Nepal: Ensuring Rapid Rate Of Terai’s Economic Growth – Analysis

By Hari Bansh Jha

During the planning period beginning from 1956, investment by the government for the economic growth of the peripheral Terai region remained quite inadequate. Perhaps, this is one of the important factors responsible for the present economic crisis in the country in which extreme poverty and low per capita income (US $ 340) is the order of the day.

In India, on the other hand, more investment was made for the development of peripheral coastal cities like Kolkata, Mumbai and Madras at the initial stage of development. Once those coastal cities were developed, the planners switched over to comparatively less developed places for investment in the mainland of the country.

The Chinese model of development, though different from India, is one regarding the issue of developing the peripheral or coastal areas. China gave major thrust to the development of Special Economic Zones, Coastal Cities and Coastal Economic Zones with a view to attracting foreign investment between 1978 and 1984. As a result, Special Economic Zones were developed in Shenzhen, Shantou, Zhuhai, Xiamen and Fujian. Many of those areas were also developed as free trade zones where development indicators had a tendency to double in each two to three years period. China made economic growth at a rapid rate and is daring to compete the world under the WTO arrangement due to the development opportunities that it created in those peripheral coastal areas.

Poverty in the Terai

Prosperity is limited to a very few people in the Terai. Many people live in miseries and poverty and they are not even in a position to scratch out a living. Because of poverty, each year the people in the region are forced to leave their homeland in search of food and work. Statistics show that 45 per cent of the Terai districts, including Saptari, Siraha, Dhanusha, Mahottari, Sarlahi, Rautahat, Parsa, Bardiya and Kailali were in worst position in 1997 in terms of poverty and deprivation. Those nine districts in the Terai were among the 25 districts identified as worst districts at the national level as indicated by International Centre for Integrated Mountain Development (ICIMOD).

The Terai districts, thus, identified in the worst category were at par with the remote mountain and hill districts like Achham, Kalikot, Dailekh, Mugu, Bajhang, Humla, Jumla, Jajarkot, Baitadi and Rolpa. Moreover, the conditions of some of the remote districts like Nuwakot, Darchula, Pyuthan, Dolpa and Myagadi (which were in the intermediate category) and Parbat, Lamjung, Sankhuwasabha and Mustang (ranked in the best category) were in a better position than the nine worst districts of the Terai.

However, as shown in the following table some of the Terai districts such as Saptari, Siraha, Dhanusha, Parsa, Bardiya and Kailali which were classified in the worst or least developed districts in 1997 were promoted to the category of intermediate rank. Similarly, some such districts as Rupandehi, Banke and Dang which until 1997 were in the category of intermediate districts were promoted to the rank of most developed districts in 2003. Yet, there were still some districts in the Terai such as Mahottari, Sarlahi and Rautahat which fell in the category of the least developed districts of the country such as Humla, Mugu, Dolpa, Rasuwa, Rukum and Rolpa, to name a few.

Table 1:  Terai Districts on Poverty and Deprivation Ranking (2003)

Source: International Centre for Integrated Mountain Development: Districts of Nepal:  Indicators of Development, Kathmandu: Update 2003.

Failed Development

Many of the problems related to the underdevelopment of the Terai are due to the asymmetrical relations existing between Kathmandu and the Terai. Kathmandu being in the centre and Terai in the periphery, the former enjoys far better facilities than the latter both qualitatively and quantitatively in various infrastructural sectors like education, health, transportation, communication, electrification and several other public works.

Kathmandu is the centre of power and wealth because the ruling class takes the advantage of the location of central state apparatus and the government controls the entire distribution and allocation of national resources. Such type of relations have accentuated and reinforced the inequalities between the centre and the periphery causing exploitation of the Terai on the one hand and the neglect of its concerns in a number of areas on the other.

Moreover, the lack of adequate budgetary allocation on development activities also affected the development prospects in the Terai. This led to the creation of unemployment in the region, which proved to be an igniting factor for the present conflict. In the Terai, a vicious circle operates in which underdevelopment leads to unemployment. Unemployment leads to conflict. And in turn, conflict aggravates the prospect of development.

Internal Rate of Return (IRR)

The failure of development opportunities in the Terai region was largely due to the ignorance of the fundamental economic principle of Internal Rate of Return (IRR), what is sometimes also referred to as Economic Rate of Return (ERR). Generally, the higher level of IRR is more desirable to undertake a project. Except in the exceptional cases, it is on the basis of this principle of IRR that investment is made in a project. But in Nepal, the principle of IRR seems to have been grossly violated as it is evident from the following projects in the Terai.

