Wednesday, November 2, 2011

Imports substituting local production deficit in Nepal

Nothing surprising if you follow trade theory, but seeing it happen in real time is definitely interesting!

The Nepalese vegetable market is flooded with Indian veggies lately. Why? Because Nepal does not produce enough to satisfy local demand. Again, why so? Because of increasing urbanization and lack of local manpower (youth go abroad to work in the Gulf and other employment destinations creating shortage of labor). The substitution effect is in full swing in Kalimati veggie market. Veggies import from India and China (and even Bhutan) is gradually increasing.

“Share of Nepali vegetables has been going down due to shortage of farm workers and growing housing and real estate in key farm areas,” Arjun Aryal, director of Kalimati Fruit and Vegetable Market Development Board  (KFVMDB), told Republica.

According to him, Nepal has been highly dependent on India for lemon, onion and pointed guard as production of these vegetables is nominal in the country.

Bharat Khatiwada, a trader in the Kalimati market, said the share of Indian vegetables in Kalimati has risen with every passing year. Vegetable from India is supplied directly to Kalimati market. However, Nepali farmers are supplying their produce to other cities in addition to the capital.

“Volume of Nepali vegetables is going down in Kalimati as farmers are looking for new and lucrative markets than Kathmandu where Indian suppliers are delivering their products directly to the Kalimati market,” said Khatiwada.  

According to KFVMDB, India-supplied vegetables make for 26 percent or 52,000 tons of the total arrival of vegetables in Kalimati during the fiscal year 2010/11. The share of vegetables imported from the southern neighbor was 25 per cent or 44,000 tons of the total arrival during the fiscal year 2009/10.

The board´s data shows that supplies of vegetables from China covered two percent or 4,000 tons during the fiscal year 2010/11, up from one percent or 1,760 tons recorded the previous year. Nepal has been importing garlic and onions from China whereas potatoes are the key import from Bhutan.

Similarly, Bhutan has been contributing one percent or 2,000 tons of the total supplies to the Kalimati market. Daily arrivals of vegetables to the Kalimati market averaged at 200,000 tons.

Now, the question is what is happening to net welfare of Nepalese consumers? With rising domestic wages, low production, high imports, and high food prices, it won’t do justice to say consumer welfare is increasing! Both the market and nonmarket forces are at play here and are helping to keep prices sticky at high level. But, fundamentally, if consumers’ purchasing power increase then they will consumer even by importing if the domestic market cannot satisfy their demand. It can be good sometimes, but not always. As of now, with trade deficit over 20% of GDP, it may not be a good choice for Nepal.