Indian investment in Nepal

Here is a fairly detailed reporting on Indian investment in Nepal and troubles faced by Indian investors. The post below is adopted from an article in The Economic Times.

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India Inc in Nepal: Has the political will to woo Indian investment come back?

Last month, Hindustan Lever subsidiary Unilever Nepal remained shut for two weeks after its workers put up demands related to pay hikes and more perks. The trade union, affiliated to the Maoists, had locked the factory gates to press for their demands.

The management could reopen the factory only after an assurance from Nepal's prime minister Baburam Bhattarai to a delegation of Unilever representatives and other business leaders of the Federation of Nepalese Chamber of Commerce and Industries (FNCCI).

But the consumer goods giant is not the first company to face a difficult terrain in Nepal. Back in November 2008, Colgate Palmolive India announced its decision to move out of Nepal and transferred its shareholding in the subsidiary to Nepal-based Everest Hygiene Products, for an undisclosed amount.

This followed unrest at the factory, with angry workers attacking the general manager on fears of job losses. The Colgate Palmolive subsidiary, which was set up in 1998, had been facing problems rising out of the decade-long agitation by Maoist insurgents and had discontinued production of toothpaste at its Hetauda factory, way back in 2005.

Troubled History

India Inc's journey in the Himalayan kingdom has, in fact, been a tortuous one. Surya Nepal, the ITC joint venture, which started operations in Nepal in 1986 and is one of the largest private sector enterprises there, shut down its garments factory in eastern Nepal following prolonged labour unrest last year.

Indian infrastructure giant GMR, which is part of a consortium setting up a 900-MW hydroelectric project in Nepal, also faced an attack at its project site by suspected Maoist militants while the Manipal group's medical campus in Pokhara was hit by a junior doctors' strike, last year.

Indian companies are present in various sectors in Nepal including infrastructure, hospitality, FMCG, electronics and education.

According to a survey by Federation of Indian Chambers of Commerce and Industry (Ficci), strikes, extortion and threat to life and property have hit Indian investors and the business community. Industries have also been badly affected by acute shortages of power and raw materials, the study found.

"The difficulties faced by Indian joint ventures in Nepal emanate in a large measure from the turbulent political developments in the country, especially since 1996, when the Maoist insurgency began. Some Indian JVs have had to close their operations," says Jayant Prasad, Indian ambassador to Nepal. Other challenges include poor power infrastructure and connectivity, high fuel costs and in some cases labour union action.

Time to be Upbeat?

But despite militant trade unionism and the onslaught of Maoists, Indian companies in Nepal enjoy big commercial and social advantages. And that is probably the reason why there are efforts within the business community on both sides to leverage these pluses. Indian managers and business leaders who have been in Nepal point out that it feels more like home than a foreign country. "The friendliness and warmth of the Nepalese people makes it feel like home.

A strong political resolve to allocate more priority to industry and use it as an enabler to solve the socio-economic issues is the way ahead," says Udayan Ganguly, Dabur India's business head for Nepal, Bangladesh and Sri Lanka.

For sure, the times are changing for the better. The Nepalese government has accelerated the process to integrate former Maoist guerillas as well as frame a new constitution. Business confidence is likely to pick up on the back of these steps.

Last week, Bhattarai, who is from the Unified Communist Party of Nepal (Maoist) summed up the new sense of confidence by stating at an Indo-Nepal business forum that "democracy plus hydropower equals the new Nepal".

Industry bodies in both the countries such as Confederation of Indian Industry, Ficci, FNCCI and Confederation of Nepalese Industries are taking steps to jointly address many of the problems faced by businesses in Nepal.

"Such partnerships will help domestic industry and MNCs and will also strengthen economic ties between India and Nepal. Often the problems they face are caused because of political reasons and can be addressed through long-term economic solutions," says Binod K Chaudhary, who is member of the constituent assembly and parliament of Nepal. He is a third-generation businessman of Indian origin whose family emigrated to Nepal from Rajasthan.

Still an Uphill Climb

With the governments of both the countries taking small steps towards encouraging cross-border trade and investments, Indian Inc is now more upbeat about Nepal. "The country offers huge potential and opportunity in many sectors including agri and food processing, hydropower, cement, education, travel and tourism," says Sanjiv Keshava, managing director, Surya Nepal.

