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FDI into Nepal thins as India pulls back investments amid Covid in 2020-21

Nepal's PM Sher Bahadur Deuba

At a time when Nepal is battling several economic challenges, foreign direct investment into the country dropped significantly in 2020-21 as India pulled back investments amid the Covid 19 pandemic and the heightened political tension between the two neighbours under former Prime Minister KP Sharma Oli.

However, things have started to turn around. Indian investors are once again looking at Nepal though neighbouring China has increased its investments significantly through its ambitious Belt and Road Initiative (BRI).

Though China topped the list of countries which invested the most in Nepal, overall FDI kitty has thinned. That apart, now with apprehensions that China could lower its investments in the coming months as Beijing tightened the norms of lending for its banks and local governments, Nepal’s dependence on India is set to rise.

As of May 2021, the debt level of the local governments in China stood at $4.16 trillion, the Diplomat noted.

As one of the key challenges for Nepal Prime Minister Sher Bahadur Deuba is to revive the sagging economy, the Kathmandu administration will balance its engagements with India as well as China.

The Diplomat pointed out that “one of the major issues with local government debt is that local governments have been taking on new debt in order to repay old debt, rather than investing in new infrastructure projects.”

Also read: New roads, transport corridors could boost India-Nepal ties

“India’s investments are huge in Nepal, especially in the hydropower sector. Though China has also started increasing its investments in Nepal, New Delhi must recharter its Kathmandu policy. It needs to continue to invest so that both countries benefit,” an Indian expatriate in Nepal, engaged with a power company told India Narrative.

Recently, Nepal and India’s hydro power major Satluj Jal Vidyut Nigam (SJVN) signed a massive $ 1.3 billion deal with the aim to develop a 679-megawatt hydropower project in the eastern part of the Himalayan nation.

This is the second project awarded to SJVN in Nepal, the first one being the 900 MW Arun 3 Hydro Electric Project in Sankhuwasabha District.

A statement released by the Press Information Bureau said that India is looking to create a common pool for regional power grid and energy market in the neighbouring countries for regional peace and improvement of optimum utilisation of generation assets.

India and Nepal also signed the Power Trade Agreement in 2014 that helped in the trade of electric power just like other marketable commodities.

Also read: Modi-Deuba agree to deepen ties, jointly fight Covid 19

According to a study by the Observer Research Foundation (ORF), more than 150 Indian ventures have been operating in Nepal, accounting for over 30 per cent of the country’s total FDI. The study noted that Indian firms have been working in all such areas as manufacturing, banking, insurance, education, telecom, power, tourism and various other sectors. Most of the Indian companies have set up joint ventures with local Nepalese firms.

Though FDI inflow into Nepal has been increasing over the years, it remains lower than other South Asian countries. “The new administration will have to look into areas that would resolve this issue,” an analyst said.