Monday, October 29, 2012

Doing Business 2013: No improvement in ease of doing business in Nepal

In its latest Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises report, the IFC has ranked Singapore as the top economy in terms of ease of doing business. The other top ranked economies are Hong Kong (SAR, China), New Zealand, the United States, and Denmark. Last year as well, the same economies were in the top position.

The report ranks economies based on performance in ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. This year’s report data cover regulations measured from June 2011 through May 2012.

Poland was the global top improver in the past year. The other economies that have made the most progress in several areas of regulation last year were Sri Lanka, Ukraine, Uzbekistan, Burundi, Costa Rica, Mongolia, Greece, Serbia, and Kazakhstan.

In South Asia, Sri Lanka made the most progress and was ranked 81, followed by Maldives (95), Pakistan (107), Nepal (108), Bangladesh (129), India (132), Bhutan (148) and Afghanistan (168). Last year, Maldives ranked 79, followed by Sri Lanka (89), Pakistan (105), Nepal (107), Bangladesh (122), India (132), Bhutan (142) and Afghanistan (160). The regional average (in rank) was 117 in DB2012 but it was 121 in DB2013, reflecting either a worsening business regulatory environment or a stagnant one or significant progress by other regions (based on data revisions) or addition of new economies (this year Malta and Barbados were added).

In terms of ease of doing business, Nepal ranked 108 out of 185 countries. Last year, Nepal ranked 107 out of 183 countries and in DB2011 Nepal’s ranking was 110. Between DB2012 and DB2013, Nepal did not enact a single reform aimed at easing business processes and regulations. Hence, the progress made by other economies dropped ranking one position below last year’s ranking (plus there was addition of two economies in this years report).
  • While the ranking in registering property has improved by two positions and ranking in getting electricity is unchanged, the ranking in all other indicators has declined. The largest decline (9 positions) is in dealing with construction permit indicator.
  • In South Asia region, Nepal has the best ranking (21) in registering property. It requires 3 procedures, 5 days and 4.9% of property value to register a property in Nepal. The regional averages are 6 procedures, 100 days (250 days in Afghanistan), and 7.3% of property value.
  • In terms of documents to export, Nepal has the worst performance in the region, requiring 11 documents against the regional average of 8. Sri Lanka has the best performance with just 6 documents required for exporting a container.
  • In terms of number of procedures required to enforce contracts, Nepal has best performance in the region with 39 required procedures as against 43 for regional average.
  • In terms of time taken to resolve insolvency, Nepal has the worst performance in the region. While it takes 5 years to resolve insolvency in Nepal, the regional average is 3 years (in Maldives it is just 1.5 years). Furthermore, recovery rate is also the lowest in Nepal (24.5 cents on the dollar) compared 29.1 for the region (50.6 for Maldives).
Nepal's ranking (out of 185 countries)
Topics DB 2013 Rank DB 2012 Rank Change in Rank
Starting a Business 105 102 -3
Dealing with Construction Permits 97 88 -9
Getting Electricity 96 96 No change
Registering Property 21 23 2
Getting Credit 70 67 -3
Protecting Investors 82 79 -3
Paying Taxes 114 109 -5
Trading Across Borders 171 170 -1
Enforcing Contracts 137 136 -1
Resolving Insolvency 121 119 -2

This year, the report also provides a new measure called ‘distance from frontier’, which benchmarks economies to the frontier in regulatory practice. In other words, it measures the absolute distance to the best performance on each indicator. When compared across years, the distance to frontier measure shows how much the regulatory environment for local entrepreneurs in each economy has changed over time in absolute terms, while the ease of doing business ranking can show only relative change.

An economy’s distance to frontier is indicated on a scale from 0 to 100, where 0 represents the lowest performance and 100 the frontier. For example, a score of 60 in DB 2012 means an economy was 60 percentage points away from the frontier constructed from the best performances across all economies and across time. A higher score in DB 2013 indicates an improvement.

Compared to DB 2006, in DB 2013, in Nepal, there was improvement in all indicators except trading across borders. The largest improvement was in dealing with construction permits, followed by getting credit and starting a business. Overall, Nepal's ease of doing business improved by four percentage points (i.e. closer to the frontier by four percentage points) between DB 2006 and DB 2013.

