India Union Budget 2023.24 || Potential Impact to Nepalese Economy – A Bird’s Eye View

February 5, 2023
Reanda Biz Seeve

On 1 Feb 2023, India's Finance Minister Nirmala Sitharaman unveiled budget for the next fiscal year starting April to boost economic growth, while aiming to lower fiscal deficit. Nepal has close economic ties with India thus under the national policy of effective management of national economy and liberalization and globalization, Nepal should regularly monitor India's economic policies and programs to get maximum benefit from Nepal's economic partnership with the outside world.

Some of the major highlight of the Indian Budget that can affect Nepalese economy are summarized below. Similarly, how these affects overall Nepalese economy is summarized in the later section of this article.

Highlight 1
Capital expenditure has been raised by 33% to 10 trillion rupees ($122.29 billion) in the next fiscal year. A well-balanced budget focused on growth driven by capital expenditure by considering an adequate push to rural welfare and agriculture. The investment in the Agriculture along with the infrastructure will help the rural economy improve by boosting employment and incomes. The main objective of this is to encourage the private capex green shoots really sustain, help inclusive growth and make the economy become more resilient in light of the global slowdown. Various initiatives in the Agriculture like Digital Public Infrastructure for Agriculture, Agriculture Accelerator Fund, Enhancing productivity of cotton crop, Atmanirbhar Horticulture Clean Plant Program, Global Hub for Millets: ‘Shree Anna’, Agriculture Credit, Fisheries etc. are very encouraging and the country is trying to be self-sufficient in the agricultural products and trying to reduce its import on agricultural related products in future days.

Highlight 2
It has been proposed to cut highest surcharge rate to 25% from 37.5% under new income tax regime and Proposes to raise rebate limit to INR 700,000 under personal income taxes from the existing INR 5,00,000. There has been considerably cut in customs duty on lab-grown diamonds, higher duty on silver dores, gold and platinum items, compounded rubber etc. However, there has been exemption on EV Batteries. In addition, there has been a significant reduction in basic customs duty to reduce input costs, deepen value addition, to promote export competitiveness, correct inverted duty structure so as to boost domestic manufacturing especially in commodity of agricultural products, minerals, IT/Electronics etc.

Highlight 3
There has been various incentives given to small business and startup. India has made arrangements to open a business from home. Startups are encouraged and various tax relief initiative has been provided like the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to ten years. In addition, various incentives has also been given to MSMEs by providing the enhanced limits of  3 crore and  75 lakh respectively which earlier was Micro enterprises with turnover up to  2 crore and certain professionals with turnover of up to 50 lakh, to the tax payers whose cash receipts are no more than 5 percent. In addition, adding payment made to MSME under the ambit of Section 43B has encouraged this sector as the cash flow management is possible. Similarly the benefit like extension of date of incorporation for eligible start up to from 1 April 2023 till 1 April 2024 is encouraging.

Highlight 4
In order to promote merger/amalgamation of banking sector, the definition of “Strategic Disinvestment” has been changed. To facilitate certain strategic disinvestments, it is proposed to allow carry forward of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation of one or more banking company with any other banking institution or a company subsequent to a strategic disinvestment, if such amalgamation takes place within 5 years of strategic disinvestment.

Highlight 5
This budget, therefore, has rewritten the rules for financializing of savings in India, which will induce expenditures rather incentivize savings. However, the fiscal deficit under control, no big disinvestment targets, no bigger borrowings and thrust on government capex will keep the bulls happy on the stock markets.

Highlight 6
In order to attract foreign direct investment in India, enhancing ease of doing business, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. For furthering the trust based governance, Jan Vishwas Bill has been introduced to amend 42 Central Acts. This Budget proposes a series of measures to unleash the potential of the economy. In addition, for realizing the vision of “Make AI in India and Make AI work for India”, three centers of excellence for Artificial Intelligence will be set-up in top educational institutions. Leading industry players will partner in conducting interdisciplinary research, develop cutting-edge applications and scalable problem solutions in the areas of agriculture, health, and sustainable cities. This will galvanize an effective AI ecosystem and nurture quality human resources in the field.

Highlight 7
The existing financial sector and innovative use of technology have been known for the financial inclusion at scale, better and faster service delivery, ease of access to credit and participation in global financial markets. This Budget proposes to further these measures with various supporting streamlines like development of National Financial Information registry, further streamlining financial sector regulations, setting up of Data Embassy and Central data Processing center, capacity building in the security market, further streamlining digital payment protocols etc.


Based upon the above highlights of the Indian Budget, Nepalese economy is affected in the manner as prescribed below. The affect has to be taken as the opportunity for growth and revolution so that overall ecosystem of Nepal can foster.

Impact 1
Based on the point 1 above, the rising growth rate in India has affected the increased investment in Nepal and has shown that the demand for Nepali goods and services has increased.    However, the lack of infrastructure development in rural areas compared to India and the rejection of subsidies to agriculture and inadequate development of agricultural infrastructure, credit facilities and irrigation will affect the agricultural sector, making it inefficient to compete. India's budget has added challenges for Nepal with a budget focused on economic growth that encourages the private capex green shoots really sustain, help inclusive growth and make the economy become more resilient in light of the global slowdown. India has put forward infrastructure plans to create a business-centric environment through budget and to promote internal and external business. Thus, it’s a high time for Nepal to focus more on infrastructures like roads, waterways, railways and logistics, trade with India can be competitive and trade with third countries through India is likely to reduce its cost. This will have direct impact on the Balance of Trade and Inflation at large.

