Key highlights of Nepal's 15th five-year plan (FY2020-FY2024)

National Planning Commission recently published the 15th five-year plan (FY2020-FY2024) taking also into account the effect of COVID-19 pandemic on the government’s priorities and the economy. This plan is considered as a first phase of a 25-year long-term economic vision that aims to position Nepal as a high-income country with per capita income of USD 12,100 by FY2044.  Its theme is 'generating prosperity and happiness' and aims to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth. 

The government is expecting Nepal to graduate from LDC category to a developing country status within this plan (by 2022 with per capita income of USD 1,400). This plan is expected to contribute to efforts to ensure that Nepal reaches a middle-income country status by FY2030 (with per capita income of USD 2,900) and achieve the SDGs as well. By the end of FY2024, per capita income is estimated to reach USD 1,595.

The plan emphasizes boosting investment in the sectors or thematic issues that are considered as drivers of economic transformation. These include transport, ICT, energy, education and healthcare, tourism, commercialization of agriculture and forest products, urbanization, social protection, subnational economy, and good governance, among others.

 By FY2024, the government wants to achieve a double-digit growth rate, increase per capita income of USD 1,595, reduce population under absolute poverty line to 9.5%, and increase share of formal sector employment to 50%. 

Some of the major national targets for 15th five-year plan (FY2020-FY2024) are as follows:

• Average GDP growth (at basic prices): 9.6%
• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15.7%
• Share of essential goods (agri, livestock, food items) in total imports: 5%
• Population under the absolute poverty line: 9.5%
• Population with multidimensional poverty: 11.5%
• Share of formal sector employment: 50%
• Unregistered (formal) establishment: 10% of total establishment
• Literacy rate (15+ years): 95%
• Road density: 0.74 km of road per sq km of land
• Households with access to electricity: 95%
• Population with access to internet: 80%
• Electricity generation (installed capacity): 5,820 MW
• Renewable energy: 12% of total energy consumption
• Per capita electricity consumption: 700 kwh
• Agricultural productivity (major crops): 4 MT per hectare
• Irrigable land with year-round access to irrigation: 50%
• Per capita tourist spending: USD 100 per day
• Human development index: 0.624
• Gender development index: 0.963
• Population covered by basic social security: 60%
• Social security expenditure: 13.7% of budget
• Global competitiveness index: 60
• Ease of doing business index: 68
• Travel and tourism competitiveness index: 3.8
• Corruption perception index: 98
• Nepali citizens with national ID card: 100%
• Population affected by disaster incidents: 9.8%

The NPC estimated average growth in agriculture, industry, and services sectors to be 5.4%, 14.6%, and 9.9%, respectively. By the end of the 15th plan, the government is targeting to increase the share of industry and services sectors to 18.8% and 58.9%, respectively, while the share of agriculture sector is to decrease to 22.3%. To achieve the stated average growth rate, the NPC estimated that NRs 9.229 trillion (at FY2019 constant prices and based on ICOR of 4.9:1; FYI, a lower ICOR indicates efficient production process) investment will be required over the plan period. Public, private and cooperative sectors are expected to contribute 39%, 55.6%, and 5.4%, respectively of this required investment.  

[The government is considering FY2019 as a base year for the long-term economic vision. So, the data is presented in FY2019 constant prices. However, this is not much helpful in doing comparative analysis including that of long-term plans and targets. National account estimates, public finance, and periodic surveys - based on which the numbers are estimated eventually- are either presented with different year as base year (FY2011 for NEA for now) or are in current prices (fiscal, monetary, external sectors, and household surveys.]

As a share of GDP by FY2024, the expected impact on macroeconomic indicators are as follows:

National accounts (focused on increasing investment through savings mobilization)

• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15%
• Gross domestic savings: 22%
• Gross national savings: 47.5%
• Gross fixed capital formation: 41.6%

Fiscal sector (focused on allocation and implementation efficiency, and fiscal discipline for expenditure management; maximize revenue mobilization and taxpayer-friendly tax administration)

• Total budget: 43.3%
• Recurrent expenditure: 17.9%
• Capital expenditure: 18.6%
• Financial management: 6.8%
• Revenue: 30%
• Income tax: 10%
• Foreign debt: 5.7%
• Domestic borrowing: 4.3%

