Insight on Economic Condition of Nepal
Present Situation of Economic Condition of Nepal
Nepal is situated between two big economies India and China. The economy of Nepal is growing consecutively with 6.3%. The growth spurs from various sectors like agriculture, manufacturing and services industry, tourism industry, trade, transportation, etc. As an agrarian country, agriculture which is the mainstay of the economy in Nepal accounts for 28.9% to GDP in 2016/17 FY (source: economic survey report). But, due to the growth of non-agriculture sectors, there has been a steady decline in sectors percentage of contribution to GDP. In the present scenario, Nepal’s economy is entirely based on imports, remittances and foreign aids.
According to the economic data by ADB, among the south Asian countries, Bangladesh’s economy is booming with 7.9% GDP followed by India with 7.0%, Nepal 6.3% and Bhutan with 5.5%. This figure suggests that Nepal can learn many lessons from Bangladesh and India to boost its economy. Bangladesh has become one of the world’s economic success stories by rapidly accelerating economic growth. Singapore is another such country which has proven its economic growth in short duration.
In April 2015, when a devastating earthquake killed more than 8000 people and destroyed the monuments and heritages, the economy hit a rock hard. Today, Nepal is recovering back and the speed at which reconstruction works are taking place is impressive.The current budget of Nepal aims at attaining 8.5 per cent growth, 6 percent inflation, creating employment opportunities to 500,000 people in the country and becoming a middle-income country by 2030 AD.
As Nepal aimed to become a middle-income country by 2030 AD, a stable government of the left alliance would help to ensure the same by inviting investments and generating employment in every sector. The developing trend of Nepali economy is headed towards declining agricultural production and the increasing number of outgoing young people in other countries and importing of luxurious goods fueled by remittance.
India’s Context/ Modi Government Economic Reforms
Modi was rewarded with a landslide victory for the second time in the election. In the first tenure of his reign, the aspirations and promises he made to the people have got mixed success.
Modi government performed significantly better in infrastructure development, manufacturing sectors and tourism industry. “Make in India” campaign was launched with the purpose of job creations and skill enhancements and permitted fully foreign direct investment.
Under his government, India has introduced and adopted various policies for economic reforms such as demonetization, implementation of GST (single taxation system), insolvency and bankruptcy code primarily for the ease of doing business and to reduce the corruption. These bold steps adopted by Modi proved to be a game changer for India’s economy. Moreover, government efforts on tax reform are impressive among others. He implemented the single taxation system under the amalgamation of centre and state government which has caused in the reduction of tax rates from 28%-18% in several products. This led people to enjoy the products at lesser prices.
However, demonetization caused people to suffer especially small traders, shopkeepers, poor farmers, daily wage labourers. The purpose of demonetization was to curb the black money by making people pay taxes for the unaccounted cash and promote digitalization. But, it created havoc and chaos leading to slow economic growth in that period. Again, the biggest failure in the five years of Modi government was job creation. The government could not provide the employment to a large number of youths leading to increase in the high unemployment rate.
Growth and Development Constraints for Nepal
Nepal is slowly moving forward towards development. However, there are number of reasons for why Nepal has seen minimum developments is mostly because of political instability, frequent strikes, change of government, low domestic and foreign investment.
There are various factors that have restrained the growth of Nepal. The crowd at the Tribhuwan airport demonstrates the situation of the Nepali migration and high rates of unemployment and youth bulging have been the serious issue in the country at the moment. However, remittances has been a major contributing factor to the national GDP. Currently, Nepal is heavily dependent on remittance which accounts for 30% of GDP and remittance based economy has been the key to lubricating the economy. The sluggish development in the manufacturing sector has led to the departure of the huge migrant workers because of lack of employment opportunities, and also has steered the trade deficit. There is a huge widening gap between exports and imports i.e. the ratio to import-export is 15:1.
Another major hindrance in the growth of the country is rampant corruption due to an ineffective bureaucracy and taxation system. It is one of the corrupt countries in South Asia according to report of transparency international published by Fragile State Index.
Not enough foreign investment in coming into Nepal. Although there have been many attempts to attract investment but on the ground realities pose a huge challenge. Thus, investment has to be encouraged from the private sector, both domestic and foreign.
Some Important Lessons for Nepal
1. Tax Reforms:
First and foremost things that should be done is a reformation of the taxation system in order to invite foreign investment in Nepal. The first thing the foreign investors asks is how much is the tax. If the tax is feasible, then they are more likely to invest here.
In the current budget of the fiscal year 2076/77, there is the provision of tax relief for SME’s and agriculture based organization. However, there is no fundamental change in the tax structure presented in the budget. Instead, the tax rates have increased. The increase on excise duty and VAT in transportation goods have increased the price of commodities. The increase tax rates are likely to induce the corruption and tax evasion because it is the tendency of people to bribe in order to decrease the tax burden. This is happening and will still happen with the increase in tax rates. On the basis of experience of tax reforms in our neighbor India, the Nepal’s budget should have brought radical change by lowering the tax rate. India took big risk with the implementation of GST taxation. At the end, it provided a great relief to the middle class people in terms of direct tax as there was full exemption of tax for income up to NRs 5 lakhs. Through its implementation, people could enjoy the goods and services in lower costs as a result of lower tax rates in goods and services.
But in Nepal, along with the increase in tax rate, Government has set the minimum threshold of NRs 50 million in foreign investment which discourages small investors who may upscale their investment in the future. Singapore, Cambodia and Vietnam have succeeded in bringing FDI because they have not adopted any such policy concerning foreign investment. That is why many foreign companies set up their business in those countries feasibility exist in terms of tax.
