NATIONAL 5 (Spotlight Weekly)]

Close Watch

The new Indian budget may have both good and bad lessons for Nepal

By BHAGIRATH YOGI

As Indian Finance Minister Yashwant Sinha was presenting the annual budget estimates for fiscal year 2001-02 last Wednesday (February 28), Nepalese businessmen and officials were glued to their television sets. It is because Nepal can't avoid the impact of Indian budget on its economy. With a view to reducing government spending and containing fiscal deficit within 4.7 percent of gross domestic product (GDP), Sinha promised to accelerate privatization, widen the tax base and downsize the government. "This is a budget for carrying forward the second generation of economic reforms," he declared.

Nepali products : feeling the heat

Both analysts and industry people in India were gung-ho regarding the budget. "After ten years, the Finance Minister does an almost perfect 10," said Swaminathan S Anklesaria Aiyar, a noted columnist in The Economic Times, a leading Indian business newspaper. "Forget the usual tax changes, this landmark budget has a far broader vision of transforming India into an Asian miracle economy through second-generation reforms."

For Nepal, the new budget may have far-reaching consequences to its economy mainly in foreign trade, foreign direct investment and revenue collection. The new provision in the Indian budget of introducing countervailing duty (CVD) on Maximum Retail Price (MRP) may have an adverse impact on Nepalese exports to India.

"The provision to levy CVD on MRP is very disturbing. It will not only erode the competitiveness of Nepalese consumer products in the Indian market, but will also have a serious impact on the export of consumer products from Nepal," said Sandip Ghose, managing director of Nepal Level Limited, a subsidiary of Hindustan Lever Limited, India. The new provision may have an adverse impact on exports of toothpastes and soaps, among others, from Nepal to India. Dabur Nepal and Nepal Lever earn billions of rupees every year by exporting their products to India and thus help bridge the vast trade deficit between the two countries.

In last year's budget, India had introduced a provision of 4 percent special additional duty to all the imports into the country. Nepali business community protested against that decision, saying that it was against the bilateral trade treaty. As per a treaty in 1996, Nepalese manufactured goods, except liquor, tobacco and perfumes, enjoy duty-free access into the Indian market. The Indian government later withdrew the provision in the case of Nepal after Prime Minister Girija Prasad Koirala's visit to New Delhi in August last year.

The hike in freight charge by the Indian government would also have impact on Nepal's foreign trade. "Definitely, it will have an impact on our exports and imports the extent of which is yet to be assessed," said Rabindra Man Pradhan, President of Nepal Freight Forwarders Association. "Being a land-locked country our freight charges are already high. Now the hike in Indian railway freight will further erode our competitiveness.

With a view to liberalizing the stringent labor laws in the country, Minister Sinha has introduced flexibility for companies with less than 1,000 workers to lay off or retrench staff, while tripling the compensation payable from 15 daysí salary for each year worked to 45 days; enabling employers to use contract labor for short periods without being obliged to make them permanent workers.

As Nepalese entrepreneurs complain of stringent labor laws within the country, they will find it hard to compete with India in attracting foreign investment. "It will be more difficult for us to function under existing Labor Acts," said Mahesh K. Agrawal, former president of Nepal Chamber of Commerce and Industry. "In order to attract foreign direct investment we should develop certain areas in the model of export processing zones in China."

Officials don't agree. "Our labor and investment policies are transparent and still compatible with that of India," said Dr. Shanker Sharma, member of National Planning Commission. "There may be some long-term changes in our industrial structure due to tariff reductions effected in India."

Sinha has cut the peak income tax and corporate tax, cut the peak customs rate to 35 per cent and promised to move over the next three years towards the Asian rate of 20 per cent. As part of his liberalization drive, Sinha has fleshed out the deregulation schedule for sugar, fertilizer, petroleum and drugs; repealed the Sick Industrial Companies Act to make it easier to wind up companies; introduced group insurance for organized sector workers to help tide over periods of unemployment; providing educational loans to students.

As India has reduced customs duty on the imports of gold by 15 percent, it might lead to further decline in gold imports in Nepal. Nepal was importing gold in the past primarily keeping an eye on the Indian market.

Nepal had initiated policies to liberalize her economy much before than India did. But it seems India is slowly catching up. "In terms of openness and market oriented index we are still ahead of India," said Dr. Sharma. "Now we need to give emphasis on sustainability and diversification of our export sector."

The Indian experience that poverty could be reduced by 27 percent through broad-based economic growth is also encouraging to Nepal, said Dr. Sharma. "We can learn a lesson from them," he said.