Nepal’s remoteness and underdeveloped small consumer population has been wrestling with developmental dilemma to expand trade and investment and utilise tremendous geographical and ecological diversity. In the past and more so in the so-called post-conflict Nepal, whatever infrastructure development has been made, it is inadequate and inefficient. The task was completed at the expense of investment in direct production. The result is average growths of less than 3% most likely by the end of the Tenth Plan (2002-2007).

Nepal’s dependency syndrome has weakened the development capability of the governance. Soaring external debt level and poor investment climate is likely to further affect macro-economic stability. Aid has failed to address wider inequality in income and mass poverty but the debt service ratio remains around one-third to one-fourth of the annual regular expenditure.

India’s policy influence in determining Nepal’s growth has necessitated a debate to find out if Nepal is India locked or India linked. The opinion may differ. There is, however, no debate that Nepal’s economy is irrevocably tied to India. When there is a misunderstanding between the two countries, the penetration of Nepali goods into the Indian market becomes difficult. The trade and transit dispute of 1989, for instance, resulted in 1.5% decline in Nepal’s economic growth. On the contrary, there was a dramatic growth in trade with India during politically stable times. For instance, after signing the Nepal-India Trade Treaty in 1996/97, the trade shot up from 25.9% in 1996/97 to 48.1% in 2001/02.

Currently, Nepal’s share in total trade with India is import dominating. In 2005/06, as against the export of only 25.9%, the import constituted 74.1%. Out of Nepal’s total import of Rs. 175108.0 million, the import from India alone was Rs. 109305.9 million, whereas it remained at Rs. 65802.1 million from other countries. Interesting characteristics has been emerging in the trade front. First, the ranking of Nepal’s priority exports to India such as zinc oxide, vegetable ghee, toothpaste, copper wire rod, M.S. Pipe, and mustard and linseed is declining dramatically. As an example, the export of vegetable ghee in FY 2004/05 was Rs. 4635.9 million but it declined to Rs. 3861.7 million in FY 2005/06. Secondly, the import has excessively increased and remains constant but there is a greater degree of export vulnerability reflecting a declining trend. Nepal should seek technical assistance to facilitate trade by eliminating non-tariff barriers in the existing trade regime. Efforts are also needed to design and negotiate on the provisions of the proposed Bilateral Investment Promotion and Protection Agreement with India for enhancing mutual investment benefit.

The widely discussed advantages of lower wages in Nepal are actually offset by low labour productivity necessitating the need for competitive exchange rate and higher labour productivity. As Nepal’s competitiveness in terms of price, quality and supply potential is weak, she has bad experience in locating proper market of the manufactured goods in India. The country needs to capitalise on her strength offered through economic reform programmes. For instance, Nepal with an access to cheaper raw materials is one of the open economies in the LDCs in general and South Asia in particular, which has an average tariff rate of about only 14%.

Nepal has relatively satisfactory banking services, improved telecommunication facilities and enabling environment for foreign investors. In specialised fields such as hydropower generation, there is an opportunity for foreign investors to supply goods and services and technology. Provided the defunct Power Exchange Committee between India and Nepal is reactivated, there is a big prospect for India’s involvement in large-scale projects such as Upper Karnali (300 MW) and Pancheshwar (6,480 MW).

Although India has rescued Nepal in critical periods, Nepal’s increasing dependency has spoilt the innovativeness of the Nepali entrepreneurs. Not much success has been made in tourism sector, mineral exploration and exploitation, ICT, and infrastructure development. This is because of the unresponsive nature of socio-political and economic structure.

World growth rate can be raised only if the increased incentives for innovation in leading countries are not counteracted by the loss of too many innovation sectors to the lagging countries with which they trade. The non-developmental market with limited demand around consumer electronics, fine textiles, fancy foods, and toiletries among affluent Nepali urbanites, contributes to persistent inequality and divergence. This necessitates reorienting

economic planning to improve the incentives for investment and innovation through strengthening the institutions for addressing priority projects as the country’s own long-term self-interest.

Dr Pyakuryal is professor of Economics, TU