From Maoism to Capitalism?

(My article published in  New Spotlight, December 9-22, 2011).

Faced with a choice between a package that may or may not impart him/her with employable skills, that too in a situation of massive un/underemployment in the country (and getting a job means having to work) and a cash reward of at least Rs 500,000 for, well, doing nothing, a rational person is likely to opt for the latter without second thoughts.

And the prediction that yours humbly made in a blog post has come true. During the Maoist combatant categorization process—pursuant to the 1 November seven-point deal between the political parties controlling Nepal—the majority of the combatants in cantonments are reported to have opted for integration into the national army, with those opting for retirement with cash a close second, and only a negligible number preferring the non-cash rehab package. While a maximum of 6,500 of interested combatants could be integrated into a separate directorate of the Nepal Army, the rest had to choose between a package of education, training and vocational opportunity (with the cost ranging from Rs 600,000 to Rs 900,000), and voluntary retirement with cash of Rs 500,000 to Rs 800,000. With the latest re-verification exercise putting the total number of combatants at 16,508—2,795 less than that verified by UNMIN—at least 10,008 combatants will have to be “compensated”. (At least because not all of those who want to join the national army may meet the minimum eligibility criteria, and the Maoists are insisting “late-comers” be considered too).

The cost to the treasury of the direct cash payment would be at least Rs 6.5 billion, taking Rs 650,000 as an average payment per combatant. On the higher side, it would run up to Rs 8 billion. Of course, the combatants who have opted for the cash reward are unlikely to get the full amount they are entitled to: they will have to part with a portion of it as a levy to their beloved party (50 percent going by media reports). One need not be surprised if most of them splurge the money on gambling and drinking or other consumptive activities, or simply spend it to meet basic needs. The possibility of turning to crime when the cash runs out cannot be ruled out. Quite a few may use the cash to get an overseas job, but not without the irony that combatants of a Maoist party that officially is in favour of creating employment opportunities for Nepalis in their homeland and that heads the government have to seek work on foreign shores with money from the state’s coffers.

Instead of doling out cash, it would have been sensible to provide only the option of productive work to those not joining the army. This would not only help the combatants themselves and their families in the long run, but also contribute to the economy, not least by adding to the GDP and opening up further employment opportunities. How? Here are a few ideas but surely party-affiliated buddhijivis, members of the National Planning Commission and the PM’s team of economic advisors, among others, should be able to come up with even better ones (or else hang up their boots)—vocational training, internship, subsidized credit and other incentives for setting up own business (cottage and small enterprises), employment in infrastructure projects, some sort of employment guarantee, etc.

Perhaps the Maoists, in yet another volte face, are now seeing wisdom, albeit perversely, in the neoliberal preference for direct cash transfers, supposedly least market distorting, as a support measure for “vulnerable” groups. By this logic, the combatants should be free to choose the form of rehabilitation; guiding them into economic activities will interfere with the free workings of the market. Marx displaced by Friedman in a revolutionary party? Dr Sahib leaders of Nepali Congress happy now? And the slogan of creating a swadheen economy can always be reinterpreted as per the demands of the dialectics of opportunism, right, comrades?

Notwithstanding all these, we are assuming that all the re-verified combatants in the cantonments were also combatants during the Maoist insurgency, and that integrating them into the Nepal Army or rehabilitating them will lead to peace. That’s a heroic assumption, although they have been “verified” as such. That a significant number of core fighters have assumed new avatars in other wings of the party has been a robust charge leveled by Nepali Congressites, among others. 

Then there is the issue of justice, but raising it runs the risk of being accused of attempting to throw a spanner in the works of a “historic” peace accord. Still, a cabbie—a janta ko chhoro to the core—confided to this scribe the morning after the deal: doesn’t the deal disincentivize earning a living through legal and peaceful means?

Parking Rs 500,000—the minimum amount of “reward”—in a fixed deposit account in a financial institution in Kathmandu fetching an interest of at least 12 percent will give the recipient of the largesse a steady flow of income of Rs 57,000 (after deducting 5% tax on the interest) per year, or Rs 4,750 per month, in addition to the capital of half a million rupees. From Maoists to Capitalists overnight – quite a transition! Moreover, that income is nearly thrice the per capita average national poverty line (the latest one used by the Central Bureau of Statistics for Nepal Living Standard Survey (NLSS) III, 2010/11) and also more than the poverty line for urban Kathmandu. It is also more than the per capita nominal Gross National Income for the year 2010/11. By the way, according to NLSS III, the poverty incidence in urban Kathmandu is 11.147 percent and that in the whole country 25 percent. With Rs 8 billion, at least 55 MW of hydroelectricity can be generated.

