Major Issues regarding Nepal-India Economic Relations

With Prof. Dr. Madan Kumar Dahal, HoD, ECONOMICS, Tribhuvan University, Nepal

The historical, cultural and geographical ties between Nepal and India are time immemorial. So is economic relation that dates back to Nepal’s entrepot trade with India before the Nineteenth century. After the induction of democracy in Nepal in 1951 India was a premier donor country that played an important role in mobilizing aid to Nepal under the Colombo Plan. India’s cooperation to Nepal has been instrumental in accelerating the pace of economic development in recent years. However, Nepal’s burgeoning economy is heavily dependent on India and also deprived of the opportunity to maximize benefits from the economy of big neighbourhood like India, an emerging economic power in the world.

Sixth industrial nation in the world, India is one of the biggest development partners of Nepal over the last fifty years sharing common religion, philosophy, culture and long territorial boundary between the two countries. India is 22 times greater in size, 42 times bigger in population, 89 times higher in GDP and 1.9 times higher the GNI per capita of Nepal. As of WDR 2004 India’s share in world GDP is 4.4 percent and Gross National Income (GNI) is estimated to be US$ 501.5 billion against Nepal’s US$ 5.6 billion. GNI per capita of India is estimated to be US$ 480, and for Nepal it is confined to US$ 230, one of the lowest in the world during the period. This calls for reviewing Nepal-India economic relations not on the basis of reciprocity, but on the ground of mutual benefits creating win-win effects on both countries. The on-going conflict in Nepal demands further consolidation of economic relations between the two nations, which could be instrumental in sustaining increasing trends in growth and reduce the extent of poverty in Nepal. Although Nepal-India economic relations have multi-dimensions, it could be effectively analysed by considering major issues specified below:

Nepal-India Treaty 2002

The Nepal-India Trade Treaty 1996 provided free access for Nepalese goods to Indian market. The spirit of the treaty was to increase Nepalese exports to India and invite greater quantum of FDI from India to Nepal, which would help narrowing down growing Nepal’s trade deficit with India. The data reflects that the volume of Nepalese exports to India went up significantly and FDI from India considerably increased during the period 1997-2001. The Nepal-India Treaty was renewed in 2002 with specific modifications comprising value addition requirements of 30 percent, quantitative restrictions on export for vegetable ghee, acrylic yarn, copper and zinc oxide, and existence of negative list. These conditionalties disrupted efforts towards industrialization in Nepal. The issue of quantitative restrictions on specified items on the pretext of import surge in India from Nepal could be neutralized through regulating deflection of trade at the border. Thus, there is need to review Nepal-India Trade Treaty 2002 with a proposal for free trade between Nepal and India by relaxing value added component, quantitative restrictions and provision for negative list.

FDI from India

Indian joint ventures account for more than 35 percent of total projects in Nepal. As of July 2003 around 279 Indian joint ventures have been established with a total project costs of Rs. 29.3 billion, total fixed cost Rs. 22.5 billion, and foreign investment Rs. 7.9 billion providing employment directly to 36,346 persons. Thereafter, a few more Indian joint ventures have been set up. However, in recent times private sector in India seems to be indifferent towards expediting joint ventures in Nepal attributing primarily to growing insecurity to investment due to insurgency, political instability, and lack of transparency with regard to existing rules and regulations. HMG/N must urgently address these problems to attract FDI from India and other countries. There are potential areas for joint ventures in Nepal such as water resources, tourism, heath and education, and biodiversity particularly development of species. FDI is a prominent vehicle for development, which would bring not only capital and provide employment, but also transfer technology. With Nepal’s accession to WTO, SAFTA and BIMST-EC, FDI is entirely opened to Nepal, except in the context of small and cottage industries. The products of Indian joint ventures in Nepal are highly popular, for common people are familiar with the quality and prices of goods available in the local market.

Indian Aid to Nepal

During 1950s and 1960s India was a premier donor country to Nepal. Thereafter, several other friendly countries came into existence in the list of leading donor countries to provide cooperation to Nepal. In recent years, India’s status as a leading donor country to Nepal has been relegated with shift in priority to smaller projects that directly benefit to common people. Indian aid to Nepal has built-in quality of wider coverage with human face. The biggest virtue of Indian aid to Nepal is that it is entirely comprised of grants and not loans. However, India’s aid policy to Nepal requires modulation compatible with the overarching goals of Nepal’s Tenth Plan (2020-07), which envisaged achieving a high level, broad based, sustained economic growth rate estimated to be 6.2 percent (high scenario) and 4.3 percent (normal scenario) by reducing poverty from 38.0 percent to 30.0 percent during the plan period.

The Open Border

The Indo-Nepal Peace and Friendship Treaty 1950 has unique provision for free mobility of population between the two countries. Nepal is enveloped by India from threes sides except north, which is geo-physical reality. However, this is high time to review the status of open border and use it more productively by exploring possibility of maximizing benefits from open border to both countries. This requires initiating a research study on this issue including scholars from both countries. The classical concept of Nepal being India locked was an obsession and proposal for fencing with wire-networking at the border undesirable, which is now totally obsolete with the induction of the policy of globalisation and liberalization and with Nepal’s accession to WTO. The open border has both positive and negative aspects. It is estimated that one million Nepalese are employed in India. These workers are sending money to their families in Nepal. Thus remittance has been a major source of earning, which will take care of poverty alleviation. However, both governments should effectively regulate smuggling and cross border terrorism. The open border between the two countries would be of great help to minimize the cost of trade.

Water resources

The major issue between Nepal and India is of harnessing water resources, a foundation to Nepalese economy, which is not merely an economic and technical issue, but also political. Nepal has, indeed, hydropower potential of 83 000 MW, and a commercial potential of around 40 000 MW. So far, Nepal has produced only 255 MW, which is less than 1% of its potential. What could be a backbone of the Nepalese economy has, in fact, been neglected. India, however needs, hydropower to supplement acute shortage of electricity, and to deal with the problems of irrigation and flood in India. But the lack of understanding between the two countries has made it impossible to exploit Nepalese resources. The Mahakali Treaty has in this regard not been a successful experience. The Detailed Project Report (DPR) was supposed to be completed within five months, but it is not at sight even after more than seven years. Alternatively, Nepal should therefore invite the Wold Bank or ADB and initiate regional cooperation for the exploitation of its water resources. To improve economic relations between the two countries, political relations will thus have to be improved first. Political understanding is particularly required as India is the only possible market for Nepal for surplus electricity to export. The role of India is therefore crucial in the context of harnessing water resources and developing hydropower in Nepal.

Prospects

India has the vision to emerge as a super economic power by 2020, and so is the aspiration of Nepal to become Switzerland of Asia in 21st century. Therefore, both countries must strengthen economic ties by improving political understanding. This will provide a new dynamism to spur a high level of economic growth in both countries. The prospects for economic cooperation are very high especially in the field of water resources and tourism that must be jointly exploited.

(Amandine is a French student of M.A Political Science currently an intern at The Telegraph Weekly conducting research on Nepal-India Relations)

Headline | Opinion | National | Dateline | 5 Question  | Editorial | Letter | 2nd Impression | International | Past