India’s high growth: What does it mean for Nepal (Nepalnews feature) By Pratibedan Baidya

March 3, 2006
5 MIN READ
A
A+
A-

At a time when Nepali economy is in turmoil, experts and entrepreneurs have said Nepal should adopt appropriate policies to reap benefit from the stable and high economic growth of its southern neighbour.

Indian officials announced that they expect a growth of 8.1 percent in the current fiscal year 2005-06 thanks mainly to more than five percent growth in the manufacturing and services sectors.

“As India has fixed 10 percent growth rate in the fiscal year 2006-07, it needs more investment and needs more saving. So, the competition in (Indian) banks to increase saving will increase the interest rate contributing to the capital flight from Nepal.” –Keshav Raj Acharya, NRB
“The growth in Gross Domestic Product during 2005-06 is estimated at 8.1 percent as compared to the growth rate of 7.5 percent during 2004-05,” Central Statistical Organisation (CSO) of India said in a statement.

According to CSO, the growth rate of 8.1 percent in GDP during 2005-06 is expected mainly due to the growth rates of over 5.0 percent in the sectors of manufacturing; electricity, gas and water supply; construction, trade, hotels; transport and communication; financing, insurance, real estate and business services; and community, social and personal services.”

Talking to Nepalnews, executive director of the Institute for Development Studies (IfDS) Dr. Raghab Dhoj Pant said the high growth rate of India has created more opportunities for Nepal as the two neighbours enjoy close trade relationship.

“India enjoys high growth rate but low inflation while Nepalese economy is passing through just reverse situation. We have high inflation and low growth. So, Nepali policy makers should learn lessons from India,” said Dr. Pant.

Nepal Rastra Bank (NRB)—the central bank in the country—has forecast the inflation rate to be around 8 percent this year. After recent hike in the price of petroleum products, economists say Nepal could witness a double-digit inflation hitting poor people the most.

So, what does high and stable growth of India mean to Nepal?

According to Dr. Pant, it would be easy for Nepal to market its goods, as the price of goods in India will remain stable. The high growth rate of India had created more opportunities for Nepal but Nepal must formulate policies accordingly to grab these opportunities, he added.

Nepal’s Gross Domestic Product (GDP) growth witnessed a downward spiral in the fiscal year 2004-05. The economic growth declined by 1.21 per cent last year compared to the previous year mainly due to weak agricultural growth rate, low capital formation and dismal performance of non-agricultural sector, according to officials.

The GDP growth rate stood at 2.33 per cent in the year 2004-05 compared to 3.54 per cent in the previous fiscal year, which is lower than the government’s target of 4.5 per cent.

Of course, there could be some negative implications of the strong Indian economy to Nepal, caution businessmen. General Secretary of the Nepal Chambers of Commerce, Surendra Bir Malakar, says that Nepali industries are likely to lag farther behind that the Indian industries in the days ahead.

“We had, indeed, forecast high growth rate in India and asked HMG and Nepal Rastra Bank to devise appropriate politics. The government has reviewed tariff rates to tackle the problem but it is not sufficient. The government must do more to increase the competitive strength of our industries,” he added.

According to Malakar, Nepali industries are already facing psychological pressure since prospects for Nepali industries do not look good in near future. “Unless the armed conflict in the country is resolved, the private sector must evolve strategies to cope the challenge,” said Malakar.

The escalating conflict in the country has hampered the growth rate in agriculture, which occupies nearly 40 percent share in the country’s GDP.

The Indian economy directly affects Nepalese economy, as Nepal has to largely depend on India for the import of goods and industrial raw materials. Two third of the foreign trade of Nepal is only with the India. The common, open border between the two countries is also a crucial factor for the Nepali economy.

Talking to Nepalnews, Keshav Raj Acharya, head of the research division at Nepal Rastra Bank, admitted that there would be both the positive and negative impact from high growth of India on Nepal.

“Inflation under control in India will have positive impact upon the Nepali market but as India has fixed 10 percent growth rate in the fiscal year 2006-07, it needs more investment and needs more saving. So, the competition in (Indian) banks to increase saving will increase the interest rate contributing to the capital flight from Nepal,” said Acharya. “Though legally it is banned, in practice the possibility can’t be ruled out due to the open border between the two countries,” he added.

Another major challenge would be in terms of poor competitive strength of Nepali goods including agricultural products. Nepal has withdrawn subsidies from agriculture, but the Indian government is still providing subsidies to the sector. This will result into further erosion on the competitiveness of Nepali agricultural products resulting adversely the country’s growth, according to Acharya.

When asked what should be done to cope the challenge, Acharya says increasing investment is one of the major options. “Private sector and the government should join hands to create such an environment,” he added.

As the country is witnessing escalation in the conflict and the royal government has failed badly both politically as well as economically, Nepal’s economic woes are likely to further complicate in the days to come at a time when its two giant neighbours—India and China– are marching ahead towards an era of sustained high growth.