Nepal's finance ministry has started studying the positive and negative effects on its economy of India's interim budget that granted huge subsidies to the agriculture sector and slashed taxes on exports.
India is Nepal's largest trade partner with two-thirds of its trade dependent on India and any changes in India's exchange rate, inflation, growth and other major economic and trade policies directly impact Nepal's economy.
Nepal's Finance Secretary Shanta Raj Subedi has asked some senior finance ministry officials to study the possible impact of the Indian budget and find a way to address them in his country's budget for the next fiscal.
Presenting the interim budget Feb 17 ahead of the general elections scheduled later this year, Indian Finance Minister P. Chidambaram allocated huge subsidies to the agriculture sector, slashed taxes on export items and reduced excise duty on small cars and motorcycles.
"The Finance secretary has asked some senior joint secretaries to study the implications - both negative and positive - of the Indian budget. A team of joint secretaries is assessing and evaluating the possible impact of the Indian budget on Nepal's economy," finance ministry spokesperson Ram Sharan Pudasaini told IANS.
If the impact is positive, then "we will conduct further study on tapping the opportunities, but if it is negative, then we should come up with counter-measures", he said.
The panel will look into new measures taken by India on revenue, tax policies, exports, taxes imposed on domestic Indian products and its impact on Nepal's economy, inflation and growth rate and will make concrete suggestions before preparing Nepal's budget.
Finance ministry officials are particularly concerned about the possible surge in imports from the southern neighbour and risks to the domestic agriculture sector due to the huge subsidies given to the Indian agriculture sector.
They are also worried about the possible capital flight in the name of buying policies of Indian insurance companies as the Indian budget has talked about expanding the insurance sector.
According to Subedi, the huge subsidies given to the agriculture sector will make Indian agricultural products competitive compared to local products.
"It could also increase exports of Indian agricultural products to Nepal," he said. "Due to Nepal's trade dependence with India, these measures could affect our economy."
The Indian interim budget has earmarked Rs.2.5 trillion for subsidies on food, fertiliser and fuel for fiscal 2014-15. It has allocated Rs.1.15 trillion for food subsidy, Rs.679.71 billion for fertiliser subsidy and Rs.634.27 billion for fuel.
India has reduced excise duty on sports utility vehicles (SUVs) from 30 percent to 24 percent, while that on large and mid-segment cars has been slashed from 27-24 percent to 24-20 percent. Excise duty on small cars, motorcycles and commercial vehicles were reduced to eight percent from 12 percent.
"Our main concern is whether the measures taken in the Indian budget would affect our agriculture and trade," said Pudasaini.
Nepal's trade deficit with India has reached Nepali Rs.190.95 billion, of the country's overall trade deficit of Nepali Rs.288.76 billion, according to the Nepal Rastra Bank.
"The Indian policy may boost imports from India, while it may discourage Nepal's exports," said Subedi.
"The expansion of insurance companies may lead to capital flights as people from bordering areas may be attracted to Indian insurers."
(Anil Giri can be contacted at girianil@gmail.com)
