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Kathmandu Sunday March 03, 2002 Falgun 19, 2058.
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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.
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