Impact of Indian budget on Nepali economy

By TKP Business Team

KATHMANDU, March 2 : The total expenditure of the Indian government for the fiscal year 2002/03 (beginning April 1, 2002) is estimated to be IRs 4,103.09 billion, according to the union budget presented by the Indian Finance Minister Yashwant Sinha in the parliament on Thursday. Of the total estimated expenditure, IRs 1,135 billion has been earmarked for plan expenditure while the remaining IRs 2,968.09 billion allocated for non-plan expenditure. The estimated total expenditure is 9.35 per cent higher than the budgeted estimate and 12.59 per cent higher than the revised estimate of the current Indian fiscal year that ends March 31st. The government revenue for the next fiscal year is expected to be IRs 2,451.05 billion, which is 59.7 per cent of the total estimated expenditure. The remaining expenses are to be financed by recovering loans, other receipts and borrowings. The economy in the coming fiscal year is expected to expand by 5.4 per cent and the fiscal deficit to remain at 5.3 per cent of the GDP, down from 5.7 per cent expected for the current fiscal year.

Any type of fiscal and monetary changes in India usually impacts Nepal since India is its largest trading partner. Nepal’s trade with India currently stands at around 40 per cent of its total trade. Direction of the bilateral trade between Nepal and India reveals that exports to India stands at over 45 percent of the total Nepali exports even as imports from India comprises about 40 percent of the total Nepali imports. Furthermore, over 70 percent of imports from India constitute mainly of consumer items, essential goods, construction materials, industrial raw transport and other machinery. Even as the two neighbouring countries have a long open border and also a fixed exchange regime, the revision in the Indian tariffs directly gets propagated to the Nepali market.

This write-up aims to assess the general impact of the new Indian budget on the Nepali economy.

Last year’s Indian budget was praised as being investment friendly and growth-oriented budget due mainly to the various steps taken in that direction. The result was a moderate growth of 4.5 per cent, despite the downturn in the global economy. The new Indian budget now has taken yet another bold step in accelerating economic reforms by incorporating steps to encourage private sector involvement in the different economic activities.

Agriculture

The new budget has laid special emphasis on the agriculture sector as it announced several measures to modernise Indian agriculture and to enhance its competitiveness through various new innovative schemes. Of particular importance is the commitment to carry out accelerated reforms in the agriculture sector by gradually withdrawing direct subsidies provided by the government on agricultural inputs, thereby, ensuring more active private sector involvement. In this regard, the new budget has increased the price of fertiliser by 5 per cent and reduced subsidy on it by IRs 50 per ton. The government had announced to phase-out subsidy on fertiliser by 2006.

The budget for the next fiscal year has brought in special packages to expand agricultural credit. The interest rate of some of the successful funds as Rural Infrastructure Development Fund have been proposed to be slashed to 8.5 percent from 10.5 per cent and the amount of the fund has been increased to IRs 550 million. Similarly the budget has also proposed to set up a new Corporation for Agriculture Insurance with the joint efforts of the government and the private sector. In the like manner, 40 per cent increment was announced for the extension of irrigation facilities. The budget has also proposed Agro Export Zones in different parts of the country to stimulate the exports of agricultural products.

The Indian budget has also proposed to reduce the excise duty on tea by 50 per cent. However, the budget has increased customs duty to 100 per cent from 75 per cent imposed during the last budget. Since agricultural products of Nepal enjoy duty free access to India, this might boost the Nepali tea export to India since the Indian tea imports from other countries would now on be expensive. However, the lowered excise duty on Indian tea can erode the competitiveness of Nepali tea in the Indian market. Similarly, the proposal to increase customs duty on pulses is a positive sign for Nepal since it has a great potential to exporting pulses. The cold chain equipment used in preserving fruits and vegetables has been exempted from duties. Besides, the concerted effort laid down by the latest budget is expected to boost the productivity and competitiveness of the Indian agro products, and this will have a serious impact on the Nepali produce, due mainly to its non-competitiveness owing to high costs of production.

The Indian government has increased the customs duty on the import of various agriculture products including cardamom and other spices to some extent. This is likely to prove beneficial to Nepal vis-à-vis the produce of other countries from which India imports these agro-products. However, due to the absence of export fees on the export of agricultural products, it would have no positive impact on Nepal’s revenue.

Manufacturing

Of the various steps taken in boosting the manufacturing sector, the new Indian budget has crafted special incentives for the textile industry, which is the second largest employment provider after agriculture. The purpose of the measures is to strengthen the Indian textile industry to ensure its survival after the scrapping of the Multi-Fibre Agreement in 2004. This includes down-revision of the excise duty on fabrics, exemption of excise duty on textile machinery and heavy reduction in the custom duty in the import of modern textile machinery and technology. The new steps are major blows to the ailing Nepali textile industry and ready-made garment industry. The new incentives would further lower the cost of production of the Indian textile products prompting further the huge illegal inflow of the textile from India. Thus, the hardly surviving textile and garment industry will see tough days ahead. Similarly, the budget has enshrined various measures for the development of the Indian garment industry, which means that the Nepali garment industry will face the heat when it comes to competing in the international markets.

