Budget restructuring through judicious allocation of resources for priority-based expenditure with careful management of government revenues is a priority task for economic restructuring (necessary to sustain economic growth). Even after the satisfactory macroeconomic stability witnessed in the first five months of 2006/07, there is a significant revenue-expenditure gap. The total government revenue stood at Rs. 26.73 billion, while total expenditure made was to the tune of Rs. 32.75 billion till mid-December 2006. In this light, the impact analysis of the Indian budget of FY 2007-08 on Nepali economy should be the vital part of government’s fiscal management.

In recent years, Nepal’s trade has been mainly centred on India, as reflected by increasing exports and imports vis-a-vis that country. India’s share in Nepal’s total trade went up from 29.9 per cent in 1996/97 to 61.3 per cent in 2004/05, while the share of other countries declined from 71.4 per cent in 1996/97 to 38.7 per cent in 2004/05. This indicates the vulnerability of Nepali economy to policy changes in India.

The strength of Indian budget is its focus on rejuvenating the sagging farm sector. India is confident that it will be able to sustain a high growth rate of 8-10 per cent through agriculture sector growth. Many countries have been successful at striking a balance between growth, inflation and social objectives by reconciling between the maintenance of market forces and unmet demands of poor people lying outside the market economy. In India, fiscal deficit for 2007-08 stood at 3.3 per cent of GDP compared to 3.7 per cent in the previous year. Unfortunately, in Nepal, lower growth of revenue as compared to the growth of government expenditure has made fiscal deficit a regular feature. The fiscal deficit of Rs. 15.83 billion in 2003/04 increased by 14 per cent, escalating to Rs. 18.05 in FY 2004/05, indicating the widening gap between government expenditure and revenue. To overcome such alarming differences and expand national wealth, homework to identify the priority sectors of comparative advantage should begin immediately, pursuing the fundamental principles of Indian budget.

India averaged an inflation rate between 5.2 per cent and 5.4 per cent in 2007-08. In Nepal, the level of ten-year average overall inflation, using the National Urban Consumer Price Index (1995/96=100), depicted a rise of 5.75 per cent. During the initial year of conflict in 1996/97, the rate of inflation was 8.1 per cent, reaching 11.4 per cent in 1998/99. It decreased to 2.4 per cent in 2000/01, started to rise again and reached to 7.7 per cent in 2005/06. The recent increase in price of petroleum products pushed the price indices of transport and communication, housing goods and services subgroups upwards. The sharp rise in the price of grains and cereal products resulting from the rise in the prices of rice and rice products also pushed the overall price index up. All these factors contributed to the reduction in economic activities.

India’s increased spending on irrigation, fertilizer subsidies, seed development, rural roads and farm credit will inevitablly affect Nepali agro sector. The fertilizer sector subsidy in India stands at US $ 5 billion, while the amount allocated for irrigation projects is $2.47 billion. The government has also earmarked new funds for replanting coffee, cashew, coconut and increased farm credit. Duty on selected raw materials has been reduced from 10 per cent to 7.5 per cent. Duty on agricultural sprinklers and food processing machinery has been reduced from 7.5 per cent to 5 per cent. These targets might be met as there is not a great savings-investment gap. For example, the savings rate in India is 32.4 per cent and the investment rate, 33.8 per cent.

Although Nepal has always experienced budget deficit, she has succeeded at maintaining its ratio with GDP at less than 5 per cent, an achievement gaining much significane during the second half of the conflict period. However, in the context of Nepal’s already poor competitiveness index in food grain production, the support provided by the current Indian budget through subsidies even in the cash crops will hurt Nepali agriculture provided that serious adjustment policies are not adopted in the next budget.

Furthermore, customs and excise duties have been relaxed in India in order to make industry more competitive. The proposed reduction in customs duty for non-agricultural products will bring it down to 7.5 per cent from 12.5 per cent. The exemption limit for small scale industry has been raised to IC 1.5 crore from the previous rate of IC one crore. Nepal should consider this seriously at a time when about 70 per cent of small and cottage industries have been closed due to conflict. If the country does not restructure its budget for agriculture and non-agriculture sector growth, Nepal’s economic future will forever be dependent on India’s macroeconomic policy measures.

Dr Pyakuryal is professor of Economics, TU