For him, non-availability of a skilled workforce due to the extremely high migration from Nepal to South Asian countries and West Asia is another problem to be grappled with. Surya Nepal, however, is in the country for the long haul and is investing in a second factory and exploring the possibility of setting up a hotel.

There are signs of an improved business environment. Independent power producers were given survey licences for hydro projects for over 8,000 MW five years ago, following international competitive bidding.

Most of these licences are held by Indian companies. Even if licensing were to be granted to Indian firms for the development of between 1,500 MW and 2,000 MW, it could attract over $2 billion investments within a short span of four to five years.

But the Nepalese government has to do much more to fast-track steps to improve the investment climate. Foreign investments in Nepal have been low - a meagre $300 million in the past 25 years from India.

And that is 44% of the total foreign investments. Worse for Nepal, prospects for Indian JVs have improved in other neighbouring countries such as Bangladesh and Sri Lanka and Indian industry has a wider choice in the region. Just saying, "Swagatam, daju" may not help.

Business Register

ITC : Surya Nepal Pvt Ltd is an Indo-Nepal-UK joint venture, which started operations in Nepal in 1986. SNPL, a subsidiary of ITC Ltd, India, is among the largest private sector enterprises in Nepal.

SNPL's business includes manufacture and marketing of cigarettes and readymade garments along with garment exports. Their total turnover is over $100 million.

Dabur: Dabur Nepal Pvt Ltd was set up as an independent group company in 1992. The company reported a total turnover of Rs 525.47 cr in 2010-11 In 2010, the company faced raids by the Nepal government on allegations of stocking contaminated juice.

GMR: A consortium comprising GMR Energy Limited, GMR Infrastructure Limited (GIL) and Italian-Thai Development Project Co has signed a MoU with the government of Nepal, for developing the 900 MW Upper Karnali hydro electric project in Nepal. The plant is scheduled to be commissioned by the end of 2016.

In 2011, GMR's project site in Karnali was attacked, looted and a log cabin was torched.

Unilever: HUL has set up a subsidiary in Nepal, Unilever Nepal Limited (UNL), and its factory represents the largest manufacturing investment in the Himalayan kingdom.

The UNL factory manufactures HUL products such as soaps and detergents for the domestic market and exports to India.

Last month, Unilever Nepal remained shut for two weeks after its workers put up various demands.

Asian Paints: Asian Paints (Nepal) Pvt Ltd is the leading paint company in Nepal. The company started operations in 1985 in Nepal and has a manufacturing facility at Hetuada industrial estate with a capacity to manufacture over 8,000 kl of paints annually.

Manipal Group: Manipal College of Medical Sciences (MCOMS), Pokhara, opened in 1994 with an MBBS degree programme. The 700-bed Manipal Teaching Hospital (MTH), Pokhara was inaugurated in 1998 MCOMS is affiliated to Kathmandu University. The college is a collaboration between the Manipal Group and the Nepal government.

In 2011, the college was hit by a strike of junior doctors. The strikers, loyal to the Maoists, alleged pay disparity.

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Tourist arrivals by month in Nepal

So, which month of the year does Nepal welcome the highest number of tourists? Its October, which accounted for 13.18 percent of total visitors in 2011. It is followed by November (11.34 percent), August (9.70), March (9.18 percent), and December (8.16 percent). The total (provisional) tourist arrival in 2010 and 2011 was 602,855 and 735,965 respectively. By the way, the number of tourists has increased in all months in 2011 compared to the months in 2010, thanks to the increasing inflow of Chinese tourists. Here is a related article on Nepal Tourism Year 2011.

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Tourist arrivals by month in 2010 and 2011

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Here is the number of tourist arrivals via the main entry points:

Tourist arrival (entry points), 2011
Entry point	Arrival	Departure
TIA (Air)	544,985	612,845
Bhairahawa	129,427	122,351
Kodari	53,536	35,590
Kakarvitta	5,049	4,265
Kanchanpur	1,628	1,328
Birganj	1,025	1,189
Nepalganj	271	405
Dhangadhi	44	38
Total	735,965	778,011

