FDI: Policy Shortcomings in Nepal!!!

According to FITTA, 1992, "Foreign Investment" means following investment made by a foreign investor in any industry:

a)      Investment in share (Equity), 
b)      Reinvestment of the earnings derived from the clause (a) above, 
c)      Investment made in the form of loan or loan facilities.

There are other ways too how foreign investors may show their participation in the Nepalese market, one of the best discussable options would be “Technology Transfer” agreement between a local industry and a foreign investor. Now, there are few sectors where the law of the land does not entertain the foreign investment like cottage industries, services (hair-cutting, beauty parlor, etc.), arms and ammunition industries, gunpowder and explosives industries, real estate business (excluding construction industries), etc. There are few benefits too which the government has looked upon with an intention to lure the foreign investors.  Some of the major ones I would like to point out are:

1. No intervention by the government in the price determination of the products
2. Direct access to commercial banks of the country to open Letter of Credit (LC) for the import of required machineries and raw materials- the tussle of recommendation letter from Nepal Rastra Bank or the concerned ministry was avoided.
3. Apropos decision-making: Decisions with regards to industrial license, registration and duty drawbacks are now to be made within 30, 21 and 60 days from the date of application, respectively.
4. Act is crystal clear about the facilities and incentives to different categories of industries and escalates the transparency.
5. Returns of profits, dividend, technical and managerial fees, and certain portion of salaries of foreign experts have been guaranteed. The corporate income tax for manufacturing units is fixed at 20% and is one of the lowest in the region.

Besides these, few major institutional arrangements are made to support the foreign investment in the country:

1. Membership of Nepal in international entities like World Intellectual Property Organization (WIPO) and the Multilateral Investment Guarantee Agency (MIGA)
2. Bilateral Investment Treaties with France, Germany, Mauritius and United Kingdom
3. Double Taxation Treaties with India, Pakistan, Sri Lanka, China, Thailand, South Korea, Mauritius, Norway and Austria
4. Membership of WTO, SAFTA and BIMSTEC
5. Membership of International Centre for the Settlement of Investment Disputes (ICSID)

A very bright future of Nepal would be expected if the above measures are to be observed. But what is the real scenario?

Source: World Bank

This is the reality. Forget the world; Nepal has not been able to attract a significant percentage of FDI inflow in the SAARC region also. We talk about our natural beauty, about various investment potentialities of the country but the real scenario is pathetic. It may be very surprising to encounter that it is only once when the FDI inflow in Nepal is 1.10% of the total FDI inflow in the region and this is the highest inflow so far and this was in the year 1990. It is much frustrating to know that during the years 1992 to 1995, this percentage was as low as 0.00%. Is this what was anticipated by the FDI policy?  Of course, not. When the above mentioned facilitations and the measures are studied, nobody of us would actually expect this drastic result. 

The story does not end here. Let us see how our neighboring countries are performing in the FDI inflow scenario:

Source: World Bank 

There are few noticeable things in the above chart which we have to look into. Other countries except India and Pakistan have not shown any remarkable movement in graph. But, India and Pakistan show some specific things in this chart. Liberalization policy in India was adopted in 1991 and look at the boom in the FDI inflow in the country. And up to 1991, where Pakistan was topping the FDI inflow chart, the FDI slumped down after that. This is the real impact that a FDI inflow has to show in an economy. Taking about the latest data of 2011, Bhutan is with the least FDI inflow percentage in the SAARC region which 0.05%, Afghanistan and Bangladesh have been able to attract 0.23% of the total inflow, Nepal being able to attract mere 0.26% of the total inflow, Maldives inviting 0.79% of the total inflow, Sri Lanka and Pakistan have been successful enough for 2.68% and 3.66% of the total inflow respectively and India remains way ahead of all these bringing a massive 90.10% of the total inflow in the region.

Everything in Nepal gets comparable to the same in India, though things have turned much incomparable now due to its economic size and trends. But I would not like to be an odd-man out not comparing my views for Nepal to those of India. When Nepal and India adopted economic liberalization almost during same period of time, what did India do and not Nepal that so much of FDI flows to India and not naturally beautiful Nepal? India started Agriculture development campaign long back with its slogan “Ek Jawan Ek Kisan”. India had long back understood the importance of agriculture for their economy and started working for it, though it took absolutely a long time to come to this level, they achieved it and we are yet in the verge of failure programs like Agriculture Perspective Plan, yet to see how Agriculture Development Strategy works. 

Actually, economic theories also support the fact that society takes long to uplift from the traditional, agro-dominated society to a society following the secondary and tertiary occupations. Most of the economic theories, from classical to post-modernization, support the verdict. Public enterprises are much strong there compared to Nepal and the law of land promotes the private enterprises too which is justified by the rank of India in the Doing Business scenario of the country. Nepalese public enterprises suffer rampantly with the corruption and there is nothing disrespectful left in the country than the law of land. Private enterprises always have to be in the terror of strikes and so called party donations. Government plans in Nepal pretend of promoting the PPP (Public Private Partnerships) but the reality is that there is a wide crevasse of mistrust and cooperation and lack of confidence among the public and private sectors. Most of us are familiar about the campaign “Invest India”, it is really luring name for the investors. This name of the campaign has played a significant role in bringing the FDI to the country. In Nepal, it took a long time even formulating the entity to promote investment. Nevertheless, we do have Nepal Investment Board now with a responsibility to bring in FDI in various identified and permissible sectors of the country.  Innovations count a lot to bring in FDI. Most of us would be familiar how Narendra Singh Modi in Gujarat called up an open conference of investors from all around the globe and then the treaties were signed instantly. That needs to be the spirit of the government to bring in FDIs and to bring in development. Look at Ranchi, it has developed tourist places and bungy sites in the places where there used to be coal mines earlier. This is the innovative source of income generation. Nepal is lucky enough to have many such destinations and sports innovations in businesses are increasing in here too.

 

In case of Nepal, India is the country with highest number of investors due to obvious reasons and ease of Nepalese market access to them. Japan and China follow her. And USA, the largest economy in the world happens to be the fourth. Why are we not being able to attract investments from high income economies- the prime reason is insufficient legal framework by the Nepalese government and lack of transparency. Why do we feel proud only taking name of Ncell? This sometimes leads to a conclusion that we are content with whatever we have and we do not have any intention of bringing further investments. Again, talking about India, we have instance of how they brought into foreign companies to collaborate with their local industries and now their local industries are more than capable to produce goods of international standards. Honda came in collaboration with Hero, Kawasaki came in collaboration with Bajaj and so on. Furthermore, transaction costs have to be further brought down to make the Nepalese economy competitive. Getting permission from NRB to undertake external borrowing every time makes the work of foreign investors more hectic. I understand least developed economies have to take these measures to protect their economy from financial colonialism but then, a ceiling could be a better alternative to it. UNCTAD reports in 2010 showed that FDI flow in India grew by thirteen-fold between 2003/04 and 2009/10 and speculated that India will be the second most attractive investment location for 2010-2012.

In Nepal, policy for foreign investment was developed long back in 1980s when Investment and Industrial Enactment Act was formulated in 1987 and then further revised to Foreign Investment and Technology Transfer Act in 1992. We have lots of potential for the economic development shown by government documents, still we are way back. I have discussed only few of the issues; there are many more, why is our government not interested to facilitate the foreign investment scenario- a question to be explored… 

Note: This article was also published in the New Business Age (Corporate Monthly Magazine)