SOUTH ASIA NEIGHBOURS ADVANCING REGIONAL INTEGRATION, COOPERATION AND ENGAGEMENT IN SOUTH ASIA Business across borders: India-Nepal links thrive and grow by Sagar Prasai #OneSouthAsia CASE STUDY 2, 2021 Economic integration in South Asia has they were attracted by business-friendly moved at a very slow pace. Compared to policies that grew out of liberalized trade other global regions, South Asia lags with regimes in the 1990s. Second, the companies intraregional investments, connectivity were able to capture quality-driven buyers infrastructure, and simpler digital procedures across the border. Lastly, management of to help shipments cross borders. These costly all three companies grew domestic market non-tariff barriers are a key impediment to share to hedge against policy instability in expanded trade among the eight nations of international trade. the region. The companies share other features. Each Still, there are islands of success in cross- has operated for more than two decades border businesses that demonstrate the and demonstrated resilience amid a civil potential to scale up Indian investments conflict in the early 2000s, years of unreliable in Nepal, especially in manufacturing. The electricity supplies, and a 2015 earthquake experiences of two consumer products followed by civil unrest because of imposition companies, Dabur Nepal and Unilever of an economic blockade in Terai region Nepal, and yarn maker Reliance Spinning that borders India. All three companies have Mills have several things in common. First, manufacturing plants in Terai. Business across borders: India-Nepal links thrive and grow 1 SOUTH ASIA #OneSouthAsia Unilever Nepal and Dabur Nepal are All three actions – scrapping import multi-nationals controlled by parent companies licenses in India, reducing domestic in India. Reliance Spinning Mills is a wholly 1 content requirements, and making Nepali-owned company that imports raw it easier to certify domestic content material from India, and exports finished - opened the doors for Nepal products to India and other countries. Reliance manufacturers to target India’s big Spinning Mills and Dabur Nepal are among market. Nepal’s top 10 annual exporters. Unilever Nepal recently turned its focus to the domestic market Dabur Nepal moved quickly to capitalize on after years of significant exports to India. the policy changes with its personal care and health products. A new opportunity came when Dabur noticed Indian consumers were shifting from carbonated, sugary drinks to Dabur Nepal - capitalizing healthier alternatives with natural fruit juices. on liberal trade regimes In 1996, Dabur Nepal launched a juice plant in Nepal, then one of the largest in South Asia Dabur Nepal Private Limited (Dabur Nepal) with a capacity of 6,000 liters per hour. Two was established in 1989 with majority ownership decades later, the company’s juice brand, with held by a subsidiary of Dabur India Limited 30 variants, accounted for one-fifth of Dabur’s and 2.5 percent owned by a Nepali investor. total revenue2 and the company added In 1992, Dabur Nepal began operating with production in India and Sri Lanka. Today, Dabur an annual turnover of NRs. 5.3 million. By 2019, Nepal supplies India’s northern markets and its Dabur Nepal’s annual turnover was NRs. 10 sales volume is so significant in Nepal that Real billion, 60 percent from exports. Juice is often listed by name in the nation’s top 10 export items. The company buys raw Dabur made its initial investment in Nepal materials for juices from Israel, Holland, China, to process Himalayan medicinal herbs and India, and buys packaging materials from for personal care and health supplement India, Thailand, and Singapore. products, including Ayurvedic medicines. In addition to collecting herbs from the wild, While favorable trade policies helped Dabur the company built greenhouses to establish a Nepal in the 1990s, other trade issues limit or bigger source of raw material that allowed it disrupt how companies do business in South to ramp up production and begin exporting Asia. For example, Dabur Nepal would like to to India, which was in the midst of liberalizing sell its popular juice products to consumers in trade regulations. neighboring countries, such as fast-growing Bangladesh. Both Bangladesh and Nepal India’s 1992 export-import policy dropped a signed the South Asian Free Trade Agreement requirement for a license to trade most goods, (SAFTA) to promote intraregional trade. except for a short list of specific items. India However, Bangladesh imposes a prohibitive and Nepal amended their trade agreement tariff of 105 percent on imported juices to to reduce to 50 percent the requirement protect domestic juice makers. for domestic content in goods and to allow certification of content by a designated At home in Nepal, the company faces Nepal institution. unstable trade and tax policies. In 2018, Nepal doubled to 30 percent its import duty on sugar, 2 Business across borders: India-Nepal links thrive and grow #OneSouthAsia SOUTH ASIA a key ingredient for Real Juice. Nepal later employment to an estimated 20,000 across its introduced an import quota on sugar to limit value chain5. cheaper foreign shipments. Such restrictions tend to create shortfalls, hoarding, and prices Nepal’s growing consumer market has helped that affect company profit margins or export UNL offset unstable trade and industrial competitiveness. policies. Companies planning export- oriented production facilities typically look for stable tariffs, low trade costs, and efficient Unilever Nepal - leveraging infrastructure. Nepal has struggled to provide these to prospective foreign investors. UNL domestic market to hedge started with