Friday, October 26, 2012

Nepal has the highest minimum wage in South Asia?

Workers affiliated to various trade unions have time and again gone on strike demanding hike in wages and allowances. The recurring row over hike in wages and allowances between workers belonging to one or the other politically affiliated (and probably motivated) trade unions and businessmen has led to not only closure of national firms but also reputed international firms. Labor strikers have intensified particularly after 2006 and there has been an explosion of registered unions at the Department of Labor. The business community argues that it is not fair to demand wages and allowances beyond the capacity of the firms to pay them. The trade unions argue that they should be paid more because the cost of living has gone up. Their row has led to repeated revision of minimum wage.

A higher wage means high cost of production. In Nepal’s case, the cost of production is amplified by the inadequate supply of electricity (forcing firms to use diesel generators to run factories), high cost of raw materials, low innovation and strikes, among others. Along with the end of MFA in 2005 and the inability to compete with more competitive international players, high labor costs and strikes are also responsible for the decline of once thriving garment industry (and other manufacturing firms) of Nepal. In order to stay competitive, the government, labor unions and private sector have to work on enhancing efficiency and reducing cost of production (this can be achieved even if there is hike in wages, as seen in Bangladesh's case). Else, investors will be looking for less expensive manufacturing destinations, which would mean less investment, less jobs and low growth for Nepal.

The figure below shows that Nepal already has the highest minimum wage in South Asia. The minimum wage in Nepal increased from US$32.32 per month in 2007 to US$74.75 per month in 2012. In 2007, Nepal had the second lowest minimum wage in South Asia. In 2008, it doubled and since then minimum wage has been the highest in South Asia. Even if we consider the overall wage overheads (minimum wage and allowances), Nepal has the highest wage overhead costs in South Asia.

Now, the question here should be: is the increase in wages consistent with increase in productivity? See this article for the discussion on union strikes and productivity. The basic idea is that the marginal increase in wage should be matched by the marginal increase in productivity for long term survival of firms and employability of workers, i.e. increase in wage costs should be offset by increase in efficiency. As of now, in Nepal, it is not so as hike in wages (from an already relatively high level!) and increase in productivity are not in sync with each other. Bangladesh had synced it, i.e. the rise in wages was more than offset by increase in efficiency. No wonder, Bangladesh is the next hotspot in RMG sourcing.


Friday, October 19, 2012

Who shapes trade patterns?

In a new paper, Caroline Freund and Martha Denisse Pierola argue that it is the top one percent of exporters that shape trade patters. Abstract of their paper as follows:

This paper shows that the top 1 percent of exporters critically shape trade patterns, using firm-level data from 32 countries. In particular, variation in average firm size (the intensive margin) explains over two thirds of the variation in the sector distribution of exports across countries, the remaining share is explained by variation in the number of firms (the extensive margin). Variation in average firm size across sectors is largely driven by variation in the sectoral distribution of exports from the top 1 percent of firms in a country--export superstars. In contrast, the sectoral distribution of exports from the remaining 99 percent of firms is more similar across countries, and the distribution of the total number of firms across sectors is very similar across countries. This paper also finds that current export superstars typically entered the export market relatively large, reached the top 1 percent after less than three years of exporting, and account for more than half of a country's total exports, export growth and diversification. The results underscore the role of individual firms in determining both trade volumes and trade patterns.

Thursday, October 18, 2012

Comments on Immediate Governance and Economic Action Plan 2012

On 16 October 2012, the BRB government unveiled Immediate Governance and Economic Action Plan 2012, which has 201 reform activities in 15 different fields. Earlier, BRB government also introduced Immediate Action Plan on Economic Development and Prosperity 2012 and Immediate Relief Program 2011. It also introduced a good governance action plan.

