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LESSONS FROM INDIAN ECONOMY FOR NEPAL

Global Geopolitics Net
Friday, July 04, 2008

© Copyright 2008 Malladi Rama Rao. All rights reserved.

By Malladi. Rama Rao

Nepal and India have begun a review of the Trade Treaty and set the ball rolling for a more comprehensive partnership agreement (CEPA) covering a wide range of sectors. Both sides have veered round the view that the economic cooperation must go beyond the scope of the 12-year-old trade treaty that has been governing the movement of goods between the countries. Given the fact that the decks for a Maoist head of state are cleared only on June 26, Joint Secretary level trade negotiators meeting in the first week of July may confine themselves to the broad contours of the CEPA. That is perfectly understandable though political developments in Nepal and India had not come in the way of bilateral contacts at practically all levels in recent years.

As of now, there are not many questions on the economic policies the Maoist led government in Kathmandu will adopt. Maoist supremo Prachanda has already made an open call to the private sector to play a leading role in achieving a turn around in the Nepalese scrip. The run up to the Constituent Assembly elections has seen Nepal plagued by crippling strikes. Agriculture, the mainstay of the economy with a 40 per cent share in the Gross National Product (GNP) is in ruins.

The industrial base is very narrow with manufacturing activity providing employment to about one per cent of the country’s labour force. Nepal doesn’t have any large mineral resources. Water is its biggest natural wealth. It can generate 83000 MW of electricity and make a killing by exporting the power to energy hungry southern neighbours – Bihar, West Bengal and Uttar Pradesh states of India.

Nepal is a member of the World Trade Organisation (WTO). This membership has not yielded any worthwhile results thus far. Nepal’s participation in the world economy is very weak and the gains from trade, investments, and development opportunities remain low in stark contrast to other Least Developed Countries in South Asia, and India. As a member of SAARC, it could have taken advantage of South Asian Free Trade Agreement (SAFTA). As the participants at a recent seminar on ‘Newly Emerging Trends in Nepal-India Relations’ held in Patna noted, neither the Nepal-India Trade Treaty nor SAFTA has proved to be of much benefit to Kathmandu.

Surprisingly, the foremost votary of restructuring Nepal economy is school teacher turned revolutionary Prachanda himself. Even as he was engaged in a battle of wits with the Nepal Congress and its chief G P Koirala over the past two months, he went out of his way to reassure the business community that the Maoist policies would be guided by realism. ‘We want investments’, he told the Federation of Nepalese Chamber of Commerce and Industry (FNCCI) and added that with liberal dose of investments it should be possible to create a manufacturing base and integrate Nepalese economy with neighbouring countries.

Interestingly, this was the task the Koirala government was engaged in for about a year by taking a close look at the major challenges for Nepal’s economic development, as also lessons and benefits from the fast growing Indian economy. The Ministry of Industry, Commerce, and Supplies has brought out a ‘non-paper’ on growth potentials, major concerns for deeper integration of Nepal with the regional trading systems and the relationship between regional integration and the economic growth rate. Another area Kathmandu has been looking at closely is the plus and minus of trade ties with its two giant neighbours – India and China. Nepal is also keen on putting in place an efficient transit transport system for achieving competitiveness of trade whether it is with India or China.

To what extent this exercise will have a bearing on Delhi round of Joint Secretary level talks is difficult to say. The bureaucrats may like to play safe for the present. But one issue that they are unlikely to miss is Nepal’s desire for cooperation between Nepal Bureau of Standards (NBS) and Bureau of Indian Standards (BIS). There is reason for this, according to Nepal Trans-Himalayan Trade Association (NTHA).

Nepal’s exports to China go through the land border at Tatopani because this route is much cheaper than the sea route to reach Central and Western Chinese markets. But quality of goods becomes subjective at the border post. “If we argue with them (Chinese officials) they tell us to take our goods to Beijing for quality inspection. If we were to do so, it will greatly increase our lead time and ultimately delay our delivery”, Bahadur Rayamajhi, General Secretary, NTHA, says.