Nepal’s donors welcomed the deal. How about footing the entire bill in grant form, without diverting aid from other sectors, and/or providing employment to ex-combatants on donor-country soil in the true spirit of solidarity, humanity, compassion and all that jazz?  

BIPPA Blues

(My article published in New Spotlight, November 11-24, 2011)

The brouhaha surrounding the Bilateral Investment Promotion and Protection Agreement (BIPPA) between Nepal and India signed during Prime Minister Baburam Bhattarai’s October visit to India presented a spectacle true to the form of present-day Nepal. From a PhD-SLC topper head of government apparently failing to appreciate the substance and implications of the pact, to a lack of open debate before its signature, to coverage by the mainstream media in a consent-manufacturing mode bent on projecting the pact as the sine qua non for attracting Indian investment.

The national treatment and most-favoured-nation (MFN) treatment provisions in the BIPPA reinforce preferential treatment for Indian investors, who in practice are already treated on a par with domestic investors and enjoy more rights than do other foreign investors, thanks to the 1950 Treaty. A treaty that the Maoists, with “intellectual” fire-power from Bhattarai, once upon a time wanted to be scrapped but now are willing to accept in an adjusted and updated form. Nepal’s strategy should be to treat all foreign investors alike, regardless of their nationality.

The provision on compensation for losses (Article 6) requires each government to compensate the investors from the other country for any losses they incur due to war, state of emergency, insurrection or riots on a national and MFN treatment basis. This is, for practical purposes, more than national treatment, unless the Nepal government decides to compensate domestic investors similarly. Replacing “civil disturbances” with “riots” was trumpeted—with cheerleaders in the media—as a sterling achievement of the Nepali side, when in fact it does not require a brilliant lawyer to prove the equivalence of the two in many a circumstance, during international arbitration. A government of a least-developed country in perennial transition that is unable to maintain law and order has the cheek to pledge compensation to foreign investors for losses from its absence!

Media reports had it that the BIPPA would allay India’s concerns about the disruption of Indian investment projects, including the Upper Karnali hydropower project. The pact will not be able to address concerns related to disruption due to, say, load shedding, militant labour unionism, strikes, shutdowns, extortion etc, which are major concerns of all investors, domestic and foreign. Some “leading” dailies reported that whether to provide compensation for losses arising from incidents like strikes and shutdowns will be decided by a joint industrial committee comprising both Indian and Nepali businesspeople. The biased reportage was riddled with contradictions: the pact will encourage Indian investment by addressing security concerns; to show that Nepal has not given away much through the agreement, it is emphasized that compensation is confined to losses arising from war, emergency, insurrection and riots (thereby contradicting the hype about the agreement being key to attracting Indian investment into Nepal); and then it is let on that a committee shall decide on compensation for other types of losses. Since the agreement makes no mention of such a committee, what led the media to refer to it? Whose wishes were they articulating? Was there a letter of exchange to that effect?

Worst of all, the BIPPA could entrench a patently anti-development policy. Choice hydropower projects have been awarded to foreign investors to be built as export-oriented ventures even as the country is starved for electricity. There have been protests, including by a faction of the Maoists, against such projects. The means of protests have been violent at times, no doubt regrettable. But the policy that prompted such protests is also condemnable. The provision of compensation in the BIPPA gives the government a veneer of legitimacy in the form of “international obligation” to use force against such protests and/or use the state treasury to compensate foreign investors affected by the protests although such investment is not in the national interest in the first place. It may not be difficult to interpret the protests and associated vandalism as rioting. Or perhaps it is the putative joint committee that is to decide on compensation should they not be interpreted as rioting. The justification that the BIPPA will help bridge the huge trade deficit with India, which stood at 200.87 billion rupees in the first 11 months of FY 2010/11, is absurd. The immediate focus should be on channelizing all potential domestic resources, including remittances, into the productive, tradable (export and import-substituting) sector. Where foreign investment is essential (e.g., huge hydropower projects) it must be guided into priority sectors and uses (e.g., electricity for domestic use, not exporting away the multiplier benefits). Besides restoring law and order, developing hydropower for domestic use (load shedding is cited as the biggest constraint in business climate surveys), addressing other supply-side constraints, securing the removal of market access barriers faced in India and elsewhere, and obtaining improved transit facility are critical to increasing exports to India and beyond.

