DISSERTATION

ON

ANALYSIS OF INDIA’S FDI FOR NEPAL

 INTRODUCTION
• The historical, cultural and geographical ties between Nepal and India are time
immemorial.
• After the induction of democracy in Nepal in 1951 India was a premier donor country
that played an important role in mobilizing aid to Nepal.
• Nepal is rich in biodiversity, while India has tremendous potential for investment
outside the country attributing to its own huge market of more than one billion
populations.
• Although overall economic status of Nepal is far below India, there are vast areas of
economic cooperation that must be identified particularly in the field of investment in
joint ventures and transfer of technology ensuring benefits to both countries what is
known as “Win-Win” effect.
• India's cooperation to Nepal is essential in a greater scale in future not only to
sustain its development activities but also for poverty alleviation. India's cooperation
in comparison to overseas assistance especially in the field of investment in joint
ventures will have significant bearing on Nepal's economic development.
 OBJECTIVE

 Review the recent trends in investment policy in Nepal.

 Examine the factors that affect the FDI to Nepal.
 Analyze the structure of Foreign Direct Investment (FDI) with
reference to India’s joint ventures in Nepal.
 Examine the effects of FDI from India on revenue, employment,
trade and industrialization of Nepal.
 Assess the nature of transfer of technology from India to Nepal.
 Explore new areas of joint ventures that would be beneficial to
both Nepal and India.
 
 METHODOLOGY

•A combination of descriptive and explorative research design

has been employed in course of this study.

•Based on the secondary data, the study has made an attempt to

derive a view with regard to the established objectives of this
study.

•The data that has been presented in this study has been picked
from various research journals and internet and thereby
accuracy of the same is undeniable.
 BRIEF INTRODUCTION ABOUT NEPAL
• Nepal is a landlocked country with area of 147,181 [Link]. The country is bordered
by China in the north and by India in the south, west and east.
• The population of Nepal, as of 2001 census, is 23.2 million, 29.5 million (July 2008
est.), the average annual growth rate being 2.7 percent.
• It has never been under foreign domination.
• The election held in April 2008 abolished the monarchy and declared the country a
republic.
• Nepal enjoys cordial relations with all countries of the world. This is manifested by
her diplomatic relations with 128 countries, maintained through twenty-six
residential embassies, three consulates and numerous consulates abroad.
• Nepal is the member of SAARC,SAFTA,SAGQ and BIMSTEC. Nepal acceded to the
World trade organization (WTO) in 2004. Nepal has been member of the UN and its
specialized agencies since 1955, ADB since 1966 and the world bank and IMF.
CONTINUE….
• The economy, moreover, is the manifestation of an acute disguised
unemployment and subsistence farming with limited prospect for
mechanization where foreign aid has continued to play a critical role over
the years in sustaining the economy.
• Agriculture is the mainstay of the economy, providing a livelihood for
three-fourths of the population and accounting for 38% of GDP.
• Nepal has considerable scope for exploiting its potential in hydropower
and tourism, areas of recent foreign investment interest.
• The GDP growth rate was confined to2.7%percent with GDP of $29.29
billion.
• As per the international poverty line 38 percent have received less than
US$ 1 per day in Nepal, while approximately 82 percent people obtained
less than US$ 2 per day .
 INDIA-NEPAL RELATION
• Economic relationship between Nepal and India is unique. There are historical,
geographical cultural, linguistic, ethnic, social and family links between people
living in India and Nepal. Institutions relating to government and the economic
activities are also more or less similar.
• India is extending economic and technical support to Nepal for almost four
decades since 1951. India was the most important donor to Nepal in the early
decades after the independence of India.
• Areas of economic relation were mainly confined to the basic infrastructure which
covers; airports, irrigation, agriculture, supply of drinking water, roads, bridges,
power projects, heath, industrial estates, communication, surveys, education,
forestry, building construction, ex-servicemen welfare etc.
• From the assistance of an average of IRs. 150 million in the mid-1980s, it has
reached to IRs. 750 million in 1999/2000. So far over 120 agreements and letters
of exchange have been concluded for Indian aided projects in Nepal totaling over
IRs. 4000 million.
 STATUS OF FDI IN NEPAL
• Data for FDI reflect that 1218 foreign investment projects are registered in Nepal
comprising all categories of industries, worth a total of investment equal to Rs. 96.7
billion. The total fixed capital is estimated to be Rs. 80.1 billion, while the total foreign
direct investment (FDI) marked Rs. 32.1 billion as of July 2007/08.
• The size of FDI was Rs. 466.8 million in 1988/89, which increased to Rs. 2.5 billion in
2007/08. The contribution of FDI was as high as Rs. 3.1 billion in 2000/01, which went
down to Rs. 1.2 billion in 2001/02 and marginally increased to Rs. 2.5 billion in 2007/08.
• FDI is likely to provide employment to 1,12,889 people. Indian joint ventures account for
more than 27 percent of the total projects. The joint ventures of US, Japan, China,
Germany and South Korea are also prominent in the structure of FDI. Dept. of Industry,
Nepal 2007-08
• Licensing and regulations have been simplified and 100 percent foreign ownership is
allowed.
• Foreign Investment and Technology Transfer Act 1996 (amendment) abolished the minimal
capital investment requirement and eliminated a significant barrier to foreign investment.
 FOREIGN INVESTMENT POLICY AND REGULATIONS