commercial production of Wheel for changes in the trade washing powder and began exporting its regulations products in 1995, mainly to India. At its peak, UNL’s exports accounted for 42 percent of Unilever Nepal (UNL) began in 1992 with a annual turnover. However, exports began manufacturing unit in Makwanpur and an initial declining in the early 2000s and stopped in investment of NRs. 70.37 million. Eighty percent 3 2005-06 due to Nepal’s withdrawal of quota- of UNL equity is held by Hindustan Unilever free exports and changes in import tariffs on Limited, 5 percent is held by a private holding certain raw materials. company, and remaining 15 percent of shares are traded on the Nepal Stock Exchange. UNL, The shift in focus — from exports to domestic like Dabur Nepal, took advantage of liberalized sales — required two big changes. UNL trade policies in the 1990s to build its business. re-engineered its value chain to add Although the company at one point exported supplies from a large number of small- and about 40 percent of its products to India, UNL medium-scale manufacturers in Nepal. The today is focused on Nepal’s domestic market. company then created an extensive domestic distribution network to promote its products. That shift — the ability to target the Despite poor infrastructure and connectivity, domestic market when changes in UNL mobilized a network of distributors, sub- international trade rules make it harder stockists, carrying and forwarding agents, to export — is a big factor in UNL’s wholesalers, retailers, logistics experts, and success in Nepal. women entrepreneurs to penetrate the market. Today, UNL products are available nationwide, UNL sells consumer products for home care, including remote districts such as Humla, Kalikot personal care, food, and refreshments. In and Jajarkot.6 The company uses marketing Nepal, it produces 35 products that include tools and community engagement programs Lifebuoy soap, Sunsilk shampoo, Lux soap, Fair with retailers and distributors to build consumer & Lovely face cream, and Ariel and Surf laundry brand loyalty. detergents. Raw materials for the products are imported from India, Japan, Indonesia, Nepal’s growing middle-class market has Bangladesh, and China. In 2018, UNL’s total caught the eye of other companies with well- revenue from operations was NRs. 4.87 billion known brands. Britannia Industries, an Indian with a net profit of NRs. 999 million 4 and 10 food company, is among several companies percent annual growth. UNL directly employs that plan to enter Nepal with joint-venture 243 people and claims to provide indirect production facilities7. This model of investment Business across borders: India-Nepal links thrive and grow 3 SOUTH ASIA #OneSouthAsia and production remains attractive as long interest rates in India were significantly higher as Nepal’s domestic demand expands and than in Nepal. India-Nepal trade arrangements continue to improve. Reliance produces up to 80 metric tons of yarn daily in various blends of acrylic, UNL faces significant challenges from polyester, and viscose.9 It imports nearly counterfeit products and rising labor costs. all raw materials from several countries, Nepal’s weak enforcement of intellectual including India, and exports about 90 percent property rights has encouraged a proliferation of its finished products, including shipments of look-alike and fake products carrying the to India. Unlike Dabur Nepal or UNL, Reliance labels of well-known consumer products. lacks a significant domestic market. The The Government of India has repeatedly import-dependent spinning mill in Nepal is complained in trade talks about loopholes able to export yarn to India, beating the price in Nepal’s trademark and registration rules. and quality of well-established competitors Counterfeit products result in lost sales for in India. companies and lost tax revenue for the government. Another important factor is Reliance’s unique niche comes from its capital- Nepal’s higher wage rates and the adoption intensive, quality-focused production facility. It of progressive labor laws during the past five has invested approximately NRs. 30 billion over years. The wage rate increase is largely a result more than two decades to maintain state-of- of labor scarcity created by approximately the-art equipment, creating a high barrier to two million workers from Nepal who migrated entry for potential competitors. Reliance holds to East Asia and the Gulf. A 2017 labor law less than 1 percent of India’s vast market, raised the minimum wage and made workers generating more than USD 60 million in annual eligible for bonuses under certain conditions. export earnings – a welcome contribution to While these changes raised workers’ household reducing Nepal’s nearly USD 8 billion annual income, they also made Nepali production trade deficit with India. costs less attractive for some companies. By obtaining raw materials from a half- dozen countries – and exporting goods Reliance Spinning Mills - to seven or eight countries – Reliance has the flexibility to negotiate low prices capturing quality driven for raw materials and export its goods consumers across borders to countries with content rules that make value-added re-entries possible. Reliance Spinning Mills Ltd. is a Nepali-owned 8 enterprise that makes synthetic yarns for In that sense, Reliance is not dependent on any weaving, knitting, and textiles. Reliance is single nation’s import rules and tariff structure controlled by the Golyan Group and the MS and can survive without a significant domestic Group. The company was established in 1996 market to hedge the risks. with an initial investment of NRs. 1.5 billion when Nepal opened its doors