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Indian Demonetization As A Geopolitical Conundrum: Demonetize The Indo-Nepal Relations? – Analysis

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It would not be an exaggeration in saying that the Indian demonetization has become a geopolitical conundrum. The crescendo of cordiality seems missing in the Indo-Nepal relations, if the cursory look may be given over the dynamics of recently happening of events in quick succession. The demonetization 2016 had created a lot of chaos and confusion in Nepal along with the positive and negative vibes.

Although, the Indian currency is not a legal tender in Nepal for the financial transactions, but the same is widely circulated and accepted in Nepal in general and Terai region, in particular, i.e., one-fifth of the state’s total monetary transactions.

Due to demonetization, about INR 950 crore was entrapped in Nepal. Out of frustration due to non- exchange of the demonetized Indian currency, Nepal has banned and declared illegal the Indian currency notes Rs. 200, Rs. 500 and Rs. 2000. The demonetization and banning by India and Nepal respectively have the connotation of geopolitical dynamics.

Indian Demonetization: Devil for Nepal

The Government of India (GOI) had announced the demonetization on 8 November 2016. The GOI had claimed the main objectives of the demonetization were to curb the black money; corruption; drug trafficking; human trafficking; circulation of counterfeit currency; integration of the formal and informal economies; the expansion and increasing of tax base and taxpayers; digitalize the economy; check the free flow of funds to the terrorists and radical groups etc. Although it was started with good objectives,it had left drastic impacts. Due to the scarcity of cash, the people had faced difficulties in depositing or exchanging the demonetized banknotes. It had also left indelible imprints on the various facets of the Indian economy including the small-scale industries. Some scholars and industrialists opined that the demonetization has helped in curbing the black money and accelerated the e-commerce. But on the other hand, the same also faced severe criticism on part of many scholars like Amartya Sen, Kaushik Basu, Prabhat Patnaik and Pronab Sen (Former Chief Statistician of India).

Due to the wider acceptability and circulation of Indian currency, Nepal has also been impacted very seriously by the Indian demonetization. India is the largest trading partner and the largest foreign direct investor in Nepal.

The Indian companies are the major investors and holding about 40% of the total FDI in Nepal. The tourism industry has an important place in the Nepalese economy given its contribution of 6-7% to GDP. Million Indian tourists used to visit Nepal every year and about 1.36 million had visited Nepal in 2017. Remittance is the backbone of the Nepalese economy (28.4 % of the GDP in 2017), and the same from India has been contributing significantly. A considerable number of Nepalese have been working in the Indian Army and paramilitary forces. Additionally, there are about 90,000 pensioners, and a considerable number of widows to be taken care of by India. Also, substantial numbers of Nepalese have been residing and working in India. In this background, the Indian currency is an important binding factor for both countries.

Suddenly declared demonetization, had put the Nepalese economy into turmoil, given the wider acceptability and circulation of Indian currency. Remittances coming from India got a serious setback. The people of Terai region used to use more Indian currency than other Nepalese for day to day needs, trade and another kind of transactions in India.

As per the report of The Himalayan (Feb 19, 2017), about 95 % of transactions along the Indo-Nepal border, used to take place in the Indian currency. Reuter has quoted the BMI Research that India’s demonetization had dragged down the growth rate of the Nepalese economy by seriously getting affected the trade, remittances and tourist numbers etc.

The Nepalese $21 bn economy has already been under stress due to earthquake (2015). Now, the Nepalese economy has faced a double whammy. BMI has forecasted that India’s demonetization could bring down Nepal’s growth down to 2.2 percent for this fiscal year to July 2017, from an earlier estimate of 2.5 percent.

Demonetizing the Bilateral Relations

The Indian currency has been remained an important place in Nepal’s economy, as the considerable number of people and workers are residing and working in the former. A number of people have been working in the Indian army, paramilitary forces etc. It means that demonetization one way or the other way had impacted the various facets of Nepalese people. Thus, there was a lot of pressure on the Nepalese government to take care of the money entrapped in the NRB and with the common Nepalese people.

Nepal economy is of the only size of US$ 21 bn and the trapped money is considered as a big amount for Nepal economy. It had become a serious political issue. During the last two years, the issue of demonetization and exchange of Indian currency entrapped in Nepal has been lingering on.

Bhattrai (April 10, 2018) has argued in one of his commentaries that Indian demonetization has become one of the serious bilateral irritants between India and Nepal. Nepali leaders and officials time and again urged the Indian government and officials of RBI to make arrangements for the exchange of Indian demonetized bank notes held by the Nepalese people.

In a meeting (March 2017) with the Nepal Rashtra Bank, the RBI had verbally agreed to allow every Nepal citizens to exchange up to the ceiling of INR 4,500. In this respect, NRB Deputy Governor (Chinta Mani Shivakoti) has expressed dissatisfaction and said, “But nothing has been communicated to us formally so far.” Indian Finance Minister Arun Jaitley’s visit to Nepal (March 2017), had assured the NRB and leadership of the country that very shortly RBI would make arrangements to sort out this problem.

During the state visit of Nepalese PM KP Oli, the issue did not find any place in the bilateral talks. Although, before his visit to India, PM Oli assured the Nepalese Parliament that the issue would be taken up with India counterpart, but it did not figure in the joint statement.

