Nepali Times
Economic Sense
Misplaced concern


New Delhi: This week has been a rollercoaster ride for Indian stock markets. The Sensex that is used as the benchmark to understand the Indian market plummeted below 16,000 but recovered as soon as the US announced its interest rate cut. The Indian market has become truly globalised, meaning economic conditions and decisions made in the United States or Europe sway the fortunes of the Indian markets. While some investors are crying foul over the way the bourse has been managed, the reality of the market has finally emerged.

Eyes that were glued to the television analysis of the international markets perhaps ignored the shutdown in Nepal on Tuesday and Wednesday. We have now found that it's the streets that determine the economy, not financial fundamentals! While street leaders have found it easy to protest each fuel price rise, they have yet to help find a solution to the pricing of a product that Nepal does not produce but must import at prices determined by international factors.

The rate cut by the Federal Reserve in the US is in anticipation of a recession. This would definitely affect liquidity in global markets, and impact on stock markets across the world. This was clear from the way Asian markets reacted this week to US economy data and the Fed rate cut. The Indian media took advantage of the visit by British Prime Minister Gordon Brown to state that India is now the second biggest investor in the UK, and the UK is the fourth biggest in India.

For Nepal, perhaps it does not matter much as we have opted out of integrating with the global economy. We are happy to bet our money on whether elections will take place or not and if they will, whether they will be in April 2008 or some other time. While self-styled intellectuals do talk about a liquidity crisis and capital flight in the Nepali context, this Beed can't see any relevance. It's like a barefoot shopper choosing between Gucci and Bally. A country that relies on remittances for nearly a quarter of its GDP cannot be facing such a crunch. If there has been capital flight, then money that came in through informal channels went out through informal channels.

The volume of land transfer deeds that are being executed at the Land Revenue offices clearly shows there is money here. With a stock exchange that has transaction volumes on the wrong side of the decimal point, we cannot talk about a liquidity crisis. It is like a 100-house property developer calling his project a satellite city!

The more urgent issue here is one of borrowing. With commercial activities stagnating thanks to security and labour problems, falling tax revenue and increasing losses on fuel products are widening the fiscal gap.

India is planning its own price rise on fuel products in the next couple of weeks. The Communist partners in the current government are posturing to oppose it, perhaps learning from Nepal. If the hike goes ahead, it will be another nail in the Nepali fiscal coffin.

(11 JAN 2013 - 17 JAN 2013)