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Now, where do you think should the government upgrade tourism infrastructure? Undoubtedly, the only international airport and the border points from where a high number of tourists enter Nepal. The infrastructure and services inside and outside of the airport is pretty horribly despite paying premium prices when compared to the cost of using similar infrastructure, services, and security in other developing countries. No wonder Nepal’s tourism industry is uncompetitive and ranked 112 out of 139 economies in the latest Travel & Tourism Competitiveness Index (TTCI). In terms of tourism infrastructure (including hotel rooms) and ground transport, Nepal ranked 130 and 135, respectively, out of 139 economies in TTCI 2011. In terms of safety and security in tourism industry, Nepal ranked 127 out of 139 economies. Meanwhile, with appropriate infrastructure and services industry, the border areas (mainly Bhairahawa for Indian tourists and Kodari for Chinese tourists) can see robust tourism activities and expenditure before the tourists embark on trips to popular tourist destinations in the country.

The cost of informality in economy

Here are excerpts from an interesting piece on the increasing size of informal economy. Informal companies have substantial cost advantage by avoiding taxes and regulations, which in turn offsets the cost of their low productivity and small scale production. Informality is highest in services sector, particularly retail business.

Diana Farrell, director of the McKinsey Global Institute and a principal in the San Francisco office, argues that informality stifles economic growth (reducing tax receipts of governments, which then must raise the tax rates imposed on formal businesses) and productivity by keeping companies subscale and unproductive (operate at just half the average productivity level of formal companies in the same sectors), and aid companies to take market share from bigger, more productive formal competitors (as the cost benefit of avoiding taxes and regulations often amounts to more than 10 percent of the final price). Farrell argues that the assertion that informal businesses might grow and join the formal economy is a myth.

Btw, the size of shadow economy/informal economy in Nepal in 2007 was 37.5 percent of GDP.

Anyway, below are excerpts from the MGI’s analysis on informality:

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MGI found that the substantial cost advantage that informal companies gain by avoiding taxes and regulations more than offsets their low productivity and small scale. Competition is therefore distorted because inefficient informal players stay in business and prevent more productive, formal companies from gaining market share. Any short-term employment benefits of informality are thus greatly outweighed by its long-term negative impact on economic growth and job creation.

Informality is among the most seriously misunderstood of all economic issues. Informal companies evade fiscal and regulatory obligations, including value-added taxes, income taxes, labor market obligations (such as social-security taxes and minimum-wage requirements), and product market regulations (including quality standards, copyrights, and intellectual-property laws). Evasion varies by sector and by the nature of the business: informal retailers tend to avoid paying value-added taxes, informal food processors to ignore product quality and health regulations, and informal construction firms to underreport the number of employees and hours worked.

For many people, the informal economy means street vendors and tiny businesses, and it is true that informality is pervasive among small, traditional concerns with low levels of technology, scale, and standardization. But it is hardly unknown among larger, modern enterprises in developing countries, where MGI has found informal supermarket chains, auto parts suppliers, consumer electronics assemblers, and even large-scale industrial operations.

The extent of informality varies from industry to industry. It is greatest in service businesses such as retailing and construction, in which companies are often small in scale and geographically dispersed, making it easier to avoid detection. Revenues come from individual consumers and are difficult for auditors to verify. Labor costs are a significant share of total expenses, so companies are tempted to underreport employment. In one country, MGI found that construction workers ran away from sites when government inspectors appeared.

For similar reasons, informality in manufacturing industries is more prevalent in labor-intensive sectors such as apparel and food processing than in capital-intensive ones such as automotive assembly, cement, oil, steel, and telecommunications. Even so, some very large industrial and manufacturing companies operate informally. In India and Russia, for instance, local governments force local power companies to provide free energy to some businesses; subsidies such as these allow informal businesses to continue operating.

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Reasons for informality:

• Legal obligations—a result of poorly staffed and organized government enforcement agencies, weak penalties for noncompliance, and ineffective judicial systems.
• High cost of operating formally: red tape, high tax burdens, and costly product quality and worker-safety regulations all prompt businesses to operate in the gray market.
• Social norms: In many developing countries, there is little social pressure to comply with the law. In some, many people see evading taxes and regulations as a legitimate way for small businesses to counteract the advantages of large, modern players.

How to control informality?