What is the PM’s position on the export-orientation of the hydropower policy? The media otherwise critical of the Maoists portray him as a pragmatist. There is a thin line between pragmatism and opportunism. Once upon a time he used to write fiery articles about how Nepal was forced into underdevelopment courtesy of the core-periphery relationship with its neighbour. Can he explain how exporting cheap hydropower can spur economic development in Nepal, which in his considered view is essential to strengthen nationalism? He reportedly broke down when visiting his alma mater, JNU, and said that he is what he is because of JNU, where he learnt Marxism. Does JNU Marxism mean keeping one’s own country underdeveloped while allowing its resources to be exploited by its neighbour—if the student happens to be a Nepali? Did he miss an opportunity to tell leftist gurus at JNU and CPI(M) comrades not to demonstrate “hollow” nationalism by protesting against Indian trade liberalization moves, including its free trade agreement with the European Union?  It seems that the Marxism taught at JNU is to be interpreted differently for different folks—one version (pragmatist) for Nepal and the other for serving the interests of its motherland.

Rehab package: Turning Maoists into Capitalists?

So as many as 6,500 of the Maoist combatants in cantonments may be integrated into a separate directorate of the Nepal Army, while the rest will be rehabilitated, according to the seven-point deal reached between UCPN(Maoist), Nepali Congress, CPN(UML) and major Madhesi parties. Assuming that there are still 19,000 UN-verified combatants and 6,500 opt for integration into the security force, 12,500 combatants will have to be rehabilitated. The deal provides for two avenues of rehabilitation that the combatants can choose between: a package of education, training and vocational opportunity (with the cost ranging from Rs 600,000 to Rs 900,000); or direct cash payment of Rs 500,000 to Rs 800,000 (to be made in two tranches in two fiscal years).

Faced with a choice between a package that may or may not impart them with employable skills, that too in a situation of massive un/underemployment in the country (and getting a job means having to work) and a cash reward of at least Rs 500,000 for, well, doing nothing, a rational person, in general, is most likely to opt for the latter without second thoughts. The more industrious among them may use the cash to get a job abroad (Middle East or Malaysia). 

The cost to the treasury of the direct cash payment would be at least Rs 6.25 billion, or, taking Rs 650,000 as an average payment per combatant, Rs 8.125 billion. (On the higher side, it would run up to Rs 10 billion). Of course, the combatants who opt for the cash reward are unlikely to get the full amount they are entitled to: they will have to part with a portion of it as a levy to their beloved party. One need not be surprised if most of them splurge the money on gambling and drinking or other consumptive activities, or simply spend it to meet basic needs. The possibility of turning to crime when the cash runs out cannot be ruled out. It is also likely, as mentioned above, that quite a few will use the cash to get a job abroad, but not without the irony that combatants of a Maoist party that officially is in favour of creating employment opportunities for Nepalis in their homeland and that heads the government have to seek work on foreign shores with money from the state’s coffers!

Instead of doling out cash, it would have been sensible to provide only the option of productive work to those who are to be “rehabilitated”. This would not only help the combatants themselves and their families in the long run, but also contribute to the economy, not least by adding to the GDP and opening up further employment opportunities. How? Here are a few ideas but surely party-affiliated buddhijivis, members of the National Planning Commission and the PM’s team of economic advisors, among others, should be able to come up with even better ones (or else hang up their boots)—vocational training, internship, subsidized credit and other incentives for setting up own business (cottage and small enterprises), employment in infrastructure projects, some sort of employment guarantee, etc.

Perhaps the Maoists, in yet another volte face, are now seeing wisdom, albeit perversely, in the neoliberal preference for direct cash transfers, supposedly least market distorting, as a support measure for “vulnerable” groups. By this logic, the combatants should be free to choose the form of rehabilitation; guiding them into economic activities will interfere with the free workings of the market. Marx displaced by Friedman in a revolutionary party? Dr Sab leaders of Nepali Congress happy now? And the slogan of creating a swadheen economy can always be reinterpreted as per the demands of the dialectics of opportunism, right, comrades?

Notwithstanding all these, we are assuming that the 19,000 or so combatants in the cantonments were also combatants during the Maoist insurgency, and that integrating them into the Nepal Army or rehabilitating them will lead to peace. That’s a heroic assumption, although they have been “verified” as such. That a significant number of core fighters have assumed new avatars in other wings of the party has been a robust charge leveled by Nepali Congressites, among others. 