The Indian government has slashed excise duties in cotton yarn, processed fibres, handloom fibres, woven garments and readymade garments. As the Indian textile products are one of the traditional items that are imported in huge volume from India, the price of Indian textile might go down benefiting a majority of the Nepali customers. Similarly, while analysing its impact on government revenue, there are two possibilities. If the cheap Indian textile comes from the legal channel, it would have positive impact on the revenue collection. But, if the past experience is any guide to predict, such possibilities seems remote and the flow of Indian textile through the illegal channel can go up posing more threat to the ailing domestic textile industry and having a negative impact on revenue collection.

Likewise, in order to revive the ailing Indian steel industry and to enhance its competitiveness in the international market, the budget has proposed to lower the customs duty on various materials used by the industry. This will lead to a lower cost of production of steel due to which price of iron rod in Nepal can go down since all the raw materials for the Nepali iron industry is imported from India. This will have a positive impact on the Nepalese construction activities to some extend. Similarly, the budget has also reduced customs duty in cement and clinkers, which could mean more imports of cement into Nepal. Similarly, the budget has also increased customs duty on second and defective steels to 40 per cent.

The budget has also proposed to exempt tax on the import of raw materials and parts for aeroplane, helicopter and glider, which would make the Indian tourism industry more competitive and attractive. Since more than 40 per cent of Nepal’s tourist come through India, the new measures might impact the ailing Nepali tourism industry positively.

Financial Sector

In order to strengthen the financial position of the Indian banking system and to make the banking industry more competitive, additional fiscal relief has been offered. The new budget has allowed deducting 7.5 per cent of the total income against the provision of bad loans and doubtful debts. This measure is expected to help in maintaining the health of the Indian banking system and is likely to work as a moral booster for pursing financial sector reform in Nepal.

The new budget has also proposed interest rate cut by 50 basis points in most of the government promoted small saving schemes. In the current year’s budget announcement last year, such cut was 1.5 per cent. Such steps will positively impact the Nepali economy since it would help to curb the soaring capital flight towards the bordering Indian cities as a result of higher interest return.

Investment

With an aim to encouraging foreign investment in India, the budget has taken several measures. India has been taking various step to attract investment from Non-Resident Indians (NRIs) and the results have so far been encouraging. In order to boost investment from NRIs, the budget has provisioned for full convertibility of NRIs’ accounts, which means that they will be free to repatriate their earnings in foreign currency. This measure is good for Nepal simply because more than a third of the foreign investment comes from India. And following the footsteps of the Indian government, Nepal should also gear up to take similar measures as Non-Resident Nepali (NRNs) have long been demanding.

Similarly, to encourage Indian investment abroad, the new budget has allowed Indian companies to invest up to US$ 100 million on an annual basis, up from the existing ceiling of US$ 50 million. The Indian companies making foreign investment can do so without prior approval up to 50 per cent of their net worth. Similarly, corporates with proven track record will be allowed to contribute from their foreign exchanges earnings for setting up educational institutions and performing other social welfare activities. Nepal can benefit a lot from the new Indian investment policy by adopting necessary measures and correcting the serious shortcomings of the past. And this rings the alarm bell for Nepal since an improvement in the investment climate in India means that Indian investment that has already come to Nepal, or are planning to come, may go back and never return. However, much will depend on domestic security, in the lack of which, expecting more foreign investment will be like building castles in the air. As of present, a third of the total investment in Nepal comes from India. Nevertheless, the new steps are likely to attract more foreign investment in India, which will create more employment opportunities resulting in an influx of Nepalis to India, thereby, ensuring higher remittance income.

Price

In a major structural reform, the new budget has dismantled the Administered Price Mechanism in the petroleum sector. The announcement comes into effect from April following which the prices of petroleum products will become market determined. As a result, the price of diesel and petrol is expected to go down marginally. However, the prices of LPG and kerosene will go up by IRs 40 per cylinder and IRs 1.5 per liter due to the reduction in the fuel subsidy, which would be completely phase-out within the next 3 -5 years. To facilitate the open market economy, the government has announced to reduce the excise duty on petrol from 90 per cent to 32 per cent and on diesel from 20 to 16 per cent. After the APM is dismantled, retail prices of diesel and petrol will vary in line with the international price. The system that will be adopted in India in two months will have a direct effect in the supply of oil to Nepal as it imports all petroleum products through India. And this poses a serious challenge as to how Nepal would fix the retail price of petro-product for domestic consumption. As the new mechanism has increased the price of kerosene in India, that is likely to be an incentive for smugglers to transport cheaper kerosene from Nepal to India. Similarly, the increased price of LPG in India might just be the reason for the Nepali government to hike LPG prices back home. The government has been mulling for quite some time to taking a decision in that line.

The increase in the railway carriage freight fares that was announced in the railway budget would result in an increase in the transportation costs, which will have a direct impact on Nepal’s foreign trade. This, on one hand, will lead to an increase in the prices of imported goods, while on the other will erode the competitiveness of goods making out of the country to India and abroad.

