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Ashish Thapa

About Ashish Thapa

Ashish is working as a researcher at Samriddhi Foundation.

Formalizing MSMEs

Micro, Small and Medium Enterprises (MSMEs), despite their limited investment, knowledge and resources, have been the backbone of economies around the world. According to World Bank, 90% of all firms are MSMEs, and they contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies. Nepal, where the industrial sector has not been able to grow as expected, consists mainly of small scale enterprises. The reason is that because people have very little capital at their disposal, and they do not have the skill sets or prior experience to run large scale businesses, people start off small. This is why least developed countries with poor economy (like Nepal) see more people starting with MSMEs.

                    MSME’s contribution in Nepal Percentage
1.       Share of industrial GDP 90
2.       Share of industrial sector value addition 70-80
3.       Share of industrial Employment 80
4.       Share of industrial Export 80

* Source: Federation of Nepal Cottage and Small Industries (FNCSI)

In Nepal, the trend of registration and setting up of new small-scale industries has also been interestingly going up in the past few years. More and more small-scale enterprises have opted to operate formally. If global figures are anything to go by, then they invariably mean that this is a good thing for Nepal as well, from an economic growth perspective.

Fiscal year 068/069 069/070 070/071 071/072 072/073
No. of cottage and small industries registered 18,022 15,556 22,129 17,654 24,317

 Source: Audhyogic Tathyanka 2072/73, Department of Cottage and Small Industry (DCSI)

A question to delve into, then, would be, what is causing this surge in the number of micro and small entrepreneurs entering the formal economy. Clear and convenient government policies and processes are the need of the day if the government seriously wants to see more of the MSMEs in Nepal.

Government agencies claim that the Industrial Enterprise Act, 2073 (2016)’s free registration and complete income tax waiver for first five years of operation provisions have motivated firms to register. This is a positive start. However, we must also be wary that income tax exemption for five years simply defers the problem for next five years, and does not necessarily solve complexities embedded in it. Likewise, wiping out the registration fee does not wipe out the problems of registration as it is still entangled with multiple paperwork. For instance, as long as MSMEs have to submit business schemes (which need business’s forecasts of break-even point, annual turnover, annual profits, etc.) to oversight bodies, procedural complexities will continue to exist.

Coordination is another challenging issue which lags in government agencies. Entrepreneurs are required to visit multiple offices during registration. Currently an entrepreneur needs to visit Inland Revenue Department (IRD) as well as municipality office only to pay taxes. As an entrepreneur, it would be much easier to pay all taxes at one agency. State institutions could devise a mechanism whereby they share such revenues. This is absolutely possible and even staffers of government offices acknowledge the possibility and benefits of such measures. Yet, it never happens.

Likewise, the unclear registration procedure, piles of documentation, inaccessible government offices have discouraged firms from registering in one way or another.  In order to avoid such complexities ‘online registration system’ available at fingertips can certainly be a solution to combat those problems. Countries like Azerbaijan, Thailand, Malaysia and many other countries have started this system the subsequent ease of doing business in these countries as a result of these reforms is clearly depicted in various global indices (like the World Bank’s Doing Business Report). Even our neighbouring country India has already started online procedure for registration and tax filing (even for micro enterprise).

This will obviously not be a quick hit across the country alike for not all Nepalese can access this service right away, but even then, that is no reason to hold back. We can run these systems (manual and digital) parallelly and independently, until other people are ready to switch to digital platforms.  Such a system would end the reliance on government agencies even for minor works and make government services more convenient and accessible.

In Nepal where more people are vying to open private enterprise, government should capitalize on this by making it easier for them to enter the formal market. Actionable and quick reforms like ones discussed above, if implemented, could motivate more and more enterprises to operate formally, and more importantly, inspire birth of new MSMEs.


Ashish Thapa

About Ashish Thapa

Ashish is working as a researcher at Samriddhi Foundation.

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Cost of Unspent Capital Budget

A unique trend has emerged in Nepal over the last ten years or so whereby the success of a Finance Minister is measured by the amount of revenue generated by the state during his/her term rather than the soundness and impact of his/her policies. And interestingly, Nepal government has been able to generate higher and higher revenues with every passing year. But has the increased revenue been able to deliver real growth, or greater achievements in development indicators for Nepal? Not quite! And this is where another attribute of Nepal government comes into the scene—greater revenue collection but consistently low capital spending.

* Source: Financial Comptroller General Office & Nepal Rastra Bank

Fiscal year Percentage Capital Expenditure (CE) budget in total budget Actual capital expenditure (% of allocated budget for CE) 9-month spending (% of allocated CE Budget)


















* Source: Ministry of Finance & Nepal Rastra Bank

As can be seen above, the Government of Nepal (GoN) has been boosting revenue collection every year. Likewise, provision for capital expenditure—which is seen as the backbone of economic development—has also been growing. These ever-increasing revenue targets (and actual collection beyond the targets) are not necessarily problems in themselves; however, the fact that government consistently fails to employ these resources to development activities is definitely one.

With reference to this year’s data, only 31 percent of the total capital expenditure has been injected in the economy as we approach the end of tenth month of this fiscal year. Weaker spending capability pushes the deadline of the governmental projects and also increases the cost of the projects. The mega-projects like Pokhara Int’l Airport, Postal “Hulaki” highway, Melamchi drinking water project, ‘Madhya Pahadi Lokmarg’ and other national priority projects have been affected by weaker spending ability. Piles of billions of rupees worth of unspent capital expenditure prove that government is achieving its targets only in papers. And these sorts of failures only create bottlenecks for greater economic growth.

A question then arises—why does the government collect larger revenue every year despite being unable to utilize it fully? One possible reason is that politicians can easily promise growing revenues towards new welfare programs. Welfare programs are useful tools to become more popular among voters, and these programs can be implemented in quick span of time unlike infrastructure development.  In 2016/17, the GoN doubled allowances for old age, disable, single woman and endangered communities programmes. While there is no questioning intended benefits of these programs for genuine beneficiaries, it is also equally true that these are tools of vote-bank securing at the cost of other development activities that could create greater wealth in the economy. What is ominous about these programmes is that these are irreversible, for any politician who wishes to undo these programs will be committing a political suicide—they will become unpopular among voters. And obviously, these expenses need to increase over time.

On the other hand, every penny unspent by the government compromises the ability of economy to flourish. The frozen budget which is collected from taxpayers, if had not been collected in the first place, those funds would still be in the hands of private individuals. These private individuals could have consumed, invested or even saved this money at financial institutions. For entrepreneurs and credit seekers, this would mean greater availability of funds. All these could contribute towards wealth creation inside the economy. This is the alternative way by which the economy could have grown—leading to more new entrepreneurs, more jobs in the economy, and higher production of goods and services by the private sector. Unfortunately, some of these possibilities have been largely compromised in our country.

Therefore, what could be better for the economy is that every year, as our budget-making process begins, the government factor these other things that get compromised as the government looks to grow bigger (and create new welfare programs). There is a private sector in the economy, and every time the government grows, it shrinks the space for private sector as well. If the government is inefficient at utilising resources, then it should re-think exercising control over greater resources every year.


Ashish Thapa

About Ashish Thapa

Ashish is working as a researcher at Samriddhi Foundation.

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