Agriculture and Forestry University

(AFU), Rampur, Chitwan

Lectures on:

AGRIBUSINESS MANAGEMENT
B.Sc. Agriculture, 7th Semester
Course Code: AEC 405
Credit Hours: 3 (2+1)

Lecturer
Damodar Gautam
Technical Officer (T-6)
National Maize Research Program (NMRP), Rampur, Chitwan 1
May, 2021
 Course syllabus
A. Lectures
S.N Topics No. of lectures
1. Concept, definition and scope of agribusiness management in Nepal 2

2. Basic concept and definition of firms, plant, industry and their interrelationship with 1
respect to agricultural production
3. Agribusiness environment and management systems 2

4. Organization and business management functions and managerial decision 2

5. Human resource management in organization 2

6. Preparation of financial statements, analysis and agribusiness financing 2

7. Investment appraisals through use of discounted and appraisal measures 3

8. Leadership and motivation, economic principles involved in capital acquisition 3

9. Agribusiness control program and evaluation 2

10. Value chain analysis: Concept, mapping and approaches 3

11. Production planning in agribusiness-planning production, risk management 2

12. Implications of international trade in agriculture sector of Nepal 3

13. Agricultural policies and their impact on agribusiness enterprises in Nepal 3

Total 30

2
 Course syllabus (contd….)

B. Practical
S.N Topics No. of lectures
1. Review of organization and management structure in different agro-industries 1

2. Assessment of Demand-Supply of agri-commodities in different agro industries products 1

3. Analysis of backward and forward linkages of major agricultural products 1

4. Preparation and analysis of balance sheet- A case study 1

5. Preparation and analysis of profit and loss statement- A case study 1

6. Cash flow analysis of agro industries 1

7. Ratio analysis and forecasting techniques 1

8. Investment appraisal through discounted cash flow measures of project worth 1

9. Visit to an agribusiness unit for the analysis of problems, performance and prospects- A 1
case study
10. Value chain mapping of major agricultural sub-sectors 2

11. SWOT analysis of major agricultural sub-sectors 1

12. Preparation of business plan for agricultural firms 3

Total 15

3
 1. Concept, definition and scope of agribusiness management in
Nepal

Outline
• Introduction
• What is Agribusiness?
• What is Agribusiness Management?
• Objective of Agribusiness Management
• The Agribusiness system
• Major areas of agribusiness
• Dimensions of agribusiness
• Why Agribusiness is unique than other business
• Scope and importance of Agribusiness in Nepal
• Conclusion 4
 Introduction
• Agribusiness is one of the most challenging businesses today. Agribusiness
has held up a large share of business niche. The volume of agribusiness is
flourishing day-by-day.

• Prior to A Concept of Agribusiness, agriculture was viewed as an independent sector

from the other industries and it was understood in terms of markets and prices, thus
overlooking the backward-forward linkages between the sector and other industries. John H. Davis: Architect of
Agribusiness concept

• Agribusiness include not only that productive piece of land but also the people and firms
that provide the inputs (i.e. Seed, chemicals, credit etc.), process the output (i.e. Milk,
grain, meat etc.), manufacture the food products (i.e. ice cream, bread, breakfast cereals
etc.), and transport and sell the food products to consumers (i.e. restaurants, supermarkets
etc.).

• Agribusiness is not mere a business rather it is an useful tool for ensuring food security
throughout the world. In near future agribusiness will be the central metaphor of business
Dr. Ray A. Goldberg: Father
system for not only in our country but also to the whole world. of Agribusiness

5
• Concept of Agribusiness: ―The sum of all operations
involved in manufacture and distribution of farm
supplies, production operations on the farm, and the
storage, processing, and distribution of farm
commodities.‖ (Davis & Goldberg)

• Agribusiness encompasses all the participants involved in production,

processing and marketing of a product. This includes the market of
agricultural supplies, agricultural production, storage operations,
processing, wholesale and retail, delimiting a flow that ranges from
inputs to the final consumer. The concept encompasses all the
institutions which affect the coordination of the successive stages of a
commodity flow, such as the government, futures markets and
trade associations.

6
 What is Agribusiness Management?
 Crop production
 Fruits and Vegetable
 Floriculture
• Agricultural 

Livestock production
Fisheries
 Agro-forestry
 Medicinal and aromatics
 Bio-fuels and fibers

 Organization which is engaged

in the production, processing,

• Business
marketing and distribution of
goods and services with the
objective of earning profit by
providing satisfaction to the
consumer

ro
 f (Planning, Organizing, Staffing,
directing, coordinating, controlling,
communicating, motivating)
 The key functions of management

• Management in agribusiness are:

1. Marketing management
2. Financial management
3. Supply chain management
4. Human resource management
o Application of scientific production, Business and Management techniques, principles, skills 7
o Implication of latest technologies
 Objectives of Agribusiness Management

• Develop a competitive and sustainable private

sector led agribusiness sector
• Increase productivity/reduce yield gaps
• Commercialization of Agriculture
• Advance high potential sectors:
(horticulture, livestock and fisheries)
• Use of modern technologies
• Reducing cost of production
• Value addition
• Export agriculture
8
 Business objectives
S.N Objectives Meaning

1. Market standing Position compared with competitors

2. Growth and development How much and how fast should growth be?

3. Profitability What kinds and amount of profits are feasible?

4. Employee relation and What rewards and share of income should go to

performance investors?

5. Public responsibility and What kind of business the company does in view
relationships of the citizens/public want to be?

6. Physical resources What plants, equipment's, tools etc. are needed?

7. Products and innovation What emphasis will be placed on new products

and research

9
 The Agribusiness system
System: Interrelated set of business procedure/components used within one business unit,
working together for some purposes.

Input sector Farm sector Product sector

(Production) (Storage, Processing, Marketing)

Service sector

Climatic/Physical factors Socio-cultural factors Legal/political factors Technical/Economic factors

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 Interdependent subsystems…
Input sub-system Farm production sub-system

Processing sub-system Marketing sub-system

Support sub-system

11
Input Sub system
Working
environments
Production Sub-
system

Coordination -Government agencies

Financing -Private institutions
Manpower -Industry associations
Processing Sub- Technology
-Financing institutions
Information
system Infrastructure -Education and Research
Policies/programs institutions

Marketing Sub-
system
Affecting
factors
Final Consumer
12
 Input sector
• This sector is responsible for providing the thousands of different inputs — both products
and services — to production agriculture.

• Improved varieties of seed may be attributed to advances in biotechnology among other

more conventional developments, which allow improved and lower-cost production
methods. Animal nutrition, farm machinery and equipment, agricultural pesticides and
herbicides, and the many facilitating services offered to producers help increase the
productivity of the production agriculture sector.

• Improvements in the quality of purchased inputs have been a large source of efficiency
gains for the entire system.

13
 We can categorized the farm input
supply sector into three areas:
• Manufacturing: John Deere, Syngenta, Pfizer Animal Health, and
Monsanto are just a handful of examples of large organizations that spend
millions of dollars annually in research and development to bring improved
products to the producer. Livestock and poultry products include feed, feed
supplements, and health products which are required in the production of
meat, milk, and fiber products such as wool. Seed, fertilizer, irrigation
industries are other example of manufacturing sectors.

• Distribution: Farm production inputs move from the manufacturer to the

farm through a very wide variety of sales, marketing, and distribution
channels. individuals, companies, outlets of national organizations,
cooperatives, e-businesses, etc. — responsible for getting the products from
the manufacturer to the farm, and providing a set of services that insure
productive use of the inputs.

• Services and financing: includes farm management services,

veterinary care, consulting businesses, and farm lending
organizations etc.
14
 Production/farm sector
• It aims at producing crops, livestock and other products.
• The agricultural production sector has been the cause of
much of the change in agribusiness. They, in turn, have
been changed by development in other areas of
agribusiness, particularly in technology.

15
 Product sector
(Storage, processing, marketing)
• Employs millions of people in a variety of businesses ranging from grain
elevators to fruit and vegetable- processing plants to supermarkets to
fast food restaurants.

• Turns raw agricultural commodities either into ingredients for further

processing or final consumer products.

• The businesses in this sector acquire raw agricultural commodities from

producers and then process them into food products that are sold at
times, at places, and in forms that are desired by consumers.

16
 Service sectors
• All organizations, institutions and other entities directly and
indirectly affecting the agribusiness system through provision
of services, logistics and coordination of services from
technology, information's, programs and incentives to the
system.

– Public Sector (Ministries, NARC, Universities, R&D

organizations, Credit institutions, Market facilitating organizations
etc.)
– Private Sector
– Free agents

17
 Specialization areas of agribusiness

• Basic areas • Other areas

1. Production and operations 1. Material management
management 2. Purchase management
2. Financial management and
3. Wholesale and retail management
planning
3. Marketing and selling management 4. Office management
4. Personnel management 5. Farm management
5. Farm supplies 6. Export and import management
6. Processing
7. Research and extensions
8. Government polices and programs

18
 Agribusiness management is broad field of study….

• Principles of management and • Food technology & processing management

organizational behavior
• Agribusiness environment & policy
• Managerial accounting and control
• Marketing management
• Human resource management
• Financial management
• Production and operations management • Farm power & machinery management
• Management information system
• Rural marketing
• Agricultural marketing management
• Food retail management
• Agri-supply chain management
• Fertilizer technology & management
• Management of agro-chemical industry
• Farm business management
• Seed production technology and management
• Technology management for livestock products
• Fruit production & post harvest management
• International trade & sustainability governance
• Management of agribusiness co-operatives
• Management of agricultural input marketing
• Feed business management
• Management of floriculture and landscaping
19
 Why agribusiness is unique than other businesses
1. Diverse nature of business: There exist various kinds of
business in the agribusiness sector i.e. of basic producers,
wholesalers, brokers, processors, packagers, storage firms,
transporters, financial institutions, retailers, food chains ,etc.

2. Existence around production areas: Agribusiness is

established around several millions producers/ farmers that
produce hundreds of different food and fiber products.

3. Dealing with farmers/ producers: Most agribusinesses deal

with farmers both directly and indirectly. No other industry is set
up principally around the basic producer of the raw product.
20
4. Variety and size of agribusiness organization: There is infinite
variety in the size of agribusiness from one person and one family to
giants/huge/tall organization. Most agribusiness tends to be small
when compared to other businesses and industrial segments.

5. Scale and type of competition: Agribusinesses are small and

compete in a relatively free market (Perfect Competition) where
there are many sellers and buyers as well. The size of agribusiness
does not allow monopoly. Product differentiation is also difficult.

6. Conservativeness of agribusiness: The workers (laborers) and

producers have traditional philosophical touch, so they make
agribusiness more of conservative type.

21
7. Decision making: Agricultural operation decisions are taken by families i.e.
husbands and wives are often heavily involved in decision- makings.

8. Community oriented business: The agribusinesses tend to be community

oriented in small towns and rural areas.

9. Seasonality: The agribusinesses are highly seasonal in nature due to planting

and harvesting seasons and interdependence of specific enterprise.

10. Vagaries of nature: Agribusiness deals with vagaries of nature viz; drought,
flood, insects, diseases etc. and everyone from producer, banker and
manufactures is concerned with the weather.

11. Govt. programmes and policy: Govt. programmes and policies have direct
impact on agribusiness. Many agricultural products are directly influenced by
govt. programmes and regulations.
22
 Scope and importance of agribusiness in Nepal
• Agriculture is the backbone of Nepalese economy – drives GDP growth, employment and
inclusive development.

• Strengths of agriculture in Nepal include favorable agro-climatic conditions, availability of land,

and access to cheap labor.

• Gradual change from subsistence to commercial farming driven by – (a) increased government
support to improve productivity of the sector, and (b) improved farm-to-market linkages.

• Significant demand-supply gap exists in the agricultural sector; providing an opportunity for
greater private sector activity.

• Domestic demand for agri-commodities is increasing as a result of higher disposable incomes.

• More agribusiness activity can be seen in seeds, dairy, fruits processing, medicinal and aromatic
plants, spices, and tea sub-sectors.

• Regulatory regime presents a mixed bag across sub-sectors, having most positive impact on tea
and spices; and least on seeds and dairy.