The upward revision proposed in the Indian tariff rates is expected to cause hike in the prices of major commodities. The major products that are imported from India, including essential consumer products, comprise items like transport goods and spare parts, along with chemicals, electrical equipment, plastic goods, textiles and agricultural tools and agro products. With the budgetary announcement to impose excise duty taking the Maximum Retail Price (MRP) as the base, the price of items such as sugar and sugar products, confectionery, dyes and colouring materials will rise in the Indian market. Resin cement, caulking compounds, and other mastics, video recording, are also included into the items taxed on the MRP. The budget has also announced to include household electrical equipment as switches, relays, fuses, surge suppressers, plugs, sockets, lamp holders, junction boxes into the items subject to the duty on the MRP. In all, the effect of charging excise duties on MRP on the above products will enhance the competitiveness of the Nepali products in the Indian market, also contributing to the government revenue to some extent. Despite the positive impact on Nepali exports, the increased excise duty in the Indian market will not affect the price in the domestic market as the excise duty is refunded after the goods are exported to Nepal.

The Indian government through its budget announcement abolished the Special Excise Duty on cosmetics and toilet preparation, travel kits, cements, yachts and other vessels and the manufacture of furskin and artificial fur. These measures will lower their prices in the Indian market that may prompt illegal flow of the products into Nepal. Likewise, the import and white cement and other cement may go up. While that means revenue for the government, it spells gloom for the cement industries, especially in the wake of their deteriorating competitiveness.

In the like manner, the Indian government has announced to bring cigars, cheroots and cigarillos of tobacco or tobacco substitutes under the 16 per cent Central Value Added Tax (CENVAT). These items were tax exempted earlier. With the imposition of the duty, the prices of tobacco products will increase in the Indian market. Since the import of tobacco products from India is nominal, the impact of the budgetary decision on Nepal is likely to be negligible.

The Indian budget has also imposed Special Additional Duty of 4 per cent on items like vegetable ghee, acrylic yarn, zinc oxide and copper wire, among others, which stand as the prominent Nepali exports to India. That will wear-off their profitability and competitiveness in the Indian market. And since these exportable items have a remarkable share in the total export to India, any decline in their export will have negative impact on the overall economy including revenue collection of the country. However, modality for implementing the duty is not clear as of yet.

Tumblings in Nepse Index continue

Post Report

KATHMANDU, March 2 : Downward trend of the Nepal Stock Exchange (Nepse) index, the barometer of the investor confidence continued for yet another week and it recorded a tumble by 6.52 points during the week.

The index that opened at 225.11 points on the opening day slid to 218.59 points on the closing day of the week.

The decline in the index is attributed to the poor performance of the groups enlisted with Nepse owing to erosion of investors’ confidence reflecting their pessimism towards the economic recovery given the current business scenario.

Group-wise trading during the week reveals that the index of all the groups enlisted with the Nepse, excluding the trading group, recorded a sharp fall. The index of trading group however, went up by 2.55 points to 104.99 points on Friday against 102.44 points recorded on Monday.

The commercial banks group, which stands as the dominant group in the trading floor of the Nepse and determines the Nepse index as a whole tumbled by 7.38 points, settling at 201.48 points on Friday from 209.31 points recorded on Monday.

The index of manufacturing group recorded a whopping decline by 9.33 points and settled at 295.59 points from 304.92 points during the week.

Likewise, the index of hotel group and finance group slid to 218.14 points from 221.40 points and 273.05 from 273.53 points respectively.

The index of Insurance group, development bank group and the other group too recorded a downturn to 280.43 from 284 points, 281.59 points from 282.05 points and 131 from 140.13 points respectively.

As usual, the commercial bank group dominated the trading on the floor of the Nepse capturing 80.10 per cent of the total trading. It was followed by development bank group at 7.46 per cent, finance company group at 6.91 per cent, Insurance group at 3.64 per cent, hotel group at 0.88 per cent, trading group at 0.79 per cent, manufacturing group at 0.12 per cent and other group at 0.09 percent.

This week shares of total 33 companies were traded in the stock exchange. 49,300 share units worth Rs 18.94 million were traded in total 1313 transactions carried out during the five-day week. Last week 46,884 share units valued at Rs 25.18 million were traded in total of 642 transactions.

Nepal Development Bank recorded maximum transaction at Nepse during the week. It had a total of 468 transactions. Meanwhile, Nepal Bangladesh Bank had maximum number of transactions both in terms of share units and money. It had a trading of total 14,030 share units at Rs 9.3 million.

Companies that had shares transaction throughout week include NB Bank, Nepal SBI Bank, Nepal Bank, Bank of Kathmandu, NIC Bank, Nepal Development Bank, Himalayan Bank, Oriental Hotels, People’s Finance, Nepal Merchant Bank and Finance and Siddhartha Finance.

Similarly, companies whose shares were traded for four days include Nabil Bank, Standard Chartered Bank, Everest Bank, Premium Insurance, Alpic Finance and Nepal Bangladesh Finance and Leasing.

Meanwhile, Gorakhkali Rubber, Nepal Lever, Bishal Bazar Company and Lalitpur Finance had share transaction only once during the week.