Then there is the issue of justice, but raising it runs the risk of being accused of attempting to throw a spanner in the works of a “historic” peace accord. Still, a cabbie—a janta ko chhoro to the core—confided to this scribe this morning: doesn’t the deal disincentivize earning a living through legal and peaceful means.

Parking Rs 500,000—the minimum amount of “reward”—in a fixed deposit account in a financial institution in Kathmandu fetching an interest of at least 10 percent will give the recipient of the largesse a steady flow of income of Rs 47,500 (after deducting 5% tax on the interest) per year, or Rs 4,000 per month, in addition to the capital of half a million rupees. From Maoists to Capitalists overnight – quite a transition! Moreover, that income is 2.5 times the per capita average national poverty line (the latest one used by the Central Bureau of Statistics for Nepal Living Standard Survey (NLSS) III, 2010/11) and also more than the poverty line for urban Kathmandu. It is also more than the per capita nominal Gross National Income for the year 2010/11. By the way, according to NLSS III, the poverty incidence in urban Kathmandu is 11.147 percent and that in the whole country 25 percent. With Rs 8 billion, at least 55 MW of hydroelectricity can be generated.

Donor countries are welcoming the deal. How about footing the entire bill in grant form, without diverting aid from other sectors, and/or providing employment to ex-combatants on donor-country soil in the true spirit of solidarity, humanity, compassion and all that jazz?  

More on BIPPA and the media

A section of the Nepali media, including Nagarik daily, had reported that under Nepal-India BIPPA, compensation for losses arising from incidents other than war, national emergency, riots and insurrection--e.g., labour strikes and shutdowns--would be decided by a Nepal-India joint business/industrial committee. This scribe went through the BIPPA text posted on the website of the Ministry of Industry of Government of Nepal only to find no such provision. It is good that such a provision is not there. But this also ridicules the hoopla created by the media about how the BIPPA, by addressing India's security concern for the investment of its nationals in Nepal, will trigger a bounty of investment from south of the border and thereby help reduce our trade deficit with India, which stood at 200.87 billion rupees in the first 11 months of FY 2010/11 as per Nepal Rastra Bank. Unless one can interpret strikes and shutdowns and the locking up of managers as "riots". Or unless there is a letter of exchange to that effect.
Is this just poor reporting or something more sinister?
No attention has been given to the provision related to expropriation, which also includes indirect expropriation, in Article V.
One thing that one can infer from the brouhaha over the BIPPA is this: India, Nepal government, the media all believe that the security situation of New Nepal is going to worsen further in the days to come; insurgency, rioting, state of emergency, civil war are going to be the order of the day.
Let the fox guard the hen pen.