• Strengthen enforcement: (regulatory loopholes are less important than strengthening enforcement). So, beef up government's audit capabilities; make court system effective so that tax evaders are caught in net; don’t give tax amnesties (more incentive to evade tax if there are repeated amnesties); hike penalties for tax evaders; partner with payments providers such as banks and credit card companies to increase the number of monetary transactions
• Eliminate red tape: Streamline the regulatory burden and reduce red tape; simplifying the tax code
• Cut taxes: Reduce and redistribute the tax burden to help slow the growth of informality; raise collections from  informal enterprises

Metro, flyovers, airport, and oil supply in Nepal

New initiatives to address binding constraints to growth in Nepal.

New plan for Metro Railway of 66-km network, 5 lines, 31 stations in Kathmandu. Bhoj Raj Poudel writes “the proposed 66.1-km network comprises 31 stations in total -- including transfer and ordinary stations. The main terminal of the metro will be located at Ratnapark, says the report, which is yet to be approved by DoR.” Let us hope that this project will move ahead as planned.

Construction of Baneshwor flyover within this year: Om Astha Rai writes:

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The DoR has already approved one of the four basic designs of a flyover prepared by Soil Test and AVIYAAN. "We are now preparing the DPR of Baneshwor flyover," says Dr Suman Baidya, an engineer with Soil Test and AVIYAAN.

"Before finalizing the DPR, we will also calculate the estimated cost of the whole project. As per the basic design, which was approved on March 5, the Baneswhor flyover will be 17 meters wide and 340 meters long.” The Kathmandu Valley Raod Expansion Project (KVREP) is currently building a 10-lanes road connecting Tinkune with Maitigharmandala. The Baneshwor flyover, the design of which is compatible with the new map of the upgraded Tinkune-Maitigharmandala road, will have four lanes.

Btw, 115,000 vehicles, mostly motorized two wheelers, pass through Baneshwor intersection every day. Similarly average of 6,200 pedestrians cross Baneswhor junction during peak hour.

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Meanwhile, another corrupt twist:

Pokhara airport MoU signed before calling construction bid

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In a clear case that raises question over government´s impartiality on bid invited to develop regional international airport in Pokhara, Finance Minister Barsha Man Pun was found to have signed a memorandum of understanding (MoU) with China CAMC Engineering Co, committing to support it win the tender.

The fact surfaced when Nepali Congress lawmaker Dip Kumar Upadhaya circulated the MoU at a meeting of parliament´s Public Accounts Commitee (PAC) which called to grill Tourism Ministry and civil aviation authority officials over the controversy created by short deadline to bidders.

The MoU also availed by Republica commits that "the government of Nepal shall provide CAMC the solid and substantial support" in a tender that Civil Aviation Authority of Nepal (CAAN) would call for Engineering, Procurement and Construction (EPC) contract for the regional international airport. The MoU is undersigned by Pun on behalf of Nepali government and Lui Shengcheng, regional general manager of China CAMC Engineering.

The deal was signed on September 20, 2011 at Ministry of Finance in Singh Durbar, and Energy Minister Posta Bahadur Bogati and Chinese Ambassador to Nepal Yang Houlan have also signed it as witnesses. It was following the deal that MoF had instructed CAAN to invite the bid for developing the regional airport.

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A good development:

Govt for ending IOC's monopoly in Nepali oil market: Milan Mani Shrama writes:

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In a bid to cultivate competition in petroleum exports to Nepal, the government is mulling over requesting India to allow it import fuel from any Indian oil marketing companies along with the present supplier - Indian Oil Corporation (IOC).

Presently, Indian Oil Corporation (IOC) holds supply monopoly in the Nepali market.
Ministry of Commerce and Supplies (MoCS) is pushing the issue through Nepal Oil Corporation (NOC), which is presently holding talks with the IOC to review the bilateral Petroleum Supplying Agreement that expires on March 31.

“As existing bilateral agreement signed in 2007 already allows Nepal to import fuel from any countries, we see no point in India limiting oil supply authority to IOC alone,” said a highly placed MoCS official. If required, we will also hold talks with India at the higher governmental level, said Lekh Raj Bhatta, Minister for Commerce and Supplies.

The government is raising the issue after Bharat Petroleum Corporation Limited (BPCL) - another state-owned oil marketing company (OMC) of India - formally approached the ministry, expressing interest to export petroleum products to Nepal.