• International demand for lifestyle products from Nepal like herbal food supplements and
cosmetics and premium tea is growing 23
• Government is supportive of Foreign Direct Investments in agriculture, with
100% foreign shareholding allowed in most agribusinesses.

• Private equity investors can play a catalytic role in commercialization of the

agricultural sector.

• Private equity investors are more likely to find attractive investment

opportunities amongst agribusinesses working in spices, tea and processed
MAPs segments

• The government of Nepal has placed an emphasis on investing in and

developing agriculture to bring about inclusive socio-economic growth

• Farm-to-market linkages are improving with increase in organised activity and

emergence of agro-processing

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• Growing demand for agricultural inputs (Feed and fodder, inorganic fertilizers,
bio-fertilizers).

• Biotechnology applications (Production of seed, bio-control agents, industrial

harnessing of microbes for bakery products).

• Mushroom production for domestic consumption and export.

• Organic farming

• Production and promotion of bio-pesticides and bio-control agents.

• Seeds-hybrid and genetically modified crops.

• Micro-irrigation systems and labor saving farm equipment's.

• Production of vegetables and flowers(Export market)

• Opportunities for employment in marketing, credit, insurance and logistic

support services.

25
26
 Conclusion
• Agribusiness is a highly diverse segment and a most important industry in the
Nepal. It includes all economic activity in the food and fiber system, which
encompasses the input supply industries, agricultural production and post-
harvest value-added activities, such as commodity processing, food
manufacturing, and food distribution.

• Agribusiness is the most potential sector to improve major economic indicators

of Nepal along with contributing in food and nutrition security of rural people.

• Agribusiness is an industry with tremendous potential for growth and

development. In the future, individuals who understand the principles of
business and the nuances of agribusiness will be in greater need than ever
before. 27
28
 Lecture 2. Basic concept and definition of firms, plant, industry and their
interrelationship with respect to agricultural production

# Farm: A piece of land with specific

boundaries where crop and livestock
enterprises are undertaken under common
management.
- Piece of land
- Agricultural commodities are produced.
- f (Land, labor and capital)

- May be owned and operated by a single

individual, family, community,
corporation or a company, may produce
one or many types of produce, and can be
a holding of any size from a fraction of
a hectare to several thousand hectares.

- E.g. vegetable farm, cattle farm, fish farm, organic

farm, banana farm, integrated agricultural farm.
29
 Concept and definition of Firm

# Firm (Business enterprises): A

commercial organization that operates on a for-
profit basis and participate in production and
selling of goods and services to consumers.

• The management of a business firm will

typically develop a set of organizational
objectives and strategies for meeting those
goals to help employees understand where
the enterprise is headed and how it intends
to get there.
• Objective of firm is to increase the output/
to minimize the cost.

• It is classified based on types of business

doing, its size and pattern of ownership.

30
 Concept and definition of Plant
• Is a particular facility that is used to manufacture a product for a
company or business

• A plant will usually have a plant manager whom is responsible for

the manufacturing process to run smoothly

• They implement the most effective system for producing the

product in a comfortable and steady manner.

• They are also responsible for overseeing and organizing meetings

as well as goals that the company is aiming for in terms of
production.

• The plant is one of the company‘s facilities, normally one of its

manufacturing facilities. Thus, plant is also a set of machinery/
technology used in production process

• Plants are the input of firm and by using this input the firm
produce certain output and this summation gives industry output.

• For examples, milk processing plant, jam/jelly processing plant,

skim milk plant of dairy industry

• Objective in any business/enterprises: Provide efficient

31
technology which minimizes cost
 Concept and definition of industry

• Industry is a combination of many interdependent firms as groups producing

bulk volumes of identical/close substitute products and services; each firm is
competing with any other firm in the economy.

• Under perfect competition: Industry is defined as a group of firms producing

a homogenous product; there is no rivalry on price taking.

• It comprises of several similar firms or plants (group of similar firms/plants).

• For examples: Agricultural industry, Livestock industry, Poultry industry

(Broiler industry, Layer industry), sugar industry, jute industry , Eco-tourism,
Mining industries.

• Two criteria are used to define an industry: product being produced (market
criterion) and method of production (technology criterion)

• Firms are building blocks of industry

• Dairy industry: Livestock, Veterinarian, feed and fodder, processing
units, storage, packaging, labor, market
32
 Firm as a business enterprise for production…

33
 Firm as a business enterprise for production…

Production function knowledge and the input and output prices information can be used to know the
most profitable input and output levels.

1. If the product has any value at all, input use once begun, should be continued until Stage –II is reached.
That is because physical efficiency of variable resources, measured by APP, increases throughout stage –I.

2. Even if input is free, it will not be used in stage III. Maximum output occurs when Stage
II closes. It is of no use applying variable input when TPP starts coming down.

3. Stage II defines the area of economic relevance. Variable input use must be somewhere in stage-II, but
exact input amount can be determined when choice indicators (input & output prices) are known. 34
 Equilibrium of firm and industry under PCM
 Equilibrium of the firm can be examined in two ways.
1. Total revenue and total cost approach
2. Marginal cost and marginal revenue approach

 Conditions of Equilibrium of an Industry:

1. Constant Number of Firms:
An industry will be in equilibrium when the number of firms remains constant. In
this situation, no new firms will enter and no old firms will leave the industry.
2. Equilibrium of Firms:
An industry will be in equilibrium when all firms operating in it are in equilibrium
and have no tendency to increase or decrease the level of output.
• In PCM, Firm is only price taker and industry is price maker. Firm can produce as
35
much or as little as it likes without affecting the market price.
Equilibrium of firm and industry under PCM in short run condition

Long run equilibrium of firm: The firm adjusts its plant

size so as to produce that level of output at which the LAC is
the minimum possible, given the technology and the prices of
factors of production.
SMC = LMC = LAC = LMC = P = MR

Long run equilibrium of industry: The industry is in long-

run equilibrium when a price is reached at which all firms are
in equilibrium (producing at the minimum point of their LAC
curve and making just normal profits). Under these
conditions there is no further entry or exit of firms in the
industry, given the technology and factor prices.
36
 Interrelationship of firm plant and industry with respect to
agricultural production
Major considerable features in interrelationship:
1. Coordination/networking 2. Resources/fund flow
3. Management and decision making 4. Value adding practices and upgrading

37
 -Resources (Land, Labor, Capital &
Management)
-Money payment for goods & Services

-Money payments
-Management & Services

Firm Industry

Inputs, Goods and

Services
Production
Money
resources
payments
Money
payments

Plant
38
Figure: Inter-relationship between firm, plant and industry in respect to agricultural production
 Something interesting….
(Industry 4.0 in Agriculture)
Why? …….Industrial production is nowadays driven by global competition and the
need for fast adaptation of production to the ever-changing market requests. These
requirements
can be met only by radical advances in current manufacturing technology.

Industry 4.0 is a strategic initiative recently introduced by the German government.

The goal of the initiative is transformation of industrial manufacturing, processing
and marketing through digitalization and exploitation of potentials of new
technologies.

Major techniques used:

1. Big data analytics 2. Precision agriculture 3. Automation 4. Intelligent robots
5. Internet of things (IoT) 6. Cyber security 7. Machine learning 8. Drone
analytics 9. Agricultural robots

39
Industrial
changes

Changing
pattern of
agricultural
production,
processing,
marketing
firms &
industries
40
 Concluding remarks…..
The Agricultural industrial revolutions 4.0 is used for
three, communally interrelated factors:
1) Digitalization and its integration in simple economical
and technical relations to complex networks.
2) Services and product digitalization.
3) Updated market models.

41
 Practical/Assignment 1:
• Annual program of FY 2077/78 of Pocket/Block/Zone/Superzone
of PMAMP project where LEE students were departed and
assessment of contribution of those programs with respect to
agricultural modernization, commercialization, industrialization
and farmers need.

42
Lecture 3. Agribusiness environment and management systems

Agribusiness environment
Agribusiness environment is the situation in
which agribusiness firm is operated. It refers
to those aspects of the surrounding of the
enterprises (Internal & External), which
affects or influence its operations and
determine its effectiveness.

Agribusiness environment foresee how much

the agribusiness is potential for the overall
investment as:
• It is taken as most important steps in
business initiation;
• It is conducted throughout the business
period (pre, during and post business
duration) at business feasibility study;
• It covers beginning to end product
development and marketing

43
43
 Enabling agribusiness environment:
• Sets of polices, institutions, support and other
conditions that collectively improve or create a
general business setting where enterprises and
business activities can start, develop and drive.

• Associated with a situation in which domestic

and foreign firms can operate and grow as a
result of the presence, interaction &
coordination capacity of different institutions,
policies and services.

Agribusiness enabling environment are generally

categorized as:
 Good infrastructure: storage facilities, market
center, roads, telecommunication and irrigation
networks
 Business policy
 Business governance

Some examples of business enabling environment in

Nepal
1. Support or incentives to private sector through
schemes and partnerships
2. Institutional change: several initiatives in PPP model,
cooperatives
3. Demand for processed products increasing i.e., socio-
economic environment is favorable for food processing
agribusiness 44
45
46
47
48
49
50
51
 Economic environment
• Economic/financial environment includes:
 Labor availability, wage rate and regulations;
 Current firm, companies and industries;
 Comparative vs competitive advantage;
 Number of banks and banking facilities;
 Credit availability: credit need, formal loan providers, interest rate,
installments, security management
 Service providers: repair and maintenance, insurance, advertisement
 Suppliers;
 Bargaining power of buyers and suppliers;
 Threat of substitutable product or services;
 Input and output access:
• Input side: potential inputs, equipment's, machine, raw materials availability
in quality, quantity and time
• Output side: collection, packing, transportation etc.
52
 Demographic environment

• The size of the population has important implication both for the
demand and supply of goods and services.

• Similarly economically active groups population determine the

growth of the agribusiness firm and gender inclusion have important
implication on its growth.

• Different ethnic groups of the population represent different possible

demands and preference.

• Similarly education level determines the marketing technique

adopted by the enterprises. These indicates potential consumers

53
 Socio-cultural environment
• It is important for marketers to learn about the customs and taboos,
values and religious beliefs of different locality and community.

• The language differences have direct impact on the advertising

campaign and product labels by the marketers.

• For example: promotion of cereal products especially paddy is

popular in Nepali culture whereas promotion of under exploited crop
products (finger millet) is not much feasible.

• It includes (factors to be considered regarding social

environment):
 Types of social system, customs
 Income status of consumers
 Social infrastructures: school, college, post office, health facilities
 Social networks: groups, association, cooperatives, community based
organizations
54
 Political/legal/policy environment
• The governmental policies and intervention such as taxation, subsidy and price
control (ceiling price, floor price) affect the growth of agribusiness firm.

• The legal procedure of registration and need of trademarks, branding, labeling,

patents, market communication, product safety, acceptability and environmental
issues have direct impact on operation of agribusiness firms.

• It includes:
 Type of political system
 Governance and government
 Business policies (Agribusiness policy-2063, APP-1995-2015, ADS-2015-2035,
milk policy-2008), Agri-trade policies
 Rules and implications of policy to particular business, registrations system, import
and export policies
 Production policies
 Marketing policies
 Banking policies
 Local taxes, social taxes, income taxes, duties

55
 Technological environment:
• The level of technological advancement of a nation affects the
establishment of business enterprises as well as type of it.

• The availability of trained personnel to operate machineries,

transportation and distribution facilities, communication facilities
through mass media, etc. affect the growth of agribusiness firm.

Physical environment:
• Physical environment determines potential types and sizes of agribusiness in
particular area
• It includes:
 Location of business point
 Availability of land
 Road access, vehicle and transport network
 Communication facilities
 Electricity or power support, irrigation
 Market access and boundary
 Storage facility
 Soil, climate etc.
56
Doing Business Score: Reflection of business environment

Ranking of countries according to Doing Business score

Country DB score Rank
New Zealand 86.8 1
China 77.9 31
India 71.0 63
Nepal 63.2 94

57
58
 Lecture 4: Organization and business management functions
and managerial decision

 Concept of Organizational Structure

Organization + Structure
 Organizational structure is a framework within
which an organization arranges its line of
authorities and communications and allocates
rights and duties.