Impact 2
Based on Point 1 above, with the various incentives provided in the agricultural and Infrastructure, the Indian government is actually trying to build a strong supply chain of goods and commodities targeting the farmer at the outskirt area of the country. The objective is to reduce the import of agricultural product and trying to be self-sufficient. Agricultural products such as rice, vegetables, fruits and herbs are among the major exports from Nepal to India. Thus, there may be some impact on export of these to India from this financial year. Thus, Nepal government has to ensure to provide subsidy and relief so that all such products are self-consumed in Nepal itself so that even Nepal’s import of these can be reduced. In addition, various herbs which are only found in the Himalayan ranges has to be properly streamlined into the market. As Indian Budget has kept aside significant budget on pharmaceutical sector, a proper arrangement can be a game changer.

Impact 3
Based on Point 2 above, there is a strong possibility that the number of imported and re-exported goods in Nepal may decrease. However, due to an increase in the customs duty on some items, goods that are more expensive than Nepal's will enter Nepal and that will put pressure on foreign exchange. In addition, relief on EV batters shows that the government will provide additional tax incentives on electronic vehicles. Thus, it’s a high time for the government of Nepal to reassess the import duty of such electronic vehicle as it will have direct impact on the fuel requirement and foreign currency reserve of Nepal. It is to be noted that even in the context of India, the relief has been given to encourage manufacturing such electronic vehicles in India and incase of import of such vehicles from outside India, there has been increase in the customs duty. Thus, the intention of government of India is clear, they want to promote the domestic manufacturing sector more as compared to import on the same product.

Impact 4
Based on Point 3 above, India is now the third largest ecosystem for start-ups globally, and ranks second in innovation quality among middle-income countries. It has one of the highest unicorn startup ecosystem in the world especially IT enabled startup. Thus, Nepal has to come up with the initiatives that encourages IT sector or employment based on outsourcing of foreign country where payment are generally made by other than banking channels. This can be done by bring them in a tax bracket of a nominal subsidized rate. With this at least the government can identify such informal channels and in future can make tax policies accordingly.

Impact 5
Based on point 4 above, though the clear definition of the proposed Strategic Disinvestment is not yet published, still this initiative is very much relevant in the Nepalese Banking Sector as well. In order to promote the Nepal Rastra Bank objective to maintaining optimal banking channel route, various reform as above has to be initiated.  With the said incentive, it is also clear that Central Bank of India is also aiming/promoting the merger of various commercial bank of India. This move might have some impact (though minimal) into the inter country banking rate.

Impact 6
Based on Point 5 above, generally a strong performance in the Indian stock market can have a positive effect on the Nepalese market, as it can increase investor confidence and lead to increased demand for Nepalese stocks. On the other hand, a downturn in the Indian market can have a negative impact on the Nepalese market, as investors may become more risk-averse and reduce their exposure to Nepalese stocks. Thus, it is recommended to come up of the policy that foster expenditure rather than saving like what has been done with the Indian Budget to address liquidity problem.

Impact 7
Based upon point 6 above, it is clear that India is aiming for the revolution in AI and increase in FDI. An increase in Foreign Direct Investment (FDI) in India can have both positive and negative impacts on Nepal. On one hand, an improvement in the Indian economy resulting from increased FDI can lead to increased trade and economic opportunities for Nepal as India is one of Nepal's major trading partners. Additionally, if Indian companies expand their operations in Nepal, this can create jobs and stimulate economic growth. On the other hand, an increase in FDI in India can also lead to increased competition for Nepalese firms and potentially reduce their market share. If Indian companies begin producing goods and services that are similar to those produced in Nepal, this can lead to price decreases and decreased profits for Nepalese companies. Additionally, if Indian companies dominate key industries in Nepal, this can lead to a loss of control over the Nepalese economy. Overall, the impact of increased FDI in India on Nepal will depend on various factors, including the specific industries in which the investment takes place, the competitiveness of Nepalese firms, and the effectiveness of Nepalese policies in attracting investment and promoting economic growth.

Impact 8
Based upon point 6 above, India has working hard to make advancements in the field of Artificial Intelligence, and these developments could have an impact on Nepal as well. However, the exact nature of the effect would depend on various factors such as the nature of collaboration between the two countries in AI, the specific AI applications being developed and used, and the overall level of technological development in Nepal. In general, India's advancements in AI could bring about positive changes for Nepal in areas such as healthcare, education, and commerce. For example, AI-powered systems could be used to improve the delivery of medical services, enhance the quality of education, or streamline trade and commerce. However, there could also be negative consequences, such as job losses due to automation, or an increase in economic inequality as only certain segments of society benefit from AI-driven progress. Overall, the impact of India's progress in AI on Nepal would depend on a variety of factors, and would require careful analysis and planning to ensure that the benefits are maximized while minimizing any potential drawbacks.

Impact 9
Based upon point 7 above, the improvement of the financial market in India can have a positive impact on Nepal's economy in several ways. Like Increased investment as a strong financial market in India can attract more foreign investment into Nepal, leading to the creation of new job opportunities and the growth of existing businesses. The two countries share a long history of trade, and an improvement in the financial market in India can lead to an increase in trade between the two countries. A large number of Nepalese work in India, and an improvement in the financial market in India can increase their income and remittances to Nepal, providing a boost to the economy. Similarly, Nepalese banks and financial institutions can benefit from increased collaboration with their Indian counterparts, leading to the improvement of financial services in Nepal. However, it is important to note that the impact of the improvement of the financial market in India on Nepal's economy can also have negative consequences, such as increased competition for Nepalese businesses and a potential increase in trade imbalances.

Reanda Biz Serve’s Comment

Overall, while India’s Union Budget for Fiscal Year 2023-24 can have both positive and negative impacts on Nepal’s economy, it is important for Nepalese policymakers and stakeholders to carefully consider the implications and take measures to mitigate any negative consequences, and maximize the benefits on positive aspects. The effect has to be taken as the opportunity for growth and revolution so that overall ecosystem of Nepal can foster.

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