for trade, investment, Reliance has not been able to enter other and technology transfers. Reliance, unlike significant South Asian markets such as Dabur Nepal and UNL, does not have Indian Bangladesh, the world’s second largest investments because during mid-1990s, exporter of ready-made garments. Prior 4 Business across borders: India-Nepal links thrive and grow #OneSouthAsia SOUTH ASIA to the COVID-19 pandemic, Bangladesh the Phulbari-Banglabandh highway route. If exported about USD 32.9 billion 10 worth of that route was available, it would cost around garments annually. But Reliance is unable to 2-2.5 US cents per kilogram to ship yarn from sell yarns to those garment-makers because Nepal to Bangladesh. But only a sea route of high transport costs. Landlocked Nepal is now available, costing a much higher 15 is separated from Bangladesh by a narrow US cents per kilogram that makes shipments strip of Indian land known as the “Chicken’s unaffordable. Neck” and Bangladesh has not opened a land route for imports of Nepali yarn through What can we learn from these cases? The experiences of the three companies cultivate internal demand. The real opportunity indicate that the trade, transit, and investment in Nepal, however, lies in manufacturing goods policies of Nepal and India operate at an for shipment to nearby India. acceptable level of functionality, although they could be improved. Both countries are Two of the three companies examined see addressing nontariff barriers by increasing Bangladesh as an emerging opportunity, which investments in regional connectivity and border means even a modestly functional economic infrastructure, reforming customs procedures, integration of the Bangladesh-Bhutan-India- and addressing road congestion. In that sense, Nepal (BBIN) sub-region could attract more there are no visible structural constraints that regional joint-ventures. A stronger and active should inhibit wider and deeper business BBIN would also be a more efficient vehicle collaborations between Nepal and India. As for those countries to negotiate trade terms. the Dabur Nepal case shows, there is an early- All are signatories to the South Asia Free Trade bird advantage in positioning a company to Agreement but Bangladesh, India, and Nepal exploit anticipated reforms and the market still conduct bilateral trade negotiations on may respond to these signals faster now than virtually a product-to-product basis. two decades ago. It is normal for developing countries in South The foreign direct investment and equity Asia to be sensitive to potential external investment rush that started to enter India in threats to domestic industries. But as threats a significant way beginning mid-2000s was change over time, so do policy responses – attracted by India’s growing domestic demand resulting in business casualties or discouraging and consumer market. Nepal’s size and investments along the way. The challenges stage of growth are vastly smaller. But as the and successes of Dabur Nepal, Unilever Unilever Nepal case shows, Nepal’s domestic Nepal, and Reliance Spinning Mills show why consumption has reached a stage where it is important to keep international trade and the nation can offer nominal risk hedging for investment policies as stable as possible, for manufacturing companies that are willing to as long as possible. Business across borders: India-Nepal links thrive and grow 5 SOUTH ASIA #OneSouthAsia Endnotes 1. Although Dabur Nepal’s investment comes from 5. https://www.hul.co.in/about/introduction-to- Dabur International and not Dabur India. Unilever unilever-nepal-limited/ Nepal’s ultimate parent is the British-Dutch conglomerate, Unilever plc, the world’s largest 6. Gautam, 2017, New Business Age: 25 Years of producer of soap. Unilever Nepal: Charting New Heights in FMCG. Available from: www.newbusinessage.com [18 June 2019] 2. https://www.business-standard.com/ article/companies/dabur-profit- 7. http://britannia.co.in/about-us/overview jumps-17-116042800857_1.html 8. Bears no relation to similarly named companies 3. Gautam, 2017, New Business Age: 25 Years of in India. Unilever Nepal: Charting New Heights in FMCG. Available from: www.newbusinessage.com [18 9. Golyan Group: Corporate Profile June 2019] 10. Textile Today, Jan 2019: Bangladesh’s apparel export trend of 2018. Available from: https:// 4. Unilever Nepal Limited, 2018, UNL- Twenty Fifth www.textiletoday.com.bd/bangladeshs-apparel- Annual Report & Accounts, 16 July 2017-16 July export-trend-2018/ [ 23 June 2019] 2018. Available from: www.hul.co.in [20 June 2019]. Picture credits: The World Bank Images Neighbours Series A key objective of the World Bank’s South Asia Regional Integration, Cooperation and Engagement (RICE) approach is broadening evidence-based communication and outreach activities that will help strengthen the case for RICE and generate domestic demand. The ‘Good Neighbours’ series showcases successful cross-border stories demonstrating regional cooperation to build support for regionalism in South Asia. Series Editor Mandakini Kaul is Senior Regional Cooperation Officer, South Asia Regional Integration and Engagement at the World Bank. Editor Nikita Singla is Consultant, South Asia Regional Cooperation at the World Bank and is Associate Director at New Delhi-based Bureau of Research on Industry and Economic Fundamentals. About the Author Sagar Prasai is a free-lance consultant based in Kathmandu. He was formerly The Asia Foundation’s Country Representative in India. The World Bank SOUTH ASIA 1818 H Street, NW Washington, DC 20433 Advancing Regional Integration, Email: onesouthasia@worldbank.org Cooperation and Engagement in South Asia Website: www.worldbank.org/onesouthasia