Policy review # 2

Industrial policy 2011

Submitted by:
Anjan Poudel (18769)
Section C

Kathmandu University School of Management (KUSOM)

Pichhe Tole, Gwarko, Kathmandu

Submitted To:

Ms. Anupama S. Panta

Visiting Faculty – Nepali Economics

Bachelor of Business Administration (BBA-Honors)

March 28, 2020

 Contents

Background................................................................................................................................................1
Summary of policies..................................................................................................................................3
Pros of policy..............................................................................................................................................5
Increase in aggregate demand..................................................................................................................5
Economies of scale..................................................................................................................................6
Policy implication Cons.............................................................................................................................7
Inflation...................................................................................................................................................7
No better functioning of production possibility.......................................................................................9
Effectiveness.............................................................................................................................................10
Increase in number of small, medium and large scale industries...........................................................10
Increase in tax collection.......................................................................................................................11
Increase in employment opportunities.................................................................................................12
Ineffectiveness..........................................................................................................................................13
Failure to provide subsidy and VAT benefits........................................................................................13
Higher rate of inflation and unemployment in Nepal.............................................................................15
Policy suggestion......................................................................................................................................18
Establishment of separate large taxpayer offices:..................................................................................18
Good supervision and better utilization of technology...........................................................................18
More participation of women in industrial plans and working in industries..........................................20
Managerial implications..........................................................................................................................21
Honor code...............................................................................................................................................21
Background

The World Bank Considers Industrial policy as government effort to alter industrial
structure to promote productivity – based on growths. The role of the government in the
economy has been a major source of debate in development thinking. In the early 1990s,
under the Washington Consensus, the International Monetary Fund (IMF) and the World
Bank sought to liberalize the economy. The market was identified as an efficient
mechanism for resource allocation, and the role of the government in the economy was
minimized. However, by the mid-1990s, it was clear that market forces, on their own, are
not sufficient for development.

Nepal initiated the economic liberalization by implementing (SAP) Structural adjustment

programs. After that the government withdrew and private sectors took the role in the
economy trying to develop the country through industrial development.

Industrial policy was first established in1991 which was focused on economic
development through agricultural sector. If any country is going to move in the industrial
sector then they should be good at agricultural sector so that commercialization of
agriculture would take place ultimately leading to higher production and economic boom.
The neighboring nations has been successful in economic sector in the 1990’s and at that
time industrial sector contributed nearly 10% in the Nepalese economy.

Government reviewed industrial policy in 2011 to find present relevant solutions to gain
overall economic and social growth in the nation. The vision of this policy is to make a
remarkable contribution in the national economy through sustainable use of resources
coordinating with the government and the public sectors ultimately removing the poverty.
The various objectives of the policy includes increasing the exports of industrial products
through utilization of local resources and people with the help of latest technology and
aiming for the sustainable development. As there are many natural resource in the
country the government wants to make Nepal as a plece for investment in the south ASIA

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as well as throughout the world by protecting the domestic industry and their property
rights.

The following factors are responsible for our industrial backwardness.

 Political instability,
 Industrial insecurity,
 Unfavorable labour relation,
 Minimal availability of energy,
 Weak industrial infrastructures,
 lack of competent human resources,
 lack of capacity to adopt new technology,
 low productivity,
 lack of diversification of exportable items
 Weak supply management
 Traditional farming
 Lack of proper irrigation system
 Lack of transport and market
 Unscientific and undemocratic distribution of lands
 Over pressure of manpower
 Poor economic condition
 Lack of research activities

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Summary of policies

For the purpose of advancing the cottage, and middle scale industries and establishing
large scale industries government wants to provide special attention to these sector.
Aiming that everything should be started from a small point and we have to advance it
and go in large scale. As most the industries are filled with male employees government
also aims to provide special provision for women employment and entrepreneurship. The
policies aims to enhance the productivity and demonstrate professional expertise taking
into consideration the global competitiveness. The followings are the policies that is
needed for this review.

 Facilities and Concessions

 Special Facilities and Concessions for micro enterprises, cottage and small
industries
 Special Provisions relating to Special Economic Zone

For the policies to work in efficient and effective manner along with meeting the
objective of the industrial policy the government has come up with the idea of facilities
and concessions of exemption of income tax. This will be applicable except from those
industries which produce goods like tobacco and liquors. The hazardous goods which are
harmful to the human body are not give the subsidy of tax exemption. There are different
category prepare for the liquors i.e. they are given tax exemption looking at the
percentage of alcohol contain in the product. In case any small-scale industry that
provides a direct employment to more than 100 native workers regularly for a period of
more than six months in the minimum, a medium scale industry that provides more than
200 workers and large scale industry that provides more than 500 workers, such an
industry shall be entitled to a further exemption of 25 percent in the income tax to be

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charged in that year. Industries which provide employment to Dalit community women’s
then they are provided with 50% tax exemption. The electricity consumption by the
machine and its minimum use and eco-friendly nature will reduce the tax of the company.

