Nepal has requested India to reduce the ratio of Indian content requirements for the implementation of development projects under the Line of Credit (LoC), citing bureaucratic hurdles that are delaying project implementation.

The Department of Roads said in its Annual Progress Report 2022-23 that it has asked India to reduce the Indian content requirements to 30 percent from the existing 50 percent.

According to the department, the mandatory provision of buying 50 percent of Indian components is delaying implementation of the LoC-funded projects because of bureaucratic hurdles.

Such a request has been sent to Nepal's finance ministry through its line ministry (the Ministry of Physical Infrastructure and Transport) and the issue was also raised during the bilateral talks with India, according to the department. “India has shown no eagerness to do so,” the department.

Officials at the department said that they have been lobbying for the reduction of Indian content for the past several years and the issue was also raised during the 10th India-Nepal Line of Credit (LOC) Review Meeting held in August.

“We have to present evidence that the goods were brought from the Indian market. This should be certified by an Indian authority, which takes a long time,” said Sushil Dhakal, director general of the department.

For example, a master list of goods to be bought from the Indian market should be prepared and prices fixed to calculate the value of Indian components. “At times, variations in prices may occur during the procurement of goods and this impacts the assessed value of Indian content. In such cases, the new prices should also be validated. And this process takes a long time,” said Dhakal.

According to him, the procurement process takes longer compared to the time taken during the purchase of goods from the domestic market,” he added.

He said the contractors are themselves struggling to meet this requirement.

India has so far approved four LoCs—worth $100 million, $250 million, $550 million and $750 million—totalling $1.65 billion, according to the Indian embassy.

“These LoCs are dedicated towards infrastructure development as prioritised by the Nepal government,” it said. So far, the LoCs have financed over 40 road projects (1,105 km completed), six projects in hydropower and transmission lines, and several others in housing and reconstruction, said the embassy in August.

Power transmission infrastructure in Nepal has been augmented with major LoC projects, such as the Koshi Corridor (220 kV), Modi Lekhnath (132 kV), Solu Corridor (132 kV) and the Dhalkebar-Bhittamod (400 kV) projects.

The Indian government has also agreed to fund Bheri Corridor, Nijgadh-Inaruwa and Gandak Nepalgunj Transmission lines and associated substations under Indian LOC at an estimated cost of $679.8 million, according to the embassy.

The LoC is provided by the Export Import Bank of India (Exim Bank), with the main aim of financing development projects in other countries while ensuring that equipment, goods and services are bought from the Indian market.

Various road projects under the LoC 1 and LoC 2 have been completed but a number of projects under the LoC 3 are still being implemented, according to the department.

Under the LoC 3, as much as $340.42 million was allocated for roads. The road office has awarded 12 road contracts to contractors while two others are yet to be awarded. Charikot-Jiri road section built under LoC 3 has been completed while improvement of Gulariya road, Krishnanagar-Chandrauta and Sahajpur-Bogtan road under the East-West Highway have also been completed.

But many other projects like Lamahi-Ghorahi-Tulasipur, Mudhe-Charikot, and Balaju-Ranipauwa-Trishuli are facing delays, according to the department.

“Most projects being implemented under the LoC are facing bureaucratic delays due to the condition on Indian content,” said Dhakal. In 2014, the southern neighbour had reduced the Indian content requirement quota after Nepal’s continuous complaint.

When Nepal’s late Prime Minister Sushil Koirala visited India in November 2014, the Indian side had agreed to lower the Indian content requirement for LoC to 50 percent from over 75 percent. Likewise, India had opened the door for a joint venture company between Nepal and India to take up the LoC-funded projects.

It is not only Nepal where the LoC funded projects are facing problems due to the Indian content requirement. In February this year, India had agreed to lower the Indian content requirement for LoC in Bangladesh.

According to a report in The Business Standard, India had agreed to lower the requirement to 50 percent from 75 percent amid strong demands from the Bangladeshi side. Likewise, the two sides also proposed implementing the LoC-funded projects through joint ventures between Bangladeshi and Indian companies, changing the old provision of exclusive implementation by Indian contractors.