THURSDAY TALK

How are we more independent by barring Indian investment and buying from India?

August 24, 2017 01:00 AM Biswas Baral and Mahabir Paudyal


Biswo Poudel has a Phd in Agricultural and Resource Economics from the University of California, Berkley. He has for the past two years been serving as an economist with the Office of the Millennium Challenge. Lead author of “Vision 2030”, Poudel has closely studied Nepal’s economic ties with India and China. 

Big projects like Pancheswar will supposedly be under discussion during Modi-Deuba talks. What can we realistically hope from the prime minister’s India visit?

I think there will be some progress on Pancheswar despite what is being reported in the press. It’s high time that we took this project forward. Besides, Deuba comes from the far west, where Pancheswar will have a big impact. He has personal interest in moving this project forward. But we have not done proper homework on this. The problem is that our prime minister has a short tenure. He will as such be occupied with political issues. But it would be good for Nepal if he talks about opening new Indian ports for Nepal and about tapping the huge electricity market of India. But I don’t see any new initiative in the pipeline.

Do you suggest that there is nothing substantive to be gained from this visit? 

Exactly. Right now, we are actually importing electricity from India. If they continue to provide electricity to Nepal, the next winter could be power cut-free. There is some progress on this front. There are some big hydroelectric projects that India would be willing to fund. But India’s new regulation on electricity purchase is uncomfortable for Nepal. I hope the prime minister will talk about this during his India visit. It is not a binding constraint though. What they are saying is that Indian firms have 51 percent investment in a power project if they are to buy electricity from it. Say they want 50,000 megawatt. This will call for investments worth US $80 billion. They will invest $40 billion dollars and Nepal will have to invest as much. But Nepal does not have $40 billion. The whole financial system in Nepal probably holds around US$ 22 billion. So at most we have three or four billion dollars to invest. From that perspective their constraint is not binding but it hurts us if we plan to go to China or any other country and raise money for electricity. India is itself dependent on FDI in power sector. So it’s not clear how much money India has to invest in Nepal’s hydropower. If our electricity production is slow, then we could miss the Indian train as there are so many others who are competing for Indian investment in renewable sources of energy. 

How do we account for the long delay over Pancheswor? 

I think it is lack of willingness on both the side. Pancheswar is a big project. There are not many projects in the world that are this big. US $5 billion is a lot of money for a project.  Even if we put 30 percent, we are actually going to come up with $1.5 billion. It’s a big ticket item but do we have money for this? We are struggling to come up with $1 billion for Budhi Gandaki and are asking a Chinese company to raise money. In case of the Kathmandu-Tarai fast-track, too, of the $1 billion project cost, the government was willing to invest only one-third. 

On Pancheswar, $1.5 billion is big money. For Indians, electricity is not the most pressing issue now. Yes, they would like to have it to balance their electricity consumption, but irrigation is more important for them. They seem to be happy with the status quo as they are getting a lot of water from Mahakali River anyway. So if Nepal pushes for the execution of delayed projects, they will also probably be excited. Otherwise, they want to start this project on their own terms, or not start it at all.

Do you think the model that has been proposed for Pancheswar is in Nepal’s interest?

What India is presenting is in India’s interest. But the gap between what Nepal wants and what India is proposing is not unbridgeable. If the two prime ministers sit down and talk, they will be able to reach an agreement acceptable to both the sides. There is no problem in electricity production and sharing. The major issue is on how to allocate benefits on irrigation. Our major weakness is that we fail to come up with our own cost and benefit analysis. Why only discuss proposals that India floats, as we have done thus far? 

The recent debate in Nepal seems centered on whether Nepal should build its national pride projects on its own or it should seek foreign help. How do you see this debate?
For me, it does not matter which country comes to build these projects or whether we do so on our own. So long as the project is built we should be fine. Deng Xiaoping rightly said, ‘It does not matter whether a cat is black or white as long as it catches mice’. We need some big-ticket items in our country right now as unemployment rate is very high. Though official data suggests it is only 2.3 percent, consider that just 20 percent of employed people are actually getting paid. Around 300,000 people are ‘working poor,’ that is they work, but they are below the poverty line. We need to generate 500,000 jobs a year. So we need to start and complete five or ten big projects within next 10 years. We won’t be able to do that on our own. 

We tend to think we have enough money but in reality we only have a couple of billion dollars. We are investing in cash transfer programs. Four percent of our GDP is going on welfare programs. We allocated Rs 35 billion ($350 million) for social transfer this year. In five years, that figure will climb to almost $1.5 billion. Significant amount of our budget is invested in cash transfer, not capital formation. We need to find right balance between creating a welfare state and making economic growth. Right now we are more into creating welfare state. We need to find a way to sustainably generate a lot of revenue and help the country be an industrial state. 