The other are the facilities provided in the case of custom tariff, excise and value added
tax. No excise and value added tax shall be levied if the goods produced in the country is
exported to abroad. However, in order to enjoy this facility, such an industry shall have to
be registered for the purpose of value added tax or excise. Any Nepali company which
wishes to import machine from country like china and India they will be charged with tax
of only one percentage. No royalty shall be charged on the electricity generated by an
industry for its own purpose. Moreover, if the industry desires to sell the electricity
energy, provision shall be made to allow the excess energy to the national greed at the
prevailing market rate.

The excise and income tax to be levied to cottage industries established in the least
developed, undeveloped and under developed regions referred to in Schedule-9, 10 and
11 shall be exempted for a period of twelve years, seven years and five years
respectively. Provisions for financial access shall be provided having
Affiliated local industries within micro enterprise, cottage and small industries villages
and common services centers with cooperatives.

“Special Economic Zone” means the specialized industrialized area, export processing
zone, export promotion house, structure with specialized or unified financial activities
along with free trade areas made for any particular commercial purpose having the main
objective to produce exportable goods and services declared by Government of Nepal.
The industries established in the Special Economic Zone will be provided with special
benefits from the state like income tax exemption, facilities relating to value added tax
along with exemption of custom duty, local tax, and export facilities and services.

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Pros of policy

Increase in aggregate demand

The figure shows the increase in the increase in investment in industry of the country and
rise in the real GDP of the country. The increase in AD1 form AD2 is due to better policy
and production of agricultural sector and establishment of industries. The more people
are involved in the production and service sector this could lead to higher standard of
living of the people. Human development index of the country will go up if everyone gets
an employment and the standard of living rises. By increasing the amount of money in
the economy, the central bank encourages private consumption. Increasing the money
supply also decreases the interest rate, which encourages lending and investment. The
increase in consumption and investment leads to a higher aggregate demand rising the
real GDP.

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Economies of scale

The productivity of industrial sector increase when the research and development
increases along with the advancement in technology. The technology advancement will
give us the economies of scale i.e. producing higher number of goods with lower price.
The effective utilization of resources and the following of governmental industrial policy
leads to economies of scale. The agriculture policy and industrial policy should go hand
in hand so that the production increases ultimately reducing the import from neighboring
nations.

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With the advance in technology we can produce more of goods and services. As the level
of output rises the LRAC falls and increasing returns to scale occurs.

Policy implication Cons

Inflation
The price level and its growth, inflation, is an important economic indicator. There are
various indices which measure the price level, such as; consumer price index (CPI):
wholesale price index (WPI); sensitive price index (SPI); gross domestic product (GDP)
deflator and so on. In Nepal, there are three main price indices, namely: the CPI; the
WPI; and the Salary and Wage Rate Index (SWRI). The main focus for measuring the
cost of living is placed on CPI. This is because CPI measures inflation impact which is
the final measure of prices on households.

For the improvement of industrial division, gigantic venture from government, private
and outside areas is required. These may prompt increment in cash supply inside the
country and may prompt swelling. Essentially expanded cash supply causes the loan fee
to lessen which will diminish the arrival on speculation prompting increment in AD lastly
builds the value level.

As per the above figure , loan cost has dropped from i1 to i2 because of the ascent in
cash supply. Since the financing cost has diminished more individuals will take credits

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for venture which will make the opportunity of expansion for example a slow ascent in
the cost of products. The governmental revenue will decrease when there is huge
investment in the industrial sector. The establishment of industrial areas and importing
machines will increase the money supply. Higher money supply leads to decrease in the
interest rate. Though this investment will create jobs and people will get employment
this leads to inflation in the country.

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No better functioning of production possibility
The policies are difficult to implement in country like where there is no political stability
and always the chances of turmoil’s and difficult situations. Even though the policies are
made which are one of the best in the world like the constitution of Nepal 2072 which is
not in good application now it’s similar to the policies made by the government in the
industrial sectors. Similarly, the cost for developing the industrial sector is not a small
amount and it will become very costly for the nation to bear it. As it is already explained
in the point before i.e it will enhance inflation. Hence proper planning and money
management is required to make the industrial sector a better sector. The high corruption
in the country has brought many problems in the country. The PPC curve of the nation is
malfunctioning its producing goods and services inside the curve rather than in the curve.