2. Infrastructure Reforms:
Nepal needs to focus on four major sectors: Agriculture, Tourism, Hydropower and Information and Communication Technology. Among these sectors, hydropower is the sector with topmost investment potential. In the absence of basic infrastructure, no foreign investor is likely to invest in Nepal.
The budget 2019 reveals that the infrastructure development gets the top most priority. There is encouraging signs of development. Some mega projects or the national pride projects are currently in pipeline whereas some have been completed. Likewise, the construction of the Ringroad is already completed. Another international airport is in progress and other such projects are Upper Tamakoshi, Budhigandaki hydropower project, fast track highway, Bheri Babai diversion multipurpose project, and so on. However, most of these projects are in limbo due to the termination of the contract. Melamchi water supply project is one among such projects where it has been halted many times either due to budget problem or withdrawal of the contract by the contractor. Thus until and unless these projects are completed, the economy of the country cannot move forward.
The slogan adopted by the current PM “Prosperous Nepal and Happy Nepali’s” promises for the country prosperity and stability and aimed to develop the tourism sector. In this regard, Visit Nepal 2020 is the slogan put forward to attract the tourists.
The biggest takeaway lessons from Modi Government would be to focus on completing the projects, both ongoing and incomplete ones because better road connection, healthy tourism sectors are needed and will increase the country’s long term economic potential.
Nepal needs to develop a better environment for manufacturing firms to achieve economies of scale and create a large number of jobs. In the current scenario, 41% is occupied by the manufacturing sector followed by tourism and trade sector which is the large portion of the industry in Nepal. By developing this sector, the trade deficit can be reduced to much extent by increasing exports and will also provide jobs to a large section of the population. Our export is stagnant and imports are ballooning resulting in widening of trade deficit, currently import to export ratio is 15:1.
Bangladesh’s major success in economy is the growth of manufacturing industries with the huge production and import of garments being the largest employer providing 4.5 million jobs and accounted for nearly 80% of Bangladesh’s total merchandise exports in 2018. If Nepal is able to follow the footsteps of Bangladesh in terms of manufacturing sector or industrialization then those days are not far when Nepal can increase the exports. It will benefit in two ways, on one hand, the unemployment rate will lower down to large extent providing jobs to million people and on another hand, it will cut down the trade deficit.
Modi, immediately after taking office in 2014, launched “Make in India” campaign to promote domestic and international companies to manufacture their products and boost their investment in India. The campaign was launched to address the problem of trade deficit by boosting the manufacturing sector. The government offered different incentives to manufacturing companies with the aim of transforming India into a global manufacturing hub.
4. Go to Digital Economy
ICT is another such sector where Nepal can harness the benefits going digital. Nepal has already embarked on a digital journey, the major breakthrough in technology is the launch of Nepal’s first satellite NepaliSat -1 into the orbit.Modi initiated the scheme of “jana dhan yojna” which led to the creation of bank account and provides the rural people with access to credit by opening the bank accounts to them. Moving to digitalization or cashless economy helps to control the tax evasion. Bangladesh too, adopted the strategy of “Digital Bangladesh” in 2009 and looked where they have reached in the small period of time.
Summits: Major Initiatives to enhance the Socio-Economic Development
The recently held Summits in Nepal such as Investment summit, BIMSTEC summit, and Asia Pacific Summit, have set forth the agendas that will help in fostering the economy of Nepal.
Nepal has an attractive destination for investment as there are much resources to explore and this is strengthened by the Investment Summit hosted by Nepal. The Summit has promised to create an investment-friendly environment for foreigners. Nepal has initiated the labour law related reforms with the introduction of the Foreign Investment Act, the Public-Private Partnership and Special Economic Zone Act and the One Stop Service Center to help attract private investment. These policy reforms can be a major breakthrough when it comes to ease of doing business in Nepal. The main agenda of this Summit is to develop the policies for attracting the foreign investment for the physical infrastructure, industries based on energy, information and communication technology, tourism, agriculture and forestry.
The another most recent 4th BIMSTEC summit 2018 focused on the areas of transportation, connectivity and electricity transmission lines, investment, trade and tourism development, poverty alleviation and mitigating the effects of climate change. The summit of the seven countries- Bangladesh, Bhutan, India, Myanmar, Srilanka, Nepal, and Thailand would facilitate Nepal in mainly energy and tourism sectors. Following BIMSTEC, Asia Pacific Summit helped to promote “Nepal Tourism Year 2020”.
Nepal is in the phase of transition. There have been a lot of changes and improvement mainly because of effective power supply and the speed at which ongoing post-earthquake reconstruction is taking place is very impressive. However, to accelerate the growth and to achieve the target set of 8% economic growth, the trade balance is of utmost importance. For this, foreign investment has to be encouraged with the supportive tax system. Nepal should promote the export-based economy by establishing export-driven industries like Bangladesh did by manufacturing and exporting garments. With the continuous growth of industrialization, Nepal has a high chance of achieving the goal of becoming a middle income country in 11 years. Secondly, overdependence on remittances has to be reduced because being dependent on remittances may not be sustainable in the long run. It will not lead to higher long term growth. The country needs to move up with the industrial value chain and should partly depend on remittances and international aid. Thirdly, the country should bring different policies to retain the youths in the country because they are the working and energetic population and can contribute to the development of the country.