Special features of Organizational structure:

1. Composed of individual and groups of individuals
2. Oriented towards achieving common goals
3. Differentiated functions.
4. Intended rational coordination
5. Continuity through time.
59
 Purpose of organizational structure
• Work Division
• Responsibilities assignment
• Coordination
• Relationship build up
• Line of authority
• Allocation of organizational
resources

60
 Organizational Design
The process of designing, defining or adapting
the organizational structure. It usually tries to
answer the following:
1.Who is responsible for each activity?
2.Who has the authority?
3.What are the limits of authority?
4.Who reports to whom?
5.Who has control over which resources?
6.How information flows in
Organization?
61
 Elements of Organizational Design
1. Work Specialization: The degree to which
task in the organization are subdivided into
separate jobs.

2. Departmentalization: The basis by which

the jobs are grouped together.

3. Chain of Command: The continuous line of

authority that extends from upper levels of an
organization to the lowest levels of the
organization and clarifies who reports whom.

62
4. Span of Control: The number of employees who can effectively and
efficiently supervised by a manager.

5. Decentralization: Degree to which decision-making authority is

concentrated at higher levels in an organization. In centralized
companies, many important decisions are made at higher levels of the
hierarchy, whereas in decentralized companies, decisions are made and
problems are solved at lower levels by employees who are closer to the
problem in question.

6. Formalization: The degree to which jobs within the organization are

standardized and the extent to which employee behavior is guided by
rules and procedures.

Narrow/Tall span
of control

Flat/Wide span of
control
63
 Organizational design for Business enterprise/firm
1. Organizational design by function 2. Organizational design by products

3. Organizational design by Customers 4. Organizational design by division

5. Matrix organizational design

64
 Types of Organizational Structure
1. Classical Organizational Structure:

2. Bureaucratic Organizational Structure:

3. Modern Organizational Structure:

a. Project design b. Matrix Organization

c. Adhocracy (ORGANISATIONAL STRUCTURE WITHOUT STRUCTURE): An organizational design whose
structure is highly flexible, loosely coupled, and amenable to frequent change. Adhocracy arises out of
the need of formal organizations to be able to recognize, understand, and solve problems in highly
complex and turbulent environments. E.g. Among private-sector organizations, high-technology
firms—particularly young firms facing fierce competition—are sometimes organized as adhocracies.

65
 Other Forms of Organizational Structure
1. Ladder Type/ Pyramid Type 2. Conical Type
3. Pie-Chart Type 4. Spore Type
5. Hydra Type

66
 Organization/Business management function

1 3 5 7
Planning Directing Coordinating Motivating

2 4 6
Organizing Controlling Communicating
 Execution of these functions is important for success of business firm. In fact, this is the best concept of
management.

 Some management specialists have divided the functions as main and subsidiary as below:
Main functions Subsidiary functions
1. Planning 1. Communication
2. Organizing 2. Decision making
3. Staffing 3. Innovation
4. Directing
5. Controlling
6. Co-ordinating
7. Motivating

 Management is needed to convert the disorganized resources of men, machines, materials and methods
into useful and effective enterprise.

 The purpose of management is to achieve certain organizational ends and to maintain or improve the
ability of an organization to efficiently achieve objectives.

 The essence of management is coordination of people and functions.

 The manager directs and controls the organization and its activities towards chosen objectives.

 Poor management can hold back progress of the agri-business. It is the not the matter how hard the
manager works in the given situation, but how intelligently he solves the problem and handles to the
success of the firm is important.
Major areas to focus:
1. Marketing management 2. Financial management
68
3. Supply chain management 4. Human resource management
1. Planning
The forward thinking (looking ahead) about course of
action or activity (developing alternatives) based on full
understanding of all the related factors and directed at
specified objectives.

 Determining goals, policies and courses of action which

involves the processes like work scheduling, budgeting,
setting up procedures, setting goals or standards,
preparing agenda and programming.

Major advantages of planning for business enterprises:

1. Gives an organization a sense of direction.
2. Focuses attention on objectives and results.
3. Establishes a basis for teamwork.
4. Helps anticipate problems and cope with change.
5. Provides guidelines for decision making.
6. Serves as a prerequisite to employing all other
management functions.

69
2. Organizing
The process of establishing the orderly use of resources by
assigning and coordinating tasks.

 Determine how to distribute resources and organize employee

according to the plan
 The organizing process transforms plans into reality through the
purposeful deployment of people and resources within a
decision-making framework known as the organizational
structure.

Major advantages of organizing for business enterprises:

1. Facilitates administration
2. Benefits of specialization.
3. Optimum/efficient use of resources
4. Stimulates innovation and technology
5. Establish good relationship among individuals, group, departments with
good coordination
6. Adaptation to risk and sudden changes
7. Productivity, growth and diversification

70
3. Staffing
The process of filling the positions in an organization structure
through identifying work-force requirements, inventorying the
people available, recruitment, selection, placement, promotion,
appraisal, compensation and training of needed people to carry out
the business activities very effectively.

 Staffing should be based on the need of the enterprise operation

and day to day running of the business with out any sort of
hindrance.
 Staffing is an ongoing process that begins with finding the right
people through proper planning, recruiting, and selecting. But
staffing doesn't end once employees are hired; management
must keep and nurture its people via training, appraising,
compensating, and implementing employment decisions that
determine such things as promotions, transfers, and layoffs.

Major advantages of staffing in business enterprises:

1. Basis of any organization
2. Achievement of business objectives
3. Discovering and obtaining competent personnel
4. Putting right people in the right job
5. Efficient and optimum utilization of resources and technologies
6. Key for directing and controlling
7. Healthy working environment and relationship
8. Competitive advantage
71
4. Directing
Directing is that part of management process which ensures that the
members of an organization work efficiently and effectively for the
attainment of organizational objectives. Directing is nothing but
motivating, ordering, guiding, leading, executing and supervising
the organization.

 Directing may be considered as the heart of management

process. Planning, organizing and staffing are merely
preparatory functions. Without direction, other managerial
functions such as planning, organizing and staffing remain
ineffective.
 Concerned with guiding, instructing, supervising and
inspiring employees to achieve predetermined objectives.
 Issuing orders to subordinates, overseeing people at work
and creating a work environment.
 Includes motivating subordinates and providing leadership to
them.
Major advantages of directing in business enterprises:
1. Initiates actions
2. Improves efficiency
3. Ensures Coordination
4. Facilitates Change
5. Balance in the organization
6. Helps Stability and growth 72
5. Controlling
The process of monitoring the activities to ensure that they are
being accomplished as planned and correcting any significant
deviations.

 The managerial function of the controlling is the measurement

and correction of performance in order to make sure that
organizations objectives and plans devised to attain them are
being accomplished.

Qualities of an effective control system:

1. Accuracy 2. Timeliness 3. Economy 4. Flexibility 5.
Acceptability 6. Integrity 7. Strategic placement 8.
Corrective actions

Major advantages of controlling in business enterprises:

1. Ensure order and discipline
2. Facilitate coordination in action
3. Improve the performance
4. Helps in minimizing the errors
5. Helps in achieving organizational goals
6. Judging of accuracy of standards
7. Making efficient use of resources
8. Improving employee motivation
73
6. Coordinating
Coordination is the integration, synchronization or orderly
pattern of group efforts in the organization towards the
accomplishment of common objectives.

Importance of coordination
1. Creative force 2. Unity of direction 3. High employee
morale 4. Diverse and specialized activities 5. Avoid
personal rivalries 6. Avoid conflict of interest

Types of coordination
1. Internal coordination: Within business enterprises
2. External coordination: Outside business enterprises

74
7. Motivating
Motivation is the process of inspiring people in order to intensify
their desire and willingness for executing their duties effectively
and for cooperating to achieve the common objectives of an
enterprises.

 The organizer in firm has to motivate his staff towards

better utilization of resources and move the things in
right direction towards accomplishment of goals and
objectives.

Performance = Motivation x Abilities

Major advantages of controlling in business enterprises:

1. Removal of Apathy
2. Combining ‗Will to work‘ with ‗Capacity for work‘
3. Securing full support and energy of workers
4. Understanding the Employees‘ Needs
5. Maximum Utilization of the Resources:
6. Increase in efficiency and output
7. Low Employee Turnover and Absenteeism
8. Acceptance of Organizational Changes
9. Better Industrial Relations
10. Facilitating Other Functions of Management 75
 Organization/Business managerial decision
Decision making: The process of selecting a course of
action from among several alternatives in order to
accomplish a desired result.

 The purpose of decision making is to direct human behavior

and commitment towards a future goal.

 If there are no alternatives, if no choice is to be made,

if there is no other way‐out, then there would be no need for
decision making.

 It involves committing the organization and its resources to a

particular choice of action thought to be sufficient and
capable of achieving some predetermined objectives.

76
77
 Lecture 5: Human resource management in organization
Human Resource Management (HRM) is a process of making the efficient and effective use of human
resources in an organization/enterprises so that the set goals/objectives are achieved.

 At a macro level, endogenous growth theories suggest that the accumulation of human capital
constitutes the main engine of macro-economic growth.

 At a micro level, resource-based theory points to the human capital of employees as a major
source for sustained competitive advantage for individual firms.

 Human Resource Management is concerned with the people dimension in management.

 HRM is concerned with the most effective use of people to achieve organizational and individual
goals. It is the way of managing people at work so that they give their best to the organization.

78
79
 Scope of HRM
It includes all activities starting from manpower
planning till employee leaves the organization.
Accordingly, the scope of HRM consists of
acquisition, development, maintenance/retention, and
control of human resources in the organization.

Scope of HRM can be specified as:

1. The Labor or Personnel Aspect: This is concerned
with manpower planning, recruitment, selection,
placement, transfer, promotion, training and
development, lay-off and retranchement, remuneration,
inventives, productivity, etc.

2. Welfare Aspect: It deals with working conditions, and

amenities such as canteen, rest and lunch rooms, housing,
transport, medical assistance, education, health and
safety, recreation facilities, etc.

3. Industrial Relations Aspects: This covers union-

management relations, joint consultation, collective
bargaining, grievance and disciplinary actions, settlement
of disputes, etc.

80
81
Approaches of HRM

82
 Factors affecting HRM
Internal environment External environment
(within business enterprise) (Outside of business enterprise)

 Organizational culture  Economic environment

 Mission  Labor market condition
 Policies  Labor
 Coordination unions/organizations
 Working environment  Demographic trends and
 Financial status increasing work force
 Motivation diversity
 Technology
 Government
 Globalization 83
Functions of HRM

84
 HR Planning process
 Process by which an organization ensures that it has the right number and kind of people at the right
time, capable of effectively and efficiently completing those tasks that will help the organization to
achieve its overall strategic objectives.

85
 Analyzing Factors for Manpower Requirements on Demand Side (Demand
Forecasting)

1. Judgmental forecast:
(a) Managerial Estimate (b) Delphi Method
2. Statistical projection:
(a) Ratio-Trend Analysis (b) Econometric Model
(c) Work-Study Techniques

Analyzing Factors for Manpower Requirements on Supply Side (Supply

Forecasting)
1. Judgmental forecast:
(a) Replacement planning (b) Succession planning (c) Human Resource Audits
(d) Employee Wastage (e) Internal Promotions (f) Renewal analysis

2. Statistical projection:
(a) Markov-chain model (b) Econometric Model 86
 Recruitment
• Recruitment refers to the process
of identifying, attracting,
interviewing, selecting, hiring and
onboarding employees. In other
words, it involves everything from
the identification of a staffing need
to filling it.

87
 Selection
Selection is the process of differentiating
between applicants in order to identify those
with a greater likelihood of success in a job.

 The selection of a candidate with the right

combination of education, work experience,
attitude, and creativity will not only increase the
quality and stability of the workforce, it will also
play a large role in bringing management
strategies and planning to fruition.

88
89
90
Placement

91
 Induction

 First developed in early 1970‘s in the U.S.