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We could do better in those industries which were started in the past. Industrialization has
failed to take off in Nepal. Even after seven decades since Biratnagar Jute Mills, the first
industry to be established in Nepal in 1993 BS, industrialisation has gone nowhere in
Nepal. In the ninth five-year Plan (2054-2059 BS), the production of export-oriented
industries declined. From the industrialisation point of view, the ninth five-year plan was
a complete failure. Though we establish industry because of the instability it leads to
failure in its production possibility.

Consumer goods

Capital
The above figure shows the production possibility of our country. We goods
can manufacture
goods and services at the pint A,B,C and can go further to points like E but due to chaotic
situation in the country we are not able to produce the goods and services at the efficient
points. This is due to difficulty in implementation of plans and policies by the
government.

Effectiveness

Increase in number of small, medium and large scale industries

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As we know from the industrial policy 2011 it aims is to increase production inside the
country and ultimately importing less goods and exporting much. So higher production
will lead to economies of scale and this decreases the production cost. At this situation
when the cost decrease it will lead to higher supply in the economy shifting the aggregate
supply curve rightward. The increase in number of industries though small or large it will
increase the supply of gods ultimately shifting the AS curve rightwards.

As the SRAS1 shifts to SRAS 0 the national income increases with the change in the
equilibrium point. The national income increases from the pint Y1 to Y0 in the above
figure.

Increase in tax collection

With the establishment of more industries and effectiveness of the industrial policy 2011
there will be rise in the tax revenue. The reduction of tax rate and the subsidy will
increase the establishment of the factories and industries. The more the industry or firms
the more will be the tax payers. Even though the policy has included giving subsidy and

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benefit to the industries since they are newly established and new tax payers the money
they will be paying will rise in the tax revenue regardless of the percentage. The income
tax, progressive, corporate income tax and every other type of tax will help boost the
economy. For more illustration the Laffer’s curve will help.

The government should impose a tax rate looking at the type of industry or firm. Those
industry which produces hazardous things to human health should be charged more and
less to the eco-friendly products. The rise in the industries after the better implementation
of industrial policy will definitely increase the tax revenue of the country. The tax should
be imposed in such a way that industry will keep on manufacturing the product and keeps
on paying the tax. Higher collection of tax leads to more investment by the government in
the future.

Increase in employment opportunities

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This strategy underlines the broadening of industrial divisions for example from jobless
to self or small, small to medium, etc. Moving to start with one structure then onto the
next isn't a simple undertaking so the government ought to create and extend fitting
modern innovations. With the presentation of new innovation, more centers ought to be
given to the preparation and improvement of farmers and skilled labor who can utilize
such advance innovation. Consequently we can expect that there will be increment in
work openings inside the country and economy development will be inside the vision.

Since more industries have been establishing there is more demand for workers in the
labor market so the demand curve has shifted from D to D1. Similarly, people are aware
about the increasing industrial sector so they won’t stay at the job or establish their own if
the wage rate is not as per their needs which further shifts wage from W to W1. Due to
the employment opportunities we can see positive impact in the poverty. There will be
high productivity leading to high income which will create more demand, when the
demand is more people will do higher investment leading to capital efficiency and
reoccurrence of the cycle.

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Ineffectiveness

Failure to provide subsidy and VAT benefits

In context of country where there is no political stability and there is frequent change in
the government how can one policy work effectively? Those things which are included in
the policy are not going to be followed by the governmental offices itself. The policies
we read in the Industrial Policy- 2011 are great in books but are somewhat
overpromising. To bring those policies in practice the government would have to forego
huge amount of tax revenue, which as a developing nation would be very hard for us. The
government has not been able to provide incentives for both domestic and foreign
investments.

Failure of raw materials processing and importing and not being able to give the subsidy
provided by the government is one of the main ineffectiveness. The target group as said
by the government had not been able get the benefits of what they were promised for.
The subsidy program is focused on basically at small scale industries. The greater part of
the nation's poor are farmers who vigorously depend on advancement.

Alongside sponsorship for purchasing machines by governments. This will not work
properly because of huge corruption in the country the budget separated for the industrial
development will go into the mud.

The explanation for this in-viability that the program, subsidy and award isn't connecting
with the focused on gathering of population is corruption and absence of observing by the
administration.

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We know that higher corruption demotivates industries as well as agricultural farmers to
be productive in the economy. This shifts the aggregate supply curve from S1 TO S2.
Reduction in the level of supply in the economy creates inflation and scarcity.

Though the Inland Revenue department of the country has told to provide VAT benefits
to the companies but they have made the process so difficult that firms owners are unable
to claim it. There is a great failure in this part of tax payment which demotivates the
investors and owners.

Higher rate of inflation and unemployment in Nepal

As clarified above there are different elements that clarify higher pace of inflation in
Nepal. In some cases it is made by higher inventory of cash in the economy and some of
the time by decline in total stockpile. In Nepal our economy is profoundly needy with
that of India, so Indian economy likewise impacts inflation in Nepal.

