You´re in Kathmandu to give a speech on economy in a federated Nepal. What are the basic principles that have to be followed while carving out federal provinces?
No, I am not giving a speech on economy in a federated Nepal. I think that an outsider should not comment on Nepal. What I am going to talk about is the Indian experience. So how you apply it is for the people of Nepal to decide.
But what are basic principles that we have to follow to ensure federal provinces become economically well off?
In our (Indian) structure, it is largely about money, meaning collection of taxes. Firstly, one has to figure out how these taxes are distributed in a fair way. In this regard, one may confront two kinds of problems. One, how much of the amount collected from taxes will go to the central government and how much will go to the state. Secondly, how will the amount collected through taxes will be distributed among states. Fundamentally, what we do is - although we do not do this efficiently - backward states are given a greater weightage.
This is because a relatively advanced state can tap other sources like the capital market and the private sector. In principal, this could be applied to resources like water as well, as that certain state has ownership over certain natural resource and rent can be collected from it. It may be difficult to calculate monetary value of such resources but it can be done.
The biggest question regarding federal structure, from economic point of view, is allocation of resources, like water. What does Indian experience have to say about this?
You gave this example of water but in principle this issue can crop up for any natural resource. So there will always be disputes, and there will always be relative gainers and relative losers. That´s why you need to have a system which can efficiently handle these issues. Although India has not handled this issue very efficiently, we, at least in principle, have set up inter-state councils, which play mediatory roles while handling disputes. So whatever is the eventual structure, you need some kind of a forum that can perform a mediatory role. You also need to ensure the law of contract is followed. What I mean to say is: if the dispute reaches the court and the issue is adjudicated, then the states should stick to the verdict. Problems arise when the unhappy party takes the issue to streets.
Let´s change the topic. Indian economy is currently facing hardships, which in turn is expected to affect Nepal´s economic growth. What are the core problems faced by Indian economy?
Indian economy is growing at a rate of around six percent, from around nine percent couple of years ago. Part of it is because of external factors, like economic downturn in the West. But the biggest problem is posed by delay in implementation of decisions.
Could you please elaborate?
Some of these decisions are linked to reforms related to foreign direct investment, pensions, insurance and all that. Some are related to subsidies on petroleum products and targeted subsidies. Some are linked to reducing public expenditure and bringing down fiscal deficits. Some of the problems are related to passing legislations that are pending as the parliament is not functioning properly, while others are related to procedures like land acquisition and environmental clearances. So there is a whole package of problems, which is hitting investment hard and creating uncertainty. These uncertainties will not be resolved until elections are held.
Because of these problems Standard & Poor´s recently warned to downgrade India´s sovereign credit rating to junk status. If that actually happens what will be the consequences?
S&P is actually downgrading the rating for external debt. Although the country is not facing that much of a problem with regards to external debt, the downgrading will affect investment. In addition, Indian private companies that want to borrow from abroad will face problems as they will have to pay higher interest rate on credit.
Lately India´s currency is also under stress. Since Nepali rupee is pegged to Indian currency, the weakening of Indian currency is causing Nepali rupee to depreciate, which has become a bane for net importing country like Nepal. How long do you think will this situation continue?
Currently Indian currency is hovering at 55 per US dollar. And I think it will remain at that level, if you don´t factor in day to day volatility.
Lastly, South Asia Free Trade Agreement (SAFTA) has failed to promote trade in South Asia. What went wrong?
Firstly, I´m very skeptical about SAARC and SAFTA because nothing significant will happen unless political issues between India and Pakistan are settled. I think the future really is in the sub-regional cooperation, not SAARC kind of a grouping. Secondly, SAFTA is only about trade. And trade volume is determined by cross-border investments and visa regimes. Until there are improvements in these areas trade will not take off.
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