Category Archives: Economy

Land Rights for Women in Nepal

“Earlier, we had tongues but could not speak. We had feet but could not walk. Now that we have the land we have the strength to speak and walk!” This quote from women who received land titles in India’s Bodhgaya Land Rights Movement perfectly portrays how land rights empower women.

The struggle for women rights in Nepal has been an on-going battle with property rights being an important component. Although the situation as detailed below is pretty dismal, we have come a long way. From a civil code that limited inheritance rights for women and biases that determined property rights according to marital status and age, to passing of the Gender Equality Act and the Constitution forbidding gender based discrimination, thus granting daughters and sons equal rights to inherit property, progress is evident.

Furthermore, numerous progressive policies are currently in place to help increase land ownership of women. These include:

  • Tax exemptions of 25%-50% (depending on geographical area) available to women during land registration, provided she does not sell the land within three years.
  • 35% tax exemption for widows during land registration.
  • 50% tax exemption when land is transferred within three generations of daughter or granddaughter.
  • Joint Land Ownership which can be obtained for just Rs.100.

Why then is women land ownership in the country still dishearteningly low?

  • Many women are unaware of the rights and benefits they possess.
  • Women do not receive help in the implementation of their rights.
  • Deep seated patriarchal norms make women feel that they do not need to own land, especially because of the fear that they risk divorce if they ask for land.
  • Families are concerned that women owning land will deprive the family of an asset in the event of marriage or re-marriage and so they are discouraged from getting citizenship certificates.

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Researcher at Samriddhi Foundation. She is a graduate student at Heinz College, Carnegie Mellon University in Pittsburgh, Pennsylvania, pursuing a Master of Science degree in Public Policy and Management; and has a Bachelor of Arts Degree in Economics and Statistics with a minor in Complex Organizations from Mount Holyoke College, South Hadley, Massachusetts.

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PAN Registration Process in Nepal

We can observe from the infographic that an entrepreneur who wishes to obtain PAN registration certificate for his/her business has to go through three desks and six steps before he/she finally gets a PAN certificate. Out of the entire procedure, it seems that we can remove at least two steps without hampering effectiveness of the registration process but making it more efficient, instead. Firstly, after entering information provided by applicant into the computer system and issuance of the submission number, it seems unnecessary to take it back to the Tax Officer for corroborating information provided by the applicant with the information entered into the computer. This process could be reduced if entry is done carefully enough at PAN registration desk. If this could be achieved, PAN certificates could be printed at second step itself. Thus, the applicant would not have to go to Tax Officer (third step) and again come to PAN registration desk (Fifth step), reducing the process to four steps from six. This makes the registration process faster and more efficient.

In order to make PAN registration process easier, the number of documents that need to be submitted by the applicant could also be reduced. PAN registration is a secondary registration. A business initially has to get registered at Office of Cottage and Small Industry, Department of Industry, Office of the Company Registrar or Commerce Office before applying for PAN registration. Hence, documents such as Citizenship certificate, Estate ownership document/ rental contract and Location map of the proposed industry/trading business have to be presented during the primary registration as well. If there was a proper co-ordination between the primary registration agencies and Inland Revenue Offices, applicants would not have to go through the redundant process of submitting the same documents again.

It is really disappointing that in the world where technological advancement has reached great heights, our government agencies still does not have any mechanism by which information could be shared digitally. Now, the task of submitting same document again might not be a laborious one but it would at least liberate entrepreneurs from submitting same documents at multiple places. This could also be a small step towards digitization of all the government works which would make government’s service delivery more efficient.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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On Funding Public Education Locally

The constitution of Nepal has listed basic education as a prerogative of the local government which will also include the financing of the education. As local government will require funds in order to finance the basic education, an important thing to look into will be the various sources through which the local government can generate funds.

Article 60 of the Constitution of Nepal grants local governments to generate revenue though taxes, fines and fees on matters relating to their jurisdictions.  The same article also lays down the basis by which local government can receive funds from federal and provincial governments. Inter-Government Financial Management Act, 2017 furthers this provision and specifies four different categories of grants that local governments qualify for.

