Indian economic woes may hurt Nepal's growth aspirations

KATHMANDU, SEP 05:

It is often said Nepal shares India’s prosperity. That’s why the country’s economy is chugging along despite years of political instability, power shortage, strikes and not-so-friendly investment climate.

But with the Indian economy bracing for a full-blown crisis it is now being said Nepal will also have to share the southern neighbour’s woes. This means Nepal may not be able to meet its economic growth rate target of 5.5 per cent set for the current fiscal year.

Goldman Sachs, on Wednesday, said the Indian economy would grow by four per cent this year as against the previous estimate of six per cent. Many other investment banks such as JP Morgan, HSBC and Nomura have also downgraded their forecast on the Indian economy to below five per cent as problems like corruption and widening trade and current account deficit led foreign investors to flee with billions of dollars.

“External factors like slowdown in the Indian economy does affect Nepal’s growth,” head of the Research Department at Nepal Rastra Bank (NRB) Min Bahadur Shrestha acknowledged. “But its intensity is yet to be known.”

The economic downturn in India may lead many to adopt cost-cutting measures, rendering many Nepalis working there jobless, while affecting remittance inflow. It may also affect flow of foreign direct investment from India — one of the biggest investors in Nepal — as many may postpone plans on pouring money into Nepali projects.

Another downside of the hiatus seen in the Indian growth story is slowdown in demand for goods and services in the southern neighbour. This is expected to hit Nepali exports, as 66 per cent of the country’s merchandise exports are absorbed by India. Once exports come under pressure, domestic production will also be affected.

“This will then lead to reduction in imports of many capital goods and raw materials, which will put pressure on the value that trading activities add to the economy,” said director general of the Central Bureau of Statistics (CBS) Uttam Narayan Malla.

A snapshot of what Malla said was recently seen when the Finance Ministry said it failed to meet customs duty collection target by Rs 350 million in the first month of the current fiscal year. If customs duty collection fell below target because of slackness in imports of goods meant for consumption then it could be seen positively. But if this was due to lower imports of capital goods and raw materials then production and capital formation process will take a hit.

But again the country’s imports are expected to come under pressure this fiscal year as sharp depreciation of rupee (to as low as Rs 109.03) will make imported goods expensive and lower their demand. This is expected to somewhat correct widening trade deficit which has crossed Rs 479 billion. Yet, the extent to which imports will take a hit is not known because Nepal is a net importing country and demand for many essential goods may not go down despite price hike. This means currency depreciation may only fuel inflation and eat into disposable income of many.

Then, there is the agricultural sector, whose mediocre performance this year is also expected to put pressure on the economy.

The government had predicted 5.5 per cent growth target largely on hopes of bumper harvest due to good monsoon.

Nepal did have plenty of rain this year. As a result paddy was successfully planted in around 97 per cent of 1.53 million hectares of land used for rice production.

Yet, many major rice-producing districts like Mahottari, Dhanusha, Sarlahi and western parts of Siraha and Saptari did not get adequate rain after plantation season was over.

“This will affect paddy cultivation this year, although total yield will be higher than last year’s,” spokesperson at the Ministry of Agricultural Development Prabhakar Pathak said. Since paddy makes significant contribution to total agricultural output and agriculture, in turn, contributes to over 32 per cent of the gross domestic product, slackness that is likely to be seen in rice cultivation is not being seen in a positive light. This reason, coupled with the India factor, is expected to give a jolt to the country’s growth aspirations.

“In my opinion four per cent growth rate this year should be regarded as a good achievement,” CBS’ Malla said.

Yet, officials like NRB’s Shakya are seeing silver linings in the cloud of uncertainty.

“Our services sector stands to benefit as the growing Indian middle-class that has a penchant for travelling abroad may cut plans to visit many Asian, European and American destinations because of the Indian currency’s depreciation and see Nepal as a lucrative travel destination,” Shakya said.

“At the same time Indian investors planning to invest abroad may channel their funds to Nepal because of the Indian currency’s fall.”

Source: THT