The major points from the latest ambitious action plan are as below:

Economic progress and prosperity
  • Get eight aircrafts (two for international and six for domestic) for Nepal Airlines within six months. Fire employees who fail to ascertain procurement process initiation within a month.
  • Operate an appropriate manufacturing activity/industry inside the defunct Janakpur Cigarette Factory within six months.
  • Invite private sector to construct an exhibition and convention center in the premises of the defunct Himal Cement Factory within three years.
  • Lease Birgunj Sugar Factory to either cooperatives or private sector within 18 months.
  • Revive Hetauda Clothing Factory and mandatorily use its products by government agencies that get clothing allowance within a year.
  • Revive the sick industries within a year.
  • 24 hour security in major trade routes and industrial corridors to be enacted immediately.
  • Dedicated Security Force to firms employing more than 500 employees within a month.
  • Operate Nepal Orient Magnesite Factory under PPP model within six months.
  • Open track of Kathmandu-Terai and mid-hill postal road within a year.
  • Start construction of regional airports to be built in Bhairawaha and Pokhara within six months.
  • Prepare DPR of Budhi Gandaki hydropower and West Seti hydropower projects within two and a half years.
  • Start civil works of Tamakoshi hydropower project within two years.
  • Seal agreement with a new constructor for Melamchi Water Supply Project within six months.
  • Construct at least 25 kms of canal in Sikta irrigation project within a year.
  • Disburse Rs 3 billion under Youth Self-Employment Program to 15000 youths within six months.
  • Establish think-tanks related to security, foreign affairs and strategic affairs within six months. Similarly, establish economic and social issues related think tank within six months.
  • Prime Minister National Award to investors investing more than Rs 2 billion (to be implemented within three months)
  • Organize high level economic summit within six months.
  • New Nepal Development Fund to be established within six months by collecting at least one day of income from Nepali and NRNs.
  • Publicize 50 bankable projects by Investment Board within six months.
  • Provide at least 100 days of employment within a year to those having poverty identification card.
  • Increase number of public servants in PM’s Advisory Council within six months.
Corruption control and transparency
  • Facilitate corruption related complaints, salary to be indexed to NRB’s data on inflation rate; random sampling of at least 3 percent houses in urban areas to check compliance with building codes and standards; plug leakages by at least 25 percent in supply of electricity, water supply and petroleum products; one door policy to all money coming via NGOs and INGOs and make mandatory for all to make public their accounts and activities
Transport management
  • Terminate driving license if caught five times for drunk driving; no passengers on the top of vehicles; parking space management in Kathmandu valley; passenger pick up and drop off only at designated bus stops; operate Sajha buses in Kathmandu valley and other major cities
Supply of essential items
  • Import 200,000 MT of fertilizers for this year; discounted price shops to be established during festival season; stop illegal collection of duties along highways; at least 25 percent veggie supplies in Kathmandu valley to come from cooperatives; market monitoring
Power sector
  • Include supply of petroleum products in emergency items; plant twice the number of trees for each tree cut until 5000 MW of electricity is produced; construct at least six transmission lines to connect at least 30MW additional electricity to the grid; import 200MW of electricity; operate multi fuel plants in Duhabi and Hetauda; limit load-shedding to 12 hours in dry season


On an optimistic note, let us hope that the government will be able to fulfill at least 50 percent of the promises made in its latest action plan. That much should suffice given the difficult political transition and weak economic fundamentals.

It is a ambitious, long list of work and set action plan. The problem is that similar plans have already being unveiled by the same government and there has been no systematic evaluation of the achievement of targets. At the outset, the core issues here should be: (i) Why do we need a new plan with lofty targets and aims, which have in one way or the other been the main topics in pretty much all of the earlier short, medium, long and ad hoc plans and programs?; (ii) What new does this plan offer other than seemingly unattainable hope?; (iii) Can the nature of this government (caretaker) bring to fruition the plans within the stipulated deadline?; (iv) Given the history of non-implementation of similar plans and programs with the same kind of bureaucracy and political culture, are these realistic?

