Implication of India’s budget on Nepal’s economy

Editorial

The Parliament of India has endorsed the Union budget for the Fiscal Year (FY) 2020-21. The union budget, presented by the Finance Minister Nirmala Sitharaman on 1 February 2020, is her second budget since assuming her position in the union cabinet. The total budget size for the FY 2020-21 stood at INR 16.98 trillion (NPR 26.99 trillion).

The union budget highlights on reviving the overall economy by putting a central focus on agriculture, allied and rural development, infrastructure, job creation, skilled development and the financial sector. A major emphasis has laid on deepening the corporate bond market, micro-small-and-medium enterprises (MSME’s), and rural economy.

In the light of ongoing economic slowdown and social instability, this year’s budget also has underscored the importance of privatization and divestment to adhere to fiscal growth. A report by the International Monetary Fund (IMF) revealed that more fiscal initiatives are required to revive the current slowdown in the Indian economy as India’s growth forecast has been reduced to an all-time low of 4.8 percent in 11 years (FY 2009/10 to FY 2020/21). Thus, the new fiscal incentives and measures are expected to revive the sluggish Indian economy.The new budget unveiled a series of far-reaching reforms, aimed at energizing the Indian economy through a combination of short, medium, and long term measures.

However, the new budget also has certain drawbacks which might have direct implications in Nepal’s economy.India’s current budget is deemed to be expansionary with an aim to uplift the current struggling economy through fiscal stimulus. There is a risk that sluggish Indian economy could slow down Nepal’s economic growth which is heavily reliant in terms of trade and commerce with the southern neighbour. Any changes or reforms brought in by the Indian government for their domestic economy tends to have major implications in Nepal’s economy.

The announcement of India’s new Union Budget holds strong direct impacts on Nepal’s economic growth. The significant reduction in India’s aid commitment to Nepal is likely to cast an uncertain shadow on the Nepal-India’s bilateral relations, which in recent months has soured (due to various diplomatic and political issues). If Nepal is left with lesser and lesser amounts of financial aid (to be spent on necessary productive areas), there can also be instances of the economy opening up to other sources of financial funding. As foreign aid is one of the most significant sources of financial assistance for Nepal, the pattern of aid and its disbursements is a matter of serious concern, which can also heighten economic vulnerability if not properly looked into. Thus, this matter needs to be considered through various dialogues, schemes, policies and increased transparency, to push the economy towards prosperous economic growth, in the long-run.

On the other hand, stable inflation forecast in India could be a small relief for Nepal whilst subsidies by the Indian government on its agriculture sector could adversely impact Nepal’s farmers.

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