 Next to Selection and Placement.
 Brief introduction about the organization.
 Rehabilitated in the changed surroundings.
 Welcoming Process.
 Also called Orientation programme
 Used by prominent Indian companies like Taj group of Hotels,
Citibank, HUL, P&G and many more.
92
93
Lecture 6: Investment appraisals through use of discounted
and appraisal measures

Major focus:
1. Opportunity cost
2. Nature of cash flows: Discounted/Non discounted,
Single cash flow, regular equal cash flow, unequal
cash flow, Perpetual cash flow

1. Time value of money: Present value and Future

value
2. Investment appraisal techniques using discounted
and non-discounted cash flow techniques: B:C
ratio, NPV, IRR, Break even analysis, Profitability
index, Pay back period, ARR 94
 Opportunity cost
Suppose you have 10 lakh rupees and you have following
options:

1. Invest in a Bank- Bank annual return: 8%

2. Invest in a Non-agricultural business- Annual return:
15%
3. Invest in a Agricultural business- Annual return: 10%

 What is the opportunity cost if you invest in a Bank?

 What is the opportunity cost if you invest in a non-agricultural
business?
 What is the opportunity cost if you invest in a agricultural
business?
95
 Nature of cash flows
• Discounted cash flow: Time value of money is considered
• Non-discounted cash flow: Time value of money is not
considered.
1. Single cash flow: Money received at once time. E.g. money
received after 2 years, after 5 years.
2. Regular equal cash flow
a. Ordinary annuity: Payment made at the end of the each
period.
b. Due annuity: Payment made at the beginning of the each
period.
3. Unequal cash flow
4. Perpetual cash flow: Regular equal cash flow for infinite
period

96
 Time value of money
• Most peculiar attribute of money is its purchasing power. Purchasing power of
money is also known as the value of money.
• Any change in the purchasing power of money over the period of time is known
as the time value of money.
• “The firm can maximize wealth only when it is able to recognize the time value
of money and risk.”

1. Present value of money: PV = FV/(1 + r)n Single cash

2. Future value of money: FV = PV*(1 + r)n flow

Four reasons may be attributed to the individuals preference for

money:
 Inflation (Purchasing power)
 Investment opportunities
 Risk (Future is uncertain and risky)
 Personal consumption preference
97
Q.1) You would like to buy a house that is currently on the market at 10 lakhs but you cannot afford it
right now. However, you think that you would be able to buy it after 4 years. If the expected inflation
rate as applied to the price of this house is 6% per year, what is its expected price after four years?
 Here we know the present value of the house is 10 lakhs. Its price is going to grow at the rate of 6%
per year for four years.
FV of house = PV of house * (1 + r)n
= 10,000,00*(1.06)4 = 12,62,476.96

Q.2) Suppose you have 1 lakh rupees and you decided to give loan to your friend. You told your friend to
return 1.5 lakh after 6 years? From economic point of view, is this your rational decision?

Q.3) A bank account pays 8% annual interest, compounded yearly. How long will it take the money to
double in this account?
98
 The rule of 72

Note: The rule of 72 considers compounding return. If the rule is not

compounding, result will be different.
99
Future value of money (Single cash flow)

Future value of money: FV = PV*(1 + r)t

Or

Future value of money (FVt)= PV * CVF(t,r)

Note: CVF= Compound Value Factor

100
 Future value of money (Annuity-Ordinary)
Annuity is a series of even cash flows for a specified duration. It involves regular
cash inflow/outflow. E.g. Life insurance premium, recurring deposit, systematic
investment plan.
 Cash flow happens at the end of the year- Ordinary/Regular
 Cash flow happens at the beginning of the year- Annuity due

 1  r   1 n
FVordianryAn nuity
Ordinary Annuity  CF  
 r 
Where, CF = Cash flow per period, r = interest rate n = number of payments

FVA  PMT * CVAF n ,r Using table

Where, PMT = Regular fix payment 101

CVAF= Compounding Value Annuity Factor
Q.1 Suppose that a firm deposits NRs. 20000 at the end of each year for 10 years at 8% rate of
interest. How much would this annuity accumulate at the end of the 10 years.

Q.2 What annual interest rate would you need in order to have an ordinary annuity of NRs.
15000 per year accumulate to NRs. 559200 in 15 years?
102
i  n FV
Application
 The future value annuity formula can be applied in
different contexts.
 Its important applications are
 To know how much we have in the future
 FV= A(1+r)n
 To know how much to save annually
r
A  FV
1  r n  1

 To find out the interest rate i  n FV

 To know how long should wait to get the accumulated
money FV
log(1  r )  log
n
r
A
 Present value of money
• It is a process of discounting the future value of money to obtain its value
at zero time period (at present)
• To determine present values, we need to know:
– The amount of money to be received in the future
– The interest rate to be earned on the deposit
– The number of years the money will be invested

• Using the Present Value Table

– Present value interest factor (PVIF):
a factor multiplied by a future value to determine the
present value of that amount
PV = FV*(PVIF)
 Notice that PVIF is lower as the number of years increases
and as the interest rate increases.

• It can also be calculated using a financial calculator

PV = [FV/(1+r)n] 104
 Present value of money (Single cash flow)
 FVt 
Present value of single cash flow PV   
 1  r t

Or

Present value of single cash flow (PV)= FVt * PVIF r,t

Q. You expect to receive 1,00,000 as a bonus after 5 years on the job. You have
calculated the present value of this bonus and the answer is 80,000. What discount rate
did you use in your calculation?

105
 Valuing a Stream of Cash
Flows
• Valuing a single cash flow amount is easy to evaluate
because there is one cash flow.
• What do we need to do if there are multiple cash
flow?
– Equal Cash Flows: Annuity or Perpetuity
– Unequal/Uneven Cash Flows

FV1 FV2 FVN

PV     
1  i  1  i 
1 2
1  i  N

N FVt
PV  
t 1 1  i 
t
 Valuing a Stream of Cash
Flows

? 1000 2000 3000

0 1 2 3

• Uneven cash flows exist when there are

different cash flow streams each year
• Treat each cash flow as a Single Sum
problem and add the PV amounts together.
 • What is the present value of the preceding
cash flow stream using a 12% discount rate?

n FVt  100
n 3 200 300 
PV  
t 0 1  r 
 
=PV   3
t  0  1  0.12  1  0.12 1  0.12 
n 1 2

PV   893  1594  2135

PV  4622

Year 1 1,000 / (1.12)1 = 893

Year 2 2,000 / (1.12)2 = 1,594
Year 3 3,000 / (1.12)3 = 2,135
4,622
 Annuities
• The present value of an annuity is the value now of a series
of equal amounts to be received (or paid out) for some
specified number of periods in the future.

• It is computed by discounting each of the equal periodic

amounts.

• An annuity is a series of nominally equal payments equally

spaced in time

• The timeline shows an example of a 5 year, 100 annuity

100 100 100 100 100

0 1 2 3 4 5
 Present Value of an Annuity
• The present value of an annuity can be
calculated by taking each cash flow and
discounting it back to the present, and adding
up the present values.

• We can use the principle of value additivity to

find the present value of an annuity, by simply
summing the present values of each of the
components:
N

 1  i
Pmt t Pmt1 Pmt 2 Pmt N
PVA      
t 1
t
1  i 1
1  i 2
1  i N
 Present Value of an Annuity
(cont.)
• Alternatively, there is a short cut that can
be used in the calculation [A = Annuity; r =
Discount Rate; n = Number of years]

• Thus, there is no need to take the present

value of each cash flow separately

• The closed-form of the PVA equation is:

1  1 
 (1  r ) N 
PV  FV  
 r 

 

 Present Value of an Annuity
(cont.)
• Using the example, and assuming a
discount rate of 10% per year, we find
that the present value is:
100 100 100 100 100
PVA       379.08
110
. 
1
110
. 
2
110
. 
3
110
. 
4
110
. 
5

62.09
68.30
75.13
82.64
90.91
379.08 100 100 100 100 100

0 1 2 3 4 5
 • We can use this equation to find the present
value of our annuity example as follows:
1  1 
 (1  0.1)5 
PV  100 
 0.1 
 
1  1 
 (1.1)5 
PV  100 
 0.1 
 

 0.3791 PV  1003.791
PV  100
 0.1  PV  379.1
 This equation works for all regular (ordinary)
annuities, regardless of the number of payments
Present value of perpetuity annuity
• A perpetuity is an annuity of with an infinite
duration.
• Hence the present value of perpetuity may be
expressed as follows

PV∞ = CF x PVIFA

Where, PV∞ = present value of a perpetuity

CF = constant annual cash flows
PVIFA = present value interest factor for
perpetuity (an annuity of infinite duration)
 1 1
– The value of PVIFA is PVIFA   t 
t 1 1  r  r
So, Present value of perpetuity annuity PV∞ = CF/r
Deadline for Assignment 1
submission: 5th June, 2021

Email: gautam.damodar.np@gmail.com

Or,

gautam.damodar@narc.gov.np
Application of time value of money

1. Sinking fund
2. Loan Amortization
3. Equated Monthly Investment
(EMI)
4. Compound Annual Growth Rate
(CAGR)
 1. Sinking fund
• A sinking fund is a type of fund that is created and set up
purposely for repaying debt.
• A sinking fund is an account that is used to deposit and save
money to repay a debt or replace a wasting asset in the future.

Q. A financial manager of a company wants to pay a debt of Rs

5,00,000 at the end of 5 years . He request to find out the annual
payment required. If his savings earn an interest rate of 10% per
annum.
 2. Loan amortization
• Loan is an amount raised from outsiders at an interest and
repayable at a specified period (Lump sum or Installments).
• Payment of loan is known as amortization.
• Financial manager may take loan and he/she may be interested
to know the amount of equal installment to be paid every year
to repay the complete loan

𝑟 (1+𝑟)𝑛
Loan installments (LI)= P×
(1+𝑟)𝑛 −1

𝑃
or, Loan installments (LI)=
𝑃𝑉𝐼𝐹𝐴

Where, P= Loan amount (Principal)

n= Loan repayment period
3. Equated Monthly Installments (EMI)

Q. Assuming a loan as NRs. 2,00,000

at 12% repay in 2 years. Calculate
EMI.
 4. Compound Annual Growth Rate (CAGR)

 The mean annual growth rate of an

investment over a specified period of time
longer than one year.

Q. Yearly revenue of a company is given below. Calculate CAGR of

the company.
Year 2015 2016 2017 2018 2019 2020
Value 20.3 25 27.3 30.2 32.7 34.1
(Billion)
 Investment appraisal criteria/Capital budgeting
techniques
Basic concept
 Independent projects are those whose cash flows are unrelated to
(or independent of) one another; the acceptance or rejection of
one does not eliminate the others from further consideration.

 Mutually exclusive projects are those that compete with one

another, so that the acceptance of one eliminates further
consideration all other projects that serve a similar function.

 Unlimited funds is the situation in which a firm is able to accept all

projects that provide an acceptable return.

 Capital rationing is the situation in which a firm has only a limited

availability of fund for capital expenditures, and have numerous
projects compete for investment. 122
Capital Budgeting Techniques

Evaluation Criteria

• NPV - Net present Value

• IRR - Internal Rate of Return
Discounted
• PI – Profitability Index
Cash Flow
• Benefit-Cost ratio
• Payback period

• Payback period (Payback period is usually

calculated considering the Non discounted
Non- cash flow.
Discounted • Accounting rate of return
Cash flow • Proceed per unit of outlay
• Simple rate of return
• Break even analysis 123
 1. Net Present Value (NPV)/Net Present Worth
(NPW)
• NPV of a project is the sum of the present values of all the cash
flows-positive as well as negative-that are expected to occur over
the life of the project
• NPV of a project is the present worth of the benefits less the
present worth of the costs
• It is simply the present worth /value of the incremental net benefit
or incremental cash flow stream

Net Present Value = Present value of cash inflows - Present value of

cash outflows

124
 Valuing a Stream of Cash
Flows
• Valuing a single cash flow amount is easy to evaluate
because there is one cash flow.
• What do we need to do if there are multiple cash
flow?
– Equal Cash Flows: Annuity or Perpetuity
– Unequal/Uneven Cash Flows

FV1 FV2 FVN

PV     
1  i  1  i 
1 2
1  i  N

N FVt
PV  
t 1 1  i 
t
Net Present Value
Example: Calculating NPV
A sum of NRs. 400,000 invested today in business enterprise may give a series
of below cash inflows in future:
70,000 in year 1
120,000 in year 2
140,000 in year 3
140,000 in year 4
40,000 in year 5
If Discounting rate is 8% per annum, then should we accept or reject the
project?