This is not the first time BPCL showed interest to export fuel to Nepal. The company in 2010 had approached the Indian government to end IOC´s monopoly in exports to Nepal and open it to all oil marketing public sector undertakings.

Also BPCL is not just one company that is eying Nepal´s petroleum market. In late 2009, Essar Group -- a private petroleum group of India -- too had approached the MoCS for opening imports from private Indian suppliers as well.

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Targeted food subsidy could work in South Asia

A latest working paper (Food Price Escalation in South Asia: A Serious and Growing Concern) by Bruno Carrasco and Hiranya Mukhopadhaya of the ADB states that “a spike in the cost of food staples like rice and wheat could push tens of millions more people into extreme poverty in South Asia but food subsidies targeted at the very poorest in the region would help them cope with still-high prices”. Low income households in South Asia spend more than 50 percent of their budget on food. It also notes that while Nepal and Sri Lanka would be less affected, although a further surge in wheat prices would be especially painful for Sri Lanka, which is completely dependent on imports of the staple and has already seen prices hit historical highs in recent years.

Note that an earlier study (Global Food Price Inflation and Developing Asia) by ADB showed that a 10 percent increase in food prices will increase the number of poor people (in millions) living below US$1.25-a-day by 3.8, 0.01, 22.8, 6.7, 0.6, 3.5, and 0.2 in Bangladesh, Bhutan, rural India, urban India, Nepal, Pakistan, and Sri Lanka, respectively.

The following factors are driving poverty elasticity and may contribute to differences in elasticity indices across countries: (i) the higher inequality, the lower the price elasticity of
poverty and hence the smaller the impact on poverty ratios for any given increase in food prices (ii) the distribution of income just under the poverty line (more people just under the line, the larger the elasticity), (iii) the higher the base level of food prices, the larger the elasticity as for example a 1% change in price at $10/unit has a larger impact than 1% change in prices at $5, (iv) the level of GDP/capita with smaller elasticity for countries with higher incomes, and (v) country specifics such as the effectiveness of social security systems and other safety nets, and other cultural institutions captured by a country dummy.

Reasons for rise in food prices and inflation:

• Mostly short-term weather shocks and costlier oil account in past few years
• Rapid population growth
• Changing food consumption patterns linked to higher incomes (especially in India)
• Stagnating agricultural output

They recommend subsidizing the cost of food for the most poorest and vulnerable ones by government without putting an excessive burden on government spending. Now, that is the challenge faced by all developing countries, isn’t it? The big question is how to strike a balance between extending subsidies (temptation is always high to increase such programs for political gains) and fiscal position (more subsidies mean increase in fiscal deficit in the absence of high growth of revenues that can offset the increase in expenditure due to subsidies).

Other recommendations include boosting agriculture productivity, develop agriculture support network (infrastructure investment in irrigation and water resource management, early warning systems of flood, farm to market roads, storage facilities, and ICT for disseminating market information), getting prices right (by avoiding distortion of price signals), focusing on sustainable solution [??] (avoiding short term restrictive trade policies), effective use of monetary policy (mainly contractionary policies), and promote regional cooperation (operationalize SAARC Food Bank).

Anyway, Bangladesh has the highest weight of food on CPI. The weight of food on CPI is 42 percent in Nepal.

Food Weights in CPI (%)
Afghanistan	61
Bangladesh	58.8
Bhutan	31.7
India	46.2
Maldives	33.3
Nepal	42
Pakistan	40.3
Sri Lanka	45.5

[Here is a draft paper I wrote on high food prices and its impact on South Asia. Presentation slides here and a related article here].

29.8 percent of population below poverty line in India in 2009-10

According to the latest figures released by India’s National Planning Commission, the headcount poverty in India was 29.8 percent in 2009-10 (rural 33.8 percent and urban 20.9 percent). This is a 7.3 percentage points decline in headcount poverty between 2004-05 and 2009-10 (rural poverty declining by 8.0 percentage points and urban poverty declining by 4.8 percentage points). According to Census 2011, India had total population of 1.21 billion (rural 68.84 percent and urban 31.16 percent).

