Impact of Indian aid on economic growth of Nepal

Abstract

This thesis explores the impact of Indian foreign aid on the Nepalese economy, analyzing how bilateral assistance from India influences Nepal's key macroeconomic indicators such as Gross Domestic Product (GDP), gross capital formation, and government expenditure. As one of Nepal’s largest development partners, India has consistently provided financial and technical assistance aimed at enhancing infrastructure, education, health, and other sectors critical to economic development. However, the actual effectiveness of this aid in fostering sustained economic growth in Nepal remains a subject of debate, particularly given the complex political and institutional dynamics between the two countries. To empirically investigate this relationship, the study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration, which is particularly well-suited for small sample sizes and variables with mixed orders of integration (I(0) and I(1)). Time-series data spanning from [insert years] are used to analyze both the short-run and long-run dynamics between Indian aid and Nepalese economic indicators. The ARDL model allows for the assessment of the immediate as well as the lagged effects of aid inflows, offering a nuanced understanding of how such aid translates into economic outcomes over time. The empirical findings reveal a statistically significant long-run relationship between Indian aid and Nepal’s economic growth. In the long run, Indian aid demonstrates a positive and robust influence on GDP and capital formation, indicating that aid has contributed to economic development when sustained over time. However, in the short run, the results are more mixed. The short-run coefficients suggest a weaker and sometimes inconsistent relationship, potentially due to administrative bottlenecks, governance issues, and delays in aid disbursement or project implementation. These findings highlight the importance of improving institutional capacity and ensuring that aid is aligned with national development priorities. By focusing specifically on Indian aid—a relatively underexplored area in aid effectiveness literature—this study contributes to the broader discourse on the role of bilateral assistance in shaping the developmental trajectories of small economies. It also provides important policy implications for both Nepalese and Indian policymakers, emphasizing the need for strategic planning, improved transparency, and accountability in aid utilization to maximize developmental outcomes.