Indian investment in Nepal: Challenges and opportunities

Because of the importance of foreign direct investment (FDI) in employment creation, technology transfer, export promotion and overall economic growth of a country, Nepal tried to create investment friendly environment to encourage FDI, particularly after the political change in 1990. As a result, over one thousand foreign investment projects have been registered in Nepal covering all such sectors as hydro power, mineral exploration, construction, agro based, chemicals, tourist hotels and restaurants and other specialised services.

In terms of approved amount of FDI, India is Nepal’s largest source of FDI. Most importantly, India alone accounts for as much as 44% of Nepal’s total foreign direct investment. Some of the major joint ventures with India in Nepal include Surya Nepal - a joint venture with ITC India, Dabur Nepal, Nepal Lever and United Telecom Nepal, Everest Bank, SBI Bank, LIC Nepal, Asian Paints, GMR India, IL&FS and Manipal.

Considering the growing demand for power both in Nepal and in India, Satluj Hydro Electric Project of India has made investment for the construction of 402 MW in Arun III. On the other hand, GMR, an Indian infrastructure developer has made investment for the construction of 300 MW Upper Karnali at Tunibagar in Dailekh district. Also, Himtal Hydropower Company Pvt Ltd (in which GMR has 80% share and the Nepalese have 20% share) has made investment for the construction of 600 MW Upper Marshyangdi-II hydropower. IL&FS has 15% stare in 750 MW West Seti project.

The low labour costs and liberal trade and economic policy resulting in lower tariff rate structure are mainly responsible for attracting Indian investment in Nepal. Additionally, the climatic advantage due to the terrain ranging from almost the sea level up to the Mt. Everest merely within the average distance of 200 kilometres provide wider scope in Nepal for growing all sorts of agricultural products such as medicinal herbs, fruits and high quality tea, coffee and saffron in the country. Also, there is huge scope for the commercial production of hydropower to the extent of 44,000 MW.

Due to the booming Indian economy, Nepal’s trade with India has increased enormously from US $ 209.5 million in 1995-96 to US $ 2 billion in recent years. But at the same time Nepal’s trade deficit with India also widened and it culminated to over US $ 1 billion. This also suggests the need for expanding the volume of export base of Nepal; for which Indian investment is quintessential. Understanding the importance of Indian investment for the economy, Nepal’s government has identified infrastructural facilities as hydropower, education and health,

apart from agri-business, tourism and other financial sectors as priority sectors for Indian investment.

Yet, there has been a growing Indian concern not only about the health of the Indian investment in Nepal but also about the investment climate in the country. Today, the Indian investors in general feel quite insecure to make an investment in Nepal as the business environment in the country has been badly shattered due to the frequent bandhs, prevailing culture of strikes, labour disputes, forced donations, poor law and order situation and above all the continuing political instability in the country.

Though the work in most of the projects in hydropower projects in which India has made major investment has already begun, there are reports that certain forces have mixed up politics with economics and obstructed the implementation of different activities.

Besides, on account of the outmoded national laws in regard to acquisition of land for the development of hydropower projects, there have been problems related to it for the development of roads, construction of project sites and also for the rehabilitation of those to be evacuated due to the project activities. The ILO Convention 169 on Indigenous and Tribal Peoples of which Nepal is a signatory is also a problem in the implementation of the projects.

In such a situation, it is unlikely that the Indian investors would make further investment in Nepal. Such a set back might seriously affect the growth of agricultural, industrial, service and trade sectors of Nepal and thereby further aggravate the deficit in balance of trade with India. It will also give a wrong message to the international community and further aggravate the investment prospect in Nepal, when the entire banking and other financial institutions are virtually in the state of severe crisis.

It is in Nepal’s own national interest that the existing hydropower projects are allowed to move smoothly. If such projects are completed, they would change the national economy dramatically as they would have multiplier effect on different sectors such as on education, health, transport, communication, industry, trade and service sectors. In this respect, any attempt to disturb the project activities might have detrimental impact on the peace process as well as peace in the absence of such development activities as in hydropower sector and that too at a time the country is going through load shedding.

Prof. Jha is Executive

Director of Centre for

Economic and Technical Studies in Nepal.