PM’s India visit and manufacturing of consent

1. Media reports say the Bilateral Investment Promotion and Protection Agreement (BIPPA) will provide “national treatment” to Indian investors. National treatment means according the same treatment to foreign investors and domestic investors alike in certain or all respects (e.g., equity participation, taxes, etc.). It is not clear in what respects national treatment is to be accorded to Indian investors. In practice, Indian investors are treated on a par with domestic investors and enjoy more rights than do other foreign investors, thanks to the 1950 Treaty.
2. Nepal’s Foreign Investment and Technology Transfer Act allows foreign investment without any restriction on equity participation in all but 21 sensitive sectors (e.g., cottage industry) and permits repatriation of earnings and investments, while, for services sectors, Nepal’s commitments under the World Trade Organization (WTO)’s General Agreement on Trade in Services (GATS) are relevant. Under GATS Nepal has committed to allow foreign investment with up to 80 percent equity participation in 70 sub-sectors in 11 services sectors. In practice, the actual level of equity participation allowed is greater than the GATS commitments; even 100 percent. Prime Minister Bhattarai, for all the media hoopla about his being a political economist, seemed unacquainted with these facts; more seriously, neither his economic advisor: the prime minister was quoted as telling a crowd of Indian businesspeople that they will be allowed up to invest  in ventures in Nepal with up to 44 percent share! While the actual provisions of the treaty will be known only after seeing it in black and white, the highlight in the media was its provision requiring Nepal government to compensate Indian investors for any losses they incur due to war, insurrection and riots. This is, for practical purposes, more than national treatment, unless Nepal government decides to compensate domestic investors similarly. Since Nepal’s law does not allow Nepali nationals to invest abroad—although quite a few prominent business houses are known to be doing exactly that, some ostensibly through their “NRN” scions—the BIPPA will only impact investment into Nepal, if at all, as admitted by media reports. In that case, Nepal’s strategy should be to treat ALL foreign investors alike, regardless of their nationality.
3. The BIPPA is supposed to allay India’s concerns about the disruption of operation of Indian investment projects, including Upper Karnali hydropower project. But if as per media reports (and media reports is what we have to rely on since neither the government sought the opinion of all relevant stakeholders nor the media thought it their duty to inform the people of its contents, so much for their investigative journalism zeal) compensation is required only for losses arising from war, insurrection or riots, then the treaty will not be able to address concerns related to disruption due to strikes, shutdowns, etc which are major concerns. Nepali investors too are grappling with such disruptions. A media report says whether to provide compensation for losses arising from incidents like strikes, shutdowns will be decided by a joint committee comprising both Indian and Nepali businesspeople.  As can be expected of journalists poor in substantive matters and especially economic journalists who have learned economics by obtaining and printing the quotes of party-affiliated economists, the reportage is riddled with contradictory interpretations: the treaty will encourage Indian investment by addressing security concerns of Indian investors; to prove that Nepal has not given away much through the treaty, it is emphasized that compensation is confined to losses arising from war, insurrection and riots (thereby contradicting the hype about the treaty being key to attracting Indian investment into Nepal); and then it is let on that a committee shall decide on compensation for other types of losses (arising from labour strike, shutdowns etc). The media in general seemed to be in an overdrive to “manufacture consent” that the BIPPA is key to attracting Indian investment, giving the impression that  Indian investment will flood in just because the SLC topper of a PhD PM is positively in the goods books of the Indian establishment.
4. Why, pray, even in loktantra open discussions and debates on such treaties are not held? If there are any rules that bar such a discourse, then such rules should be amended. Are there any takers in the mainstream media? A treaty has been signed without even people living in the capital city with access to the internet and the media knowing the exact contents of the agreement, this scribe included. But then it may be naïve to expect the media that do not have the guts to spell out the names of tax evaders in the VAT scam to be concerned about the public’s right to information on this issue. 
5. Yes, providing assurance of compensation to foreign investors has been practiced by many countries to lure in foreign investment. But such a provision can potentially entrench a wrong, criminal policy in a country like Nepal: for example, choice hydropower projects were awarded to foreign investors to be built as export-oriented ventures even as the country is starved for electricity. There have been protests against such projects. The means of protests have been violent at times and this no doubt cannot be condoned. But at the same time the policy that prompted such protests should also be condemned. The provision of compensation in the BIPPA gives the government a veneer of legitimacy in the form of “international obligation” to use force against such protests and/or use the state treasury to compensate foreign investors affected by the protests although such investment is not in the national interest in the first place. It may not be difficult to interpret the protests and associated vandalism as rioting. Or perhaps it is the joint committee that is to decide on compensation should they not be interpreted as rioting. Ironically, the Maoists were in power when some choice hydropower projects were awarded to Indian investors for export purpose; a faction within them then started opposing such projects; and now a Maoist Prime Minister signs on a treaty with a provision that if implemented would mean taking action against those disrupting the operation of the projects, and by implication supporting the policy of exporting hydropower at dirt-cheap rates when there is no dearth of demand for the same inside the country both for domestic consumption and industrialization.
6. The media apparently do not deem it worthwhile to question the prime minister about his position on the export-orientation of hydropower policy in practice. They are busy portraying him as a pragmatist. There is a thin line between pragmatism and opportunism. Once upon a time he used to write fiery articles about how Nepal was forced into underdevelopment courtesy of the core-periphery relationship with its southern neighbour. Can he explain how exporting cheap hydropower can spur economic development in Nepal, which in his considered view is essential to strengthen nationalism? Doesn’t such a policy smack of a conspiracy to accentuate a neo-colonial relationship? Mind you, he has not squeaked a word against it (or for that matter, on issues of border encroachment)--perhaps this exemplifies why he has been projected in a positive light in most of the mainstream media otherwise highly critical of the Maoists. What do his comrades at his alma mater, JNU, or at Communist Party of India (Marxist), which is nursing its wounds of electoral defeat,  have to say on this? The PM reportedly broke down when visiting his alma mater and said that he is what he is because of JNU, where he learnt Marxism. Does JNU Marxism/communism mean keeping one’s own country underdeveloped while allowing its resources to be exploited by its neighbour—if you happen to be a Nepali? Did he miss an opportunity to tell CPI(M) comrades and leftist gurus at JNU not to protest against Indian trade liberalization moves, including its free trade agreement with the European Union that also covers some investment issues, and not to demonstrate “hollow” nationalism?  Or publicly congratulate the CPI(M) for wooing Tata to set up a plant in West Bengal and for being trounced in the state assembly polls. It seems that the Marxism taught at JNU is to be interpreted differently for different folks—one version (pragmatist) for Nepal and the other for serving Indian interests.
7. Bhattarai is said to have had “closed door” on-one-one meeting with his Indian counterpart Manhoman Singh, the media dutifully reported. This is hogwash. The truth is in such meetings the Indian prime minister is flanked by his aides whereas the Nepali leader is unaccompanied. The media people either do not know about this or pretend not know for obvious reasons. They do not see any incongruity in such differential treatment.
8. Transit issues—which are critical for Nepal’s third-country trade (expansion and diversification)—were put on the backburner, as were the barriers faced by Nepali exporters to India.

