Jul 12, 2018-Nepal has been facing a persistent trade deficit for years. Enhanced purchasing power, remittance inflow and advancements in communication and technology have changed the consumption and saving behavior of the Nepali people. However, the country is not able to produce goods and services to fulfil the demand of consumers, hence it is obliged to import them, leading to a trade deficit.
According to the macroeconomic indicators released by Nepal Rastra Bank, the percentage of imports during the last five years amounted to more than 35 percent of the GDP, while exports remained below 4 percent, resulting in a trade deficit of more than 30 percent of the GDP. This concise picture of Nepal’s foreign trade raises a red flag about the economy. An even more serious problem is that Nepal is a landlocked country, and most of its trade is with India. More than 60 percent of the trade deficit is with the southern neighbour; and if something is not done, this will only increase in the future.
Even though Adam Smith argued that nothing is more absurd than the concept of the trade deficit, Nepal cannot endure for long the widening gap with India. Delivering the federal budget statement for the fiscal year 2018-19, Finance Minister Yuba Raj Khatiwada also stated that reducing the trade deficit was not only a priority but also one of the biggest challenges for the government. However, the budget statement was vague about the policies and activities that the government would pursue to slash the deficit.
In the current situation where the remittance inflow is tapering, if the deficit continues to widen, it will result in a dollar drain in the country. Nepal and India have held a number of high-level talks time and again to reduce the trade gap, but nothing has happened. Therefore, it has become important to analyse the reasons behind the trade deficit and ways to reduce it.
There are a number of reasons behind the trade imbalance with India; the major ones are total dependence on India for petroleum products, lack of access to third countries, limited exportable goods and poor productivity. Similarly, Indian non-tariff barriers against Nepal are also playing a major role in increasing the trade deficit. For example, the recent introduction of a separate licence to import Nepali vegetables and other farm products is against the norms of the Nepal-India Trade Treaty and the South Asian Free Trade Agreement (Safta).
Likewise, a decade-long civil war and political chaos in Nepal stymied the growth of the industrial sector, and India remained the only source of imports to meet the demands of Nepali consumers. Also, geographical constraints make it difficult for Nepal to expand third country trade. Besides, India’s long-term interest in keeping Nepal dependent on the Indian market is another important issue in bilateral trade.
India has never taken the issue of Nepal’s trade deficit seriously. Indian Prime Minister Narendra Modi has been intensifying talks on free trade with the US, Canada and Germany, but he was very reluctant to do the same with Nepal during his recent visit to Kathmandu. Likewise, it has been reported that the Indian government has clearly stated that India will not purchase electricity produced by hydropower projects in Nepal if they are constructed by non-Indian contractors. This clearly indicates that India does not want Nepal to be free from its trade trap. Therefore, unless Nepal stops pleasing India in every matter, bilateral trade will never be in its favour. Nepal has to raise these issues strongly, and find some new ways to correct the trade deficit.
One of the biggest challenges is that Nepal is a country of small businesses with the service sector being the dominant one among them. Therefore, first and foremost, Nepal has to enhance its productive capacity. Private sector investment in the productive sector has to be increased and dependency on India for most of the consumable goods has to be reduced. Similarly, Nepal has to increase the extent of quotas, tariffs and anti-dumping policies on low quality Indian products. For example, an anti-dumping policy can be applied against Indian tobacco products like gutkha, bidi and chewing tobacco.
Likewise, it has become important for Nepal to reduce its dependency on India for petroleum products by importing them from other neighbouring countries like China and Bangladesh. For this, Nepal has to bargain strongly with India to revise the trade treaties and use them to benefit Nepal. It is to be noted that Nepal is among the top 11 export markets for India, hence there is no reason for the Nepal government to hesitate to raise every aspect of the trade imbalance with India, and negotiate to gain easier access for Nepali products into the Indian market.