Solution: Calculating NPV

Step 1: Calculate the PV value of year 1, year2, year3, year4, and year5
Step 2: Sum the PV of all years
Step3: NPV = Present value of all cash inflows – Present value of all cash outflow.
Step 4: If NPV is positive, Accept the project, if not Reject the project.

126
 Cash Inflow of all Present Values is : 408,959
Present value of Cash outflow is : 400,000
Net Present Value = PV of Cash inflows – PV of Cash Outflows = (408959 – 400000) =
8959
Since NPV is positive, (i.e., 8959, This project can be accepted)

Same example: Calculating NPV however with Discount rate or Opportunity cost of capital at
15%
A sum of NRs. 400,000 invested today in a business may give a series of below cash inflows in
future:
70,000 in year 1
120,000 in year 2
140,000 in year 3
140,000 in year 4
40,000 in year 5
If Opportunity cost of capital is 15% per annum, then should we accept or reject the project?
127
Solution: Calculating NPV
Step 1: Calculate the PV value of year 1, year2, year3, year4, and year5
Step 2: Sum the PV of all years
Step3: NPV = Present value of all cash inflows – Present value of all cash
outflow.
Step 4: If NPV is positive, Accept the project, if not Reject the project.

Cash Inflow of all Present Values is : 343591

Present value of Cash outflow is : 400,000
Net Present Value = PV of Cash inflows – PV of Cash Outflows = (343591– 400000) = -
56408 dollars.
Since NPV is Negative, (i.e., -56408, This project should be rejected)

N.B: Though we have the same inflow of cash in the previous example and this example,
The NPV value changed with the change in the Discount rate of interest. Therefore, NPV
is very much dependent on the Discount rate of interest value or in other words the
128
opportunity cost of the capital value.
Decision rule for NPV:

NPV = + ve →Project accepted (provided the discount rate more or equal to the
opportunity cost of capital)
NPV = 0 → Indifferent in decision making
NPV = -ve → Project rejected

Properties of NPV rule

1. It has additive property, i.e., NPV of a number/bundle of projects is sum of NPV

of individual projects.
2. It explicitly recognizes the time value of money.
3. It takes into account total benefits and costs arising throughout the life of the
project.
4. It considers differential discount rates also, if so required by the nature of the
project.

Limitation of NPV technique:

1. The NPV is expressed in absolute terms rather than relative terms and hence
does not factor in the scale of investment

129
 Thus, no ranking of acceptable, alternative independent projects is possible
with NPV rule.
 A small highly attractive project may have a small NPV than a large, marginally
acceptable project.
 Thus Project A may have NPV of 5000 while Project B may have NPV of 2500
but, Project A may require an investment of 50,000 whereas project B may
require investment of just 10,000
 NPV is most appropriate measure to choose among the mutually exclusive
projects

2. The NPV rule does not consider the life of the project. Hence, when
mutually exclusive projects with different lives are being considered, the
NPV rule is biased in favor of the longer term project

130
 2. Internal Rate of Return (IRR):
 IRR (Internal Rate of Return) is a discount rate at which NPV (Net Present Value) becomes
Zero. In other words, IRR is the opportunity cost at which the NPV becomes Zero. IRR as
the name suggests, it tells how much rate of return are we getting from the project.

 Also called Yield on investment, Marginal efficiency of capital, Rate of return over cost,
Time adjusted rate of internal return.

 It is the discount rate at which NPV=0

 In IRR method the interest rate that equates the present value of the future cash
earnings with initial investment outlay is calculated

 In NPV calculation we assume that the discount rate (cost of capital) is known and
determine the NPV
 In IRR calculation, we set the NPV equal to zero and determine the discount rate
that satisfies the condition

131
Why IRR, what is the use of calculating IRR?
⮚ IRR is used to rank different projects.
⮚ The higher a project's internal rate of return, the more desirable it is to undertake the
project.
⮚ If all the other factors are same for different projects then the project with the Highest
Internal rate of return value should be considered.

Note:
 For Constant rate of Cash inflow for every year, Internal Rate of Return can be calculated with the
help of a formula
 For Uneven rate of Cash inflows for every year, IRR can be calculated by little trail & error
adjustments.

Decision criteria
In case of single project: Accept the project when IRR greater than opportunity
cost of capital i.e. market interest rate which is generally between 14-19%.
In case of two mutually exclusive projects: Accept one having higher Internal
Rate of Return

Conditional analysis:
1. Equal and unequal cash flow
2. Conventional and Non-conventional cash flow
3. Types of project (Independent and Mutually exclusive)
4. Amount and duration of cash flow 132
133
 Calculation: Equal and unequal cash flow
Equal cash flow: Case of Annuity (We can use the formula of annuity)
Unequal cash flow:
Case 1: if time period is up to three years, we can solve through equation.
Case 2: if time period is more than three years, IRR is most commonly calculated
using the hit-and-trial method, linear-interpolation formula or spreadsheets and
financial calculators.
• Since IRR is defined as the discount rate at which NPV = 0, we can write that:
NPV = 0 or PV of future cash flows − Initial Investment = 0
The most difficult aspect of trial and error is making the initial estimate. If the estimate is
too far from the final result, then several trails will have to be made to find two rates
close enough together to permit accurate interpolation. Interpolation is the process of
finding a desired value between two other values.

134
• Question 1: Suppose an organization is planning to invest in a plant, it generates the
following cash flows:
Year 0 1 2 3 4 5

Cash flows 240000 140000 80000 60000 20000 20000

The company’s required rate of return is 13 percent. Calculate IRR.

Solution:
Number of years is greater than 3 years, so IRR can be calculated by Hit and trial method.
Let us suppose, discount rate is 13%, then NPV will be: Rs. 11250
Discount rate is 15%, NPV= Rs 3059
Discount rate is 17%, NPV= Rs. -4643
By using 15% we have a positive figure that is greater than zero whereas by using 17%,
NPV is less than zero that is negative. NPV appears to be between 15% and 17%. Then
use interpolation techniques:

= 15 + (17-15) * (3059/ (3059-(-4643))

= 15 + 2 * 0.3972
135
= 15.79% So, IRR= 15.79%
 Independent and mutually exclusive projects
Independent project:
Case 1: Accept projects which have IRR> Cost of capital
Case 2: In case of ranking, choose the project having higher IRR
Mutually exclusive project: NPV and IRR conflict may arise in which one project
has a higher NPV but the other has higher IRR. The conflict either arises due to
relative size of the project or due to the different cash flow distribution of the
projects. Whenever an NPV and IRR conflict arises, always accept the project
with higher NPV.
Example: Project A Project B

Initial investment 10,00,000 1,00,000

Discount rate 10% 10%

NPV of all cash inflows 7,00,000 70,000

IRR 18.4% 22.3%

136
 Conventional and Non-conventional cash flows
Year Cash flow Year Cash flow

0 1,00,000 0 1,00,000

1 40,000 1 40,000

2 30,000 2 30,000

3 25,000 3 -40,000

4 10,000 4 10,000

5 15,000 5 15,000

Conventional cash flow Non-conventional cash flow

 In conventional cash flow, only one IRR is obtained which can be

calculated by hit and trail method.
 In Non-conventional cash flow, more than one IRR (Multiple IRR) can be
obtained which can mislead our decision criteria. In general (Not always)
the number of IRRs (number of multiple IRR) equals the number of times
the cash flows switch signs.
137
 Modified internal rate of return
There are mainly two limitations for conventional Internal rate of return
1. Conflict of NPV and IRR for mutually exclusive project (Limitation for MEP)
2. Multiple rate of return (Limitation of IRR for Non-conventional cash flow)
These limitations can be solved by using Modified Internal Rate of Return
(MIRR)
 MIRR addresses the reinvestment rate issue and produces results which are
consistent with the NPV method.

Major difference between IRR and MIRR is basis of assumption:

 IRR assumes that the positive cash flows from a project are reinvested on the
same rate of return as that of investments.
 MIRR assumes that positive cash flows are reinvested based on the cost of the
capital or opportunity cost of the firm.

Note: IRR inherently assumes that any cash flows can be reinvested at the
internal rate of return. This assumption is problematic because there is no
guarantee that equally profitable opportunities will be available as soon as cash
flows occur. The risk of receiving cash flows and not having good enough
opportunities for reinvestment is called reinvestment risk. 138
 3. Profitability index or Benefit-Cost ratio
 PI is also known as profit investment ratio (PIR) or value
investment ratio (VIR)
 It is a useful tool for ranking projects because it allows you to
quantify the amount of value created per unit of investment.
 Profitability index is an investment appraisal technique calculated
by dividing the present value of future cash flows of a project by
the initial investment required for the project.
 PI of 1.1 implies that for every 1 rupees investment, we create an
additional 0.1 rupees value.

139
140
141
Project acceptance criteria using Profitability Index method.

Accept the project when PI > 1

Reject the project when PI < 1
May accept the project when PI = 1
Higher the profitability Index of the project, the better.

Note:
For a project with NPV > 0, PI is always greater than 1.
For a project with NPV < 0, PI is always less than 1

142
 4. Pay back period (Discounted)
 A discounted payback period gives the number of years it takes to break even from
undertaking the initial expenditure, by discounting future cash flows and recognizing the
time value of money.
 In terms of Projects ranking, it gives highest ranking to the project with the shortest payback
period.

Principle: How fast can I recover my initial investment plus interest?

Method: Based on cumulative discounted cash flow
Screening guideline: If the discounted payback period is less than or equal to
some specified bench mark period, the project could be considered for further
analysis.
Weakness: Cash flows occurring after DPP are ignored.

Q. An initial investment of 23,24,000 is expected to generate 6,00,000 per year for 6 years.
Calculate the discounted payback period of the investment if the discount rate is 11%.
143
144
 Exam questions
Q1. Suppose an organization is planning to invest in a plant, it generates the following cash flows
Year 0 1 2 3 4 5
Cash flows 240000 140000 80000 60000 20000 20000

From the above information calculate NPV and IRR. The discounting rate is 10% and suggest
whether the organization should invest in this plant or not?
Q2. Calculate the IRR from following information.
Year 0 1 2 3 4 5
Cost (000) 35 20 40 60 90 130
Returns (000) 0 45 85 115 135 145

Q3. Interpret result.

Firm A Firm B
NPV 2500 NPV 250
IRR 14.5 IRR 15.5
PBP 4 Years PBP 4 Years
B:C 2 B:C 2

a. If firm A and firm B are mutually exclusive.

145
b. If firm A and firm B are independent.
 Non discounted methods
1. Accounting Rate of Return (ARR) or Simple Rate of Return
• It expresses the average annual net income (annual profit) as a
percent of the initial amount invested in the project.
• Accounting rate of return (ARR) is a formula that reflects the
percentage rate of return expected on an investment, or asset,
compared to the initial investment's cost.
• It is used in situations where companies are deciding on whether or
not to invest in an asset (a project, an acquisition, etc.) based on the
future net earnings expected compared to the capital cost.

146
Decision criteria:
 Accept the project only if its ARR is not less than the required
rate of return. In case of mutually exclusive projects, accept the
one with higher ARR

Example 1:
An initial investment of 130,000 is expected to generate annual cash inflow of 32,000 for
6 years. Depreciation is allowed on the straight line basis. It is estimated that the project
will generate scrap value of 10,500 at end of the 6th year. Calculate its accounting rate of
return assuming that there are no other expenses on the project.