New Nepal budget opens housing to foreign investment: Implications

It can happen only in spanking new Nepal. The budget speech for FY 2011/12 has opened the door for foreigners, including foreign citizens of Nepali origin (better known as NRNs), to buy commercial and residential houses and apartments. Even as the country's Civil Code prohibits any foreigner from engaging in any real estate transactions, the budget presented by Finance Minister Bharat Mohan Adhikari has a provision to allow NRNs to purchase houses and apartments "in specified terms", without specifying what those terms are, and, further, foreign individuals or companies to purchase houses and apartments amounting to US$200,000 or more. This means that NRNs can purchase houses and apartments of any amount. This provision comes with a caveat that such purchases cannot be sold until five years from the date of purchase, although it is not clear whether it applies to foreigners of non-Nepali origin only or NRNs also. It can be argued that the provision does not violate the Civil Code because foreigners will still not be allowed to purchase land, and this argument is likely to weather any challenge at the court of law given the country's juridical history. But as houses and apartments stand on land—not in the air—the spirit of the Civil Code is violated. Predictably, the implications of the provision were not analysed in the mainstream media, a major section of which was busy taking partisan positions on the budget. Analysts wearing political blinkers were too busy making hackneyed points drenched in political prejudices to deign to debate a provision introduced with the aim of appeasing the NRN community, whose demands of their ex-homeland are no way matched by their contributions. Below are some implications, and an assessment, of the provision.

1.       The Finance Minister cited the need to attract foreign investment in the commercial houses and apartments sector as a reason for introducing the provision. The reality is that there is no such need—for the economy as a whole, if not for a handful of people that until recently rode high on the real estate and housing boom. Overinvestment, rather than underinvestment, is the problem. It is not for nothing that the central bank tightened bank credit to the sector (although it has begun to relax it, the overall stance is still restrictive, for good reason). Opening the door to foreign investment in the sector threatens to further puff it up. It will only delay the inevitable correction course and make a bust more painful.

2.       Investment in new houses and apartments surely constitute "fixed capital formation". They will surely increase the investment component of GDP – in a technical sense. But they do not increase the economy's effective productive capacity; they do not lead to a sustained production of goods and services and a sustained employment generation (except for construction materials to the extent they are produced domestically, and workers to the extent they are Nepali nationals).

3.       Yes, the country needs foreign investment – in the tradable sector ((i.e., the export sector and the import-substituting sector) and in sectors like hydropower that provide critical inputs to the tradable sector. Even as it opened the non-tradable housing sector to foreign investment, the budget was wanting in introducing measures to attract foreign investment into hydropower projects to cater to the domestic demand. At the very least, it could have, in keeping with an earlier commendable position taken by Energy Minister Gokarna Bista, introduced a policy of utilizing the electricity generated by all projects, already awarded or yet to be awarded, to meet domestic needs before considering exports.

4.       That NRNs can purchase houses and apartments of any amount, in particular, has equity implications. The additional demand (in fact not only of NRNs but also of other foreigners, even if the latter can make purchases of US$200,000 and over only) will contribute to inflate prices of houses/apartments and land alike. The impact of high prices will be borne by middle-class Nepalis making a living on their soil and desirous of buying a house/apartment or land to build a house.  (Besides, the lowering of capital gains tax (on income from the sales of houses and land) by 50 percent, announced in the budget, may benefit foreign investors too.)   

