Manufacturing sector needs more attention

One of the main causes behind the lack of industrialisation in Nepal is the private sector’s indifference towards industrialisation. Till late 1980s, large manufacturing plants like Bansbari Shoe factory were mostly owned and operated by the government.
In the post-1990 era, private sector has come up in an aggressive way to make its presence felt in the manufacturing sector. Once government dominated sector is now totally gone to the private hands. As a result the private sector has invested in major manufacturing industries — like jute, sugar, cigarettes, beer, matches, shoes, chemicals, cement, bricks and pharmaceuticals. Other manufacturing units like garment and carpet industries — targeted mostly to the foreign markets — are also dominate by the private sector.
Most of Nepal's manufacturing activity is based on the natural resources and agricultural products. However, agro-based industries in recent times have come under tremendous pressure as the government has imposed 13 per cent VAT on them, say industry players. “Once the VAT is imposed, industries could not compete and almost lost their identity, because in India — with whom we share wide open border —charge only four per cent VAT on agro-based products,” they complain.
The best thing Nepal can do is commercialisation of agriculture and promotion of industries like tea, coffee, jute, sugar, cigarette, dairy, leather-based, herbs. Being an agricultural economy most of the industries are based on these agricultural raw materials. Building competitiveness in these sectors can increase export and displace import. The other kinds of industries are also dependent on various imported raw materials like oilseed, sugarcane, jute, and tobacco are the major cash crops.
Diwakar Golchha, vice-president of the Golchha Organisation, one of the key manufacturing industries in Nepal, says, “VAT in agro products should be at par with India to build a competitive edge.”
He also suggests the government to establish pulses institute, sugar board and jute board — to boost the production of these major cash crops that can promote the Nepali manufacturing industries— immediately.
“Nepal used to produce 80,000 to 90,000 tonnes of jute earlier. But the production has been plummeting,” he says. “Apart from that farmers also have to change their traditional way of farming and learn modern technology. The production could be increased three-fold, if modern technology is adopted.”
Some of the other problems are unorganised marketing that has eroded the confidence of farmers.
As India and China positioned themselves as global technology and manufacturing hubs, Nepal has yet to realise its scope of being a manufacturing hub. The myth in the manufacturing industry could be broken, if government brings paradigm shift in policies to exploit the huge southern and northern markets.
To promote exports, the government has come up with the idea of Special Economic Zones (SEZs) and Export Promotion Zones (EPZs). But the industry insiders suggest these zones be linked to dry port.
In the past also, government has established industrial estates in different parts of the country like in Patan, Balaju, Hetauda, Pokhara, Dharan, Butawal, and Nepalganj to encourage manufacturing units. But most of the industries in these estates are either closed or non-operational due to recent disturbances.
The decade long Maoists insurgency has bled the industries blue. The business community had a little hope once the government and Maoists reached an agreement to stop violence. But again, confidence of the business community has eroded in recent days due to Maoists intimidation and donation–spree. “Though Maoists say that they support the national industries, they have not spared anyone,” industrialists complain.
Shekhar golchha, executive director of the Golchha Organisation, says that the low confidence is due to directionlessness of the politics. Not only the business community, consumer confidence is also low. There is a sense of nervousness in the market.
“Water is muddy now. And the investors and business community are waiting for the things to settle,” says Golchha. He, however, is hopeful that once the political parties have a long-term policy commitment, the double-digit growth is not a far cry.
Apart from political upheaval, no significant improvements were recorded in the overall productivity growth and spatial distribution of manufacturing which appear to be due mainly to the lack of basic infrastructure and the shortage of skilled manpower. Thus, appropriate investment policies are essential, if the potential benefits of liberalisation are to be fully achieved. “The nation must bring long and short-term strategies to develop its manufacturing sector to reap the benefits from SAFTA, WTO and BIMSTEC, suggests manufacturers.
With the expectation to supplement domestic private investment through foreign capital flows, transfer of technology, enhancement in management skills and productivity and to get into the global market, Nepal finally opened its door for foreign investment by adopting the most liberal economic policies in the 1990s.
After Nepal adopted the free-market economy and opened the manufacturing sector for foreign investment, there is a flow of foreign money in the sector. Indian manufacturing giants like Dabur and Hinduatan Lever entered the Nepali market with their consumer products. Few more companies have also entered into manufacturing tie-ups with Nepali companies like Shaw Wallace. Given the low import duty and tax regime in Nepal, several consumer goods companies can use Nepal as its manufacturing base.
The labour cost of Nepal is comparatively very low. Semiskilled and skilled labourers are plenty. The wage and salary of any of these groups is also lower than in any other developing countries, which is a boon for the foreign companies to shift their manufacturing bases here.
However, Joseph Pulikottil, general manager of Asian Paints, says that the government should take right steps to create an environment to change the import-led economy to manufacture-led economy. “Indian states are luring FDIs with longer tax holidays. Nepal can do the same, if it wants more foreign money to flow in,” he adds.
Almost every sector in Nepal is open for investment like manufacturing, energy, tourism, mining, agro-based industries except cottage, arm and ammunition industries; explosives and atomic energy; real estate; poultry and fisheries; and some other sensitive industries directly relating to public health, environment and defence are a few exceptions. Nepal is a member of Multilateral Investment Guarantee Agency (MIGA) that assures the foreign investors against non-commercial risks like currency transfer, breach of contract, war and civil disturbances in the country. The government has also granted several benefits for foreign investors — like charging no income tax on dividends, export earning and interest earned on foreign loan — to woo them.

(Published in The Himalayan Times of 2006, July 6)