Nepal already has many deterrents for potential investors; lack of electricity, poor infrastructure, and lack of competent manpower are just a few. On top of the lack of these basic necessities, there is another layer of risk: Random kidnappings and murders, uncertain chakka jams, a fragile political system, and the possibility of another brutal armed conflict.
The Bilateral Investment Promotion and Protection Agreement (BIPPA) with India is an attempt to reduce some of these additional layers of risks for Indian investors. It promises to treat Indian investment just as domestic investment, and also promises to compensate should the firm incur any loss due to armed conflict or riots. While this reduces some of the risk in investing in Nepal, there are so many other obstacles that Indian investors are likely to remain unimpressed. Regardless, our premier needs to be applauded for another step in the positive direction.
To nobody’s surprise, this deal has generated quite a bit of opposition. As is usually the case, it appears to be another case of stroking Nepal’s latent anti-India feeling for political points. We know this because no fuss was made about Nepal signing such agreements with France, Germany, UK, and more recently with Finland. It’s the agreement with India that ruffles feather in Nepal.
This is unfortunate. Attracting investment from India is the easiest for us. India has a lower cost for investment in Nepal because of its geographic proximity, cultural similarity, open borders, and past trade relations. So it makes sense to start with India. Sadly, agreements with India are what generate the greatest angst.
What we need to keep in mind is that it is not India that needs us as much; it is Nepal that needs India. Of course, we do not want to give preferential treatment to Indian corporations to the extent that our entire economy depends upon their companies. That is why we need a balance. We need to sign such deals with other countries as well, including China. But there is little doubt that we need foreign direct investment to break the vicious cycle of poverty.
And the path to attract foreign investors is not easy—the competition is global. Our competitors include other states of India, Bangladesh and Bhutan, and even developed countries like US and UK. These nations also want companies to open plants so that their citizens can find employment. The biggest employer in the UK now is Tata. Mahindra is now opening a plant in Texas. Leaders of all these countries recognize that only when business thrives, there will be employment for the youth, dignity for workers, and a strengthening of their nations’ images.
The BIPPA deal has generated quite a bit of opposition. This is unfortunate. Attracting investment from India is the easiest for us. India has a lower cost for investment in Nepal because of its geographic proximity, cultural similarity, open borders, and past trade relations.
From the perspective of attracting foreign investment in Nepal, the best thing that can happen to Nepal is a free trade agreement with India and China. The companies investing in Nepal should feel assured for a reasonable time frame (100 years) that there will be no tax on goods that they bring from China and India, and no tax on goods that they produce in Nepal and send it to these countries. Absolutely no tax would be hard to negotiate, and in that case, at least these countries need to agree on reducing import and export duties, and reduce completely in the future. If we cannot have an agreement with both the countries, such an agreement with even one of the country will serve us well.
Just think about it. Suppose a cement company from India wants to invest in Nepal, the company will have to pay more than 100 percent tax on any truck that it imports from India. Once the cement is produced, there will be another tax if it were to supply the cement to Bihar and Uttar Pradesh. Both of these taxes could increase anytime! Wouldn’t this factor deter the cement company from opening a plant in Nepal? We need to continue to think about reducing such risks. Only then can we attract investment (foreign and domestic).
The writer is an Assistant Professor of Economics and Finance at Texas A&M International University in Texas, US
680anand@gmail.com
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