The Foreign Investment and Technology Transfer Act, 1992 lays down the law governing foreign
investment and the applicable rules and regulations.
It was amended in 1996 to make the environment of industrial investment more transparent and
to simplify the administrative procedures.
Foreign investment in Nepal is welcome in three forms:
1. Investment in share (equity).
2. Reinvestment of earnings derived from foreign investment.
3. Investment made in the form of loan or loan facilities.
Facilities and incentives
Income tax exemption
Income tax deduction
Concessional rate of custom duty
Excise duty rebate and refund
Duty draw-back
Opening of foreign exchange account
Treatment and protection of foreign investors
National treatment
Non-discrimination
Expropriation
Funds’ transfer
Dispute Settlement
 STRUCTURE AND ANALYIS OF FDI FROM INDIA

Percentage share of Indian JVs in Nepal

Total India % China % Japan % [Link] % USA % UK % Others %

Operating 401 118 29.43 30 7.50 44 10.97 20 4.98 51 12.72 15 3.7 123 30.6
4 7

Under construction 186 32 17.20 31 16.67 12 6.45 18 9.67 21 11.29 13 6.9 59 31.7
9 2

Licensed 124 39 31.45 11 8.90 16 12.90 6 4.83 9 7.25 7 5.6 36 29.0

5 3

Approved 619 164 26.50 101 16.32 55 8.88 49 7.92 42 6.78 31 5.0 177 28.6
0 0

Total 1330 353 26.54 173 13.00 127 9.54 93 6.99 123 9.24 66 4.9 395 29.7
6 0
 Share of Indian JVs and Authorized Capital in Nepal under Different Categories

Categories Total no. Total authorised No. Of Authorized capital(India)([Link]) India’s India’s share in
Of JVs capital([Link]) India’s share in total authorized
JVs total JVs capital

Operating 401 39836.57 118 13468.21 29.43 33.80

Under construction 186 11728.69 32 2247.58 17.20 19.16

Licensed 124 10388.09 39 2787.77 31.45 26.84

Approved 619 23303.03 164 11741.11 26.50 50.38

Total 1330 85256.38 353 30244.67 26.54 35.47

 Indian JVs in Nepal under Different Categories and Sectors
Category/sectors Operating Under Construction Approved Licensed Total

Agro based 1 3 0 1 5

Construction 0 0 10 0 10

Energy based 0 1 2 0 3

Manufacturing 89 12 96 23 220

Mineral 1 0 1 1 3

Service 17 10 42 9 78

Tourism 10 6 13 5 34

Total 118 32 164 39 353

 Contribution of Indian JVs in the term of share of Employment generation in Nepal

Total India China Japan S. Korea USA UK Others

Total no. Of 1330 353 173 127 93 123 66 395

JVs

Total No. Of 1,18,287 47,302 11,320 6,308 4,044 10,844 6,422 32,047
employment

% of share in 100% 40% 9.57% 5.33% 3.42% 9.17% 5.43% 27.08%

employment
 FACTORS INFLUENCING FDI TO NEPAL
• The method used in report was regression analysis.
• Dependent variable: - FDI
• Independent variables: - GDP, Average Exchange rate (Rs/$), Exports
• Least square method regression equation
• FDI = Constant +A1 [GDP (1990-2008)] + A2 [Average Exchange rate
(1990-2008)] + A3 [Exports (1990-2008)]
Regression results
Variables Coefficent t-value Prob. R-square Adj. R-square Result
C 1000.156 2.4891 0.024 0.204036 0.157215
GDP 0.001908 2.0875 0.052 significant
C -334.8384 -0.4349 0.669 0.311266 0.270752
Avg.
Exch.
Rate 34.0154 2.7718 0.013 significant
C 967.2408 2.5888 0.019 0.248847 0.204662
Exports 0.02166 2.3732 0.03 significant
C -440.6093 -0.3387 0.74 0.313203 0.175844
GDP 0.000593 0.2052 0.84 insignificant
Avg.
Exch.
Rate 36.05511 1.1594 0.264 insignificant
Exports -0.006976 -0.1706 0.867 insignificant
 CONCLUSION AND RECOMMENDATION
• Because of the importance of FDI in employment creation, technology transfer, export
promotion and overall economic growth of a country, Nepal tried to create investment friendly
environment to encourage FDI, particularly after the political change in 1990. As a result, over
one thousand foreign investment projects have been registered in Nepal covering all such
sectors as hydro power, mineral exploration, construction, agro based, chemicals, tourist hotels
and restaurants and other specialized services.
• In terms of approved amount of FDI, India is Nepal’s largest source of FDI. Thus, Nepal should
develop forward-looking approach to attract FDI from all over the world and more pertinently
from India.
• Nepal and India both have liberalized foreign investment policies that would help promote FDI
to Nepal.
• However, foreign investment policies in Nepal are relatively inward looking that requires to
adjusting with small and cottage industries and industries of national importance. Review is
imperative in some areas where FDI is barred.
• Most of the JVs has incurred have been facing hard times due to unfavorable economic and
political circumstances. Highest priority has been accorded to water resources for joint
investment followed by tourism, herbs development and processing, and exploitation of natural
gas and minerals.
Contd…
• Strong emphasis has been given to large-scale industries for promoting joint investment. It is
suggested that basic infrastructure must be improved to attract FDI in Nepal.
• The low labor costs and liberal trade and economic policy resulting in lower tariff rate
structure are mainly responsible for attracting Indian investment in Nepal.
• Yet, there has been a growing Indian concern not only about the health of the Indian
investment in Nepal but also about the investment climate in the country. Today, the Indian
investors in general feel quite insecure to make an investment in Nepal as the business
environment in the country has been badly shattered due to the frequent bandhs, prevailing
culture of strikes, labour disputes, forced donations, poor law and order situation and above
all the continuing political instability in the country.
• The Nepal government should resolve political misunderstanding and improve economic
relations between Nepal and India and ensure peace, security and political stability in the
country to expedite FDI in Nepal.
THANK YOU