Author : Hari Bansh Jha

Expert Speak Raisina Debates
Published on Oct 30, 2020
Nepal’s FDI challenges

Understanding the importance of Foreign Direct Investment (FDI) for economic development, Nepal has been adopting liberal investment policy to attract FDI ever since the 1990s. Towards this direction, the Government of Nepal (GON) not only made changes in its laws and regulations, but it also established one-window system at the highest level under Nepal Investment Board to provide necessary services to the potential investors. Nevertheless, the nation is facing several challenges in the FDI sector, which is mainly due to the lack of transparency, haphazard selection of projects and the neglect of their possible impacts on the national economy.

Foreign investors have made commendable investments in all such sectors like hydropower, industrial, manufacturing, service, tourism, construction, agriculture, minerals and energy, which have been generating income and employment opportunities.

Over the years, foreign investors have made commendable investments in all such sectors like hydropower, industrial, manufacturing, service, tourism, construction, agriculture, minerals and energy, which have been generating income and employment opportunities. The location of the country on the lap of the Himalayas, apart from its ecology and climatic advantage over its neighbours, India and China, is in itself an attraction. The landscape of the country varies from almost sea level in the Terai region up to Mount Everest, the highest peak in the world. As such, all sorts of climate are available in the country within a short distance of 193 kilometers from the south to the north, which provides ample opportunities for investment in different sectors such as herbal and organic farming.

Moreover, the supply of labour is well assured in the country, which is known from the fact that the bulk of the population is young and very affordable by international standards. Until the outbreak of Covid-19, around 1,200 to 1,500 youths used to leave the country each day for the Gulf for employment, apart from those going to India for the same purpose.

FDI in Nepal’s tourism sector such as in airlines, hotels, restaurants, resorts and travel agencies is well known. This sector alone contributes nearly 8 percent of the country’s GDP. The thick forest, flora and fauna, high mountains, hill terrain, lakes, rivers and ponds on the one and religious centers such as Janakpur, the birthplace of Goddess Sita, Lumbini, the birthplace of Gautam Buddha, Pashupatinath temple in Kathmandu and Muktinath temple in Mustang provides major attractions to the tourists. Because of the expertise that Nepal has developed in eye surgery, bypass surgery and organ transplantation, FDI in medical tourism is gradually also becoming promising.

As Nepal entered into Power Trade Agreement with India in 2014, the market is no more an issue for the foreign investors as India is prepared to purchase all the power that Nepal could sale to it. The country is endowed with rich natural resources, like the metallic and non-metallic objects and minerals.

Nepal has the potential to harness over 80,000 MW of hydropower; of which less than 1000 MW is produced so far. As Nepal entered into Power Trade Agreement with India in 2014, the market is no more an issue for the foreign investors as India is prepared to purchase all the power that Nepal could sale to it. The country is endowed with rich natural resources, like the metallic and non-metallic objects and minerals. There are huge deposits of limestone, talc, construction-related minerals and so on. Some of these sectors are rewarding to foreign investors. To promote FDI, foreign investors are allowed to work in joint venture firms. In certain sectors, FDI up to 100 percent is permitted. Laws of the land allow the repatriation of profit to foreign investors. Due security is provided to industries under the Foreign Investment and Technology Act (FITA).

In recent years, however, major turbulence has been observed in the FDI sector in Nepal. India, which until recently happened to be the number one investor in Nepal has been overtaken by China both in terms of the number of projects as well as in total amount. The Chinese investment in Nepal has become three times more than the Indian investment. There was no FDI from India during the Maoist insurgency period between 1996 and 2006.  Even afterwards, FDI inflow from India has not been very substantial.

During the two-day Nepal Investment Summit in 2017, organised in Kathmandu, Chinese firms made investment pledges of US$ 8.36 billion out of the total investment pledges of US$13.52 billion; while Indian firms committed only US$ 317 million. The investment commitment by Indian firms in that event was even lower than that of Bangladesh, Sri Lanka, Japan and the USA.

Under the Belt and Road Initiative (BRI) China is now investing in road construction, hydropower, industries, integrated check posts, free trade area, irrigation, economic corridors, transmission line, disaster management and climate change.

Under the Belt and Road Initiative (BRI) China is now investing in road construction, hydropower, industries, integrated check posts, free trade area, irrigation, economic corridors, transmission line, disaster management and climate change. Estimates are that the total investment in some of these areas is approximately US$10 billion, but not much is known about the terms and conditions of the deals in these projects.

Even amidst the growing clout of China in the FDI sector, Indian investment companies are no less important. More than 150 Indian ventures have been operating in Nepal, which accounts for over 30 percent of the country’s total FDI. Indian firms have been working in all such areas as manufacturing, banking, insurance, education, telecom, power, tourism and various other sectors. Some of the major Indian firms that work in joint ventures in Nepal, include Surya Nepal, Dabur India, Hindustan Unilever, VSNL, State Bank of India, Punjab National Bank, Life Insurance Corporation of India (LIC), Asian Paints, GMR India, CONCOR, Manipal Group and MIT Group Holdings. Also, the Indian firms like Satluj Hydro Electric Project, Himtal Hydropower Company Pvt Ltd and IL&FS have made massive investments in hydropower projects in Nepal.

Lack of political commitment, difficulties in transferring the dividends to the home countries, lack of transparency and growing corruption are some of the key factors that have discouraged foreign investors.

However, over the years foreign investors have been finding it difficult to work in Nepal as they don’t feel their investment in this country adequately safe. Lack of political commitment, difficulties in transferring the dividends to the home countries, lack of transparency and growing corruption are some of the key factors that have discouraged foreign investors. Indian companies like Manipal group, Reliance Cement (India), and Dongote of Nigeria stopped working in Nepal mainly on account of administrative hassles.

Therefore, the net FDI inflow accounted for only 0.79 percent of GDP in Nepal in 2017, even though the country organized Nepal Investment Summit the same year. In 2019, the FDI inflow in the country was almost non-existent, though the Nepal Investment Summit 2019 was organized with great fanfare.

For Nepal today, the time has come to be cautious about FDI as it might come both in the form of boon or bane. Certain countries entered into a debt trap when they accepted FDI haphazardly without properly analyzing the terms, conditions and transparency details of the projects. Hence, only those FDI projects should be welcomed that could increase the GDP by generating income and employment opportunities for the common people. Since most of the Indian companies working in joint ventures in Nepal have made a significant contribution to the national economy, they need to be wooed back in. Meanwhile, care should be taken to remove administrative hassles and corruption that discourage noteworthy investors to work in the country.

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Author

Hari Bansh Jha

Hari Bansh Jha

Hari Bansh Jha is a Visiting Fellow at ORF. Formerly a professor of economics at Nepal's Tribhuvan University, Hari Bansh’s areas of interest include, Nepal-China-India strategic ...

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