First, it has raised public spending, hiked duties on petroleum products and taxes on non-petroleum products that is acknowledged to shoot up inflation in India -- casting a strong impact in Nepal as well. [break]
Given that Nepal´s monetary authority is already facing tough time to contain the double-digit inflation, this has added to the woes of the Nepal Rastra Bank.
Secondly, it has raised duty on petroleum products and gold that have been troubling Nepal over the last six months, contributing to the trade deficit and pushing BoP deficit to over Rs 20 billion.
The rise in imports duty on gold, which made gold dearer in India, has further widened tariff differences -- a factor which gold dealers said will surely spur smuggling of the metal from Nepal to India.
At a time when value of its (gold´s) import stands well over country´s overall exports, the widening of duty gap is feared to aggravate the problem for the Ministry of Finance leaving it with no option but to adjust duty to bring it in line with India´s in the middle of the fiscal year.
Because any change in duty calls for approval from the parliament, concerned officials said it will be a difficult task to make adjustments. But a central bank official said raising customs duty for gold is still an easier option because politicians in general do not bother about the movement of the price of gold in the market.
“The tough choice, however, will have to be made on petroleum products, particularly petrol and diesel,” the official told myrepublica.com.
Officials at Nepal Oil Corporation (NOC) said the duty rise on crude oil (by 5 percent) and petrol and diesel (by 7.5 percent) and increase in factory gate tax by Rs 1.60 per liter in India will not impact import prices because Nepal enjoys duty-free and bonded supply.
"However, the difference it has created in prices across the border will trouble us a great deal," said Mukunda Dhungel, NOC spokesperson, referring to the cross-border smuggling of fuel.
Based on fresh duty and tax adjustments, India has already increased the prices of petrol by Rs 4.33 (IRs 2.71) and diesel by Rs 4.08 (IRs 2.55). This has made petrol cheaper in Nepal by about Rs 2.50 and diesel by more than Rs 3 per liter.
“This is a substantial gap and needs to be plugged urgently,” said the central bank official.
However, given the high inflation and recent hike in the price of diesel, officials at the Ministry of Commerce and Supplies fear there will be a strong political resistance to narrow down the price gap.
“We have plans to raise the petrol price. But even that will not be easy,” said the source.
Garments exports to go up
Indian government has revoked 4 percent special additional duty (SAD), a move which will encourage manufacturers here, particularly readymade garments manufacturers.
India had imposed the duty since about a year ago and it had hit Nepalese exports. Most importantly, it had discouraged Indian importers from placing garments orders in Nepal.
“Now that SAD has been withdrawn, we anticipate the Indian importers will soon start to place fresh orders,” said Uday Raj Pandey, vice president of Garment Association of Nepal.
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