Lessons for Nepal

The death of India’s former Prime Minister Manmohan Singh nudges us to revisit his legacy in policymaking. As India’s technocrat Finance Minister in the PV Narasimha Rao government from 1991-1996, Singh is credited for liberalizing India’s economy at a time when it was nearing an economic crisis, caused by political actors governing the economy, and dismal foreign exchange reserves enough only to support imports for a few weeks. India was then suffering from low output and inefficient markets. 

However, Singh’s aggressive liberalization policies raised domestic productivity, making way for decades of economic expansion. Today, Nepal is also dealing with major institutional inefficiencies, and although not to the same magnitude, an underperforming economy. India’s liberalization story helps understand what holds Nepal back from realizing its economic potential, and as Singh said in his historic 1991 budget speech, from awakening, prevailing and overcoming.

India’s growth, despite being fueled by its geographic advantages, was held back by excessive regulations and centralized economic policies. Before 1991, trade in India remained strictly controlled by political actors that governed the economy. The License Raj, a protectionist system initially designed to nurture young industries, slowed economic activities through its stringent licensing requirements. While elite-backed businesses were able to obtain licenses easily, smaller industries at the core of the economy found it impossible to do so. Low domestic production and widespread inefficiencies largely suppressed economic activities. 

In 1991, India experienced a paradigm shift when the economic reforms brought by Singh reduced licensing requirements, eased trade, deregulated institutions. This increased productivity reformed the economy and political institutions, strengthened core industries and attracted FDI rapidly.

It is worth noting that while India opened up, Nepal also attempted to follow suit. In fact, Praveen Dixit, a member of the USAID’s economic liberalization project in Nepal, recounts in one of his works that Nepal had liberalized its currency before the Indian currency was fully liberalized. Due to unrestricted access to international trade, Nepal was on its way to align with the global economic order. By the end of the 90’s, public enterprises, banks and financial enterprises were privatized; tax reforms were introduced; industry registration was streamlined; and stock trading began. Judicial reforms enhanced the rule of law. 

Today, as India is set to become the world’s third largest economy, Nepal lags behind. This raises an important question—although India and Nepal underwent significant liberalization at the same time, why has Nepal’s liberalization story diverged so significantly?

Nepal’s political instability caused by frequent changes in governments has disrupted long-term planning and policy continuity. Between 1990 and 2024, there have been 32 government changes, a transition from monarchy to a federal democratic republic and institutional frameworks have been overridden by inefficiencies. As Dixit notes, the surge of FDI that followed liberalization in the 1990s came to a halt after the 1994 midterm polls. This disruption highlights how political instability has a direct and negative impact on Nepal’s economic progress. A simple extrapolation gives us an idea of how much economic potential has been wasted in the last 34 years. 

Nepal’s hydropower sector exemplifies these inefficiencies. While hydropower has the potential to transform Nepal into a key energy exporter, institutional inefficiencies prevent this. For example, the Arun III hydropower project, first conceived by the government in 1992, reached financial closure 28 years after its inception in 1992. Another case, a recent tripartite electricity export agreement between Nepal, India and Bangladesh allowed Nepal to earn around Rs 3.8m by exporting electricity for just a little less than 12 hours to Bangladesh on Nov 15. Nepal is projected to make around Rs. 1.2bn annually by selling electricity to Bangladesh for five months each year. Although a net exporter of electricity, the NEA’s margin from exports is only Rs 120m, 0.12 percent of Nepal’s electricity exports. Had this agreement been signed a decade ago, Nepal today would have earned enough to construct a power plant of the size of the Sunkoshi III hydropower project. Combined, these examples highlight the ineffectiveness of institutions working to transform Nepal into a regional hub for electricity trade in South Asia. Clearly, Nepal’s institutional frameworks prevent it from realizing its comparative geographic advantage.

Singh’s legacy highlights the transformative potential institutions have. As the economic center of gravity shifts eastward, Nepal can reap benefits from regional growth. Nepal’s geographic endowments offer immense opportunities for growth, but they alone cannot guarantee prosperity. Without healthy institutions, its comparative advantages will remain underutilized. Therefore, Nepal’s leaders must embrace bold reforms to address inefficiencies within institutions, as Singh did, and unlock the economy’s full potential. Without institutional reforms, Nepal may risk missing the window to achieve sustainable economic development.