Road Projects

The IRR in most of the road projects is much higher in the Terai as compared to other regions of Nepal. For example, in the hill the IRR was found to be 7.2 per cent in the Ilam-Fidim road and 3.3 per cent in the Taplejung road. In the Terai, the IRR was as high as 17.2 per cent in the Biratnagar-Rangeli-Dainia road, 23.5 per cent in the Urlabari-Bardanga road and 25.3 per cent in the Damak-Gaurigunj road.[2]

ADB Road Projects

Table 2 shows that the IRR of the hill-based roads was lower than one-third of the Terai-based road projects. The IRR of the Terai-based road projects on an average was 24 per cent; which was only 7 per cent in the hill. Among the major Terai-based roads, the IRR was maximum (40 per cent) in the case of Birtamod-Bhadrapur road and minimum (12 per cent) in the Chauharwa-Siraha road. On the other hand, the IRR was maximum (17 per cent) in the Maikhola-Ilam road and zero in Dadeldhura-Patan road in the hill.

Table 2:           IRR in ADB Road Projects

Source: 1.       Asian Development Bank: Project Completion Report on the Second Road            Improvement  Project in Nepal, January 1998.

2.        Asian Development Bank: Third Road Improvement Project (Project Completion Report), 2002.

WB Road Projects

The following table shows that the World Bank in Nepal constructed all the roads in the hill with the only exception of 14-km long Lumbini-Taulihawa road. Of the World Bank supported, upgraded, newly constructed and rehabilitated road projects of 612.6 km, the share of the Lumbini-Taulihawa road was 2 per cent only. In terms of total expenditure of Rs. 2,924.2 million on the World Bank road projects, the share of the Lumbini-Taulihawa road was Rs. 30 million, which was merely 1 per cent of the total expenditure.

Table 3:           Expenditure in World Bank Supported Road Project

Source: GoN/Ministry of Works & Transport/Department of Roads, Borrower

              Project Implementation Plan: Road Maintenance and Development

              Project, Kathmandu, December 1999.

RAP Road Projects

Under the HELVETAS-supported Rural Access Project (RAP), altogether six districts including Doti, Dailekh, Achham, Khotang, Bhojpur and Sankhuwasabha had been covered. RAP was implemented as a joint programme with the Rural Community Infrastructure Works Programme, collaboration between GTZ’s Integrated Food Security Programme and the UN’s World Food Programme. Under this programme, feeder roads had been constructed, apart from launching activities for poverty alleviation. However, no road as such was constructed under this programme in the Terai.

Irrigation Projects

The IRR of New Surface Projects in the Terai varied between 9 and 25 per cent; which, however, was between 8 and 21 per cent in the hill region (Table 4). In the major Rehabilitation Surface Projects, the IRR varied between 11 and 30 per cent in the Terai; whereas it varied between 18 and 23 per cent in the hill. In the Minor Rehabilitation Surface Projects, the IRR varied between 15 and 31 per cent in the Terai against 14 and 19 per cent in the hill.

Table 4:           IRR in Selected Irrigation Projects

Source: WECS: Summary of Irrigation Sub-sector Report National Water Plan June 2003

Electrification Projects

Table 5 presents that the average transmission line cost (Wolf 66 kV s/c and d/c and also Wolf 132 kV s/c and d/c) per km is higher in the hill (84 kUS$) than in the Terai (76 kUS$) by 11 per cent. It means that the total costs including all materials, construction works, design, land acquisition and engineering are less in the Terai, which provides better opportunities for its expansion in this region.

Table 5:           Transmission Line Costs (kUS$/km   excluding of taxes and duties)

Source: Master Plan, 1998

Costs of Components in Electrification

Table 6 shows that the total average costs of major components in electrification were lower by 11 per cent in the Terai (US $5,508) as compared to the same in the hill (US $6,105). This was due to the fact that the transportation and installation prices were more expensive in the hill on account of the difficult terrain.

Table 6:   Total Costs of Major Components (in US $)

Source: ADB TA 2911-NEP – Final Report

Rural Electrification

It is evident from Table 7 that the average capital cost per customer was US $ 120 in the Terai; which was as high as US $ 245 in the hill i.e. an increase of 104 per cent.

Table 7:           Costs of Rural Electrification Component

Source: ADB TA 2911-NEP – Final Report

Linkages with the Border States in India

Interestingly, out of India’s 1.17 billion population (2009), nearly 361 million (2001) people live in Nepal’s bordering states in India. Figures have it that Nepal’s bordering Indian state of Uttarakhand had population of 8.48 million; whereas that of Uttar Pradesh was 190 million, Bihar – 82 million, Bengal – 80 million and Sikkim – 0.54 million. This clearly demonstrates that India in general and the bordering states of India in particular might be a potential market for the Nepalese exportable items. The presence of the huge 361 million customers in the bordering states provides immense prospects for exports from Nepal including the Terai region if the goods could be produced to meet the taste, preferences and purchasing power of these people.

