How can South Asia become more integrated?

Development practitioners often paint two faces of South Asia. One South Asia is dynamic, growing, urbanizing and globalizing. The other South Asia is still predominantly agricultural, stiflingly landlocked and stagnating as a consequence of policy, institutional, and infrastructure constraints. Unfortunately, Nepal still falls into the latter category. But promising signs of change are on the horizon, mostly to do with openings at regional integration.

With 1800km in open shared borders and 27 trading points, India is by far Nepal’s largest trading partner, accounting for roughly two-thirds of Nepal’s merchandise trade. But landlocked Nepal must rely on its coastal neighbors to access export gateways to regional and global markets. The port of Kolkata in India serves as Nepal’s access to the sea and is a major transit point for Nepal’s third-country trade. Nonetheless, Nepal’s trade and investment outcomes remain alarmingly poor. Exports grew only 60% since 2007 while imports increased four-fold. Over three million Nepali migrants abroad – nearly 40% of who work in India – finance this trade imbalance through remittances. Foreign Direct Investment hasn’t fared any better. In 2014 Nepal received only $70 million in FDI – half of what Rwanda received that same year.

“The upside of this neighbourly collaboration for India is that it reinforces her own agenda on domestic inclusive growth and sustainable development in lagging areas heavily impacted by cross-border issues.”

It goes without saying, therefore, that cooperation and coordination with South Asia, and neighbouring India in particular, are central to reducing Nepal’s trade costs and improving competitiveness. Nepal’s 2010 Trade Integration Strategy seeks to promote inclusive growth by enhancing the competitiveness of Nepal’s exports and reducing the costs of trade. Complementing bilateral initiatives, the World Bank Group, too, is helping Nepal achieve these goals through infrastructure development, harmonisation and integration of policies and procedures, improvements in logistics, and synchronisation of operational practices. The upside of this neighbourly collaboration for India is that it reinforces her own agenda on domestic inclusive growth and sustainable development in lagging areas heavily impacted by cross-border issues. Moreover, with trade between India and China growing exponentially, Nepal could potentially even become an important land-link, provided that all three countries can together overcome the high cost of trans-Himalayan transit.

Regional energy trade perhaps represents the brightest hope for Nepal’s economic transformation in the medium run. Nepal could potentially produce commercial hydropower in excess of 40,000 MW to service domestic needs and feed into regional grids as and when these start taking shape. While Nepal’s domestic demand is projected at 4,500 MW by 2030, the first natural market for surplus hydro-power is India. A breakthrough was achieved last year with the signing of a Power Trade Agreement between Nepal and India and the subsequent signing of Project Development Agreements for the export-oriented Upper Karnali (900 MW) and Arun III (900 MW) hydropower projects. The Investment Board of Nepal is negotiating investments for an additional 1,350 MW of hydropower generation. Looking ahead, the World Bank Group is helping Nepal set up its regulatory and institutional arrangements for power trading and establishing high-voltage cross-border transmission lines to enable power flows both ways. The first 400 kV cross-border transmission line to India should be up and running before the end of the year.

“[W]ith trade between India and China growing exponentially, Nepal could potentially even become an important land-link, provided that all three countries can together overcome the high cost of trans-Himalayan transit.”

Two more bright spots are worth noting. India recently announced a line of credit for Nepal to help pursue its long-cherished vision of building a ‘Fast Track’ highway aimed at reducing travel time and transportation costs between the capital, Kathmandu, and the border crossing at Birgunj, which handles over half of Nepal’s exports and nearly a third of its imports. If built, heavy trucks could save at least $40 per one-way trip in fuel and maintenance costs and long hours in elaborate detours. Linking into the East-West Highway, the Fast Track would effectively move Kathmandu closer to the rest of Nepal, India, and the global economy.

Earlier this year Nepal and India also signed an agreement to lay a strategic oil pipeline between Raxaul in India and Amlekhgunj in Nepal – the first such regional infrastructure of its kind. Nepal imports about $1.1 billion worth of petroleum products every year, all from India. The pipeline will significantly reduce the use of road tankers, saving Nepal over $6.5 million a year. It will also help save the environment along the trunk route, lower labour costs, relieve congestion at the border crossing, and reduce pilferage and adulteration. In the first phase, the 41km pipeline is expected to be completed in about 30 months. In later phases, the pipeline will be extended all the way to Kathmandu, according to plans.

For early movers such as Nepal and India, the South Asia Economic Conclave in New Delhi this week presents an opportunity to showcase to the rest of the region how even the first baby steps towards greater integration are already leading to win-wins.

This blog was originally published on Huffington Post on 24 September 2015 

This article is published in collaboration with The World Bank. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Rajib Upadhya is the senior external affairs officer in the Nepal office of the World Bank.

Image: A Nepalese riot police officer patrols outside the parliament. REUTERS/Navesh Chitrakar.