It was furthered cleared by Indian Foreign Secretary Vijaya Gokhale (8 April 2018) that, “This issue was not raised at any of the meetings.” During the reciprocal visit of PM Modi to Nepal, again the same issue was raised.

PM Oli said, “I requested Modi Ji to facilitate the exchange of demonetized currency notes held in the Nepali banking system and by the general public, at the earliest.” After waiting for a long period of two years, ultimately, the Nepalese government have not only banned the denomination like of Rs. 2,000, Rs. 500 and Rs. 200, rather directed its people not to keep or carry notes except Rs. 100.

The issue of exchange of currency, demonetized bilateral relations have become serious question for the policymakers and commentators. For eliciting answers of this question, a cursory look required to watch out the recent dynamics happened in the quick succession.

Being landlocked, Nepal is dependent on India but now wanted to be free from the same. It can be substantiated by some arguments like, Nepal’s strong support to Chinese OBOR initiative, China One Policy, diplomatic assurance like not to allow Tibetan to use its soil for anti-China activities, expanding strategic cooperation (Sagarmatha Friendship- Joint Military Exercise) and withdrawal from BIMSTEC Joint Military Exercise held in India etc.

Parashar (11 September 2018) argued that Nepal was not pleased with the Indian move to heighten the security and defence cooperation within the BIMSTEC, rather raised a question on the Indian stance over the BIMSTEC. The 19th SAARC has emerged as another irritant between both the countries.

While being interviewed PM KP Oli during his visit to India (April 2018) by the Time of India during , he said, “Everyone also knows that the SAARC Summit that was supposed to be held in Pakistan in 2016 has been postponed. Nepal, as the current Chair of SAARC, desires to see that we are able to revive the process. However, we are fully aware that this cannot happen unless every SAARC member desires so unanimously.”

The visit of Chairman Pushpa Kamal Dahal (The Ruling Communist Party of Nepal) to India and meeting with high ranking officials and fretting of India over the delaying in appointing ambassador since October 2017, have become post-demonetization bilateral irritants. The happening of these events in quick succession had resulted in mistrusts and distrusts between both the countries. The lingering impacts of the Indian demonization 2016 have further created a wide rift between both the countries. This argument is substantiated by the recent banning of high-value Indian currency notes by Nepal in December 2018.

Lingering of Exchange of Currency: Geopolitical Conundrum

During the last two years, the issue of exchange of currency has been lingering on. India’s slow and snail speed reciprocation had compelled the Nepalese Foreign Minister Prakash Mahat to state that “even before [the demonetization crisis], there were a lot of things which were not delivered […] but there was a special episode which put to test both sides [sic].”

As per the DNA report (15 December 2018), the decision of banning the Indian currency by the Nepalese Cabinet had taken place as the consequence of Indian government’s dilly-dallying over the request to exchange the old defunct currency notes worth Rs 950 crores. Nepal has also requested to increase the ceiling of Rs 4,500 per person to Rs 25,000 per person. Even this request is still pending. The fallout of the same has been experienced by the Nepalese economy, bilateral trade, the people working in India and moreover, tourism has been impacted seriously.

Resultantly, the Indo-bilateral relations passing through the thick and thins. During the last, one year, Nepalese mission in Indian is without an ambassadorial appointment, however, the same was made in December 2018. The tension between Indo-Nepal relations can be understood by the statement given the newly appointed Nepalese Ambassador Nilambar Acharya to India, who said, “although there is an open border between Nepal and India, the hearts of the two countries are yet to be opened. There is a need to create an environment of confidence as some kind of suspicion still persists in bilateral relations.”

Some media reports indicated that out of frustration caused by demonetization, pushed Nepal to China for economic and security cooperation. Leudi (January 29, 2017) has argued that India’s failure to address the concerns and apprehensions out of demonetization, had pushed Nepal to China for economic and security purposes. The economic uncertainties and upheavals given the demonetization had resulted in an erosion of confidence in the Indian currency on both sides of the border. If the crunch of currency persists in Nepal, it would be an opportunity for China to shift it away from India to use Chinese currency yuan in place of the Indian currency. If it happens, what would be the implications, needs serious rumination on part of Indian policymakers. How to keep the confidence not only of the Nepalese businessmen, traders, merchants, tourists, migrants, Nepalese workers in India rather the Nepalese citizens who keep their savings in cash in Indian currency at home, has become a serious question for the Indian government?

Although, the demonetization was done with good intentions, but the results have remained other way around. The economies, people and the bilateral relations have been put under strains. The ban imposed by Nepal seems that the neighbouring country has been losing faith in the Indian currency. Moreover, it has shoved Nepal to China. If the situation not improved and the reciprocation on part of Indian government remained in dilly-dallying mode, it is anticipated that the Chinese currency can replace the Indian currency in Nepal, which further cement the Sino-Nepal relations. Reviving confidence in Indian currency and solution of the exchange of currency may be taken care of by India in order to maintain cordial and friendly relations.

*Dr. Jaspal Kaur (AP), has been teaching Sociology in  the Regional Campus Jallundhar, Guru Nanak Dev University, Punjab (India)  and Dr. Bawa Singh (AP), has been teaching in the Department of South and Central Asian Studies, School of Global Relation, Central University of Punjab (India)

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