India-Nepal Relation Extends Beyond Political Ties

By – Mandil Munankarmi

Inflation is one of the major macroeconomic indicators of the economy. Inflation is the rise in price of goods and services that are consumed in the economy. Post pandemic, the inflation has increased to 8.56% in the 11 months of the fiscal year 2021/22 from 3.6% in the fiscal year 2020/21 (Nepal Rastra Bank, 2021/22). The rising inflation in the economy severely impacts the working class or the families with lower income to the middle-income families, as the prices of the daily consumption goods and services increases, their savings decreases lowering their quality of life.

In a paper published by the Nepal Rastra Bank (NRB), one percentage change in consumer price index (CPI) in India results in 0.43 percentage change in inflation in Nepal. The Indian Rupee (INR) and the Nepalese Rupee (NPR) are pegged in the ratio (1:1.6). Therefore, foreign currency exchange rates vary according to the fluctuations in the value of the INR. For example, if the INR depreciates in value against the USD, the NPR automatically depreciates, and so it is for other currencies. 

 Because Nepal imports most of its goods from India i.e., 60 percent of the total import share of Nepal, any changes or fluctuation in the price of goods, commodities, or services directly impacts the price of such products or goods in Nepal which further fluctuates the inflation. The major imports from India are petroleum products, rice & paddy, vehicles & spare parts, and medicines. Slight changes in the price of these products in India, changes the price in Nepal as well. Likewise, these are the commodities which are consumed on a regular basis and therefore, can not completely ban the imports because, ban on the imports would directly impact the domestic market and cause the price of goods to increase sharply due to supply constraints which would again exacerbate the situation.

Increasing agricultural production and transformation of the energy usage in the country is a must in order to decrease the import bills of the nation. The petroleum products and the agricultural products such as; grains, vegetables, fruits, exerts largest share in the total imports of Nepal. In order to contain the inflation rate within, the agricultural production should be increased which requires likewise policy level changes. While granting subsidies, concessional loans, might seem like an ideal way to encourage the farmers, and increase agricultural production, the prior policies have failed to do so. Alternatives to such policies should be explored such as leasing out lands to the farmers in contracts, government ensuring the purchase of their production, exemptions in tax and other regulatory costs for production of fertilizers by the private sectors and reformations in the subsidy schemes, accommodating foreign investments in Nepalese agriculture sector might help to increase investments and participation in the agriculture sector, ultimately increasing the agricultural output. Since, vehicles exerts a large chunk of share in the total imports of the country, and promoting them via levying taxes, and providing subsidies, can as well deplete the foreign currency reserves. Therefore, a long term plan to eliminate the use of petroleum vehicles, gas for industrial as well as household purposes, should be set along the way rather than making policies to immediately do so.  Likewise, improving infrastructure such as connectivity to transport the goods or the products produced from one place to another is a must, since many parts of the country have poor access to the roads and highways which prevents the production of such places reaching out throughout the country.