Outcomes Of Nepal PM Bhattarai’s India Visit – Analysis

By Hari Bansh Jha

One of the major achievements of the visit of Nepalese Prime Minister Baburam Bhattarai to India is the signing of two agreements – one on $250 million Line of Credit for Nepal and the other on long awaited Bilateral Investment Promotion and Protection Agreement (BIPAA). Many people in Nepal take this development as success of the country’s economic diplomacy. PM Bhattarai himself termed this development as historic and a major step towards removing distrust in the bilateral relations between Nepal and India.

As it is well known, the loan is highly concessional as Nepal would have to repay it to the Indian government in 20 years. The rate of interest on this loan is as low as 1.75 per cent per year. In fact, it was during the visit of Nepal’s President Ram Baran Yadav to India in February 2010 that India had agreed to provide this facility to Nepal, but the deal was not materialized as formal signing of the agreement had not been done.

The credit facility as made available to Nepal will be largely used for the maintenance and upgradation of nearly half a dozen of transmission lines, including that of Duhabi-Kataiya transmission line in the Koshi Power Corridor and Bhairawa-Nautanwa transmission line. This will enable the private power developers to enter into power purchase agreement with Nepal Electricity Authority and thereby make further investment in hydropower sector. Certain portion of this credit might also be used for the development of infrastructural facilities such as the the highways, airports, bridges, irrigation, railways and hydropower projects.

With regard to BIPPA, it has made it obligatory to both Nepal and India to create conducive environment for the protection and growth of investments. Now investments from one country to the other would receive Most Favoured Nation Treatment (MFN) as well as national treatment and they would enjoy the same facilities as made available to domestic investors in either countries. There would be free repatriation of funds on the investment made. Besides, there would be no nationalization of such investments except in special circumstances in public interest and even in such a situation the investors would be liable to receive fair and equitable compensation. The mechanism for dispute resolution has also been developed. Besides, the agreement binds each of the country to pay compensation to the investors if in one or the other way they happen to incur loss on account of war, armed conflict and due to the declaration of national emergency in the respective countries. As per the provision made, the agreement will remain in force for a period of 10 years with provision of automatic extension unless one party gives to the other written notice in advance for its termination.

It was due to the lack of such agreement as BIPPA that the Indian investors were shy in making new investment in Nepal for last couple of years, though their share in Nepal’s total foreign investment is 45 per cent. Many of the Indian investment projects were unnecessarily harassed on one or the other excuse. This led to a situation in which some of the investors even closed their industries in Nepal; while the others were in the process folding their operations. All such Indian joint ventures in Nepal as the United Telecom Limited (UTL), Dabur Nepal, Surya Nepal and the GMR group working in 900 MW Upper Karnali hydropower project and Upper Marshyangdi have been the victims.

Now the provisions related to compensation as laid down in BIPPA will create pressure among the forces that unnecessarily obstructed the working of the joint venture units. Undue interference by such elements say in GMR projects working in Upper Karnali and Upper Marshyangdi was against the larger interests of the nation. Delay in the execution of such power projects would affect the growth in all such sectors as industries, agriculture, trade and service.

Another significant aspect of the visit was the understanding developed between Nepal and India to sign agreement on Avoidance of Double Taxation Agreement in near future. Once this agreement is signed, the investors in either country will be allowed to repatriate income back home without paying any additional taxes, if they paid taxes in the host country.

Significantly, Nepal and India directed the Inter-Governmental Committee (IGD) of commerce secretaries to address all trade and transit issues related to trade imbalance, waiver of 4 per cent additional customs duty, fixation of additional one-time lock by the Indian customs between Kolkata/Haldia Port and Nepal, and the use of Visakhapatnam port to facilitate Nepal’s trade with third countries. The two sides also directed the concerned officials to review Rail Services Agreement to facilitate furhter movement of wagons to/from Birgunj ICD in Nepal.

Also significant was the agreement between Nepal and India to check the corss-border crime, facilitate the speedy execution of construction of roads, rail and Integrated Check Posts along the border areas of Nepal and India.

In addition, India exhibited positive gesture towards Nepal’s demand for importing 200 MW of power from India. The Nepalese side reciprocated and made commitment to address the issue of fake Indian currency, which is one of the major concerns of India in Nepal.

The Nepalese Prime Minister Baburam Bhattarai termed the BIPPA as a historic accord and a landmark achievement in Nepal-India relations. He expected that this development would help Nepal to reap dividends from the prosperity across the borders in India, which is in the larger benefit of Nepalese business circle and the people at large.

Nepali Congress leader Ram Sharan Mahat was positive about BIPPA as he said that this was in tune with pro-investment industrial economic policy of Nepali Congress. Nepal’s Industry Minister Anil Kumar Jha commented that the BIPPA was important for its role in generating employment opportunities in the country.

However, some quarters of UCPN (Maoists) and CPN (UML) criticised BIPPA on the ground that it risked Nepal of paying compensation to India in case the joint ventures would not be able to work due to conflict, war or other such reasons. It should not be forgotten that what is binding for Nepal is also a binding for India. Even the Indian government will be responsible for paying such kind of compensation to the Nepalese ventures in India in similar situation.

Without guarantee of risks, it is not possible to attract foreign investment in high cost infrastructural development and create employment opportunities within the country. In fact the arrangement made under BIPPA for promoting investment projects are not something new. It is a world-wide practice to have some such kind of arrangement if the recipient country wants to attract foreign direct investment. Even Nepal has signed such kid of agreement with six other countries of the world, including the United Kingdom, Germany, France, the Netherland, Mauritius and Finland.[1] India has signed such agreements with 70 countries of the world, including with China. So much so that as being the member of the World Bank’s initiated Multilateral Investment Guarantee Agreement (MIGA), Nepal is obliged to make coverage against political risks in the same way as it is agreed in BIPPA.[2]

Now it could be expected that the new line of credit arrangement and the BIPPA would help generate investment opportunities in potential sectors in Nepal such as in hydropower, fast-tract road, railways, tourism, education, health, herbs and other infrastructural projects during the “Investment Year 2012-13. Such arrangements might create a new milestone in economic relations between the two countries and thereby help the country to come out of the perennial poverty trap and political instability. But to reap the benefits from such historic deal Nepal has added responsibility to resolve problems related to industrial security, power crisis, labour militancy and above all ensuring improvement in governance structure at all levels.

(The writer is Executive Director of Centre for Economic and Technical Studies in Nepal)

[1] http://nepalnews.com/archive/2011/oct/oct23/news07.php

[2] Guna Raj Luitel and Ram Kumar Kamat, “PM defends BIPPA” in The Himalayan Times, October 23, 2011.