Monetary and external sector (focused on controlling inflation, balance of payments stability, and financial stability)

• Average annual Inflation: 6%
• Export of goods and services: 15%
• Import of goods and services: 49%
• Remittances: 22.1%
• Foreign investment: 3%

Meanwhile, the average financing gap to achieve the SDGs is estimated to be NRs 585 billion per year for the entire period of 2016 to 2030 (SDG period). It is on average 8.8% of GDP for 2016-19, 12.3% of GDP for 2020-22, 13% of GDP for 2023-25, and 16.4% of GDP for 2026-30. The overall annual financing gap is estimated at 12.8% of GDP throughout the period of 2016 to 2030.

Post-COVID-19 opportunities for India: Talent, technology and trust

In an op-ed in Mint, Kelkar, Mashelkar and Rajadhyaksha argue that India's self-reliant movement (Aatmanirbhar Bharat Abhiyan) should not be a protectionist agenda. They assert that the organizing principle for global supply chains will be now “just-in-case" scenario in addition to “just-in-time" usual scenario.

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India can play an important role in this quest if it remains open to the flow of knowledge and ideas, partly by participating in multilateral institutions and partly by being a centre of trade and investments. The world is unlikely to go all the way back to techno-nationalism. A more likely outcome is selective techno-globalism, with patterns of trade and technology favouring nations that are seen as trustworthy. For example, Britain has proposed recently a “D10 Alliance", which is a club of 10 democracies comprising G7 nations plus India, Australia and South Korea on 5G and emerging technologies. Such a shift will certainly favour India.

It is very likely that the global economy will be reconfigured in the aftermath of the ongoing pandemic. The need for resilience from shocks could mean “just-in-time" will be flanked by “just-in-case" as an organizing principle for global supply chains. It is in our national interest to take advantage of this anticipated reset, by deepening our engagement with the rest of the world rather than sliding towards protectionism. 

One way to think of the opportunities is in terms of the three Ts—talent, technology and trust. India is well placed in terms of talent and technology. It needs more trust, not just in others but also in itself; or more self-confidence. The goal of atmanirbharta (self-reliance) will be meaningfully met if it is complemented with atmavishwas (self-confidence).

A confident India, which is already a lower middle-income country, and which needs to avoid the middle-income trap, should not be afraid to engage with the world, for trade, for investment, for ideas, for innovation. Embracing economic isolation at this turning point in the global system will be a strategic mistake.

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Actual fiscal stimulus in India

On 12 May 2020, Prime Minister Narendra Modi announced a special economic package worth INR 20 lakh crore (INR 20 trillion or about USD 267 billion), which taken together with the earlier announcements by the government and RBI is equivalent to about 10% of GDP, with a focus on a self-reliant India (Atmanirbhar Bharat). On 26 March 2020, the government had announced an economic relief package (PMGKP) worth INR 1.7 lakh crore while the RBI offered liquidity support of INR 3.7 lakh crore in March and INR 2 lakh crore in April. 

The Atmanirbhar Bharat Abhiyan (ABA) has five pillars and will focus on land, labor, liquidity, and laws.

1. Quantum jump in economy 
2. Modern infrastructure
3. Technology-driven system/reforms
4. Vibrant demography
5. Strong demand 

The main idea is to build back better so that the eventual economic recovery is better than before and India is better positioned to respond to any future health or natural crises. Some of the measures (such as direct cash transfers and food subsidy) are designed to negate the effect of crisis such as COVID-19. The reform measures will not only enhance efficiency across sectors, but also ensure quality and push India towards a self-reliant economic regime. 

The government is aiming for bold reforms in supply chain in agriculture, rational tax system, simple and clear laws, competent human resource, and a strong financial system. Make in India campaign will benefit from these reforms as the emphasis is on meeting demand locally but competitively. The expectation is that these measures will lead to the emergence of confident and resilient India that depends on its strengths and also integrates with the global economy. 

Following up on PM Modi’s announcement, on 13 May 2020, Finance Minister Nirmala Sitharaman, provided details, in five tranches (Part 1, Part 2, Part 3, Part 4, and Part 5), of the comprehensive package. 