Export Processing Zones

FTA with common external tariff with India is possible only if the Export Processing Zones (EPZs) are established and strengthened, particularly in the Terai region of Nepal. The Terai region has comparative advantage over other regions of Nepal in developing EPZs mainly due to proximity factor in trade with the bordering states.

EPZs are industrial estates which form enclaves within the national customs territory. Usually, they are situated near the international port or airport with the objectives of increasing foreign exchange earnings, generating employment opportunities, upgrading the skills of local manpower, transmitting new technology to the host countries and developing backward regions of the country. Besides, they are also meant for creating linkages to stimulate the inflows of local raw materials, semi-finished goods or packing materials and to promote the growth of ancillary industries.

In the EPZs, infrastructural facilities like road, water and land are developed in which there is a potentiality of joint venture (JV) investment. Uninterrupted power supply along with telephone/fax service is guaranteed to the JV. In case of any such problem, adequate facilities are made for in-house power generation. Also, incentive is given to the labor class so that they might learn skills needed by the JV units. Labor laws are enacted in such a way that the increase in facilities is directly linked to productivity.

Substantial tax incentives are granted to investment in EPZs. In addition to the duty free imports and other privileges, there is complete tax holiday for five years for the industries established in EPZs. All hard currency earned from exports is totally made tax-free. Certain percentage of the goods manufactured in the EPZs is allowed to be sold in the domestic market. No excise duty is levied on such items. Customs duties on imported components are 50 per cent of the normal rates. Companies, which sell in the domestic market as well as international markets, are allowed to deduct export earnings from their tax liabilities.

The prospects for the growth of EPZs are high in the Terai region also due to the existence of necessary infrastructures in the form of Inland Container Depot (ICD) in Birgunj, Biratnagar and Bhairahawa. ICDs would facilitate the industries in the EPZs to produce and export goods. Of the three ICDs, the one at Birgunj is most important to Nepal’s economy for 80 per cent of the country’s trade is carried through this route.

India set up a broad-gauge rail link for the 5.3 km. stretch between Sirsiya (Birgunj, Nepal) and Raxaul (India), which substantially reduced time in the transportation of goods, transport costs, pilferage, demurrage and problems at Kolkata port. A number of facilities have been made available to facilitate the import and export of goods through those dry ports. There are no such dry port facilities even in the bordering Indian states of Bihar or Uttar Pradesh. Export is facilitated to business enterprises in India and to third countries through such dry port, where containers called multimodals have multiple modes of transport ranging from surface, sea and air.

Donors/INGOs Support

Foreign aid and assistance has played a crucial role in economic development of the Terai. Aside from India, the United Sates was the first few countries that started giving aid to the Terai region of Nepal through USAID (originally known as the U.S. Operations Mission or USOM) in 1950s. Rapti Valley Development was USAID’s major project in 1950s, which focused on equitable land distribution, local participation in self-help projects, improved farming methods, malaria eradication, improved health services, road and market development, and formation of cooperative societies for agricultural inputs and marketing. USAID also extended support through technical advisors and funding for a cadastral survey covering 20 Terai districts.

Later on, countries like the USSR, United Kingdom, Germany, Denmark and the multilateral agencies like the World Bank, the ADB, the UN agencies and the INGOs like Save the Children Japan, Save the Children US, Save the Children Norway, ACTION AID/Nepal, CARE Nepal, DFID and Plan Nepal also made their presence felt in the Terai by launching different kinds of programmes.

Yet, among all kinds of aid and assistance made available to the Terai region by different bilateral/multilateral agencies and the INGOs, the Indian cooperation proved unique. It is unique both in terms of volume of amount and its proper utilization for the execution of different projects. While the activities of other agencies are confined to certain pockets, Indian cooperation widely covers one part of the Terai to the other and there is consistency in the approach.

Though India itself is a developing country like Nepal, its contribution to the development of peripheral Terai, particularly in areas related to the development of infrastructural facilities and human resource development is overwhelmingly important. Indian co-operation to the Terai is solely guided by the motive of making the region self-reliant, prosperous, vibrant and modern in such sectors as roads, airports, railways, communications, education, health, industry, urbanization and cultural promotion. India has been making consistent economic assistance strategies for the development of this region considering the very high IRR in almost all important sectors – be it related to infrastructural development like the roads, railways, irrigation, airways or the development of agriculture, industry, trade and service sectors.

Since 2003, the Terai region like that of hill or mountain regions equally benefitted from the Small Development Projects (SDPs) of the Government of India (GOI) for its focus on social and physical infrastructures in education, health and community development sectors. Projects under SDPs are undertaken at the request of the local government, communities and organizations. Transparency is one of the important features of these projects. Any amount allotted to the project is directly spent by the executing agency – usually the DDC or a local GON body – based on the recommendation of the oversight committee, which is composed of grassroots level local community leaders and members of the beneficiary groups. The committee ensures effective implementation of the project; while GOI’s role is confined to disbursement of grant assistance based on physical monitoring of the projects.

