Customs duties and the declining value of the Indian currency in Nepal are becoming matters of concern between the two nations
In one of his recent interactions with journalists, India’s External Affairs Minister Dr. S. Jaishankar stated that the country’s connectivity with Nepal, apart from that with Bangladesh and Bhutan, improved after the rise of the Bharatiya Janata Party (BJP) in India. However, despite the growing connectivity, especially between Nepal and India through airways, roadways, railways and cross-border petroleum product pipelines in recent years, the banning of Indian currency notes above the denomination of INR100, the provision to levy customs duty on goods above NPR100 brought from India to Nepal through the border above, and the declining value of the Indian currency in Nepal are eroding the gains from growing connectivity between the two countries.
In 2019, when KP Sharma Oli was the Prime Minister of Nepal, the Nepal Rastra Bank, the central bank of the country, banned the circulation of Indian currency notes of INR 2000, INR 500, and INR 200 in Nepal. This created certain hardships for Indian tourists and for all other Nepalese and Indian citizens who used to enter Nepal with Indian currency notes above the denomination of INR 100. But this did not affect the life of the people so much, as Indian currency of all the denominations unofficially remained acceptable in Nepal due to its demand.
The more one gets away from the Nepal-India border region in Nepal, the lesser becomes the value of the Indian currency.
But for quite some time, the situation has been changing with the fall in the value of the Indian currency in Nepal. The INR 100 is now valued less in Nepal as it is equivalent to the amount ranging between NPR 135 and NPR 150 when the official rate between the two currencies is still INR 100 equal to NPR 160. The more one gets away from the Nepal-India border region in Nepal, the lesser becomes the value of the Indian currency. It was in 1963 when the Nepali currency was pegged to the Indian currency and ever since then, the official exchange rate between the currencies remained unchanged at NPR 160 equivalent to INR 100.
Until recently, the Indian currency was more important to Nepal than even the US dollar as Nepal Rastra Bank used to pay US dollars to India to buy the Indian currency. The demand for the Indian currency in Nepal was so high that, in the unorganised market, one had to pay even NPR 165 or even more to get INR 100.
In the changed situation, Nepalese shopkeepers and even petrol pumps in Nepal have started refusing to accept the Indian currency at the official exchange rate of NPR 160 equivalent to INR 100. Or, if at all it is accepted, it is accepted only at the discounted rates. So, a large number of unauthorised agents have sprung up all along the Nepal-India border regions to exchange Indian currency for Nepalese currency at discounted rates.
One of the major factors that led to the sudden drop in the value of the Indian currency in Nepal is the growing euphoria that the Indian currency notes would be demonetised by the Indian government again, as had been done in 2016. Besides, the massive smuggling of gold, apart from the liquor, from Nepal to India has also led to the devaluation of Indian currency in this country. Since such items are largely bought and imported into India through unauthorised channels, there is a massive flow of Indian rupees in Nepal. Because of the higher supply and lower demand of Indian currency in Nepal, its value continues to fall.
The Indian currency was more important to Nepal than even the US dollar as Nepal Rastra Bank used to pay US dollars to India to buy the Indian currency.
To make matters worse, the present government under Pushpa Kamal Dahal in Nepal has introduced a provision whereby those crossing the border from India to Nepal are required to pay customs duty on goods valued more than NPR 100 (INR 62.5). Because of such a restriction, it is assumed that this provision is intended to make the cross-border movement of people more difficult between the two countries. This provision has created severe complexities along the border regions, particularly for the Nepalese border inhabitants who often buy essential goods for their daily needs like rice, wheat, pulses, sugar, milk, clothes, cooking oil, washing detergent, potatoes, etc. across the border in India. Unfortunately, those people are now facing insurmountable hardships to buy such items across the border in India because they are forced to pay customs duty while bringing goods valued over NPR 100.
It is more a compulsion rather than a choice for many of the Nepalese border inhabitants to buy the basic necessities of life for their day-to-day consumption from across the border in India as there is a substantial difference in their prices on the two sides of the border. For example, the price of milk per litre is higher in the border region of Nepal by INR 5 or even more. So are the margins in the prices of other essential items.
The common people have a perception that the government officials have intentionally created unnecessary hassles by imposing customs duty on goods carried by individuals from India to Nepal through the border.
However, certain government officials in Nepal view that local business along the border region in this country would not flourish until cross-border purchases are discouraged. On the other hand, the common people have a perception that the government officials have intentionally created unnecessary hassles by imposing customs duty on goods carried by individuals from India to Nepal through the border. They suspect that there is a nexus between the customs authorities and the traders as both of them get benefits through this move of raising the prices of Indian goods in Nepal.
Some of the above developments are matters of concern as they have started affecting the cross-border movement of people and also the traditional amicable relations between Nepal and India based on the solid foundation of roti-beti (intermarriage). The two countries are incurring a huge economic loss as the local markets on both sides of the border are drying fast. Hence, it will not be wise on the part of the concerned bodies to remain complacent dreaming that connectivity is a panacea for all the troubles.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Hari Bansh Jha was a Visiting Fellow at ORF. Formerly a professor of economics at Nepal's Tribhuvan University, Hari Bansh’s areas of interest include, Nepal-China-India strategic ...
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