The extra fiscal spending will be a fraction of INR 20 trillion as most are related to providing or leveraging liquidity, providing guarantees, and regulatory tweaks. The guarantees and backstops increase contingent liabilities on government, to the extent they are utilized. The following table gives an overview of the estimated fiscal cost or stimulus (1 USD = INR 75).

Self-reliant India movement economic package
Sectors	INR crores	USD billion	Fiscal stimulus or cost
Before May 13
Revenue loss due to tax concessions since 22 March	7,800		Tax relief
PMGKY	170,000	22.7	102,600
Emergency Health Response Package	15,000	2.0	15,000
Total	192,800	25.7
Tranche 1-For businesses including MSMEs
MSMEs
Emergency collateral-free working capital facility	300,000	40.0
Subordinate debt for stressed MSMEs	20,000	2.7	4,000
MSME Fund of Funds	50,000	6.7	10,000
EPF
Extend EPF support for 3 more months	2,500	0.3	2,500
Reduction in employer & employee contribution to 10% from 12% for 3 months	6,750	0.9	Tax relief
NBFCs/MFIs
Special liquidity scheme for NBFC/HFC/MFIs	30,000	4.0
Partial credit guarantee scheme	45,000	6.0	20% of loss if incurred
DISCOMs
Liquidity injection	90,000	12.0
Tax relief
TDS and TCS reduced by 25% for FY2021	50,000	6.7	Tax relief
Total	594,250	79.2
Tranche 2-For poor, including migrants and farmers
Migrant workers welfare
Free food grains supply to migrant workers for two months	3,500	0.5	3,500
Farmers and small businesses
2% Interest subvention for 12 months for Shishu MUDRA loanees	1,500	0.2	if incurred
Credit facility for street vendors	5,000	0.7	if incurred
Extension of Credit Linked Subsidy Scheme under PMAY (Urban)	70,000	9.3	if incurred
Additional emergency working capital for farmers through NABARD	30,000	4.0	if incurred
Concessional credit to PM-KISAN beneficiaries	200,000	26.7	if incurred
Total	310,000	41.3
Tranche 3-Formalizaiton of Micro Food Enterprise (MFE)
Strengthen infrastructure logistics and capacity building
Agri Infrastructure Fund	100,000		100,000
Formalizaiton of Micro Food Enterprise (MFE)	10,000		10,000
Pradhan Mantri Matsya Sampada Yojana (PMMSY)	20,000		20,000
Animal Husbandry Infrastructure Development Fund	15,000		15,000
Promotion of herbal cultivation	4,000		4,000
Beekeeping initiatives	500		500
TOP to TOTAL	500		500
Total	150,000	20.0
Tranche 4-New horizons of growth- Structural reforms in eight sectors
Social infrastructure VGF	8,100		8,100
Total	8,100	1.1
Tranche 5-Government reforms and enablers
MGNREGS	40,000		40,000
Total	40,000	5.3
RBI measures-actual	801,603	106.9
Grand total	2,096,753	279.6	335,700
Share of total			16.0
FY2020AE NGDP		2,998.6	22489420
Share of NGDP FY2020AE			1.5

When the size of fiscal stimulus is expressed as share of GDP, then one confusion is which year’s nominal GDP to use. If folks use FY2020 advanced estimate of nominal GDP, then it may not be correct because nominal GDP is sure to decline as the advance estimate was released before COVID-19 pandemic. But then, if folks revise FY2020 nominal GDP downward then the size of fiscal stimulus as a share of GDP will increase compared to FY2020 AE. If folks are using FY2021 nominal GDP forecast, then the variability in size of fiscal stimulus is unsurprising. Furthermore, note that some of the fiscal stimulus may not be realized in FY2021 itself. So, expressing fiscal stimulus as a share of GDP is not uniform across estimates by different organizations. That said, most of the estimates are between 1-2% of GDP. 

While some argue that the economic package is inadequate to address the economic challenges, other counter that it is appropriate for the time being. 

Land provision for investment and shortage of workers after lockdown

Covid-19: India offers land twice Luxembourg's size to firms leaving China

From The Times of India: India is developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China, according to people with the knowledge of the matter. A total area of 461,589 hectares has been identified across the country for the purpose, the people said, asking not to be identified because they aren't authorized to speak to the media. That includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh, they said. Luxembourg is spread across 243,000 hectares, according to the World Bank.

