The gross domestic product (GDP) of Nepal indicates total domestic production of goods and services produced in a fiscal year that usually starts from July 15. Our national aim- the only objective of the periodic plan- is to increase GDP to alleviate high and rising poverty. Unfortunately, it has remained more or less stagnant since the past several years while our neighbors have attained what is popularly known as double digit growth. The question naturally arises is simple: what wrong have we committed- ignore domestic politics for the moment- that led to shatter our hopes to see Nepal's speedy growth in GDP almost at par with neighbors. We don't have to go far. A brief look of Nepal's basic data and that of India and China as well will clear the issue why we have remained poor, and how long we will continue to remain in such a position except few urbanites that have benefited even from the non development of the country.
Let us take the case of India for simplicity as well as for economic reasons; about 65 percent of Nepal's foreign trade is confined with India. The GDP in real terms between 2004-07 has increased, on average, at an annual rate of 8.9 percent, and per capita income, that is, increase in income allowing for population growth, is increased by 7.4 percent. Nepal's experience is at the other extreme. The GDP in the same period increased at an annual rate of 3.0 percent and per capita income by 0.8 percent. We do not have to go far to find the reasons for divergence in economic performances between Nepal and India. A simple comparative study of macro economic indicators of the two countries will help to clear the issue, though in few cases it may need in depth study and even time series study. True, there will be no controversy on one issue, that is, too much government regulations and control will not help the economy to move as is too much domestic political problems in the name of political ideologies that few leaders are faithful.
Whatever limited growth in GDP Nepal has been attained (2.5 percent in 2007 according to the World Bank), it is largely due to private consumption, probably supported by receipts from remittances, while in India more than 55 percent of growth is due to investment which total one third of gross domestic product. In Nepal too, the fixed investment absorbs almost 25 percent of GDP but its contribution to growth of income in few years is even negative! The reasons for such outcome have yet to be studied, but there are several factors that can be easily guessed. The most important reason for such outcome is high corruption that is now politically encouraged and socially acceptable. Notwithstanding our so called political commitment, the structure of economy has remained virtually unchanged since the past several years, and whatever development activities the country has initiated is confined to few urban centers, mainly Kathmandu, the capital city. There is a wide and growing disparity in income and also in the availability of opportunities. As expected, a significant part of GDP- 95 percent in 2006 and 2007- is accounted by private consumption. This is to be expected in view of the high and rising poverty. In India, on the other hand, private consumption accounts for slightly higher than 50 percent of GDP while investment totals about 37 percent of GDP.
The size of the Nepalese economy is less than one percent of the Indian economy- 0.7 percent to be precise. As far as the increase in government consumption is concerned, in India it is increasing at a rate less than the growth in national income. But in Nepal, it is rising almost at a rate double the growth rate of the economy. For example, in 2007 government consumption increased by 4.9 percent compared with a growth rate in private consumption by 2.3 percent and GDP by 2.5 percent. As a result, in several years the fixed investment has exhibited negative growth with expected adverse impact on the growth rate of the economy in the following years. Recently, the government has managed to run its regular expenditure by borrowing from the private household and business. This has led many to conclude that the most important bottleneck in the development of the country is the government itself. It is, however, run on the assumption that it can implement development activities in time and according to planned schedule and in the most efficient pattern. In reality, the government development expenditure is financed entirely from the external sources, mainly grants and loan from the government and other multilateral sources.
In the field of balance of payments, Nepal's performances are relatively satisfactory again due to high poverty that has led to increasing migration of the young people to other countries. The receipts from remittances have not only financed Nepal's rising imports, it has also enabled it to maintain artificial exchange rate. This has helped to turn away foreign investors. The reason is obvious: No rational investors will invest in a country that is expected to devalue its currency in the not too distant future.
There is thus cancer growing in the economy, it is growing daily and it is growing at a compound rate. There is an urgent need to correct existing situation honestly for which much can be learnt from the experiences of neighbors.
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