On the recommendation of Natural Resource and Fiscal Commission (NRFC), the federal government can distribute fiscal equalisation grant on the basis of expenditure need and revenue generation capacity of provincial and local governments; the provincial government will further distribute fiscal equalisation grant to the local governments on the basis of the same principle.

Federal government, according to criteria set by the NRFC, can distribute conditional grant to provincial and local governments to implement their programs. Likewise, provincial government can grant conditional loans to local governments on the basic of provincial law and criteria set by NRFC.

Additionally, there is a provision for the federal government to provide complementary grant to provincial and local governments to implement infrastructure development projects. Also, provincial government as per their law can distribute complementary grant for infrastructure development to local governments.

Finally, there is a provision for federal government to provide special grant to provincial and local governments and likewise for provincial government to provide special grant to local governments for implementation of the special plans and programs as mentioned in Section 4 of Inter-Government Financial Management Act, 2017.

Apart from these, local government can also generate funds through borrowings. Local government can apply for the loans with the federal government specifying the use of fund, methods of repayment and the time within which the amount will be repaid and, receive loan from the federal government.

Also, local governments, following the limit recommended by NRFC and by taking permission from the federal government, can acquire funds through internal borrowing.

 

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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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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The Trade-off Between Social and Economic Development

Nepal has recently adopted federalist approach with the aim to bring economic as well as social transformation. We aspire to become an egalitarian society, ensuring equitable economy, prosperity and social justice. We also aspire to achieve perpetual peace, good governance, development and prosperity. While as a political document there does not seem to be much of a problem with either one of these, from an economic perspective, there appears to be a slight bit of tension among these aspirations.

Both economic development and social development has been a leading concern for Nepal. On one hand Nepal aims for achieving high income equality and poverty reduction through inclusive growth, while on the other it aims for high economic growth with increased productivity. Both goals are such that, social development through inclusive growth needs economic compromises and economic growth through productivity enhancement is likely to create more unequal distribution of income and assets.

Nepal, since 2000 has been giving eminent priority to inclusive participation, gender mainstreaming and poverty reduction. A series of positive impacts – poverty reduction to 13% in 7 years from its initial 33%, decline in hunger by 22.5%, reduction in Gini Coefficient to 0.35, resolved gender issues with increment in household headed by females, increment in average household income by 2.5%, net primary enrollment ratio of 96.6% and improvement in overall health outcomes – to name a few, can be regarded as astonishing achievement for Nepal. These achievements portray the dedication of Nepal over the past decade towards social development. The government of Nepal allocated more than NRs. 33 billion for social security alone.

However, these achievements have not been able to tackle the underlying challenges of Nepalese economic concerns as in the same period Nepal also faced slow economic progress with low PCI of US$850 in 2017 and is still lying among the 48 least developed countries despite its goal to upgrade itself to developing nation by 2022. The decline in employment from 84.3% in 2000 to 81.7% today, despite of majority of people migrating for foreign employment shows lack of productive, employment generating activities. The slow industrial progress with decline in agriculture productivity with only 2/5th of arable land illustrates that Nepal has been deteriorating in terms of investment climate, industrial growth and agricultural productivity. The inability of government to invest in priority projects is hindering the expansion of other sectors as well, further leading to slow economic growth. This depicts a contradictory picture of Nepal’s progress than compared to social development.

We cannot completely deny the role of remittance, aid and migration in the various social achievements. Thus, we can say that there is food in our belly but yet we are not self-sustainable. Despite the deteriorating macroeconomic variables of Nepal, the indicators of social sector enhancement showed more positive results. This makes it apparent that in case of Nepal, the achievement of social progress is negatively correlated to the achievement of economic progress. One important question for Nepal to dwell over, at this juncture then would be, will it be rational to compromise, as a country, a fair portion of otherwise potential economic growth for social growth?