Some of the large and intermediate-size projects implemented under the India-Nepal Economic Cooperation Programme at the present time include B.P. Koirala Institute of Health Sciences, Dharan, Manmohan Memorial Polytechnic, Biratnagar, Nepal Bharat Maitri Bakhtawari Hari Eye Hospital, Krishnanagar, etc.

INGOs

Until the political change in 1990, there were only 253 NGOs registered with Social Welfare Council (SWC); of which quite a few worked in the Terai. But in less than two decades thousands of NGOs have been registered with SWC, leaving aside many more that have been registered with the District Administration Office in various districts.

The number of INGOs working in Nepal has exceeded 200. Many of them prefer to work in the hill and mountain regions. But there are also INGOs that have been working in the Terai. However, not much information is available about the exact number of INGOs working in this region.

As the Table 8 shows, the maximum 32 INGOs have been working in each of Bardiya and Banke districts and the least in Rautahat district (16). In other districts, such as Kailali 30 INGOs have been working followed by those in Morang (30), Chitwan (28) and Kanchanpur (27). On an average, 24 INGOs have been working in each district of the Terai. These are the organizations known for their interest in working in diverse fields such as in agriculture, forestry, environment, health, education, women/gender, children, saving/credit/micro-finance, conflict and peace, poverty, livelihood, human rights, water and sanitation and small enterprises.

Table 8:           INGOs Working in the Terai

Source: Association of International NGOs in Nepal (2008). Membership Report 2008.

However, the impact of the INGOs working in the Terai appears to be dismal. Despite the presence of so many INGOs in the region, poverty is rampant. Improvement in agricultural, industrial, trade, service, environment and other sectors is not distinct. Sometimes, it appears that many of the INGOs are complicating the development process rather than supporting them. So much so that the contribution of these INGOs in conflict mediation also appears to be questionable.

There are a few factors for which the INGOs in general have not been able to make due delivery for peace and development efforts in the Terai region. Many of the INGOs obviously appear to have made their presence felt in different Terai districts, but their coverage is partial as their activities are confined to just a few pockets or VDCs.

Most of the INGOs do not have technical manpower with expertise in areas in which they are expected to make delivery. They often come to this region not on the basis of competence, but on other grounds. This is also due to the fact that there is no proper mechanism or coordinating body in Nepal to check the quality or delivery of the expatriates coming through the INGOs in this country.

Another noteworthy reason for the lack of delivery on the part of the INGOs is that they are hardly made accountable for the development of any particular issue/sector such as poverty, road, irrigation or communication at the regional or district level in the Terai. So in some limited pockets they introduce one programme and in the other they do other activities.

Also, there are INGOs which are believed to be involved in activities that they hardly advocate. Often, they advocate one thing but do the other. There is a growing feeling among the Terai intellectuals that certain INGOs promote religious conversion in the region, when their mandate is to go for development activities. Even the government and so to say the SWC or other line ministries under which the INGOs mostly operate have no effective machinery to monitor the working of the INGOs. In the existing situation, the development expectations of the people in the Terai region from many of the INGOs have largely been belied and it will remain so till there is no structural change in their (INGO’s) modus operandi.

A Way Forward

Despite the development potentialities in the Terai, the common people of the region are poor. Lack of political will and asymmetrical relations between Kathmandu and the Terai are the most important hurdles for alleviating poverty in the region. The planners and policy makers largely forgot the potentiality of the development of peripheral Terai unlike the importance given to such region in India or in China. The failed development scenario is responsible for the present conflict in the region.

However, because of the geographical advantage of being plain land, high density of population and several economic activities, the chances of returns on investment in infrastructural projects in this region are very high. In this context, manufacturing and exports in the Terai targeting the border states of India might be very important. The EPZs to be established in the region would largely create congenial environment for JV investment or FDI in this region.

Moreover, time has come for the Nepalese government and other concerned bodies to effectively monitor the modus operandi of the INGOs and donors working in the Terai region. Policy has to be framed so that the donors and INGOs are made responsible for the development of certain specific sectors. The existing system of allowing them to have their presence felt in different districts despite working in a few pockets or VDCs needs to be reviewed. A serious study needs to be made for the policy purpose as to how the resources of the donor agencies and the INGOs need to be streamlined for addressing peace and development issues of the Terai region.

Dr. Jha is Professor of Economics and Executive Director of Centre for Economic and Technical Studies in Nepal. His paper is based on the work done in his book on “The Economy of Terai Region of Nepal: Prospects for its Sustainable Development”

[2] Hari Bansh Jha, “Terai awaits better treatment from government,” Kathmandu: The Himalayan Times, 20 August 2003.