The two salient clauses for such an agreement would be as follows: (i) No taxation or quota on the flow of authorized goods between India and Nepal, (ii) No regulation on the flow of people between India and Nepal. A firm ought to be able to hire and fire Indian and Nepali workers without any restriction. This agreement should be signed so that it is valid for at least 100 years, assuring investors that opening a plant in Nepal is virtually the same as opening it in any other state of India.
If Nepal could provide other pro-market reforms that India has not been able to provide, it would become an even more attractive place to invest. Let us just examine two quick reforms that Nepal could make that would encourage investment in Nepal.
Having closer economic ties with India is the quickest way to prosperity for Nepal.
One, Nepal could make it easier to fire workers. In India, a company with more than a thousand workers needs government permission to fire workers increasing the cost of layoffs. This essentially discourages firms from growing and taking advantage of economies of scale. This law in India has proven to be a serious hindrance to growth of firms in labor intensive industries. If Nepal could provide an environment where firing workers is not a problem whatsoever, labor-intensive manufacturing plants (Indian and foreign) would prefer Nepal compared to India for building manufacturing plants. Manufacturers could take advantage of the Indian market, and Nepali laws that decrease the cost of firing workers at the same time.
Two, Nepal could allow free entry in the higher education industry. In India, the University Grants Commission of India has tightly controlled the market for higher education and has created obstacles for the entry of new private universities with flexible curricula that suit the needs of the growing Indian economy. Nepal’s laws that have zero regulations on the establishment of private universities and allow foreign universities to establish a branch will dramatically increase investments in Nepal. Nepal could become a factory of skilled manpower.
An agreement with the two clauses mentioned above, and the two reforms suggested would dramatically increase investment in the labor-intensive manufacturing sector and in higher education, creating massive job opportunities in Nepal. The spillover of higher education would be that skilled labor-intensive industries might find Nepal conducive in the long run.
Who is likely to agree to such an agreement and who is likely to disagree? First, would India agree to such a pact? Yes, there is nothing to lose from such an agreement for India. If anything, the agreement can only benefit India, because it provides Indian investors the Indian market to sell its products to top it with a pro-market set of labor laws that India so badly lacks.
Who would disagree? There are two camps in Nepal that are likely to disagree. The first one is the India-phobic establishment, who are phobic to everything Indian, except Indian aid to Nepal, and are convinced that the ultimate goal of India is to make Nepal part of its territory. Arguments made by this camp are based more on passion and less on intellectual rigor. Second is the camp that believes in equality before economic efficiency. They would argue that making it easier to fire workers will hurt them. But the idea is that more factories will open up and although workers will be easily fired, they will find jobs much more easily as well. This would also mean that unskilled Nepali workers need not travel to India in search of work and could stay closer to their families.
Both of these camps could be convinced if the impact in job creation is highlighted and economic prosperity of such policies is communicated patiently to the public. Ideally, election should be run with this as one of the changes that a party hopes to bring. If not on the first try, eventually this idea could be sold to the Nepali public. Having closer economic ties with India is the quickest way to prosperity for Nepal.
(Writer is an Assistant Professor of Economics and Finance at Texas A&M International University in Texas, US.)
Related story
Economic diplomacy is a key to enhancing Nepal-India relations
