Wednesday, October 19, 2011

Nepal’s economic agenda for PM Bhattarai’s India visit

[This piece was published in Republica, October 18, 2011. p.7]

PM Bhattarai’s India visit

What’s Nepal’s economic agenda?

Prime Minister Dr. Baburam Bhattarai is scheduled to visit India starting next week. While his team is consulting with a range of stakeholders to shortlist viable agenda for the visit, commentators and talking heads have flooded the market with suggestions and recommendations ranging from historical to political to economic issues without even knowing the nature of the upcoming visit by our prime minister. Some have even gone to the extent of arguing that political agenda, chiefly repealing ages old treaties inked since 1950, should supersede any other “minor” agenda such as those related to economics.

While the ages old treaties might deserve review or repeal, of which I have insufficient knowledge to make a definite judgment, what is certain is that not all the outstanding issues can be resolved in a single visit. There are many challenges and opportunities emerging as a result of our close historical, cultural and economic ties with India. As a sovereign nation that aspires to rise along with the rapid progress made by our neighbors, we should be looking at and thinking over ways to neutralize challenges and take advantage of opportunities keeping in mind our national interests and immediate priorities. As of now, given the domestic constraints to growth and development, our immediate priorities are not political, but economic issues such as importing electricity, increasing investment, promoting exports, collaborating on R&D, and sharing best practices on rural development.

Whatever Nepalis say or feel about India, the fact is that it is increasingly being recognized as economic and democratic emerging powerhouse with tremendous potential in a number of fronts, thanks to the astounding economic growth rate, which might overtake China’s growth by 2013 due to two main factors, namely demography and democracy. The Indian economy is projected to be the third largest (in PPP terms) by 2050 and is expected to grow at over 6 percent until 2050. The booming Indian middle class together with its market potential and human resources have been closely followed by investors worldwide. Meanwhile, Indian investors are spreading their wings deep into Africa and Latin America. Currently, India is the shining star of the wave of globalization that swept the globe after 1990. It is increasingly reckoned as an indispensable economic, military, political and democratic force. And, in its backyard lies Nepal, one of the poorest countries in Asia struggling to grow above 4 percent, which is battered by numerous non-economic constraints that have forced investors to rescind investment plans.

The growing power of India at the global level and our excessive dependence on its markets for most of the things we consume in a daily basis make any high level visit by Nepali authorities a significant and worthy issue for discussion. Given the nature of our constraints and those that can potentially be resolved now, it will be pragmatic if PM Bhattarai and his team take up economic issues only with India. The economic issues should hinge on addressing the most binding constraints in the short term, which means all agenda should aim at securing high growth rate, investment and employment.

First, the country will experience power cuts of at least 14 hours a day in the coming months. Since the domestic demand is far higher than supply of electricity, there is no possibility of lighting our bulbs or operating refrigerator all day unless we depend on alternative sources of energy, which as of now also seems hopeless. Despite having a huge potential in hydroelectricity we are still continuously importing about 50 MW from India. Now, swallowing whatever pride we have in our running waters, we will have to request India to increase the supply of electricity by at least 200 MW with an aim to reduce the scheduled hours of load shedding. We cannot afford closure of more firms and further erosion of investors’ confidence, which are costing us both revenue and jobs.

Second, enticing new Indian investment and securing existing ones should be high on the agenda. Several Indian MNCs have closed down operation in Nepal due to political instability, power outage, labor dispute, and lack of investment guarantee, among other factors. PM Bhattarai should commit, and rightly honor, to provide full security to foreign investment in Nepal. It might encourage Indian investors, our major source of FDI, to reconsider investing in Nepal. If this does not happen, then there is no reason to believe that investors outside of India would even consider investing sizably in our economy. We are in a dire need of investment in infrastructures (hydro and transport networks), the most binding constraint to economic activities.

Third priority should be on securing favorable trade and transit facilities for Nepali traders so that our products exported either to India or via India to other countries do not have to incur additional costs, making them uncompetitive in the global market. Indian market absorbs approximately 61 percent of our total exports and it is the source of almost 57 percent of our total imports. Believe it or not, our trade and transit needs are one-sided. With expanding domestic as well as global markets, Nepal is insignificant in terms of market size to the Indian investors and exporters. Cognizant of this reality, we should ask the Indian government to accord special privileges to Nepali exports, and to address a range of non tariff barriers (such as CVD, local duties, double lock system, delay at Calcutta port), that are increasing cost of our exported products. Furthermore, we should try to convince the Indian government to allow for unhindered entry of Nepali exports via India to Banglabanda so that our exporters can use the nearest Bangladeshi port. Overall, the trade and transit agenda should be aimed at securing provisions that will help our exports avoid extra costs in final markets as well as during transportation phase. It would be fantastic if India gives concession like it did in the trade and transit treaties of 1996.

Nepal has always been asking for favors from India. Our politicians and negotiators hardly make an effort to learn best practices in development and employment generation. This is the right time to do so and should be our fourth agenda. Nepal should request India to share its expertise in research and development, especially on IT, education and agriculture. There is a great deal we can learn from India’s success in services industry. Furthermore, we should seek assistance from India to help us commercialize agriculture sector and increase production like it did during the Green Revolution in mid-1970. It will not only help in supporting structural change, stimulating growth and generating employment in rural areas, where still 83 percent of our population resides, but also help reduce food insecurity. We could also ask India to help us establish and invest in special economic zones (SEZs), on which it has an abundance of capital and experience.

Finally, and further to the previous point, we should make an effort to learn how India manages to fairly efficiently run its rural development programs, chief among them being National Rural Employment Guarantee Act (NREGA), which guarantees 100 days of employment to one adult member of a rural household at wage rate equal to that of unskilled laborers in agriculture sector. Our National Planning Commission is considering rolling out a similar kind of program in rural Nepal. We should learn from India’s experience in running rural employment programs like NREGA and, if possible, seek assistance (both investment and capacity building) in other rural development initiatives.

All of these issues are directly linked to stimulating economic growth, generating employment and addressing the most pressing short term challenges of our economy. These doable initiatives in the short term should be the priority instead of the elusive political agenda. Importantly, let us try to learn good growth and development practices from India this time.

[Published in Republica, October 18, 2011, p.7]