Meanwhile, the WB’s US$1.25 a day estimate puts India’s headcount poverty at 37.37 percent in 2008, down from 41.64 percent in 2005 (a 4.23 percentage points drop). When I checked the data, the WB did not compute India’s total poverty at US$1.25 a day in 2010. Anyway, it has estimates for rural India and urban India for 2010. The headcount poverty at US$1.25 a day in rural India and urban India was 34.28 percent  and 28.93 percent in 2010.

Poverty in India
NPC_March 2012		WB_Feb 2012
Poverty (%) - national poverty line (MRP method)		Poverty (%) - US$1.25 a day
Total		Total
2009-10	29.8	2008	37.37
2004-05	37.2	2005	41.64
1993-94	45.3	1994	49.4
Rural		Rural
2009-10	33.8	2010	34.28
2004-05	41.8	2005	43.83
1993-94	50.1	1994	52.46
Urban		Urban
2009-10	20.9	2010	28.93
2004-05	25.7	2005	36.16
1993-94	31.8	1994	40.77

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• Poverty ratio in Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Sikkim, Tamil Nadu, Karnataka and Uttarakhand has declined by about 10 percentage points and more. But, in Assam, Meghalaya, Manipur, Mizoram and Nagaland, poverty in 2009-10 has increased. Some of the bigger states such as Bihar, Chhattisgarh and Uttar Pradesh have seen only marginal decline in poverty ratio, particularly in rural areas.
• In rural areas, Scheduled Tribes exhibit the highest level of poverty (47.4%), followed by Scheduled Castes (SCs) (42.3%), and Other Backward Castes (OBC) (31.9%), against 33.8% for all classes. In urban areas, SCs have HCR of 34.1% followed by STs (30.4%) and OBC (24.3%) against 20.9% for all classes. In rural Bihar and Chhattisgarh, nearly two-third of SCs and STs are poor, whereas in states such as Manipur, Orissa and Uttar Pradesh the poverty ratio for these groups is more than half.
• Nearly 50% of agricultural laborers and 40% of other laborers are below the poverty line in rural areas, whereas in urban areas the poverty ratio for casual laborers is 47.1%. In the agriculturally prosperous state of Haryana, 55.9% agricultural laborers are poor, whereas in Punjab it is 35.6%.

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The latest Economic Survey 2011/12 released by India’s Ministry of Finance states that GDP growth rate for 2011/12 is estimated at 6.9% (factor cost at 2004-05 prices). The Indian economy is expected to growth at 7.6% in 2012-13 and 8.6% in 2013-14. Here is more. In South Asia, Bangladesh, followed by India, has the highest proportion of poor people below the poverty line of US$1.25 a day.

Here is a discussion on the poverty rate in Nepal. For Nepal, the poverty headcount at $1.25 a day (PPP) was 24.8% in 2010 [7.4 million people] and 53.1% in 2003 [13.9 million people]. It was 68% in 1995 [14.7 million people]. The headcount poverty rate based on national poverty line in 2010/11 was 24.82 percent. The poverty estimate by WB and NPC is very close in the case of Nepal. But, the one in India is quite different. The WB estimate shows that there are more people living below US$1.25 a day than India’s national poverty line (monthly per capita of IRs 672.8 in rural India and IRs 859.6 in urban India—or IRs 22.4 in rural India and IRs 28.7 in urban India ). As per Tendulkar Committee recommendations, the state wise urban poverty lines of 2004-05 are updated for 2009-10 based on price rise during this period using Fisher price indices. The state wise rural-urban price differential in 2009-10 has been applied on state specific urban poverty lines to get state specific rural poverty lines.

Food weight in overall CPI in Nepal

The weight of food in CPI is 42 percent in Nepal, which means higher food prices would affect food security and exert upward pressure on inflation. The NRB figures show that food and beverage has 46.82 percent weight in CPI in fiscal year 2010/11.The NLSS III shows that 61.5 percent of household budget is spent on food (up from 59 percent in 2003/04).  Controlling food prices and ensuring food security is good for overall CPI and development. Now, what is the government doing about it?

The table below shows comparable food weights in CPI figures.

Food Weights in CPI (%)
Afghanistan	61
Bangladesh	58.8
Bhutan	31.7
India	46.2
Maldives	33.3
Nepal	42
Pakistan	40.3
Sri Lanka	45.5

Bangladesh has the highest food weight in CPI (Bhutan has the lowest) in the region. Here is the source (see Table 8, p.19).