China is a big trade partner for Nepal, though it is not in the same league as India. In 2006-07 fiscal, 70.9 per cent of Nepal’s total exports went to India, 59.01 per cent of imports came from India and 55 per cent of total trade deficit was to India. In terms of numbers, the imports were worth Rs. 117.74 billion, with petroleum products accounting for Rs. 33.54 billion, but exports hovered around Rs. 41 billion mark pushing the trade deficit with India to a historic high of over Rs. 75 billion. This deficit is expected to reach Rs. 85 billion in the current fiscal which ends in mid-July 2008.

The Sino-Nepal trade volume currently stands at $4,010 million. China sells goods worth about $ 386 million and buys Nepali goods valued at around $ 15 million. In Rupee (Nepalese) terms, Nepal is running a trade deficit of Rs. 6.5 billion. If the unofficial trade is added, the deficit would be much higher. Smuggling of Chinese goods into Nepal is rampant while smuggling Nepal goods into China is said to be almost impossible.

There is more than language barrier that has tilted the scales in favour of China. “We are still not running businesses in an organised manner and this has led to China reaping all the benefits of being close to us”, says Keshav Bahadur Rayamajhi. Exports to China are mostly raw materials. And whatever little is being exported to China is not backed by any market research.

Nepali businessmen seem to be at a disadvantage while exporting to China because the payment procedures are dictated by the Chinese. ‘We have to play by their rules. After goods reach the client and the quality is okayed, the payment is done in instalments in which the schedules are generally violated by the client’ says a regular exporter who prefers not to be identified. ‘As a result, many of our exporters have been cheated’.

Whatever be the flip-side of Sino-Nepal trade, the fact of the matter is that China is keen to do better business with South Asia and is eyeing Nepal as a conduit. In another five-years, the Tibet railway will reach right upto the border of Nepal and thus Beijing will be in a better position to tap the regional market through Nepal. Trade experts in Kathmandu are not too clear whether Nepal stands to benefit from China’s plans. Their concern stems from the deluge of sub-standard but cheap Chinese goods which have strangulated Nepal’s manufacturing base which is uncompetitive.

Chinese manufacturers are violating Nepal’s patents with impunity. Take for instance ghee. Chinese companies have started manufacturing ghee with popular Nepali brand names, such as Shanti, Arun and Nirban and have cut into Nepal’s exports to Tibet, according to Kamal Kumar Begani, president of the Nepal Vegetable Ghee Association.
(Indian companies are involved with some of these ghee manufacturing units either directly or indirectly)

The Maoist led Nepal government will have to factor in another reality. China has stringent visa regulations and often closes the Tatopani border causing misery to Nepali businessmen. The situation demands enhancement of Nepal’s competitiveness to protect its market share in Tibet at least to begin with.

Nepal has much to learn from the Indian experience with market economy and the WTO regime. More over, whatever be its unimaginative ways, Delhi is not guilty of undermining Nepal’s competitiveness. That is why it waived the four per cent tax on Nepali goods after Prime Minister Girija Prasad Koirala's visit to India in 2007.

The latest Delhi round of talks should focus on streamlining trade in food articles and strengthening the infrastructure at the border points in mutual interest. Also worth considering is the proposal to set up an economic sub-group under SAFTA comprising Nepal and the Indian states of Uttar Pradesh and Bihar which share the border and backwardness.

There is no magic wand to wish away trade deficit particularly for an underdeveloped country like Nepal. It must create a climate for investment and industrialisation and set up institutional backing under a sound policy framework. By tradition, Nepalese prefer agriculture, which is uneconomical on account of fragmented land holdings. The Maoist led government has a clear cut task. It must make farming scientific and remunerative and promote industries to absorb the idle labour force in the country.

About the Author

Malladi Rama Rao is an analyst and writer on the Indian political scene and geo-political and security issues of South Asia. He directs a Weekly Feature Service in English, Syndicate Features, in colloboration with his wife Vaniram. He is also the India Editor of Asian Tribune.

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