The achievement of both the goals together seems to be paradoxical. Economic growth being a pre-requisite, Nepal for social development can either aim for equality of opportunity or equality of outcome. Focusing on outcome equality is practically not a rational or possible goal and more equal distribution of income might create additional problems resulting in stagnant economy. Nepal can achieve economic growth and social development by focusing in equality of opportunity. However, we need to understand that this approach is likely to create social and income disparity. Equality of opportunity will hamper the equity and equality goals of Nepal as everyone is not equal and all will have different ways to avail the opportunities. Some will benefit highly while others might not. Which of the two is more logical approach, is for us to decide. It is a trade-off.

 

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an intern in the research department of Samriddhi Foundation.

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Import Substitution: A Hindrance To Economic Development

As Nepal’s imports vis-à-vis exports continue to surge, more and more voices in favour of import substitution through import substitution industrialization (ISI) have been gaining ground. The fundamental logic is, instead of depending on imports, these (imported) goods should be produced domestically. While it may be tempting to defend this policy on the grounds of reduced reliance on imports and promotion of domestic market, there are quite a few explicit and implicit costs such policy entails.

Developing countries generally adopt ISI with the objective of stimulating economic growth, ironically by setting up trade barriers – imposition of tariffs and/or import restriction through quotas. Protectionist mechanism as such inflates the price of otherwise cheap imports, which in turn induces people to consume domestic alternatives they otherwise would not have in the absence of import tariffs or quotas. Consumers are compelled to bear substantial welfare loss for the sake of protecting few domestic jobs. New jobs replace old ones as a result of technological advancement under what we call the process of creative destruction. Hence, domestic jobs being lost due to foreign competition is a normal phenomenon of “economic evolution”. One way to look at it is as a release of human capital to take on something else where this capital can be employed. The question then would be are the economic policies of a country conducive enough to facilitate that transition?

ISI has proved to be counterproductive time and again. Latin American countries suffered severe ramifications – ranging from overvalued exchange rates to high level of foreign debt – upon adopting this policy. Furthermore, dependence on imported capital goods intensified as a result of attempting to substitute imported consumer goods with domestic goods. There was no improvement on trade deficits whatsoever and in some cases worsened as high exchange rates discouraged exports. And finally, ISI failed to alleviate unemployment in all respects.

Nepal has witnessed soaring trade deficits over the years. A recent finding has shown that Nepal’s imports amounted to Rs.893.09 billion while exports lagged behind at Rs.67.35 billion. Experts have pointed out the need to focus on promoting import substitution industrialization. However, is enforcing import restriction really going to help domestic markets to grow? Gorakhkali Rubber Industry, a domestic tire manufacturing company, was established in 1992 with the goal of reducing dependence on imported tires from India. The price of tires manufactured by this company was more expensive than the ones offered by Indian brands, which are of course levied custom duties. Evidently, Indian brands had comparative advantage over the production of tires as they were able to manufacture them at a lower opportunity cost. Gorakhkali Rubber Industry had to eventually halt production as it faced a supply glut since no one was willing to purchase overpriced tires. The basic principle of trade – countries engage in production of goods that they have comparative advantage over – is entirely disregarded under ISI as it was the case with Gorakhkali Rubber Industry.

Export oriented industrialization (EOI) approach could be more economically viable in generating sustainable growth. Rather than imposing import restriction to retain inefficient domestic industries, Nepal should divert its attention towards industries that actually have comparative advantage in the world market and incentivize these industries to export their products. On the other hand, Nepal is still not at par with foreign producers when it comes to manufacturing capital intensive commodities, say cars. Instead of attempting to manufacture cars on its own to bring down trade deficits, the government should formulate policies that would attract foreign direct investments to establish a plant for manufacturing foreign cars in the country. This significantly shrinks the import-export gap but more importantly, technology transfer that follows foreign direct investment contributes to the extensive development of domestic industries.

Nepal needs to analyze the trade-offs involved in each case and construct policies accordingly – ISI could save a few jobs in the short run at the expense of consumer welfare, and EOI might fail to save those jobs in the short run but enhances productivity and fosters growth eventually. All policies are carved with good intentions; however, good intentions of a policy do not necessarily yield good consequences in the long run. We therefore need to get our priorities right in the first place.

About Sambriddhi Acharya

Sambriddhi is a researcher at Samriddhi Foundation.

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