Running head: IMPACT OF MACROECONOMIC POLICIES ON THE GROWTH AND

DEVELOPMENT OF SMALL SCALE INDUSTRIEES OF NEPAL

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IMPACT OF MACROECONOMIC POLICIES ON THE GROWTH AND

DEVELOPMENT OF SMALL SCALE INDUSTRIES OF NEPAL.

Submitted by:

Barsha Katuwal (18743)

Sweta Khanal (18749)

Srijan Mahat (18760)

Ankit Pandey (18763)

Jeevan Regmi (18781)

Ayusha Tuladhar (187118)

Group 4 - Section A

KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Pichhe Tole, Gwarko, Kathmandu

Submitted to:

Ms. Anupama S. Panta

Faculty of Development Economics

Bachelor of Business Administration (BBA-Honors)

DATE: December 16, 2019

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Table of Contents
ABSTRACT ...........................................................................................................................3
INTRODUCTION..................................................................................................................4
1. PROBLEM STATEMENT .....................................................................................................5
2. OBJECTIVES OF THE STUDY ...............................................................................................5
3. METHODOLOGY ...............................................................................................................6
Primary Method: ..............................................................................................................................6
Secondary Method: ..........................................................................................................................6
4. ANALYSIS..........................................................................................................................7
1. PPC................................................................................................................................................7
2. Interest rates.............................................................................................................................7
3. IS-LM Model..............................................................................................................................8
4. Employment..........................................................................................................................12
5. Major Export and Import........................................................................................................13
6. Spending multiplier on small scale industries: ............................................................................14
7. Impact of wealth inequality in small scale industries:..................................................................15
5. Conclusion .........................................................................................................................17
5.1 Summary of findings .................................................................................................................17
5.2 Policy Recommendation............................................................................................................17
5.3 Limitations of the study.............................................................................................................17
5.4 Managerial Implications ............................................................................................................18
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ABSTRACT

Through this research, we are trying to analyze and preset the impact of Macroeconomic policies
on the growth and development of small scale industries of Nepal. This research paper brings out
the Impact of Macroeconomic Policy on the growth and development of Small Scale Industry in
context of Nepal by using some macroeconomic variables such as Gross Domestic Product (GDP),
Investment, Inflation Rate as well as interest rate. This research paper also includes the trend of
last five years along with the current study of small scaled industries and macro-economic policies.
We have also included the effects of the macro economic variables to small scale industries as well
as to the national income of the country.
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INTRODUCTION

Macroeconomics is a branch of economics that deals with the performance, structure, behavior as
well as the decision making of an economy as a whole. Macroeconomics deals with phenomena
like inflation rate, rate of economic growth, price levels, Growth Domestic Product (GDP),
unemployment and National Income. Macroeconomic policies are the instruments or tools by
which a government tries to regulate or even modify the economic affairs. The main aim of the
macroeconomic policies are to provide a stable economic environment that helps in the strong and
sustainable economic growth.

We are aware of the fact that, small scale industries are the most dependable source of growth of
the National economic development all over the world. The small scale industries are the major
employers of labor than the major industries and are the backbone of any economy. In context of
Nepal, there are many small scale industries. However, these industries are not very developed and
are lagging behind. We have found that there is a huge impact of macroeconomic policies in the
development of small scale industries in Nepal. By choosing this topic we are trying to show how
macroeconomic policies help in the development of small scale industries in Nepal. Small scale
industries are the backbone of Nepalese economy therefore, development of small scale industries
is very important for the development of the country. Small scale industries also play a vital role
in increase in employment which leads to the development of economy. Therefore the
development of small scale industries leads to the development of the economy which is possible
with the help of macroeconomic policies.
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1. PROBLEM STATEMENT

Since, small scale industries are the most dependable source of growth of the National economic
development all over the world. But in Nepal, these industries are not very developed and are
lagging behind, through this research, we are trying to find out about the impacts that the
Macroeconomic policies have on the growth of small scale industries in Nepal. Nepal has a lot of
natural resources that can be utilized by the small scale industries of Nepal in order to get high
level of output. The implication of macroeconomic policies will help in creation of jobs, wealth
and also improve the living standard of people. Small businesses can have a huge impact on the
economy and the macroeconomic policies can have a huge impact of the development and growth
of small scale industries in Nepal. Through this research, we are trying to find out, by using
macroeconomic policies how can the strategies for the growth of small scale industries in Nepal
can be known.