Solution: Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years
Annual Depreciation = (130,000 − 10,500) ÷ 6 ≈ 19,917
Average Accounting Income = 32,000 − 19,917 = 12,083
Accounting Rate of Return = 12,083 ÷ 130,000 ≈ 9.3%

147
 Example 2 Compare the following two mutually exclusive projects on the
basis of ARR. Cash flows and salvage values are in thousands. Use the straight
line depreciation method. Salvage value of project A is 10 and project B is 18.
Project A Project B
Year Cash flow Year Cash flow
0 -220 0 -198
1 91 1 87
2 130 2 110
3 105 3 84

Solution:
Project A:
Step 1: Annual depreciation= (220-10)/3 = 70
Step 2: Accounting income for year 1= (91-70)= 21
Accounting income for year 2= (130-70)= 60
Accounting income for year 3= (105-70+10)= 45
Step 3: Average accounting income = (21+60+45)/3 = 42
Step 4: Accounting rate of return = 42/220 *100 = 19.1%
Solution:
Project B:
Step 1: Annual depreciation= (198-18)/3 = 60
Step 2: Accounting income for year 1= (87-60)= 27
Accounting income for year 2= (110-60)= 50
Accounting income for year 3= (84-60+18)= 42
Step 3: Average accounting income = (27+50+42)/3 = 39.6
Step 4: Accounting rate of return = 39.6/198 *100 = 20%

148
 2. Break even analysis

• Break-even sales units are the number of units that must be sold to reach the
break-even point. Using the break-even point equation, P*X = V*X + FC, you can
solve for X to determine the number of units that need to be sold to break even.
P*X = V*X + FC
(P*X– V*X) = FC
X (P – V) = FC
X = FC/(P – V) 149
150
Q1. If I sell a product for Rs. 79.99 that costs me Rs. 11.99 per
unit to produce and my fixed costs total Rs. 27,336, how many
units must I sell to break even?

Q2. A product currently sells for Rs. 12 per unit. The variable
cost is Rs. 4 per unit, and 10,000 units are sold annually and a
profit of 30,000 is realized per year. A new design will increase
the variable costs by 20% and Fixed Costs by 10% but sales will
increase to 12,000 units per year.
(a) At what selling price do we break even
(b) If the selling price is to be kept same ( Rs. 12/unit) what
will the annual profit be?
151
3. Proceeds per unit of outlay
 Proceeds: Money received from sale or Profit
 It is equal to total value of incremental production
divided by the total amount of the investment

Decision criteria: Invest where maximum proceeds per

unit of outlay exist

4. Pay back period (Non discounted)

152
153
 Lecture 7: Agricultural policies and their impact on
agribusiness enterprises in Nepal
Topics to be covered
Major agricultural policies: Emphasizing
major policies which are related with agribusiness
development in Nepal

ADS and PMAMP: Concept, vision,

objective and relationship between ADS and
PMAMP
Floor price
Ceiling price
Effect of taxation
Effect of subsidy
154
 Agribusiness policies in Nepal
 High priority on diversification, modernization, commercialization and promotion of agriculture sector

 Important role of private sector to promote commercial farming

 Promotion of internal and external markets

 Agri-business service centers establishment for quality agriculture inputs and services

 Emphasis on special economic zones for agro-industry development- Commercial, Organic and Export
Areas

 Infrastructure development for processing and marketing as a foundation for commercialization and
diversification

 Promotion of partnership approach between government and the private sector for agriculture
development

 Private sectors involvement for the export of quality goods and market network

 Focused on market oriented and competitive agriculture 155

 Major agricultural policies of Nepal
1. National Agricultural Policy -2061 (रास्ट्रिय कृषि नीषि- २०६१)
2. Agribusiness promotion policy - 2063 (कृषि व्यवसाय प्रवर्द्ध न नीषि, २०६३)
3. National coffee policy -2060 (राषरिय कफी नीषि २०६०)
4. National tea policy - 2057 (राषरिय षिया नीषि २०५७)
5. National seed policy – 2056 (रास्ट्रिय षबउ षबजन नीषि २०५६)
6. National fertilizer policy – 2058 (राषरिय मल नीषि २०५८)
7. Dairy development policy – 2064 (दु ग्ध षिकाश नीषि-२०६४)
8. Irrigation policy -2070 (ष िंिाइ नीषि २०७०)
9. Commercial agriculture policy – 2064 ( व्याि ाषयक कृषि नीषि – २०६४)
10. Industrial policy- 2067 (औद्योषिक नीषि २०६७)
11. Floriculture promotion policy – 2069 (पुष्प प्रिर्द्ध न नीषि, २०६९)
12. Climate change policy – 2067 (जलिायु पररििधन नीषि-२०६७)
13. Commerce policy- 2072 (िाषिज्य नीषि २०७२)
14. Agriculture mechanization promotion policy – 2071 (कृषि यास्ट्िकरि प्रिर्द्ध न नीषि, २०७१)
15. Agriculture perspective plan 1995-2015
16. Nepal Trade Integration Strategy (NTIS) 2010
17. Nepal Integrated Trade Policy (NITP) 2010
18. ADS 2015-2035
156
 Agribusiness promotion policy- 2063 (2006 AD)
 Formulated with the objective of transforming the subsistence oriented and
dispersed agricultural production system into a modern, sustainable,
competitive and commercial production system.

 The policy intended to reduce poverty through agriculture

commercialization along with Export enhancement through agricultural
development.

 The policy incorporated the following programs within the framework of

National Agriculture Policy 2004:
 Emphasis on establishment and development of growth centers based on geographical, technical and
economic potentials.

 Establishment of agro-product export areas and business service centers.

 Development of infrastructures required for agro-business promotion such as irrigation facilities,

roads, collection centers, cold and frozen storage, cooling chambers, rural electrification etc through
collaboration of the government, private sector, NGOs and civil society.
157
 Objectives of ABPP
1. To support in the production of market led and competitive
agricultural produces

2. To contribute domestic market and export promotion by

developing agri-industries

3. To support poverty alleviation by commercialization of agriculture

158
 Major focus of ABPP
1. Establish and develop extensive growth centers based on geographic,
technical and economic potentialities
2. To be compatible and coordinate with special economic zone program
3. Establish and promote ‘Business Development Service Centre’ based on
agribusiness and geographic region
4. Extend agribusiness promotion infrastructures like irrigation, road, cold
storage
5. Subsidizing import tax of machines and equipment's up to 75%
6. Provision of agribusiness loan liberal repayment strategy
7. E-commerce at agri-market and business service centres
8. Price determination system
9. Foreign Direct Investment (FDI) promotion for agribusiness development
and extension
10. Subsidy scheme in agricultural cost items
11. Agri-market and agribusiness relate information system will be
developed, extended and inflowed in close cooperation of private sector,
cooperative and local bodies
159
 Synthesis of Agriculture Development Strategy (ADS)

• ADS includes:
– 20 years vision for agriculture development in Nepal

– A 10-year Action Plan and Roadmap of the agricultural

sector

– Succeeding plan to Agriculture Perspective Plan (APP

1994/95-2014/15) of the government

– ADS is a complementary policy for Broad based,

inclusive, balanced and sustainable development

• The ADS includes 4 outcomes, 35outputs, and 232

activities.
160
 Agriculture Perspective Plan (APP)
APP is a Preceding Plan (1995-2015) to ADS with mixed
performance

Priorities
a) Priority Inputs (Fertilizer, Irrigation, Road & Power,
Technology)
b) Priority Output (High Value Crop, Agribusiness, Livestock,
Agro-forestry)

Performance: Mixed Performance

• Good Progress: High Value Commodities, Vegetable, Livestock
(Poultry, Dairy), Rural Road Expansion
• Moderate Progress: Cereal Crop, Irrigation, Fertilizer,
161
Technology and power
 Agriculture Perspective Plan (APP)

Critical Factors for Mixed performance

• Poor Coordination
• Low Level of Investment
• Policy Inconsistency (eg. Subsidy policy)
• Domestic Conflict
• Design fault (Seed was not priority input)
• Less priority by GoN & DPs
• Lack of ownership by others than MoAD,
and NPC to an extent.
162
 ADS: Departure from APP
APP
 Based on concept of Physiographic Potentialities and Land
Use Planning of Nepal
 Production Focused
 Growth Led development strategy
 Green revolution perspective
 Concentration on few priorities (Input & Output)
 Government Led

ADS
 Based on Concept of Value Chain
 Welfare based and Market based Growth strategy
 Sustainability & Inclusive perspective
 Multiple priorities (Food-based nutrition, Right based,
Market oriented)
 Pluralistic Approach (Government –Farmer
Groups/Cooperatives-Private sector engagement) 163
164
165
 Vision of ADS
“A self-reliant, sustainable, competitive and inclusive
agricultural sector that drives economic growth and
contributes to improved livelihoods and food and nutrition
security leading to food sovereignty.”
 æcfly{s j[l4nfO{ ult lbg], hLjg:t/nfO{ dfly psf:g], vfB tyf kf]if0f ;'/Iffdf
of]ubfg lbg], vfB ;Dk|e'tfpGd'v cfTdlge{/, lbuf], k|lt:kwL{ tyf ;dfj]zL s[lif
If]q”

 It is expected that Nepal will be a middle income country with a significant

increase in gross domestic production in the coming 20 years and creating a
significant portion of income from industry and service. 166
 2035
High Agricultural
Development

Assessment -
Where are we

Vision – Where we
want to be

2015
Low Agricultural
Development
 1. Food and Nutrition Security
2. Poverty Reduction
3. Agricultural Trade Competitiveness
4. Higher and Equitable Income
5. Farmer’s Rights ensured and strengthened

Inclusion Private Sector,

Cooperative Sector

Sustainability Connectivity

Profitable
Governance Productivity Competitiveness
Commercialization

Strategic Framework of the ADS 168

 Components of ADS framework
1. Improved governance
– Policy credibility,
– Coordination,
– Implementation Support,
– Integrated planning,
– Beneficiary participation
– Food and Nutrition Security,
– Performance based Management
System
3. Profitable commercialization 4. Increased competitiveness
– National Value Chain Programs,
– Value Chain Infrastructure
– Investment Friendly Climate,
– Market information and intelligence,
– Contractual arrangement: Contract Farming
– Land Leasing Corporation
– Land Zoning, Land Use Policy
2. Higher productivity
– Decentralized Research-Extension
– Research Extension and Education
Integration
– Inputs management (eg. Seed, fertilizer)
– Resilience to Climate Change,
– Climate Smart Agriculture
– Sustainable agriculture
– Market infrastructure,
– Innovation,
– Export Orientation on High-value
Products,
– Food safety and quality,
– Public Private Partnership
169
Indicators and targets for ADS vision

170
171
 ADS programs
Types of Programs

Flagship Programs Core Programs Other Programs

(Multi-sectoral type of
program and require Implemented through Currently ongoing
different management existing government programs but not a part of
structure) agencies flagships and core
programs

• Food and Nutrition Security Program

(FANUSEP)
• Decentralized Science, Technology and
Education Program (DESTEP)
• Value Chain Development Program
(VADEP)
• Innovation and Agro-enterprenurship
program (INAGEP) 172
 Institutional arrangement for ADS
NADSCC NADSIC
National ADS Co-ordination Committee National ADS Implementation Committee
Chair: VC, NPC Chair: Minister, MoAD
NADSCC Sub
Committees

CADIC ADSISU
Central Agriculture Devt. ADS Implementation
Implementation Support Unit (Section) Flagship Programs
Committee (MoAD)

RADC Core Programs

Regional Agriculture
Devt. Committee

Other Programs
DADC
District Agriculture Devt.
Committee
IMPLEMENTATION
CO-ORDINTATION

ADS Implementation and Co-ordination Mechanisms 173

 Prime Minister Agriculture Modernization Project (PMAMP)

• Project duration : Shrawan 2073 to Asadh 2082 (10 years)

• Implemented by GoN, MoALD
• Vision:

• Target:

• Purpose:

174
175
176
177
178
 Government intervention
• The government tries to combat market inequities through regulation,
floor price, ceiling price, taxation, and subsidies.

• Governments may also intervene in markets to promote general

economic fairness.

• Maximizing social welfare is one of the most common and best

understood reasons for government intervention.

• Inefficient market: An economy where social optimality is not achieved;

an economy where resources are not optimally allocated.

• free-market equilibrium price: The price established through

competition such that the amount of goods or services sought by buyers
is equal to the amount of goods or services produced by sellers. 179
 Price control
 Price controls are legal restrictions on how high or low a
market price may go.
Price D

4 S
 Price controls are government-mandated minimum or
maximum prices set for specific goods and services. 3

 Price controls are put in place to manage the 2

affordability of goods and services on the market.

100 200
 Price controls interfere with market signals. Quantity of icecreams

2 kinds of price controls:

1. Price Ceilings: a maximum price sellers
are allowed to charge for a good. It’s an
upper limit for the price.
2. Price Floors: a minimum price buyers are
required to pay for a good. It is a lower limit
for the price. 180
 1. Price ceiling
• A maximum price allowed by law.

