One dominant theme in last week's riots in Kathmandu was that for the first time it was an organised and targeted attack on Indian interests in Nepal. It jolted Indian business, India-Nepal joint ventures, and Nepalis of Indian origin. Unless the government acts quickly to assuage this feeling of insecurity, memories of this unreasoned rage will drive away investors who are already here and frighten those who are considering investing in Nepal.

Even before the riots, pressure had been building on Nepal to amend the 1996 trade treaty. There has been a barrage of articles in the Indian media about how Nepal is being used as a conduit for everything from vanaspati (hydrogenated vegetable oil) to cheap Chinese consumer items to flood the Indian market. There are other outstanding issues for Indian investors:

? Security threats from Maoists.
? The government has not refunded millions it owes to large exporters, mainly Indian joint ventures for duty on raw and packing material imports.
? India says smuggling from Nepal is hurting its industries and so is re-export of goods repackaged by fly-by-night Nepal-based companies.
? Pesky Indian traders in fringe markets across the border are also mad because cheaper imports from Nepal and China is hurting sales.

Not only is our security machinery dysfunctional, politicians are now actively stoking populist anti-Indian feelings as we saw last week. This means industries are essentially left to fend for themselves against everything from labour disputes to Maoist threats. By now almost everyone, labour unions, students and the Maoists, have taken pot shots at industry, Indian joint ventures included. A protracted labour dispute forced Nepal Battery Company (a Union Carbide India venture) to pull out in November leaving over 80 workers jobless. Most businesses have been regularly making "contributions" to the Maoist cause. Some larger Indian joint ventures like Surya Tobacco, Nepal Lever and Colgate-Palmolive were vandalised last year in suspected Maoist attacks.

"Any investor would first think about security of the investment and safety of workers," Rabi Bhakta Shrestha, a vice-president at the Federation of Nepalese Chambers of Commerce and Industries (FNCCI), said in a radio interview this week.

When the first Indian companies came to invest in Nepal after 1996, the main attraction was the relatively lower wages and the lack of unrest here compared to the Indian states of Bihar, West Bengal and Uttar Pradesh. Other attractions were proximity to the market, cheap unskilled labour and duty-free exports to India. By now many companies have realised that proximity comes with hidden costs resulting from Nepal's landlockedness: the added expenses of raw material import, freight and back-freight of finished goods. Then there are security problems and the politicised unions. Even duty-free export is not as straightforward-as we've seen from the Kodak Nepal experience.

The Nepali attitude about "big brother" comes from a perception that we are overwhelmingly dependent on the southern neighbour for just about everything. But it is actually inter-dependence. Especially since 1996, and it's not just Nepal's exports to India that have swelled. Trade figures for the last five years show both Nepal and India have gained from business, and Nepal's trade deficit with India is actually narrowing. Since the signing of the trade treaty with India in 1996 Nepal's exports to India has grown six-fold from Rs 3.68 billion to 22.6 billion in 1999-2000. Imports from India have also grown from Rs 24.4 billion to 49.9 billion. There are plenty of opportunities to increase Nepali exports to India, but these plans will surely be delayed by last week's events.

Asks one frustrated FNCCI official: "How do you convince your Indian counterparts to do business here when we go about attacking them even for unsubstantiated rumours about what one Indian out of one billion may have said?" Aside from riots and Maoists, even official ineptitude discourages investors. The unnatural delays in duty drawback refunds have angered business. The law says the claims should be settled within 60 days, but some companies like Nepal Lever have been waiting for three years for the refunds. The government owes Lever Rs 163 million and Rs 170 million to another Indian investor, Dabur Nepal, in duty refunds. Says T.K. Gupta, director, Dabur Nepal: "We've already invested Rs 840 million here and sometimes we're forced to ask ourselves if we're doing the right thing by thinking about further expansion." Some companies-ball-pen maker Reynolds, bicycle manufacturer Atlas and Jain Tubes-are understood to have shelved plans to set up businesses in Nepal for one reason or the other.
Nepal's hope for industrialisation lies in its ability to attract foreign investors but the government has not been following up on early successes in wooing them. Now it is going to be doubly difficult. Says Prabhakar Rana of the Soaltee Group: "Potential investors ask us, would you yourself invest now, if you had the money? How do you answer a question like that?"

There are 164 Indian joint ventures in Nepal that account for nearly half of all exports to India, and employ about 40 percent of the industrial labour force. Larger companies like Nepal Lever even help to create new jobs and help prop up ancillaries. It has a network of 70 stockists and distributors to serve 15,000 retailers. Dabur Nepal has gone a step forward: it does not just sell finished products but also involves farmers in raw material production. It is growing herbs in different parts of the country: even getting farmers in Jumla to cultivate saffron. It also runs a modern nursery near Banepa to produce seedlings.
Then there's the issue of widespread re-export that supposedly takes place from Nepal. The Indians are particularly worried about copper wires, which they say is imported as sheets and exported duty free as wire. Nepal does not claim all is well, but says it has taken steps to ensure that is stopped. "There is smuggling but it is two way," says one FNCCI official. "The charges about dumping are totally unfounded. We're convinced smuggling helps no one and we're ready to co-operate with both governments to stop it."

The battle over copper wires, ball bearings, zinc oxide, and polythene bags may end soon, now that Nepal has agreed to enforce a last-digit change in the four-digit Harmonised Commodity Description and Coding system for Nepali goods to qualify for zero customs duty. (This is an international system that codifies the extent to which an industrial product has changed from an earlier stage. For instance, the harmonised code for cotton is 15.01, yarn made from it becomes 15.02 while the fabric woven out of it becomes 15.08.).

The issue of HS coding was raised by India last year while the row over the still unresolved issue of Kodak was raging. "The enforcement of a change in HS code will force companies to add value to their products, thus creating more jobs in Nepal," says one Commerce Ministry official.

That may help convince some New Delhi-based babus in charge of trade policy. But after last week, we may have made it more difficult for our officials to discuss the "surge" of some items that India has begun to talk about. However, the most difficult part may be pacifying companies who have put money into Nepal projects.