Drop in raw material imports points to industrial slowdown

THERE has been a massive decline in imports from India for which payment is made in US dollars. The drop points to a slowdown in industrial activity as US dollars are mostly used to pay for raw material imports. Nepal Rastra Bank (NRB) statistics show that such imports from India fell 34.58 percent to Rs 39.69 billion in the last fiscal year 2012-13. In the previous year, the country imported goods worth Rs 60.67 billion. The central bank has allowed payment to be made in US dollars for the import 401 products from India which it has classified as industrial raw materials. Payment for other imports has to made in Indian currency. NRB has implemented the system to permit Nepali industry to obtain raw materials at reduced rates from India as the Indian government provides incentives to exporters earning convertible foreign currency. Imports have dropped even though the central bank has enlarged the list of products that can be bought in US dollars. This is also the first time that imports against US dollar payment from India has come down in the last seven years since the peace process began. “We are surprised by the massive decline in imports from India bought with US dollars,” said Min Bahadur Shrestha, chief of the research department at the central bank. “We have not confirmed the reason with industrialists, but it may be the result of a worsening industrial environment in the country due to loadshedding, labour unrest and various other problems.” He added that reduced capacity utilization by manufacturers may be a reason why raw material imports have come down. According to the central bank’s study as of the first half of the last fiscal year, average capacity utilization by manufacturers based in eight major industrial cities was just 44.72 percent, down from 57.79 percent at the end of the previous fiscal year 2011-12. The eight major cities where the survey was conducted are Kathmandu, Biratnagar, Janakpur, Birgunj, Pokhara, Siddhartha Nagar, Nepalgunj and Dhangadhi. Economic Survey 2012-13 published by the Finance Ministry has estimated the industrial growth rate to be just 1.5 percent in the last fiscal year, a four-year low since its growth turned negative in fiscal 2008-09. Industrialists said that two factors seemed to be responsible for the decrease in raw material imports from India: One, the country’s worsening industrial environment and two, an increased tendency among industrialists to pay for imports in Indian rupees. Similarly, vice-president of the Federation of Nepalese Chambers of Commerce and Industry Pradeep Jung Pandey blamed the deteriorating industrial environment in the country for the decrease in imports. However, vice-president of the Confederation of Nepalese Industry Hari Bhakta Sharma said that besides the country’s industrial environment, a rising dollar and scrapping of the duty refund procedure (DRP) system had prompted manufacturers to import raw materials by making payment in Indian currency. “I have found many manufacturers switching to Indian rupees to pay for imports following the scrapping of the DRP system which reduced the advantage for making payment in US dollars,” said Sharma. The DRP system was scrapped in March 1, 2012. Before that, the Indian government did not charge excise duty on goods purchased by Nepali importers by paying for them in US dollars. Importers paying in IC had to pay excise duty which would be refunded later under the DRP system. Sharma said that many manufacturers also began paying for their raw material imports in Indian rupees due to fluctuations in the exchange rate of the US dollar in recent months.