• Price ceilings limit the price sellers can charge for their
goods to the maximum price

• Prices cannot legally go higher than the ceiling

 Price ceilings create five important effects:

1. Shortages.
2. Reductions in product quality.
3. Wasteful lines and other search costs.
4. A loss of gains from trade (deadweight loss)
5. A misallocation of resources. 181
1. Shortages
 When the price ceiling is below
market price, Qd > Qs which leads to
a shortage.

 The shortage is measured by the

difference between Qd and Qs at the
controlled price.

 The lower the controlled price is

relative to the market equilibrium
price, the larger the shortage.

 When basic goods being shortage,

consumer will to pay higher price
than ceiling price from back door,
which is considered as illegal market.
That type of illegal supply at higher
price is known as black market. 182
 Control measures of black market
1. Government should supply goods itself.

2. Government should produce goods itself and supply at reasonable price.

3. Provide subsidies for producer.

4. Encourage production of substitute goods to cope shortage of related

goods.

5. Reduction on production and income tax of firms.

6. Consolidating the public sector and making administration more efficient.

7. Stringent laws to control and monitor.

8. Awareness raising
183
2. Reduction in quality
• At the controlled price,
sellers find there is an
excess of demand.

• Sellers can evade the

law by reducing quality
rather than raising
price.

• Another way quality

can fall is with
reductions in service.
184
3. Wasteful Lines
• At the controlled price, demanders
are willing to pay more.

• The price controls make a higher

price illegal.

• People spend money, time and

expend effort in order to deal with
the shortages caused by the price
ceiling.

• If price is not allowed to rise, buyers

must compete in other ways.

• Other ways to pay:

• Bribes
• Waiting in line (includes value of
time)
• Bribe goes to supplier, while time in
line goes to no one. 185
4. Lost gains from trade
• As long as there are mutually profitable trades that can
be made.
• With price controls, some profitable trades will not be made. This creates a
deadweight loss.
• When prices are controlled, the mutually profitable gains from free trade cannot
be fully realized, creating deadweight loss.
• Deadweight Loss (or allocative inefficiency) - the total of lost on consumer and
producer surplus when not all mutually profitable gains from trade are exploited.

186
5. Misallocation of resources
• When prices are controlled, resources do not flow to their
highest valued uses.
• Price controls distort signals and eliminate incentives-
leading to a misallocation of resources.
 Consumers who value a good most are prevented from
signaling their preference (by offering sellers a higher
price.)

187
 2. Price floor
A price floor is the lowest Price
legal price that can be paid in
a market for goods and floor creates:
services, labor, or financial 1. Surpluses
capital. 2. Lost gains from trade
• Important examples of price (deadweight loss)
floor are: Minimum Support 3. Wasteful increases in
Price (MSP), Minimum wage quality
rate. 4. A misallocation of
• Not as common as price resources
ceilings but still important
188
 1. Surpluses
 Price floor creates favorable environment for producer to produce
more and more product which will create surplus into industry.
 Floor price is higher than equilibrium price that causes the reduction
of quantity demands.
 The surplus quantity of good is known as Buffer stock. If there will not
any government regulation, price will fall.
Price Surplus
D S
Price D S
4
4

3 3
Price Ceiling

2 2

100 200 Quantity of 100 200 600 Quantity of

189
icecreams
icecreams
 Minimum wage rate
• The minimum wage is a legal floor on the wage rate, which is the
market price of labor.

• A minimum wage above the market price creates a surplus - the

quantity of labor supplied exceeds the quantity demanded.

• A surplus of labor is called unemployment.

190
2. Lost gains from trade (deadweight loss)

191
 3. Wasteful increases in quality
 Surpluses means that producers will not be able to sell all of their goods.
 In free markets sellers compete with other sellers by offering a lower price.
 Since price is not allowed to fall below the floor price, sellers must compete in
other ways.
 Some producers may be willing to make quality investments in order to sell their
surplus goods.
 Quality investments require resources that are wasted when consumers are not
normally willing to pay for the higher quality.

192
 Effect of taxation
• Taxation: fees and financial obligations imposed by a government on its residents.

• Commodity taxes: taxes on goods, such as those on fuel, cigarettes, liquor and other
agricultural/non-agricultural commodity.

• When government impose tax on any goods, that will cause shift in supply curve upward i.e.,
quantities of supply decreases by amount at which tax impose.

• The amount of the tax is always shown by the vertical distance between the two supply
curves.

193
 Reasons for imposing taxes:
1. To generate Government revenues: excise duties on beers, wines and
spirits are price inelastic in demand, so tax price increases by levying
specific alcohol and tobacco taxes raise consumer expenditures as a whole
on these categories and therefore taxation revenues;

2. To discourage consumption: Government might use taxes to discourage

consumption of certain demerit goods such as cigarettes.

3. To alter the pattern of consumption: Government might use direct

taxes as a mean to alter the consumption patter of its population. Certain
goods can be made more price attractive through lower taxes while goods
which have high marginal social cost can be made expensive through
taxation.

194
 Effects of a tax:
• Increases price
• Reduces consumption/output
• Welfare effects:
– Burden of tax on producer and consumer – changes in producer and
consumer surplus

 Share of tax burden to the consumer and producer side is depend on

elasticity of demand and supply.

1. More elastic demand: Higher tax burden will be shared by producer.

2. Less elastic demand: High tax burden shared by consumer.
3. More elastic supply: High tax burden will be shared by consumer.
4. Less elastic supply: High tax burden will be shared by producer.

Taxation also causes deadweight loss. 195

196
 Who Ultimately Pays the Tax
Price of Apples
(per basket) $1 Tax on Suppliers
1. Supply shifts up by $1
$4 Supply 2. With no tax, equilibrium is
w/tax at a: P=$2, Q=700
3. With tax, equilibrium is at
$3 b point b: P=$2.65, Q=500
2.65 Supply 4. Buyers pay $2.65,
Buyer a w/o tax Suppliers receive
$2 $2.65 - $1.00 = $1.65
Supplier
1.65 Demand 5. Tax burden:
Buyers $0.65
$1
Suppliers $0.35

Quantity of
500 700 Apples (baskets)
197
 Who Ultimately Pays the Tax
Price of Apples
(per basket) $1 Tax on Buyers
1. Demand shifts down by $1
$4 2. With no tax, equilibrium is
at a: P=$2, Q=700
3. With tax, equilibrium is at
$3 b point d: P=$1.65, Q=500
2.65 Supply 4. Buyers pay
Buyer a w/o tax $1.65 + 1.00 tax = $2.65
$2 d Suppliers receive $1.65
Supplier
1.65 Demand 5. Tax burden:
w/o tax Buyers $0.65
$1
Demand Suppliers $0.35
w/tax
Quantity of
500 700 Apples (baskets)
198
 Commodity Taxes
No Tax With Tax
Price Price
Consumer
Consumer surplus Tax wedge
surplus $2.65 S
S
$2.00 $2.00 Deadweight
loss
D $1.65
D
Producer Government
Producer surplus revenue
surplus

Q Q
700 500 700

199
200
 Effect of subsidy
• Subsidy is an amount of money paid by the
government to producers or consumers per
unit of output.

• A subsidy has an opposite effect of a tax.

• Subsidies may be regarded as negative

indirect taxes.

201
Reasons for Subsidies
 To lower the price essential goods.
Encouraged by lower price,
consumption will be increased.
 To guarantee the supply of products
that the government thinks are
necessary for the economy.
 To enable producers to compete
with overseas trade and to protect
the home industry.
How is it helping?
 When subsidy is granted,
supply curve will shift
vertically downwards by the
amount of the subsidy.
 It lowers the prices.
 This is again depended on
the relative elasticity of
demand and supply.
202
203
204
Who
benefits
from a
subsidy does
depend on
the relative
elasticities
of demand
and supply.

205
206
207
208
Value chain analysis:
Concept, mapping and
approaches

209
 Value chain analysis: Concept, mapping and approaches
 The concept of value chain was developed during eighties to gain competitiveness
by firms as focus shifted from product to value.

 The idea of a value chain was pioneered by Michael Porter in 1985 in his book
"Competitive Advantage: Creating and Sustaining Superior Performance.” This
book clearly describe a firm’s internal value-adding activities.

 The concept of the value chain comes from a business management perspective.

 During 1990s Gereffi elaborated this concept to global commodity chains.

 Kaplinsky (2000) defined it as wider system view “the full range of activities
which are required to bring a product or service from conception, through the
intermediary phases of production (involving a combination of physical
transformation and the input of various producer services), delivery to final
consumers, and the final disposal after use”.
210
211
This system is often described as ‘farm gate to plate’,
or ‘beef to burger’

212
A value chain describes all the activities, functions,
roles and organizations involved in the production,
delivery and consumption of products from raw
materials to final consumption and back again
through reverse flows.

Value chain service providers & enablers

Variety Seed Production Varietal adoption,
Seed processing and seed demand and
development and (Source and Seed marketing
conditioning Seed use
maintenance improved)

Business environments

213
 Michael Porter generic value chain model-1985
 A value chain is a chain of activities that a firm
operating in a specific industry performs in order to
deliver a valuable product or service for the market.

 The goal is to deliver maximum value for the least

possible total cost.

 It involves identification of primary and supportive

activities that add value to the final product.

214
 1. Primary activities
Inbound logistics: Concerned with receiving, storing,
distributing raw materials. This also covers all relationships with
suppliers. (e.g. handling of raw materials, warehousing, inventory
control.)
Operations: Comprises the transformation of inputs in to
the final product form. (e.g. production, conditioning, assembly,
215
packaging)
Outbound logistics: Involves the activities like collecting,
storing and distributing the product to the buyers. (e.g. processing of
orders, warehousing of finished goods and delivery)

Marketing and sales: Identification of customer needs

and generation of sales. (e.g. advertising, promotion, distribution)
Service: Involves how to maintain the value of the product after
it is purchased. (e.g. installation, repair, maintenance, training)

216
 2. Support activities
 Procurement: Concerned with the task of
purchasing inputs such as raw materials, equipment's,
labor etc.

 Technology development: These activities are

intended to improve the product and the process, can
occur in many parts of firm.

 Human resource management: Involved in

recruiting, hiring, training, development and
compensation.

 Firm infrastructure: The activities such as

organization structure, control system, company
culture. Serves the company's needs and ties its
various parts together, it consists of functions or
departments such as accounting, legal, finance,
planning, public affairs, government relations, quality
assurance and general management.
217
218
 Porters five forces model
• Porter's Five Forces model of Competitive Position Analysis were developed in 1979.

• It is a simple framework for assessing and evaluating the competitive strength and
position of a business organization.

219
 Supply chain
Various activities, individuals and businesses that
are involved in the transfer of product from one
place to another are integrated in a supply chain.
Supply Chain activities
include the transfer of
material from one place
to another.

220
 Difference between supply chain and value chain
Aspect Supply Chain
Originated from Operation management
Concept Conveyance
Objective Customer Satisfaction
Deliver to consumer Supplies/products
Information flow Little or none
Organizational structure Independent actors
Sequence Product Request - Supply
Chain - Customer
Nature Static, unable to adjust with
changing consumer demands
Limitation Less equipped for analysis of
social and environmental
sustainability
Value Chain
Business management
Value addition
Gaining competitive advantage
Values and satisfaction
Extensive
Interdependent actors
Customer Request - Value
Chain - Product
Dynamic and systemic, keep
pace with changing consumer
demands
Equipped for analysis of social
and environmental
sustainability
221
222
 Value chain governance
 Authority and power relationships that determine how
financial, material and human resources are allocated and flow
within a chain.

 The analysis of governance aims to investigate the rules

operating in a value chain, and the system of coordination,
regulation and control in which value is generated along a chain

 The analysis of value chain governance and services is best

approached by separating three dimensions:

•Coordination Structures,
•Rules and Regulations, and
•Control Mechanisms (Transmission of Information and Services).

