Thursday, October 4, 2012

How big is the Indian market for Nepal?

Nepal is inherently dependent on India for pretty much everything. All of the petroleum products are imported from India. India is the biggest market for Nepal’s exports and imports (informal trade is also equally large). It is further facilitated by the free flow of goods (there are no tariffs imposed on manufacturing goods exported to India, but there exists some NTBs) and services between the two countries.  Each year, the largest share of FDI comes from India (also see this). Nepal is also importing increasingly large amount of electricity from India (this should have been the opposite!). Nepal signed BIPPA and DTAA with India last year. Nepal has pegged its currency to Indian rupee (maintaining which has been a cornerstone of Nepal’s monetary policy) and about one-third variability in prices is determined by the ones prevailing in the Indian market. India provides the only exit point for third country trade of Nepal. Overall, Nepal is economically, culturally, religiously and historically linked to India and the Indian economy.

Against this backdrop, it is often said that Nepal has a high potential to grow rapidly given the huge market potential in neighboring India and China, the two emerging economic giants of Asia. Most of the commercial investments mention India as a promising market at some point of the proposal or business plan. Now, how big really is the Indian market for Nepali goods and services?

The adjoining five states matter the most than any other states of India because the cost of trade in these five states is relatively lower given their proximity and possibly complementary production structure. The adjoining five states are Uttarakhand, Uttar Pradesh, Bihar, West Bengal and Sikkim.

The table below provides a snapshot of the potential number of customers (proxied by population size), increasing demand (proxied by real per capita income growth) and economic prospect (proxied by real GDP growth) of the adjoining five states, India and Nepal.

NPL-IND Uttarakhand Uttar Pradesh Bihar West Bengal Sikkim INDIA NEPAL
Population in 2011, million 10.12 199.58 103.81 91.35 0.61 1210.19 26.6
Real GDP growth* 11.56 6.90 12.11 7.32 16.20 7.93 4.47
Real per capita income growth* 9.31 4.92 10.82 6.17 12.25 6.26 3.04

*Average between 2007/08 and 2011/2012; Source:Compiled from Planning Commission (India), and Economic Survey 2012 and Census 2011 (Nepal)

According to Indian Census 2011, the total population of the five adjoining Indian states is 400 million. The total population of India and Nepal is 1.21 billion and 26.6 million respectively. On an average, between 2007/08 and 2011/12, all the adjoining Indian states had real growth rate of about or above 7 percent. Real per capita growth was above 6 percent in all but Uttar Pradesh. With the relatively low real growth rate and per capita growth rate of Nepal, there exists a tremendous opportunity for Nepal to catch up if only it could cater to the already available markets with what they need the most: electricity.

Now, Nepal itself is facing long load-shedding hours. If Nepal is able to generate adequate electricity (that means facilitating construction of small, medium and big hydro projects with all possible support to investors), then it can consume first what is needed and then export the rest to the energy hungry adjoining Indian states. It would be a win-win strategy for both Nepal and India. India would be able to fulfill some of its electricity demand by importing from Nepal. Nepal would see huge investment, competitive manufacturing and export sectors, spurring of economic activities, new jobs, higher income, and robust agriculture and industrial sectors. It will also strengthen fiscal position as revenue rises and could help maintain macroeconomic stability.

So, how big is the demand for electricity in the adjoining Indian states? Overall, India is anticipating 14,856 MW of electricity deficit (10 percent of total requirement) during peak time in 2012/13. Total energy requirement is estimated to be 985,317 GWh (India uses MU instead of GWh) but availability is expected to be 893,371 GWh only, resulting in 91,946 GWh of deficit. FYI, in India, kilowatt hour is referred to as a unit of energy and a million units (MU) is a gigawatt hour (GWh).

The table below shows requirement, availability and shortage of energy in the adjoining Indian states, whole of India and Nepal in 2011/12. Bihar had the highest shortage of electricity (21 percent of total energy requirement). Overall, throughout the year India had 8 percent shortfall of energy and Nepal had 20 percent.

