace and Friendship” and in October of the same year inked “Treaty of Trade and Commerce” with Nepal. Under the latter arrangement, India agreed to allow Nepal to use its territory and sea ports for exports and imports with no customs duties on transiting goods. Nepal was a crucial neighbour for India being its bordering with china too. In 1954 Indian military mission was set up in Nepal, an accord had been signed for well coordinated foreign policy and Indian security posts were established in Nepal’s northern frontier to quell anything from china. Indian growing influence compelled Nepal monarchy to pursue a non aligned policy and distanced itself from India.1962 Sino-India war brought bounties for Nepal .India had to suspend the support of Indian based Nepali opposition, had to grant Nepal transit rights with other countries through India and access to Indian markets. In response, India gained monopoly of arms sale to Nepal. The honeymoon was not long. Nepal pressured India to withdraw its army check posts and liaison groups from the soil of Nepal. India had to repulse on both but kept the so-called Treaty of Peace and Friendship intact. Things registered a better face in 1978 when India signed a pretty favourable transit trade agreement with Nepal. Long feared China–Nepal relationship was now a reality when Nepal contracted china for arms purchase. Unmindful of the GAAT Article V which gives an inborn right to the landlocked countries to use neighbouring coastal country territory and sea, India imposed  trade embargo and stopped Nepal for using its seaports and territory anymore on 23rd  march 1989. India is the only country that inflicted any neighbour landlocked country with economic blockade after the Second World War. Nepal decoupled its rupee from India’s and agitated against trade embargo worldwide. Nepali trade and investment suffered the most. India could not sustain world pressure and un-choked Nepal in june1990. Normalcy prevailed. Indo-Nepal Treaty of Peace and Friendship in itself remained and things moved on further in establishing cordial relations between India and Nepal. In 2008 the officially visiting prime minister of Nepal stated that the treaty needs a “clear revision”.

Nepal realizes that India’s Kolkata sea port is the only nearest seaport and is just 1150 kms away from its territory, so Nepal’s dependence on India as a transit country is obviously natural. However, Indian offer of a single Kolkata seaport, helped the situation to some extent.

Bangladesh is just 15 km away from Nepali territory separated by Indian soil in southeast but India has many reservations on this route involving Bangladesh. Bangladesh has offered Nepal its three seaports of Chittagong, Khulna and Chalna. UNCTAD in its 2004 report applauded Bangladesh that it was one of 22 countries which have been able to reduce poverty through effective implementation of liberalized trade policy and securing gender parity in enrolment of male and female into primary and secondary level education, ensuring supply of drinking water to 97 per cent of its population and reducing child mortality rate by two thirds. However Bangladesh’s ambition to gain access through Indian land to Nepal nullified by Indian objections. Chinese heartland industry is away 5000 km from Nepal. Though China is building roads, air and rail services to ensure a better access to Nepal but even then India will be somehow the natural choice to Nepal at least for a transit trade corridor. However, Nepal’s trade with China is also on increase despite Nepal’s dependence on India for 70 per cent of its trade and markets. Last five years data show that Nepal has always registered a negative balance of trade in its accounts with India. The figure rose from $1172.5m in 2003-04 to $2542.7m in 2007-08). In 2007 China-Nepal trade volume registered 36 per cent growth corresponding to the previous year and touched $300m. Some of the recent political developments will draw the future path of India–Nepal trade relations. Nepal is considering a proposal of waiving visa to Chinese nationals visiting Nepal, a thought that has raised some concerns with the Indian government. India became highly concerned when on 27th December 2007 the Chinese Ambassador in Nepal Mr. Gouhong said “we are thankful to Nepal that it helped build a bridge between China and South Asia. We hope that Nepal will help China establish economic relations with other countries as well.

China is mainly drawn to Nepal on the issue of Tibet. Many Tibetan “dissidents” come across India through Nepal.

South Asian political economy is artless unless bringing into light role of the Bhutan that it has in the region. Bhutan is perhaps the only country in the world which is bound to seek prior approval from neighbouring but coastal India either for purchasing arms and ammunition and establishing diplomatic relations with any country of the world under article 2 of the so-called Peace and Friendship Treaty signed in 1949 between the two countries.  Being a landlocked and 80 per cent dependent on India for bilateral trade and almost 95 per cent for transit trade,

Bhutan became the 2nd country after India to recognize Bangladesh as an independent country. Bhutan has always recorded a negative balance of trade with India without its largest export to India that is electricity. India and Bhutan signed a protocol in 2006 by which Bhutan will export 10000MW electricity to India by 2020.Bhutan has huge hydro power potentials. Although Bhutan qualifies for duty free access to European Union’s markets under “Everything but Arms” initiative for least developing countries. However being a landlocked, its foreign direct investment is just 1-per cent of its GDP. At the same time, Bangladesh and Bhutan has a positive balance of trade of $2.8m.

World Bank and IMF joint report “Doing Business in Landlocked Economies 2009” is a running commentary of the economic hapless of the landlocked 38 countries of the world. The three that fall in south Asia are Afghanistan, Nepal and Bhutan. On the basis of number of domestic regulations and investment friendly environment, the report assigns rank to each country. Not a single landlocked country is placed among the top 20 countries; Pakistan with 77ranking is better placed than India with 122. Bangladesh is 110, Nepal is at 121, Bhutan is 124, and Afghanistan is at 162. Among top three landlocked, Switzerland is first followed by Austria and Azerbaijan. India is expected by neighbouring countries to act like a “gentle giant” not a bully “big brother”. Indian record with neighbours has always been strewn with suspicion and mistrust. India has fought three full-fledged wars with Pakistan and one with China.

Today it seems that Indian politics is gaining support in the international arena. It is being appreciated worldwide for its democratic norms and stable economy. FDIs are increasing establishing new industries, creating jobs and helping its economy to reap the benefits.