5.        Foreign investment will temporarily add to Nepal's foreign exchange reserves (although it is not clear whether NRNs will be required to make the purchase in foreign currency or not). Investment will be forthcoming if the investors believe that they will be able to reap more than what they have put in. After five years, they will have the right to repatriate their original investment and earnings (capital gains) in foreign currency, without having contributed to increase the productive capacity and production of the tradable sector (i.e., the export sector and the import-substituting sector). So the medium- to long-term, if not short-term, implication for the balance-of-payments is negative. If the provision was ostensibly introduced to encourage foreign investors to invest in the tradable sector or hydropower, then it should have been tied to investment of certain amounts in such sectors.

6.       Formally, the Nepali rupee is convertible in the current account only. By opening up investment in the speculative, frothy housing sector, the government has, unwittingly, made a move towards capital account liberalization. Although foreign investment into the housing sector cannot be called portfolio investment and will count as "foreign direct investment" technically, the fact remains that it is basically guided by expectations of capital gains.

7.       Neither the communist/Maoist prefix/suffix in the names of the two major ruling parties nor the Mahamanav variety of socialism the main opposition party supposedly cherishes were strong enough barriers to introducing, or not opposing, such a provision.

High share of consumption in GDP: More than meets the eye

Over 90 percent of Nepal's GDP goes into consumption. With just 10 percent of income left for savings, low savings are a constraint on investment and hence growth – this argument is peddled by policymakers and "experts" alike, particularly towards the end of the fiscal year when the Economic Survey or part of its contents is unveiled. This year was no exception, with Abhiyan business daily carrying a front page main news that sounded alarm over the high share of consumption in GDP. Below is an attempt to explain why the reality may not as simple as that.

1.       Yes, the share of consumption in GDP has always been high and has been on an increasing trend – rising from 88.6 percent in 2001/02 to 90.6 percent in 2009/10.[1] As a result, gross domestic savings (GDS) amounted to 9.4 percent of GDP in 2009/10, while gross capital formation (GCF), or investment, was 38.2 percent of GDP. This gives a savings-investment gap of - 28.8 percent of GDP. But this does not capture the savings of the economy from money earned from abroad (mainly remittance income). Taking net income from abroad (e.g., income earned on assets abroad) and net transfers (e.g., remittances, pension and grant) from abroad, the relevant savings measure is gross national savings (GNS), which was 34.4 percent of GDP in 2009/10. The gap between GNS and GCF in 2009/10 was less than - 4 percent of GDP, or less than one-seventh of the gap we get while using GDS instead of GNS. Furthermore, the gap was positive (that is, GNS exceeded GCF) for most of the nine years from 2001/02 to 2009/10: only in 2006/07 and 2009/10 was it negative. As grant is aid and hence not income proper, it can reasonably be argued that GNS should exclude grant. Even when we deduce the grant component while calculating GNS, the gap between GNS and GCF remains positive for three years, and except for 2009/10, the negative gap is less than 3 percent of GDP, which is again far less than what the gap between GDS and GCF would show.

2.       Is the 90.6 percent of GDP being spent on consumption a result exclusively of dearth of attractive savings options or also partly due to the fact that the majority of the people are poor or have very low income, such that they are but compelled to spend all or most of their income on consumption (using National Living Standard Survey 2003/04, the World Bank puts 77.6 percent of the population as living below PPP (purchasing power parity) $2 a day (or, about Rs 43.2 in 2005 PPP rate)? The latter possibility is rarely considered in mainstream discussion.

3.       High consumption, if on domestically produced consumer goods and services, contributes to GDP. But when consumption is import-based, consumption detracts from, rather than adds, to GDP. This point is recognized in mainstream discussion, including in media reports/analyses. However, no policymaker or "expert" or policymaker-turned-expert would condescend to suggest how much of the national consumption demand is satiated by imports. Here is a humble attempt by this scribe:

a.       The World Bank-administered World Integrated Trade Solutions (WITS) disaggregates national merchandise trade data (compiled by UNCOMTRADE) into broad economic categories, viz., consumer goods, intermediate goods, raw materials and capital goods. While such classification does not capture country-specific use of imported goods and the data pertain to formal trade only, it does offer a rough indication. In 2009, 35 percent of Nepal's merchandise imports were consumer goods. That would amount to 11 percent of the consumption component of GDP in 2008/09. [Note that the consumption component of GDP comprises both goods and services consumption; that we are not considering services imports here; and that part of the imported intermediate goods and raw materials would go into the domestic production of goods and services consumed domestically. Hence, the share of imports in consumption would be much higher than this figure]. Given that consumption was 90.3 percent of GDP in 2008/09, it follows, through a back-of-the-envelope calculation, that the leakage effect of consumption imports reduces the multiplier (the factor by which income increases due to a given increase in autonomous expenditure, e.g., investment, government purchase, etc) by at least 50 percent.  

