With the recent announcement of the Union Budget 2017/18, India aims to boost its economy through investment in rural agriculture, social sector, infrastructure and poverty elimination programs. Nepal; as a closely-linked neighbor, often faces the ripple effects of certain economic developments in India. The following are five key pointers from the Union Budget announcement that could potentially impact the Nepali economy.
Increased Investment in Agriculture: The budget for the new fiscal year has pledged an increased investment in irrigation projects through various schemes and provision of easy credit worth around IRS 10 trillion (NPR 16 trillion) to farmers at lower interest rates. These along with other measures like crop insurance schemes and model laws on contract farming, if properly implemented, are all set to make the Indian agricultural sector more competitive in the global market. While agricultural imports to Nepal are likely to become cheaper, Nepali agricultural exports will face stiffer competition from its Indian counterparts.
Trade Infrastructure for Export Scheme (TIES): Under TIES, the Indian government plans to create better infrastructure for export promotion at the state level. The scheme will decrease transaction costs and increase competitiveness of Indian goods in the global market. As imports from India already constitute around 62% of Nepal’s total import figures, cheaper and more affordable Indian goods are likely to further increase the volume of imports. Meanwhile, increased imports may put additional pressure on Nepal’s widening trade deficit which already stands at NPR 352 billion.
Liberalization of Foreign Direct Investment (FDI): India is taking a liberal stance when it comes to FDI through its newest budget. It has abolished the Foreign Investment Promotion Board (FIPB); which required prior approval for foreign investment, to ease FDI inflows. Since India provides a market of over 1 billion people, Nepal can tap into the potential gain as well by allowing Nepali nationals to legally invest outside of Nepal.
Increase in Financial Aid to Nepal: India has also pledged to increase financial aid by 17% to Nepal, with the aim of encouraging development in the nation. The Indian government has allocated IRS 3.75 billion (NPR 6 billion) for 2017-18 in comparison to the INR 3.20 billion (NPR 5.12 billion) allocated in 2016-17. While having greater financial assistance is a boon, correct implementation of the funds is now required.
Reduction in Interest Rate for Soft Loans: India has also proposed to lower interest rates from 1.75% to 1%, on soft loans to Nepal. India had recently extended NPR 79.5 billion in soft loans to help with post-earthquake construction. The reduction of soft loan rates is an indication towards greater Indian cooperation in development projects happening in Nepal.
The union budget of India for the FY 2017/18 provides both challenges and opportunities for Nepal. Nepal ought to take prudential steps to reap maximum benefits through scrupulous spending of increased aid flows as well as availability of a bigger market, while readying itself to stand up to competition from cheaper Indian agro and manufactured goods. Additionally, the Nepali government should also take a few lessons from the union budget, especially in regard to developments in agriculture and trade infrastructure; as there is a pressing need to address issues in these sectors in the country.
This article has been co-authored by Rajat Shrestha, Zubin Rajbhandary and Sijan Thapa.