Land has been one of the biggest impediments for companies looking to invest in India, with the plans of Saudi Aramco to Posco frustrated by delays in acquisition. Prime Minister Narendra Modi's administration is working with state governments to change that as investors seek to reduce reliance on China as a manufacturing base in the aftermath of the coronavirus outbreak and the resultant supply disruption.

[..]The government has hand-picked 10 sectors -- electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles -- as focus areas for promoting manufacturing. It has asked embassies abroad to identify companies scouting for options. Invest India, the government's investment agency, has received inquiries mainly from Japan, the US, South Korea and China, expressing interest in relocating to the Asia's third-largest economy, the people said.

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Labor shortages to hit industrial sector in India

After the massive reverse migration during the lockdown, restarting factories might be a challenge in urban and peri-urban areas due to shortage of workers. Migrant workers are being offered goods welfare package back in their own states to deal with the hardship caused by the COVID-19 pandemic and lockdowns. Attracting them back to workplaces might require offering higher incentives, which many MSMEs may not be able to afford. Here are a few implications outlined in an article in The Economic Times.

• Insufficient labor could severely impact construction operations even if supply of materials normalizes in the next few weeks
• There will be stress on logistics and local distribution. 
• The India Cellular & Electronics Association expects 30% normalcy by the end of May. Foxconn has got approval to resume production with 10% workforce, but getting labour is turning out to be a big challenge
• MSMEs could resume with just 20-25% capacity
• Food processing would be affected severely due to the shortage of workers and difficulty in getting working capital loans at low interest rates. Retailers usually have stock for just 3-4 weeks.
• Export shipments are being hit due to shortage of workers. In two days, around 10,000 workers engaged at Kandla had registered to return to native states.
• Most workers are unlikely to return for the next three months once they reach home. Local leaders in Uttar Pradesh, Bihar and Rajasthan need to appeal to the workers to stay put in their places of work

Here is chart from Mint showing the sectors badly hit by shortage of workers:

Import substitution in India and crowding out of corporate bonds due to high state borrowing

Indian government to chart plan for higher investments

From The Times of India: The government is beginning to reach out to domestic and global investors to work out a strategy for higher investments and reduced reliance on imports in the post-Covid-19 world. During the lockdown, the commerce and industry ministry has had detailed discussions with a group of CEOs on boosting local production of several items, which are currently imported in large quantities, with work on an initial blueprint having begun. Sources told TOI that segments such as mobiles, air-conditioners, auto parts, specialised steel and aluminum products, power equipment, wooden furniture, along with food processing (with potato and orange in focus) are on the table.

Separately, Invest India, the government’s investment promotion agency, had identified over 1,000 global companies across sectors, whom it was reaching out to as part of the “China+1” strategy. “Globally, companies are realising that there is a need to diversify their production bases and India is being pitched as a possible destination. Our plan had slowed down due to Covid-19 but we are in talks with some of them,” a senior government officer told TOI.

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State Govt borrowers are crowding out cash-strapped firms in raising funds

From The Hindu Business Line: Indian companies struggling against the coronavirus pandemic and a domestic credit crunch are facing another obstacle: competition from state governments to sell debt. States are planning to crank up bond sales by 18.2% this quarter from a year earlier to make up for a decline in tax revenue due to an economic slowdown. They usually have lower credit risks than companies, and are offering higher yields than before, which could entice investors. The corporate bond market was already suffering, prompting the RBI on Friday to again inject more money into it. The demand for longer tenor corporate bonds from insurers and pension funds is expected to fall as they shift allocations to state bonds after the recent surge in yields, said Manoj Jaju, chief investment officer at Bharti AXA General Insurance Co. “We too will have a bias toward state bonds over corporate debt now.

[...] But recent cases show how state debt may be more appealing than company securities, even with the extra policy support. Maharashtra state is a case in point. It auctioned 10-year debt on April 7 with an annualized yield of 7.98%, the highest for that tenor since January last year. The latest rate was 44 basis points more than the yield on similar maturity AAA corporate notes. On the same day, REC Ltd., a state-owned financial firm, scrapped plans to sell notes because market participants demanded higher yields.

State bonds are also attractive because they have better trading liquidity in the secondary market compared with corporate securities, said Jaju at Bharti AXA. The State notes are accepted as collateral at the central bank’s repurchase auctions, unlike corporate bonds, providing an added incentive for investors, he said.

