Automatic Route – A Prerequisite for FDI Inflows

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Economy

Nepal Investment Summit, 2017 raised the aspirations of many investors and business opportunists as it unlocked various possible alternatives to promote investment-friendly policies and practices. Among the many commitments, political stability to attract foreign investors, huge FDIs from various nations including China and USA, and the assurance of Minister of Industry to promote friendly regulatory framework for doing business in Nepal were the major outcomes of the Summit. Parallelly, the MoI had also been working on reforming the Foreign Investment Act, and the provision of granting permission to some investors via “automatic route” seemed to be a good complementary move; there were also some genuine arguments about why it was limited to only some, and why not all.

However, a recent move by the MoI to remove the provision of automatic route from the draft of Foreign Investment and Technology Transfer Bill (FITTB) countervails these commitments. The removal of this policy requires foreign investors to enter Nepal through a long and cumbersome process—submit multiple documents to the regulator (Department of Industries, Investment Promotion Board, or the Nepal Investment Board, depending on the scale of investment), and additional documents to Nepal Rastra Bank (NRB). This approval system for Foreign Direct Investment has been one of the biggest tailbacks for investors to make actual investments in Nepal.

Nepal does not need such a complex approval process. What Nepal actually needs is simple Acts and regulations to attract as many investors as possible in order to meet saving-investment gap, technology and skill gap and generate ample employment opportunities. The many goals of the GoN – completion of national pride projects, building of satellite cities, infrastructure development projects, energy development projects and an aim of achieving double digit industrial growth rate – cannot be fulfilled with limited domestic investments. Foreign direct investment is an irrefutable factor for the economic development of Nepal and thus, we cannot afford to offset our potential investors.

Nepal already ranks in the 109th position in the World Bank’s Index of ease of Starting a Business. Moreover, Nepal is the only country in South Asia to have a two-layer approval system and extensive paper-works to bring in foreign investments – a major comparative disadvantage which makes Nepal less attractive to the foreign investors. Foreign investors are likely to explore more favorable alternative investment destinations within the markets of South Asia rather than investing in Nepal. Nepal already lags behind in numerous ways than other neighboring countries. In such scenario, a policy change that enables easy entry of FDI in Nepal could be a competitive factor among its South Asian counterparts.

Automatic route could indeed be a defining factor for economic transformation of Nepal through which foreign investors could bring in investments without government approval, reducing the lengthy and cumbersome processes. Nepal, in this matter should comprehend India’s reform. After the adaptation of automatic route for FDI, India was able to attract $44.20 billion in 2015, a rise by 28%. The FDI contribution in GDP of India during that period was 14-15%.

It is apparent that Foreign Direct Investment is crucial for the economic growth of Nepal. Automatic route could be seen as the most rational step for the government to take in order to attract these FDIs for executing all its committed plans. However, the removal of this principal provision by the MoI is unconceivable.

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an intern in the research department of Samriddhi Foundation.

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