First, if growth and prosperity are the two main concerns then we already know what is required to kick-start the growth engine in the first place. It will be hard to bring in new investments in sectors other than hot potato ones (infrastructure—mainly energy and transport—and some services sector) right now. The ones that is most important in terms of attaining decent growth rate and creating employment opportunities are manufacturing and agro-processing sectors, which are beset by lack of adequate supply of electricity, labor problems, lack of innovation, uncompetitive production structure, inconsistent policies, corruption and lack of finance among others. Simply solve these by using the already available policy tools and implementing the already introduced policies. Keep it simple. Keep it real.

Second, difficult labor relations are eating up whatever investors’ confidence there was after 2006. We need a solid understanding and setting up of parameters for labor unions to operate both in public and private sectors. Several firms, both domestic and foreign, have closed down due to labor disputes. Labor unions are way too politically motivated and less concerned about actual welfare of workers. It is not inappropriate to have a policy that anchors pay and benefit hikes to productivity. Furthermore, the distortions created by middlemen in veggie and fruit markets are not touched upon.

Third, what good it is to revive the defunct state-owned enterprises and sick industries? Without the solution to the issues mentioned above, reviving defunct firms will serve no purpose other than employing party faithful and draining state’s coffers filled with taxpayer’s hard-earned money and loan from development partners.

Fourth, getting aircrafts for Nepal Airlines will not solve the core problems, which lie in the excessive politicization of the once healthy institution. Keep politics out of Nepal Airlines, rightsize and downsize redundant staff, and give it plans, things will get better. No master plan is needed at least in the initial phase. Is six months timeframe realistic given that even with more than six years of talks and planning, Nepal Airlines has not seen its fleet of airplanes increased.

Fifth, preparing DPR of hydro projects and expediting works are commendable. Hopefully, these will be done within the given timeframe and without much opposition from one or the other political parties in the name of sovereignty! Playing by the international rules, let investments come in, especially in infrastructure and manufacturing sectors, regardless of the source country.

Sixth, the commitment to expedite the process to again kick-start Melamchi related works and establishing think-tanks is also commendable. The only worry with the latter one is that it should not be a parking space for retired bureaucrats, should be demand-driven and independent, strictly focused on policy analysis and advisory services, free of political interference, and staffed with competent people that can be retained as and when required. Also, why need a foreign affairs think-tank when Nepal already has Institute for Foreign Affairs to do the job (at least in principal)?

Seventh, there should be a rigorous evaluation of Youth Self-Employment Fund (YSEF) as reports of mismanagement of funds and doling out money to party faithful are coming out in a regular basis.

Eighth, most of the plans and programs included in this list are the ones that have either already being featured in previous plans by the same government or were in pipeline to be included in budget. Also, are the deadlines realistic given the political constraints, particularly legislative constraint?

Ninth, and the most important of all, is finance. Where will the money come from to implement these plans and programs? Even if a full budget is unveiled, it is impossible to incorporate all of these in the two-third budget and garner political support/consensus. Granted, some of the works don’t need to wait for budget, but then given the quality of executing and implementing agencies, it is quite unbelievable to expect that the set targets will be achieved in time.

With adequate financing, political and bureaucratic consensus and will, cooperation from development partners, responsive public and private sectors apparatus, and the guts to meticulously and painstakingly follow up on the targets and compliance by executing and implementing agencies, the hope is that some of them will be achieved. Even 50 percent achievement of the targets would suffice for now.

Tuesday, October 16, 2012

State of Hunger in South Asia, 2005-2010 (Global Hunger Index 2012)

According to the Global Hunger Index 2012, though hunger in Nepal is decreasing, it is still at "alarming" level. Nepal's hunger index declined from 26.9 in 1990 to 20.3 in 2012.  In hunger ranking, Nepal ranks 60 out of 79 countries. In 2011, Nepal's ranking was 54. Note that while GHI 2012 used data from 2005 to 2010, GHI 2011 used data from 2004 to 2009. 

In South Asia, GHI 2012 ranks Sri Lanka 37, Pakistan 57, Nepal 60, India 65 and Bangladesh 68. It means that hunger in Sri Lanka is the lowest in South Asia. Hunger level in Sri Lanka and Pakistan is "serious". In all other countries, it is "alarming".