4.       It is true that income flowing in from abroad (predominantly remittances) is not part of GDP (or gross domestic product, which measures the value of goods and services produced within the country). It is also true that the negative difference between GDS (which does not take into account remittances etc.) and GCF shows that what the nation as a whole saves from the income generated within its territorial limits is not sufficient to meet its investment demand. However, it is equally true that remittances have become a major source of income for the nation (about 20 percent of GDP in 2009/10). Remittances are the most important source of foreign exchange earnings, greater than exports (goods and services), foreign investment and foreign aid combined. According to Nepal Labour Force Survey 2008, 23 percent of households receive remittance from abroad. As much as one fifth of the labour force may be working abroad (taking the estimate of 3 million migrants doing the rounds these days). The burgeoning consumption demand (as well as investment demand), part of which leaks out in the form of imports, thereby reducing the multiplier, is partly financed by remittance income, which is not captured by GDP. The fact that consumption includes imports while GDP is net of imports makes comparing consumption with GDP inappropriate. In this context, therefore, it is more appropriate to use a measure of income that combines GDP with income (or roughly the gross national disposable income (GNDI), which appears in the Economic Survey for the years since 2000/01).

5.       Even after deducting foreign grants (for the same reason as above) from GNDI, calculated by Central Bureau of Statistics, total national consumption would hover around 74 percent (in 2009/10) of this measure of national income, a far cry from the 90.6 percent figure when one uses GDP as a measure of national income.

6.       From the above, it emerges that the argument that low savings is a constraint on investment misses the main problem. The main problem has got to do less with low savings than with failure to utilize the savings (whether generated from GDP or income/transfer from abroad). Note that GNS (including grant) has been greater than GCF for most of the last nine years. If we also take into account other external financial flows (like FDI, albeit very limited, foreign aid in the form of loan, aid channelled through I/NGOs), the resource surplus would be higher still. Moreover, if we consider only gross fixed capital formation (GFCF), which stood at 21.3 percent of GDP in 2009/10 as investment proper—ignoring the residual "change in stock", the other component of GCF—then there is further potential to increase investment, given the resources.  The change in stock component of GCF is residually derived and hence may not reflect change in inventory/stock only; as a balancing item, it may be capturing other components of GDP, such as consumption.

7.       One has to consider the nature/composition of GFCF, data for which, however, is not readily available.  A huge of amount of credit from banking and financial institutions has gone into construction of buildings. Such investments do not necessarily increase the economy's productive capacity and income-generating potential. 

8.       When savings exceed investment, the current account balance in the balance-of-payments (BoP) is positive – this is ensured by the standard macroeconomic accounting identity. When that was the case in previous years, the capital and financial accounts also showed surpluses, which, combined with the current account surplus, resulted in a BoP surplus, or an increase in reserves.  In 2008/09, the BoP surplus was Rs 44.8 billion.

9.       What is happening to the surplus?

a.       There may be capital flight. However, that would be directly or indirectly reflected in one or more components of the BoP (e.g., through overvaluation of imports/artificial growth in imports; undervaluation of export earnings; withdrawal of money from ATMs in India from Nepali bank accounts) and would eliminate the surplus. Or there may be an accounting problem, with official BoP statistics not reflecting the true magnitude, composition and direction of flows.

b.      The BoP surplus is parked in safe but low yielding assets abroad by the central bank and commercial banks – surplus which can be utilized for productive investment in Nepal itself.

c.       In Nepal, change in foreign assets of the monetary authority, the central bank, predominantly determines the reserve money and hence the money supply, and foreign exchange accounts for most of the foreign assets of the monetary authority (97 percent in July 2010). The central bank holds most of the foreign exchange reserves (77 percent in mid-July 2010) of the banking system. Thus, a large part of BoP surplus goes into increase in money supply, a substantial portion of which is likely to be circulating in the economy in a sterile fashion, without creating value (e.g., facilitating transactions in already existing property/assets, like land and shares). If it were utilized for domestic production, then that would show up in a higher GDP, as consumption or investment or exports.

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[1] Unless otherwise stated, in this analysis, data are from Nepal Rastra Bank's annual macroeconomic data available at its website (www.nrb.org.np). NRB sources national accounts data from Central Bureau of Statistics. Data used here may be slightly different from CBS' revised data.