NPL-IND Uttarakhand Uttar Pradesh Bihar West Bengal Sikkim INDIA NEPAL
Energy requirement (GWh)   10,513        81,339    14,311   38,679      390  937,199     5,195
Energy availability (GWh)   10,208        72,116    11,260   38,281      384  857,886     4,179
Energy shortage (GWh)       305         9,223      3,051        398         6   79,313     1,016

Source: Compiled from Central Electricity Authority of India and Nepal Electricity Authority

In 2011/12, during peak load, Bihar had the largest shortfall (14.43 percent). Sikkim had a surplus supply of about 5 percent of total energy demand. Overall, India had deficit of 10.63 percent. These figures look miniature in front of 43.64 percent energy shortfall in supply compared to demand in Nepal during peak load. No wonder folks had their electronic equipment (for those who do not have alternatives such as invertors and/or solar batteries) nonoperational for over 15 hours each day during dry season. There exists a huge demand for electricity internally. If energy generation surpasses the internal demand, then there already is a readymade market for it in the adjoining Indian states.

NPL-IND Uttarakhand Uttar Pradesh Bihar West Bengal Sikkim INDIA NEPAL
Energy peak demand (MW)    1,612        12,038      2,031     6,592      100  130,006     1,027
Energy peak supply (MW)    1,600        11,767      1,738     6,532        95  116,191       579
Energy peak shortage (MW)         12            271        293         60        (5)   13,815       448

Source: Compiled from Central Electricity Authority of India and Nepal Electricity Authority

Next year, Uttarakhand is expected to face 24.28 percent shortage of electricity (total) requirement. Sikkim is expected to have 87.53 percent surplus. Overall, India is expected to face 9.33 percent electricity shortage. During peak time, Uttar Pradesh alone is expected to see 2123 MW shortage of electricity. Energy requirement in Nepal next year is estimated to be 5350 GWh. During peak load, the demand for electricity in Nepal in 2012/13 is estimated to be 1163 MW. In 2016/17 and 2024/25 peak load is forecasted to be 1641 MW and 2951 MW respectively in Nepal.

Anticipated in 2012-13 (MU=GWh)
NPL-IND Requirement Availability Deficit Peak time deficit (MW)
Uttarakhand             11,322         8,573      2,749                  86
Uttar Pradesh             87,153        70,509    16,644             2,123
Bihar             14,550        11,609      2,940                774
West Bengal             44,409        43,674        735                214
Sikkim                  489            917       (428)                 (41)
INDIA           985,317      893,371    91,946           14,856
NEPAL               5,350      
Source: Compiled from Central Electricity Authority of India and Nepal Electricity Authority

BTW, of the total energy generation in 2011/12 in India, central government’s share was 41.54 percent, state government 41.94 percent, private IPPs 12.77 percent, private utilities 3.16 percent, and import from Bhutan 0.60 percent. In Nepal, of the total energy availability, the share of NEA hydro was 56.42 percent, NEA thermal 0.04 percent, import from India 17.85 percent and purchase from IPPs 25.69 percent.

There you go. Nepal already has a huge demand for electricity and if it is able to generate in excess of the domestic demand, then there is also a readymade, energy hungry market right next door. There is nothing to lose from generating more electricity by judiciously exploiting our natural endowment. Nepal has a bright future if it can continuously light bulbs and fire up electronic equipment!

Apart from the brief outline of Nepal’s dependence on India, below is a combo picture showing the increasing reliance on the Indian market for exports and imports.

Trade concentration with India is very high. The share of trade deficit with India in fiscal year 1974/75 was 78.81 percent. It decreased to 26.55 percent in fiscal year 1988/89 and then started increasing rapidly in the last two decades, reaching 65.87 percent in fiscal year 2010/11. The total trade deficit in 2010/11 was NRs 331.84 billion. Nepal is selling high amount of dollars to purchase Indian rupee, which in turn is used to purchase goods from India. Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure (mainly electricity), political instability/strikes, labor disputes, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents.

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