2. OBJECTIVES OF THE STUDY

The main objective of this study is to inspect the impact of various macroeconomic policies on the
growth and development of small scale industries of Nepal. Other objectives of our study includes
the following:

 Finding out the core reasons behind why the small scale industries in Nepal are not
developed as per their potential.
 Helping others gain knowledge on how to use the available resources to its optimum level.
 Finding about how macroeconomic policies have affected small scale industries so far in
Nepal.
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3. METHODOLOGY
Methodology is the system of methods used in a particular of study or activity. Since our research

aspires to showcase real scenario of the small-scale industries in Nepal, so we used various

methods and techniques to collect information during research studies. We conducted the research

using primary and secondary method.

a. Primary Method:
For collecting primary information, we took interview of the owner of Manakamana Food
Products, Mr. Ishwori Gyawali. We asked him a set of questions which he answered honestly,
transparently politely. Hence the entire process of collecting an information through primary
source was very efficient and productive.

b. Secondary Method:
For collecting secondary information, we used information from online resources and like:

o Facebook page
o Website
o Articles
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4. ANALYSIS
1. PPC
Small scale industries in Nepal can also be related to the macroeconomic theory- production
possibility curve (PPC). PPC is simply a graphical representation of possible combinations of two
goods. Nepalese small scale industries have focused on bringing new technologies than before.
The technologies might not be very advanced, but at least they are helping in the production of
goods. The use of technologies in the small scale industries have helped in increasing the
efficiency, reducing cost, increasing effective production by optimum utilization of the available
resources. Due to this, the production possibility curve shifts outwards, indicating the optimum
utilization of resources.

The above graph shows the outward shift in the production possibility curve due to technological
advancements.

2. Interest rates
Both the increase and decrease in interest rate influences the small-scale industry. If the interest
rate decreases, then the entrepreneurs can borrow more amount of money to invest so that the small
scale industry will prosper whereas if the interest rate increases then the entrepreneurs can’t borrow
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large amount of money and hence the investment on small scale industries will gradually decrease
leading towards different negative effects.

Government of Nepal is spending and investing especially in tourism and cottage industries as
they have a lot of scope in our country. The government banks of Nepal have been providing easy
loans to establish and run small scale industries like industries that produce dairy products,
garments, potteries etc. at low interest rates to encourage the entrepreneurs.

As seen in the graph, the interest rate has fallen from 10% to 5% which has resulted in increase in
investment from 500 to 1000. Similarly, when government banks provided loans at low interest
rates to start cottage industries, the investment in cottage industries has increased.

3. IS-LM Model
Government of Nepal, along with providing easy loans at low interest rates to establish and operate
small scale industries, is also providing incentives to encourage it. If someone wants to open a
cottage industry, especially in rural areas, they are given incentives such as more money or
equipment to do so. Similarly, government is also conducting international seminars (recently
conducted Investment Summit) that give an insight of plans and strategies for small scale
industries. Also, there is a separate department of small scale industries that allocates budget for
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the development of cottage industries by providing trainings and teaching about the optimum
utilization of resources. In all this process, government spending is seen in small scale industries.

We know that, government expenditure is a component of aggregate demand. So, when

government expenditure increases, the aggregate demand also increases and this leads to the shift
in IS curve.

As seen in the graph above, increase in government spending resulted in shift in IS curve from IS1
to IS2. But, the product market does not work alone in an economy, money market works side by
side. After government expenditure in small scale industries, it helped in the development of
nation. People got more opportunities and their income increased as well.
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Increase in income means increase in money demand in an economy. To balance this, the central
bank keeps money supply constant in short run, so when the money demand increases, there is
movement in LM curve.

As shown in the above below, the increase in money demand has led to increase in interest rate
and movement in the LM curve.

As government spending is increased, the IS curve shifts rightwards which increases the national
economy. But as the money market cannot be ignored in an economy, we should also consider the
increase in money demand after increase in government spending (as increase in government
spending leads to increase in income). So, the increase in money demand causes movement in LM
curve which reduces the national income to some extent. This reduction in national income is
known as crowding effect.

It can be made clearer by the graph given below:

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As seen in the graph, income of Y3 – Y2 is crowded out. This crowding out effect exists when
only fiscal policy is used. Therefore, government should make use of both fiscal and monetary
policy. In monetary policy, central bank increases the supply of money which causes shift in LM
curve. When that happens, the crowding out effect is neutralized.
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As shown in the figure above, after the use of monetary policy, the LM curve has shifted from LM
to LM1. And the national income has also increased from Y to Y1. In this way, a nation can achieve
full employment by neutralizing the crowding out effect.

4. Employment

During the past decade the industrial sector has made a substantial contribution to the economic
development of numerous Asian Countries like Nepal by enhancing income growth, creating
productive employment and easing banalnce of payments problems. However the importance of
small-sacle industries growth to the overall development of country and economic growth has been
there.