Hunger in South Asia (Increase in GHI score means hunger situation is worsening)
Country 1990 1996 2001 2012 RANK
(with data from 1988-92) (with data from 1994-98) (with data from 1999-2003) (with data from 2005-2010)
Bangladesh 37.9 36.1 27.8 24 68
India 30.3 22.6 24.2 22.9 65
Nepal 26.9 24.4 23 20.3 60
Pakistan 25.5 21.8 21.7 19.7 57
Sri Lanka 20.8 18.4 15.2 14.4 37

The GHI ranks countries on a 100-point scale in which zero is the best score (no hunger) and 100 the worst. This year's GHI reflects data from 2005 to 2010. Hunger level is categorized as follows:
  • <= 4.9 is low
  • 5.0-9.9 is moderate
  • 10.0-19.9 is serious
  • 20.0-29.9 is alarming
  • >= 30.0 is extremely alarming
In order to identify hunger levels and hot spots, the GHI scores countries based on three equally weighted indicators: the proportion of people who are undernourished, the proportion of children under five who are underweight, and the child mortality rate.

Compared with the 1990 score, the 2012 GHI score was 16 percent lower in Sub-Saharan Africa, 26 percent lower in South Asia, and 35 percent lower in the Near East and North Africa. The report notes:

South Asia reduced its GHI score by more than 6 points between 1990 and 1996—mainly through a large 15-percentage-point decline in underweight in children—but this rapid progress could not be maintained. Stagnation followed, and the region has lowered its GHI score by only about 2 points since 2001 despite strong economic growth. The proportion of undernourished people did not decline between 1995–97 and 2006–08 and even showed a transient increase of about 2 percentage points around 2000–02. Social inequality and the low nutritional, educational, and social status of women are major causes of child undernutrition in this region and have impeded improvements in the GHI score.

The rising water, land and energy scarcity will impact food security in the coming decades (especially food price volatility and food price spikes). On this regard, the GHI provides the following recommendations to effectively deal with its impact on food security:
  • Responsible governance of natural resources: getting the policy frameworks right (secure land and water rights; phase out subsidies; create a macroeconomic enabling environment)
  • Scaling up technical approaches: addressing the nexus (invest in agricultural production technologies that support increased land, water, and energy efficiency; foster approaches resulting in more efficient land, water, and energy use along the value chain; prevent resource depletion by monitoring and evaluating strategies in water, land, energy, and agricultural systems)
  • Addressing the drivers of natural resource scarcity: managing the risks (address demographic change, women’s access to education, and reproductive health; raise incomes, lower inequality, and promote sustainable lifestyles; mitigate and adapt to climate change through agriculture 

Sunday, October 14, 2012

Trends shaping the world economy

At the IMF-WB Annual Meeting in Tokyo, Christine Lagarde, Managing Director, International Monetary Fund, outlined the three megatrends the world economy is witnessing right now.
  • Demographic changes: Rising number of young people in developing countries and graying population in advanced and major emerging economies; more women participation
  • Shifting economic power: Economic power is gradually shifting from west to east; the south is witnessing increasing level of prosperity
  • Efficiency, productivity and connectivity with ICT: Nearly 3 billion people are connected to the internet and entrepreneurs with global reach are emerging out in developing countries
She proposed three strategies to move ahead against the backdrop of the current phase of global economic uncertainty:
  • Looking beyond the crisis: Accommodative monetary policy; the right pace of fiscal adjustment, mindful of not undercutting growth but with solid and realistic plans to bring debt down over the medium term; finishing the banking sector clean-up; and structural reforms to boost productivity and growth
  • Creating a better financial system and complying with new banking capital and liquidity requirements
  • Inequality and inclusive growth: Focusing both on efficiency and equity-- fairness in sharing the burden of adjustment, and protecting the weak and vulnerable; better financial inclusion; better transparency and governance
On similar note, read World Bank Group President Jim Yong Kim's speech on the need to move forward with an aim to alleviate absolute poverty and ensure shared prosperity.