MSMEs in India, microfinance institutions in trouble and more

India: Bring in the MSME relief package

From The Economic Times: The MSME sector accounts for about 40% of exports and almost a third of national output, and it is critical to address loss of revenue so as to purposefully avoid closure of units and damage to livelihoods. An estimated 6.3 crore MSME units employ 11 crore persons across the country, and it is only fitting that the sector is provided credit guarantees and interest subventions to survive the lockdown. True, the Small Industries Development Bank of India (Sidbi) has announced emergency loans at a concessional interest of 5%, but these are only meant for MSMEs manufacturing products or delivering services to fight the coronavirus pandemic. A far more comprehensive coverage is surely warranted. It has also been reported that public sector banks are extending emergency lines of credit to MSME borrowers, of up to 10% of their working capital limits. But much larger loans are required to tide over the present crisis in earnings capacity.

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Moratorium on loans critical for microfinance institutions: Icra

From Mint: Microfinance institutions (MFIs) could be heading for troubled times. If they don’t get a moratorium on their loans, their debt-servicing obligations could be severely impacted, according to a note released by credit rating agency Icra. The credit rating agency analyzed a sample of 29 MFIs, which makes up for 70% of the industry portfolio.

Collectively, these institutions have operation expenditures and repayment obligations of ₹8,000 crore in the first quarter of the financial year 2021. However, their on-balance sheet liquidity buffer stood at ₹5,400 crore. These institutions are facing a shortfall of ₹2,600 crore in the absence of any external funding support. “As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cash shortfall of ₹2,600 crore, according to our estimates," the Icra note said.

[...]The strain on borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local, or political issues.

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Fiscal and monetary policy: It takes two to tango

Sajjid Z. Chinoy writes in Mint: Fiscal-monetary coordination is often misconstrued to simply mean a monetization of the deficit. In India, any monetization remains an academic debate for now. Amid unprecedented uncertainty, without knowing the size of the economic shock, how automatic stabilizers on the budget will react, and what the absorptive capacity of the market will be, it’s virtually impossible to assess any funding gap. But that’s not to say fiscal and monetary don’t have other opportunities to co-ordinate in the interim. There are a plethora of opportunities and synergies.

The first task should be to enable the Centre and states to borrow from markets in a non-disruptive manner. Here, there’s some disquieting news. Three weeks after the Reserve Bank of India (RBI) unleashed its bazooka, monetary conditions have begun to tighten again. The glut of interbank liquidity (almost ₹7 trillion) has pushed interbank overnight rates to just 2-3%. Yet, the 10-year GSec recently hardened to a 2-month high of 6.5%. This is now the steepest yield curve in a decade. Meanwhile state yields have firmed to the 7.7-8% range—twice the typical spread over GSec yields.

Given the abundant system liquidity and weak credit growth, what explains this? It’s because in recent years, banks have revealed a growing aversion to long-dated government bonds (“duration risk"). This is because banks’ holding of bonds is much above statutory limits (the corollary of soft credit growth in recent years), exposing them to interest rate risk. The longer the duration, the greater the “mark-to-market" risk—losses which impinge upon (often scarce) banking capital. It’s this disinclination to buy “duration", a behaviour exacerbated by increased market volatility, that underpins the hardening of yields.

What can policy do? 

• First, given the unprecedented uncertainty, policymakers could consider granting temporary forbearance to banks on their “mark-to-market" accounting (e.g. temporarily increase “hold-to-maturity" on which there is no interest rate risk).
• Second, the “ways and means" advances for states could temporarily be increased further so that states’ near-term market borrowing temporarily reduces. 
• Third, RBI often needs to buy government bonds to create base money just to support activity in the normal course of events.As households begin to hoard cash, we expect “currency-in-circulation" to rise by 1% of GDP this year. So RBI will have potentially meaningful space to buy government bonds 
• Expenditure will therefore have to be ruthlessly prioritized, akin to a “war-time" effort, and must focus squarely on boosting healthcare capacity, support for the needy (in cash and kind), funding automatic stabilizers like the Mahatma Gandhi Rural Employment Guarantee Act scheme, and back-stopping the financial sector (credit guarantee and re-capitalization funds).