Due to income inequality there will be less demand for labor and the supply will be excess. This
situation will lead to increase in number of unemployed people. Also due to income inequality all
the people will not be privileged enough to get proper education and the number of skilled
manpower will also decrease causing structural unemployment. But while thinking other way
round due to increase in small scale industries there will be increase in the use of local resources
so that the people will get employment opportunity leading the economy to prosper. Thus this can
be explained with the help of Philips’s Curve as well. The Phillips curve is an economic concept
developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse
relationship. The theory claims that with economic growth comes inflation, which in turn should
lead to more jobs and less unemployment. However, the original concept has been somewhat
disproven empirically due to the occurrence of stagflation in the 1970s, when there were high
levels of both inflation and unemployment.
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We know that economy can be at one of three places at any given period of time. They are
recessionary gap, inflationary gap or at full employment. It turns out Philips curve shows exactly
that. The y-axis shows inflation rate and the x- axis shows the unemployment rate.It shows that
inflation and unemployment have an inverse relationship. Higher inflation is associated with lower
unemployment and vice versa. Understanding the Phillips curve in light of consumer and worker
expectations, shows that the relationship between inflation and unemployment may not hold in the
long run, or even potentially in the short run. Thus it affects the Small scale industries. The rise in
the inflation rate will lower the employment rate and vice versa. Typically, employees suffer more
than companies due to inflation. We can imagine what would happen if employees didn’t get wage
increasment. Very quickly that employee would quit coming to work. The same thing happens on
a lesser scale when inflation is lower. For simplicity sake, suppose an employee is earning $10 per
hour. If inflation is 5% per year, something that he could buy for one hour’s labor in January will
cost him $10.50 in December, but he hasn’t gotten his raise yet, so in effect if prices rise rapidly
the employee is always a year behind. Over time, that employee will start to struggle financially,
because their wage counts for less than it once did. This happens even when the inflation rate is
low, but when it’s high, this phenomenon is even more pronounced.

5. Major Export and Import

The trend of importing goods rather than producing it in our country will degrade the condition of
the existing small-scale industries and will also minimize the probability of establishing new small-
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scale industries. But if we stop importing goods and start producing goods which we are good at
producing by utilizing our local resources and manpower than we will be able to export hose goods
and hence we can also contribute in increasing national income of a country. Hence major export
and import of goods and resources will help the small-scale industries to rise.

If a country imports more than it exports it runs a trade deficit. If it imports less than it exports,
that creates a trade surplus. Thus a country must not import more than its export because the
small-scale industries will be affected. There is low chances of establishment of new small scale
industries. When a country has a trade deficit, it must borrow from other countries to pay for the
extra imports. It's like a household that's just starting out. The couple must borrow to pay for a
car, house, and furniture. Their income isn't enough to cover the necessary expenses that improve
their standard of living. Thus trade defecit will affect the small scale industries negatively.

6. Spending multiplier on small scale industries:

Multiplier effect is the process of multiplying the money by using the seed money as a primary
investment. If we invest on small scale industry than the locally unemployed labors will get
employment opportunity so that their income rises rising their purchasing power leading to
increase their consuming power as well. Also, the owner of a firm will gain profit and can expand
their business or invest on any other firm so that the GDP of a nation rises.

Government spending and subsidies for small scale industries create spending multiplier effect
for the overall development of small scale industry and economy as a whole.
“The government has been offering various incentives to cottage and small industries. For
example, the fiscal budget of 2016 year has increased the allocation for the Women
Entrepreneurship Fund from Rs 60 million to Rs 180 million,” said Narayan Prasad Bidari, director
general of DCSI, noting that such enterprises are critical for inclusive and sustainable economic
growth.(source:https://thehimalayantimes.com/business/micro-small-and-medium-enterprises-
boom/)
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Talking about the above example if government increases its spending on small scale industries
by 120 million, due to the ripple effect in the entire economy. So the initial spending of 120 million
by the government creates the total spending of 1/MPS=1/0.5 =2 i.e 240 million ( assuming MPS
as 0.5)

In the above figure the initial spending of 120 million

created rise in national income by 240 million. So, by such expansionary policies the small scale
industries can grow and expand and will multiply faster.

7. Impact of wealth inequality in small scale industries:

Inequality of wealth is also substantial in Nepal: the richest 20% hold 56.2% of all wealth,
while the poorest 20% share 4.1% of wealth. Recent reports indicate that one of the richest
Nepalis, listed on the Forbes list of billionaires, added $200m to his fortune in 2018. This is a
14.5% rise from 2017, and takes his total net worth to $1.5bn.51 The rise in his wealth could
pay more than half of Nepal’s spending on social protection. It would also take a poor
Nepali more than 100,000 years to earn that amount of money. (SOURCE:
https://oxfamilibrary.openrepository.com/bitstream/handle/10546/620607/bp-fighting-inequality-
nepal-110119-en.pdf)

Land inequality is the oldest and most fundamental type of wealth inequality. It manifests in many
forms and has far-reaching implications – from a lack of protection for the collective lands of
indigenous and peasant communities, to fiscal policies that incentivize extractivism and prevent
people benefiting equally from the exploitation of natural resources. Landless people, or those with
small amounts of land, are treated as second-class citizens in Nepal; they are denied government
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benefits and lack access to food, housing, water, health, and work, and are more likely to face
social instability and lack opportunities for economic development.