Joblessness has been the basic issue looked by the government of Nepal. The proportion
of capable works leaving nation for better open doors is high. We have not had the option
to make openings for work inside our country. At the point when we take a look at the
industrial strategy also, there is arrangement for investment bank, great technological

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system and infrastructural advancement, allows, etc. Be that as it may, when we take a
look at reasonableness, there is inefficiency, abuse of assets and wastefulness in
completing the strategies.

Individuals today observe no advantage in remaining in country as inflation and earning a

living. They are directly too on the grounds that inflation in Nepal are as yet poor.
Unemployment Rate in Nepal decreased to 3.20 percent in 2017 from 3.40 percent in
2016. Nepal Unemployment Rate - values, historical data and charts - was last updated on
March of 2020. In Nepal, the unemployment rate measures the number of people actively
looking for a job as a percentage of the labor force.

The figure above shows the unemployment percentage in Nepal from the year 2010 to
2018. The policies mentioned in the Industrial policy 2011, would increase the level of
investment at the same time decreasing the unemployment rate. If the huge level of
investment is not well settled and controlled effectively by the government then the

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inflation will rise in a faster manner. This relationship of inflation and unemployment can
be shown by the help of Phillip’s curve.

If the investment had flooded in and had decreased the unemployment rate from ‘6% to
3%’, then the inflation would have rose from ‘2% to 5%’. The Phillips Curve becomes
steeper the nearer the unemployment rate approaches zero %.

The Phillips Curve has been influential in developing the mathematical models used by
central banks and other forecasting organizations.

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Policy suggestion

Establishment of separate large taxpayer offices:

A large taxpayer office allows a country to focus tax compliance efforts on the biggest
taxpayers, as Cambodia has done. These offices also support good tax administration;
they often pilot new tax and customs procedures before their rollout to the broader
population. The information flow will become faster and tax payers can take the benefits
easily. Separate office for high earners will benefits the loyal taxpayers as well as to the
government. Since government will have clear and full record of the large scale industries
it would be easier to make separate rules as well as the policies of pollutions and other.
This makes the tax office to catch the not taxpayers and punish them as well.

Good supervision and better utilization of technology

Nepal is ranked 124 out of 180 countries, with a score of 31 (100 is the least corrupt) in
the Transparency International Corruption Perception Index 2018. This indicates that
corruption is endemic in Nepal. The Commission for Investigation of Abuse of Authority
(CIAA) is the apex constitutional body that investigates corruption by public officials.
Despite having a sound legal framework and political party leaders and government
authorities routinely speaking out against corruption, eliminating corruption in Nepal
remains an elusive goal. The corruption in the country had led to slow progress in the
development of the country. The corruption case shown by the minister of finance Gokul
Parsad baskota ko 70 corod shows the case of corruption similarly there has been
corruption in the case of agriculture as well like while buying industrial tools and
equipments.

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In the event that the general capacity of government is moved towards advanced world, it
would be simple for government to screen and direct the activities of authorities and
center men among ranchers and government. Straight forwardness in the work propels
enterprises to expand their creation. Further expulsion of negative externality from the
economy is useful for all.

The diagrams above advise if corruption is minimized in Nepali economy, industries as

well as agricultural farmers are involved extra in correctly producing goods. This
increases aggregate deliver and reduces rate increasing the quantity of goods supplied.

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More participation of women in industrial plans and working in industries

Nepalese women if furnished with abilities and thoughts about industry, agriculture and
technology, there's no doubt they could take our financial system to new heights. For this
they have to have right understanding about software of era in their work.

The industrial consists of Dalit and Utpidits however it is crucial to include women as
well. Involvement of girls creates virtuous cycle, shifts production possibility curve
outward and increases the delivery of labor inside the financial system. The industrial
policy has also stated that if any factory have 50% of Dalit’s women working then the
company have to pay only 50% of the total tax amount levied. So this is the great
opportunity for the Dalit citizens as well as to the industrialist.

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Managerial implications

From the managerial point of view, for the implementation of any coverage in an
employer the control must be unbiased even as planning, transparent even as execution
and amendable in nature. If any plans are executed with suitable governance and
regulated effectively any goals are achievable. The findings indicate that tax
administration improvements can be effective in raising revenue in developing nations.
"Meaningfully large increases in tax revenue from medium-sized firms can be obtained
through feasible administrative improvements in a relatively short period of time. While
making policies, we need to see the dynamic nature of environment and should no longer
leave out any trends which have been taking place globally.

Honor code

“On my honor as a student, I pledge that I have neither given nor received aid on this
assignment.”

18769

Anjan Poudel

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