Thursday, October 11, 2012

Festival season economics

Today’s TKP has interesting numbers related to income and expenditure shocks during festival season (Dashain, Tihar and Chhat):
  • More than Rs 15 billion enters the economy during the season in the form of salaries and allowances.
  • 10 percent of the total remittance inflows enters the country during this period. Between mid-September and mid-October 2011, remittance inflows was Rs 28 billion.
  • Most of the goods consumed are imported.
  • Revenue mobilization, hinged on remittances financed imports (custom duty and VAT), is the highest during festival month.
  • FNCCI estimates daily transaction of Rs 13 billion during festival month.

Normally, festivals give a boost to the economy: quarterly growth rate and employment numbers go up, retail activities pick up, internal tourism is high and so forth. However, in a remittances dependent economy with declining manufacturing strength (which dropped to around 6% of GDP last year), festivals do not have substantial multiplier effects as is seen in other countries. The ones who gain are traders (who import goods and sell it in the Nepali market), workers in the formal sector (think of one month extra bonus!), revenue department (customs duty and consumption taxes on imported goods), middlemen (who rig prices and supplies especially in agricultural sector) and jewelry businesses (South Asian household's fascination with jewelry during festival seasons is quite unique!) among others.

The economy does not get much stimulus because most of the goods and services consumed during festival season are not produced domestically using our own workforce, i.e. value addition is very low, if any. Unless we solve the supply-side constraints faced by industrial sector (mainly power crunch, poor infrastructure, labor disputes, lack of innovation and R&D, and policy implementation paralysis), the outlook appears grim. Worse, if monsoon becomes unfavorable, then growth rate might plunge more than anticipated. Prolonged political uncertainty is another damper on investor’s confidence. As of now, it seems the ever-increasing transactions during festival season is going to widen trade deficit (merchandise trade deficit was Rs 424.07 billion in 2011/12 compared to Rs 332.97 billion in 2010/11-- around 24% of GDP) further.

Now, Nepal cannot solve all of the supply-side constraints at once. Nepal doesn't have the financial resources, political will and institutional strength to do that. It could at least work on improving industrial relations, implement the promised provisions in several policy documents, encourage private sector to engage in R&D by offering fiscal and other incentives and gradually work on meeting energy demand.

Anyway, enjoy the festivals!

Sunday, October 7, 2012

High cost load-shedding reduction plan

So, the government has instructed the Ministry of Finance (MoF) to give Rs 5.4 billion grant to Nepal Electricity Authority (NEA) to help it meet the plan to limit load-shedding to 12 hours coming dry season. According to reports, the NEA needs Rs 2.80 billion annually to operate its thermal plants and another Rs 2.60 billion to import additional energy from India. Import price of energy is Rs 7.23 per unit, but it costs Rs 9.69 in total due to technical leakage.

The plan had proposed for the early construction of the 400kv Dhalkebar-Mujjaffapur inter-boarder transmission line, generating 40 MW of energy from diesel plants (39MW in Duhabi, Morang, and 14.4MW in Hetauda), importing 200 MW additional energy from India and purchasing energy from captive plants of local industrial units, among others. The MoE has already asked the Finance Ministry to release Rs 330 million to build the transmission line.

Looks like a pretty expensive plan. But, then it is necessary to lower load-shedding hours. The real task is to assess if the benefits of such expensive, temporary load-shedding reduction plan/action outweigh the costs of having long load-shedding hours. If such episodes are regular feature each year, then will it be sensible to invest, say, five years worth of this implicit subsidy in energy generation (investing Rs (5*5) billion = Rs 25 billion in hydro power in one go!)? More grants to NEA means more subsidy that is not properly targeted (same thing with subsidies on diesel and LPG). It would mean more pressure on fiscal balance and diversion of money allocated for development works. It has huge opportunity cost.
The country faces a stark choice: either continue plundering taxpayer’s hard earned money by subsidizing a hugely inefficient sector (and institution) or suffer for a bit more but then pump huge sum of money in the sector that will eventually erase the need for subsidy in the first place. Seems like the government is trying to tread the middle path, which presumably is also politically palatable. Anyway, these are difficult times and getting over it requires making difficult choices and decisions.

Here is a link to an article on the impact of load-shedding. Also, here is a link to a blog post that details the size of Indian market for Nepali goods and services.

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.