Accommodating Foreign Investment in Nepalese Agriculture sector

Nepal predominantly being an agrarian country needs to make the agriculture sector competent through commercialization and diversification. In recent times, the government policy landscape has been working towards modernization in a robust way with programs like Prime Minister Agriculture Modernization Project (PMAMP) formulated in 2073/74. But still the idea of transforming subsistence farming into commercial farming has not materialized.

Even today Nepalese farmers have to rely on monsoons for irrigation. According to the World Bank, only 28% of the total arable land is irrigated while access to quality inputs remains another major impediment for agricultural productivity in Nepal. The government has been spending in this sector through grants and subsidies but in absence of an effective targeting mechanism, benefits of these schemes largely offset from intended consequence. In addition, the PMAMP program dedicated for agricultural modernization is yet to work towards reaching its R& D target. (See below picture)

                                 PMAMP F.Y. 2075/76 Third Triennial and Progress Report of Annual Program 

In January, 2021, Nepal government decided to allow foreign direct investment (FDI) in  primary agriculture production with the condition of exporting 75% of their products. Before this, primary agro based industries fell in the categories of industries restricted for foreign investment as per the governing law, Foreign Investment and Technology Transfer Act (FITTA), 2019. This opening was met with much criticism. The main backlash was for the way this development came about  i.e. without holding any discussions with stakeholders on allowing FDI and a looming concern that the spillover of the decision may lead to ‘land grab’ leaving marginal farmers vulnerable to exploitation.

It is true that FDI can play  a crucial role in stimulating growth in the agricultural sector by offsetting the investment and technological gaps, mainly as a result of limited income and sources of credit. But it is equally important to consider how it operates within national boundaries. The reins on foreign ownership over agricultural lands can be limited by encouraging FDI through partnerships with local industry or farmers. The commercial contracts that foreign persons enter into for purchase or long term lease, can put subsistence farmers in the same area with ill-defined tenure rights, a classic case of dual ownership not fully resolved, at risk. The only way to regulate foreign investment in such scenario is by incorporating local people in the process of production itself. These can be- Hiring a designated number of local workers, minimum levels of contract farming, contributing a designated percentage of production to local communities or markets, etc.

A low level of modernization in agriculture and related verticals is indicative of a low capital flow because of which, Nepalese farmers and small farms may find it difficult to match the scale of foreign large agro based enterprises. Thus, it is important to pivot our current policy exercise on accounts that competition in the sector can enable small enterprises in agriculture sector in the long term.

Another point of contention can be raised on the requirement of  compulsory export of 75% products of FDI. First of all, 75% is just a margin which may or may not be suitable in all cases considering the size of foreign firms and their economies of scale. For eg. for big firms even after exporting 75%, their remaining 25% may still be able to capture the local market. Secondly, 75% being exported may actually  put export of Nepalese local products at risk. In such cases, through partnerships with foreign investors who have existing distribution channels and commercial arrangements around the world, Nepalese firms can benefit from increased market access.

Along with FDI, focus should also be on how existing technology can be transferred in the hands of domestic firms. There should be more FDI in agricultural R&D and local farmers should be part of these institutions.

Shuvangi Khadka

Shuvangi Khadka is a research intern at Samriddhi Foundation and law graduate from Kathmandu University School of Law.

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