India-Nepal Trade Tensions Over Soybean Oil Imports

Nepal is capitalizing on tariff exemptions under the India-Nepal Trade Agreement to export soybean oil to the Indian market at an unprecedented rate. According to the Ministry of Commerce and Industry, imports from Nepal have surged 14 times between April and November 2024, raising concerns among Indian policymakers.

Soaring Imports Despite Nepal Not Being a Major Producer

Nepal is not traditionally a major producer of soybean oil, yet it has emerged as a significant exporter to India. A report by The Indian Express indicates that India's total soybean oil imports rose by 19% in 2024, reaching $3 billion compared to $2.5 billion in 2023. However, while imports from top producers like Brazil have declined, those from Nepal have sharply increased.

Exploitation of Free Trade Agreement (FTA)

Nepal enjoys duty-free access to the Indian market under the 2009 India-Nepal Trade Treaty. This agreement has allowed several Indian businesses to establish refining industries in Nepal to take advantage of lower tariffs. Reports suggest that Nepal benefits from over 30% tariff advantages, making its exports highly competitive.

Potential Violation of ‘Rules of Origin’

Over the past seven years, Indian customs officials have visited Nepal multiple times to verify compliance with Rules of Origin regulations. Findings suggest that Nepalese firms are importing raw soybean oil from other countries, refining it, and re-exporting it to India to benefit from tariff exemptions. This raises concerns that the industry exists primarily to exploit the FTA rather than promote genuine local production.

India’s Increased Customs Duty and Its Impact

In September 2023, India raised customs duties on refined palm oil, soybean oil, and sunflower oil from 13.75% to 35.75% to support domestic producers. However, this move led to a shift in imports.

• In November 2024, Nepal’s soybean oil exports to India surged from $1.42 million to $23.46 million.

• Meanwhile, imports from Brazil fell from $849.19 million to $549 million.

• China, the world's largest soybean oil exporter, does not directly export to India.

Nepal’s Dependence on China and Brazil for Imports

A 2023 report by the International Food Policy Research Institute highlighted that Nepal sources 98% of its edible oil imports from China and Brazil. The country refines the imported crude oil before exporting it to India, exploiting the trade treaty's duty-free provision. Analysis shows that while China and Brazil continue supplying soybean oil, the end destination is shifting from India to Nepal, allowing Nepalese refiners to gain a competitive edge.

Is the India-Nepal Trade Agreement Hurting Indian Interests?

The 2009 India-Nepal Trade Agreement permits Nepalese goods to enter India duty-free, with certain quotas on sensitive products like:

• Vegetable oils (100,000 metric tons)

• Acrylic yarn (10,000 metric tons)

• Copper products (10,000 metric tons)

• Zinc oxide (2,500 metric tons)

Trade between the two countries is conducted in Indian Rupees, with Nepal’s central bank allowing some imports to be paid in U.S. dollars. Currently, 1 Indian Rupee equals 1.6 Nepalese Rupees, further incentivizing Nepalese exports.

Way Forward: Addressing the Trade Imbalance

Given the sharp rise in soybean oil imports from Nepal, Indian authorities may need to:

1. Review FTA Policies: Reassess duty-free provisions to ensure fair competition.

2. Strengthen ‘Rules of Origin’ Checks: Prevent misuse of trade agreements.

3. Support Domestic Producers: Provide incentives for Indian refiners to remain competitive.

4. Bilateral Trade Talks: Engage Nepalese authorities to prevent market distortions.

The Indian government faces the challenge of balancing diplomatic ties with Nepal while protecting domestic industries. Addressing loopholes in the trade agreement will be crucial to maintaining fair trade practices and economic stability.