Share of income by quintile

The evidence discussed in the previous section already indicates some of the root causes of
inequality in Nepal. Significant differences in income, and access to assets like land, property and
capital, drive greater inequality of wealth.

One of the ways to promote small scale industries is by reducing the gap of this in equality. So
comes the role of government policies and public spending on such sectors
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5. Conclusion
5.1 Summary of findings

This study has analysed the impacts of industrial policies on the industrialization of the country by
assessing the relationships between different macroeconomic variables such as GDP, investments and
other variables. Small scale industries are important because it helps in increasing employment and
economic development. It improves the growth of the country by increasing urban and rural growth.
Role of Small and medium scale enterprises are to help the government in increasing infrastructures
and manufacturing industries, reducing issues like pollution, poverty, and many development acts.
Small scale manufacturing industries and cottage industries play a very important role in the economic
development. If any amount of capital is invested in small scale industries it will help in reducing
unemployment and increasing self-employment. The industry is a sector in which the production of
goods is a segment of the economy. The number of cottage, small and medium enterprises surged
by a whopping 360.89 per cent to 320,000 by the end of last fiscal 2015-16, compared to 69,431 a
decade back (fiscal 2005-06), according to the Department of Cottage and Small Industries
(DoCSI). Cottage and Small Industry Offices (CSIOs), under DCSI, register firms having fixed
capital worth Rs 100,000 to Rs 30 million in each district. As per DCSI, 80 per cent of the
industries registered in the DCSI have fixed capital ranging between Rs 300,000 to Rs 600,000.
The government has been offering various incentives to cottage and small industries for inclusive
and sustainable economic growth.

5.2 Policy Recommendation

The government should focus on entrepreneurial development. In context of our country although
the technology are increasing, they have not reached the advanced level. So in order to increase
our growth and development there needs to be advancement in technologies. Timely availability
of finance at reasonable cost, suitable physical infrastructure, availability of technology for
producing products is major essentials for entrepreneurship development. There should be
political commitment to keep industrial peace zone. Labour laws should make labour friendly to
encourage the workers. Licensing provisions should make easy and transparent. Unnecessary
strike and disturbances should be checked through the strict laws
5.3 Limitations of the study
- The budget that has been provided for small scale industries for various facilities but it has not
reached due to;
i) Numerous cottage, small and medium enterprises being registered simply to take benefit of the
incentives provided by the government
ii) Many projects run by non-government organisations and international non-government
organisations are shut down after the term of such project concludes.
iii) Many registered enterprises for the purpose of applying for a visa to a foreign country as a
businessman.
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5.4 Managerial Implications
As a management student we can develop more ideas and as a manager how much it is important
to be updated about the government policies and spending on the category of the industry we are
working for proper growth.

References
file:///C:/Users/user/Downloads/14521-Article%20Text-49169-1-10-20160207.pdf
https://www.toppr.com/guides/business-environment/scales-of-business/role-of-ssi-in-the-
economy/
https://thehimalayantimes.com/business/micro-small-and-medium-enterprises-
boom/?fbclid=IwAR2cfyJ6ySYXCA_GthEDRW-w6FIFTSjSUtJ-j3JOe6GhomPx1EGH6fe_ybM
https://www.google.com/search?q=shift%20in%20ppc&rlz=1C1CHBF_enNP823NP823&sxsrf=A
CYBGNTntFfYWMG-
XJlpLBoaWG12_SE3RQ%3A1576423347137&source=lnms&tbm=isch&sa=X&ved=2ahUKEwjloPz
M-
rfmAhWU8XMBHQ2lDIoQ_AUoAXoECBAQAw&biw=1536&bih=706&fbclid=IwAR3iv8bM97FXhx
jW-Xd9SyLo8mXkk8rwtFxp3vvtAHPhLfbGktPeS6Vx6oQ#imgrc=fvIokMU7_ZdvzM:
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Annexure
Fig 1

Fig 2
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Fig: Increase in government spending resulted in shift in IS curve

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Fig: shift in money demand and movement in LM curve

Fig 4
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Fig: Philips curve

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Fig: Spending multiplier effect increasing real GDP

Fig: Share of income by quintile in Nepal

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