One argument is that as we are already heavily dependent on India we should invite more investment from China and other countries. How does it affect our economic interest if the money comes from, say, China instead of from India? 

Whether the investment comes from India or China or the US is really irrelevant. We will be fine wherever the money comes from. We should not be unnaturally optimistic though. The Chinese would be happy to invest in Nepal. But the Chinese are also eying the Indian market.  We, a nation of under 30 million, are not a big market for China. They may be interested in investing in tourism and in other small projects such as meat processing factories. But they would be more interested to invest in Nepal if relation between Nepal, India and China normalizes, so that they can invest here and sell their products in India. For Nepal, our only concern should be whether investments can create enough jobs for our people. 

But that is an economist talking. Surely, geopolitical factors are also play for a strategically located country like Nepal? 

I understand what you are saying, but think about it: How do we become more independent if we don’t let Indians invest in Nepal and buy from India directly? Why not let them invest and buy home-built products? Right now we are buying everything from India. We conduct 70 percent of our trade with India. We should be under no illusion that our policies are making us independent. They are not.  

Why is it that Indian companies like to sit on vital hydropower projects in Nepal instead of quickly developing them? 

Almost two-thirds of electricity India consumes comes from coal, a big portion of which comes from Indonesia and Australia. Coal is a source of dirty power. Indians will be happy if our hydropower replaces coal even partly. The good thing about hydropower is that its marginal cost of production is low. We can produce a lot of electricity in the rainy months. Indians can consume our electricity during these months and if there is shortfall in winter, they can use coal plants. Thus both India and Nepal can benefit if they cooperate. At the moment India has a lot of surplus capacity. They have many coal-fired plants and can produce their electricity easily. Thus they are not going to be crippled if we don’t send them electricity. We can help them become less dependent on coal-fired plants. Right now India does not seem interested in our hydropower because we are not producing anything and are actually importing electricity from India.

In the 1990s, when we were proposing Arun, the situation was different. India was not industrialized enough at that time. And they thought our water was more important for irrigation, especially for UP and Bihar states. Right now, their marginal productivity in industries is high. Their energy need is more pressing now than in the 1990s. But like I said, if we don’t produce and sell, they are not going to buy it for they have so many other options of energy including wind, nuclear, coal and wind. Hydropower is one of many options for India, not the only option. Yet if we sit down and talk with Indians rationally we can convince them how hydropower can benefit both the countries.

What kind of arrangement can our prime minister propose to India right now in order to reduce our trade deficit?

We need investment from India. At this stage we cannot compete against Indian firms. If they invest in Bhairahawa, Hetauda and other areas where we have special economic zones, if we allow Indians through enabling policies to sell their goods produced here in India easily and if there are no restrictions from Indian companies to invest here, that would be beneficial to both of us. For this we need to create a nice industry-labor relationship. Only then will they feel safe enough to come and invest here. 

By 2020 the border town of Kerung will be connected with Chinese railway. How do you view this development? 

This will not automatically benefit us. If Indians and Chinese start trading through this rail network there are many ways in which we will benefit. They won’t only trade in goods; they will also bring in many tourists. Since we are between them, we know more about India and China individually than India and China may know about each other. We have more experience of dealing with China and Tibet than Indians do. We also have more experience of doing business with India than Chinese do. So we can be a trading country between China and India.
 
Of late there seems to be a competition of a sort between India and China when it comes to investing in Nepal. Do you think this is a healthy development?

What if India stops investing, or China does so for that matter? If they are competing or trying to match with each other in Nepal, that is fine. This has happened in the past as well. But when China builds roads in northern parts and India becomes nervous about it or when India builds infrastructures for Nepal somewhere and China gets nervous, this will be unhealthy. But suppose China wants to build a $3 billion project somewhere in Lumbini and India comes up with a plan to do the same in Janakpur, with say $5 billion, that would be really good for us. 

For our country to prosper, China and India should remain on friendly terms and collaborate in our development efforts. Nepal is in no position to manipulate these two countries. We have other pressing issues. Twenty percent of our population does not have access to drinking water. Almost half of our population has no access to piped drinking water. Many of our women die during childbirth. If they cooperate in Nepal we will be benefitted. But if they make Nepal a battleground, we will be in trouble. More than aim to become a buffer zone like in the past, we should strive to be a place where everyone comes and invests. We should aim to be like Singapore where everybody comes. 

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