Chain governance exist when some firms work to the parameters set by other
powerful firms in the chain (Humphrey & Schmitz, 2008) 223
 Objectives of VC governance
 Understand how the value chain is coordinated, including
key firms (actors) and mechanisms (i.e. contracts,
agreements, services), and why this coordination structure
has arisen and evolved,

 Map the formal and informal rules, regulations, and

standards that influence the value chain,

 Assess the impact of the rules and regulations on different

sets of actors,

 Assess how different groups of value chain participants

receive (or lack access to) adequate forms of support that
can help them achieve the required standards
224
 Upgrading
 Value chain upgrading refers to improvements in the
performance of chain actors and/or whole chain. It also requires
improvement in service provision.

 The upgrading concept describes how firms and sectors shift

towards making better products, making them more efficiently
or moving into more skilled activities and improving their
performance and rewards in high-value markets.

 Value chain upgrading is centrally related to innovation.

 Upgrading in agri-value chains relates to changes in production

processes to improve productivity and products that are
increasingly defined by domestic and international quality
standards and food safety measures
225
 Types of Upgrading
1. Process upgrading: cost reduction, increasing the speed of
delivery, reduction of post harvest loss etc.

2. Product upgrading: Introduction of new products of improving

existing products

3. End market upgrading: diversifying to new buyers or new

geographical area

4. Linkage/supply chain upgrading: Improvement in

Backward and forward linkage
5. Functional upgrading: changing the mix of activities conducted,
increasing the range of functions etc.
226
227
 Value chain mapping
• Mapping a value chain means creating a visual
representation of the connections between businesses
in value chains as well as other market players.

• Mapping is vital step in guiding the analysis of selected

value chain.

228
229
 Major steps in value chain mapping
Step 1: Mapping the core processes in the value chain

Step 2: Identifying and mapping the main actors involved

in the processes.

230
Step 3: Mapping the activities of the actors
Step 4: Mapping services that feed in to the value
chain

231
Step 5: Mapping the volume of products and number of
actors

Step 6: Mapping the value at different levels of value chain

232
Step 7: Mapping relationship and linkage between value chain actors

233
 Value chain analysis
 Value chain analysis is emerged as important mainstream
tool for competitiveness analysis, business upgrading and
development of sustainable value chains.

Value chain analysis is systematic investigation

of:
1. Material flow
2. Non material flow
3. Economics of production
4. Organizational and coercive activities
5. Power relations
6. Entry barriers
7. Gain and risk distribution
8. actors involvement of given business in a given social,
political and legal environment to gain competitiveness. 234
VC analysis process requires
major six interconnected
steps:
1. Data collection and research
2. Value chain mapping
3. Activity analysis
4. Value analysis
5. Analysis of opportunities and
constraints
6. Evaluation and planning

235
Major domains of value chain analysis
1. Socio-economic context of value chain:
 Macro-economic and social situation of the country(ies) in which
the value chain develops

 Contribution of the value chain to the socio-economic situation,

including income, expenditure and other social wellbeing
implications for various social groups of interest to the value chain.

 Current policies and strategies affecting the value chain, including

price, factor and natural resource policies,

 Specific incentives or disincentives to producers and consumers,

 macroeconomic policies affecting exchange rates and interest rates,

credit policies and international trade policies. 236
 2. Analysis on Demand side for value chain
outputs
 Current and potential (future) domestic and foreign demand for the
value chain outputs (including trends and/or forecasts).

 Domestic and/or international output prices and price trends

 Socio-economic features of current and potential customers, including

spending capacities.

 Current and potential foreign competitors.

 Specific features of products, including product diversification to target

different types of clients.

 Current or potential substitutes that influence prices or volume

demanded

237
 3. Analysis of the institutional set up
The identification and appraisal of the
institutional set-up, i.e., set of interactions taking
place among agents and the formal and/or
informal rules governing them.

The set of rules that allows a value chain to

function, be it self-imposed or imposed by an
authority

The role of the public sector (public policies,

investments) vis-à-vis private agents.
238
 4. Analysis of input and output markets
 Input side analysis:
a) Number of agents
b) Level of information available to sellers and buyers
c) Entry/exit barriers for sellers and buyers.
d) Control binding the supply
e) Control over prices
f) Nature of product

 Output market analysis:

a) Perfect Competition
b) Monopoly (only one seller)
c) Oligopoly (few sellers)
d) Monopsony (only one buyer)
e) Oligopsony (few buyers)
f) Other, depending on the degree of competition.
239
5. Functional Analysis of the value chain

a) Technical operations required from primary production to final

consumption.

b) Inputs used and intermediate outputs produced at each stage of the

chain.

c) Economic agents involved at the different stages and related functions.

d) Physical flows of the commodity among the different agents.

e) Bottlenecks (e.g. inputs availability, logistical issues, etc).

240
241
 Why value chain analysis approach
 Creation of consumer values in products and services,
 Identifies value creating activities and processes,
 Evaluates the chain against efficiency, effectiveness in creation and distribution of
value
 The interventions to improve the chain performance with respect to understanding
customers and consumers, creating more value, reducing waste and build stronger
partnerships among chain actors
 Improves market access
 Offers wider choice of better products

242
243
244
245
THANK YOU !!

246
 Production planning in
agribusiness-planning, production,
risk management

247
248
Product life cycle approach

249
 Major concerns in production planning
Production plan helps to meet product demand
while minimizing production time and cost by
improving process flow, reducing the waiting time
between operations and optimizing use of plant,
equipment and inventory.

250
Planning for production: Consideration of all input variables to
achieve predetermined output goals; a pre-production activity to determine optimal
production schedule, operation sequence, economic quantity, etc.

Control: Remedial action to prevent variance of output from planed levels;

tracking operations to ensure compliance with planned levels

Production planning is “The administrative process that takes place within a manufacturing
business and that involves making sure that sufficient raw materials, human resources and other
necessary items are procured and ready to create finished products according to the schedule
251
specified.”
For efficient, effective and economical operation
in a manufacturing unit of an organization, it is
essential to integrate the production planning and
control system.

Production planning and control address a

fundamental problem of low productivity,
inventory management and resource utilization.

Deals with basic concepts of what to produce,

when to produce, how much to produce, etc.
252
 Objectives of Production planning
1. Effectiveness: Goods to fulfill customer needs
2. Maximizing outputs: Maximum output with optimum inputs
3. Quality control: Product/service quality meets planned quality
specifications
4. Optimization of time
5. Capacity: Full utilization of resources, plan for current and future
needs
6. Minimize cost: Minimum cost of production, maximize profit
7. Maintaining inventory: Optimal inventory
8. Flexibility: in production operations
9. Coordination
10.Reduce bottlenecks: Solve production problems early
11.Routes and schedule 253
 Functions of production planning
 Product selection and design
 Process selection and planning
 Capacity planning
 Facility layout and materials
handling
 Systems and procedures
 Routing operation sequence
 Inventory control
 Time management
 Quality control
 Maintenance and replacement
 Cost reduction and control
 Follow-up/Progressing 254
Phases of Production planning and control

255
 Major steps for production planning and control

Step 1: Forecast the demand of your product

-Historical information analysis
-Trend analysis
-Statistical modeling

Step 2: Determine potential options for production

-Mapping all the steps of production process
-Determine resources needed
-Set working modality
256
Step 3: Choose the option for production that uses the
combination of resources more effectively
-Compare the cost, time and resources of each potential production option

Step 4: Monitor and control

-Track, review, report

Step 5: Adjust 257

 Business planning
• Business planning is the process of setting a company's goals,
strategy and future actions with the purpose of maximizing the odds
of company growth within a set timeframe.

Major steps in business

planning:
1. Identify and summarize Your Vision
2. Develop Your Product or Service
3. Research the Industry
4. Analyze the Market
5. Size Up Your Competitors
6. Design Your Company
7. Create a Marketing Strategy
8. Plan Your Operations
9. Determine Your Financial Needs
10. Formulate monitoring and control system
258
THANK YOU !!

259
RISK AND UNCERTAINTY IN
AGRICULTURE

260
 Concept
Agricultural activities are subject to a wide range of risks because of the
variable economic and biophysical environment in which farming
operates.

Risk: It is a situation when all possible outcomes are known for a

given management decision and probability associated with each
possible outcome is also known. This is measurable through probability
concepts. Ex: Occurrence of pest and disease, fluctuation in market
prices etc.

Uncertainty: This situation prevails when all the possible outcomes

of events are unknown, therefore neither the probability nor the
outcomes are known. It is not measurable. Ex: Occurrence of flood,
drought etc
261
• Perfect knowledge: everything (technology, price, organizational behavior
etc.) about the future of business is know with certainty
 No need of farm management expert
 But does not reflect the real world situation

• Imperfect knowledge: may be either risk or uncertainty

 Risk represents less imperfection in knowledge than does uncertainty
 Under risk the occurrence of future events can be predicted fairly
accurately by specifying the level of probability
262
• Priori risk: prevails when sufficient advance information is
available about the occurrence of an event, e.g. the probability of a
head or a tail turning up if an unbiased coin is tossed

• Statistical risk: can only be predicted on the basis of

occurrences of several observations in the past i.e. observed
frequencies used to predict outcomes.

 From economic point of view, uncertainty is undoubtedly the most important.

 The occurrence of an event can not be quantified with the help of probability.

 Both risk and uncertainty are:

• Based on current lack of certainty in a potential fact, event, outcome, or scenario,
etc.
• Defined by probabilities or probability distributions Include both upside and
downside potential
• Subjective: they both depend on who knows what
263
Difference between risk and uncertainty

Imperfect knowledge that

may result to adversity and
loss where the probabilities
of the possible outcomes are
known

264
265
266
267
268
269
270
 Dimensions of Agricultural risks
• Production/Technical risks, concerning variations in crop yields and livestock
production, affected by a range of factors: weather conditions/climate change, pests,
diseases, technological change as well as management of natural resources such as
water

• Market risks, associated with variability in output price (mostly), also input price
variability and integration in the food supply chain (with respect to quality, safety, new
products, etc.)

• Regulatory risks connected with the impact of changes in agricultural policies (e.g.
subsidies, regulations for food safety and environmental regulations) or trade policies: a
change in government action, which is at odds with what farmers expected, may have a
negative impact on their income

• Financial risks resulting from different methods of financing the farm business,
subject to credit availability, interest and exchange rates, etc.

• Human resource risks, associated with unavailability of personnel.

271
 Types of risk & uncertainty
1. Economic Uncertainties / Economic risk

2. Technological Uncertainties

3. Institutional Uncertainties/ risk

4. Personal Uncertainties or Human or personal risk

5. Asset risk or Casualty Risk

6. Production or Yield risk

7. Price risk or market risk

272
Business risk management process

273
274
Risk management techniques in agriculture
1. Forward contract (contract farming)
2. Insurance
3. Share cropping
4. Vertical integration of Farm enterprise
5. Selection of enterprises with low variability
6. Flexibility in farm organization
7. Liquidity
8. Maintenance of resources in reserve
9. Adjustment to uncertain of Inputs
10. Diversification
275
THANK YOU !!

276
Implications of international trade
in agriculture sector of Nepal

277
 Trade scenario of Nepal
Based on Annual data of FY 2077/78 (Mid July 2020
Table 1 : Foreign Trade Direction :
to Mid July 2021)
Change
SN Trade Indicators FY 2076/77 (12 Months) FY 2077/78 (12 Months)
(%)
1 Imports (Rs.in `000) 1,196,799,053 1,539,837,068 28.66

2 Exports (Rs.in `000) 97,709,105 141,124,080 44.43

3 Trade Deficit (Rs.in `000) 1,099,089,948 1,398,712,987 27.26

4 Total Foreign Trade (Rs.in `000) 1,294,508,158 1,680,961,148 29.85

5 Imports/Exports Ratio 12.25 10.91 -10.92

6 Exports Share to Total Trade (%) 7.55 8.40 11.23

7 Imports Share to Total Trade (%) 92.45 91.60 -0.92

278
279
280
..\Downloads\FTS_Annual_207778.xlsx
281
 Basic concepts
Trade: Exchange of goods and services
Domestic trade: Exchange of domestic goods within the boundaries
of a country.
International trade: The exchange of goods and services between
countries and across borders is referred to as international trade.
Trade deficit: Occurs when a value of a nations export is less than the
value of its import i.e. Exports<Imports.
Trade surplus: Occurs when a value of a nations export is more than
value of its import i.e. Exports>Imports
Terms of Trade:

282
 Difference between domestic and international trade

1. Field of trade: domestic trade occurs inside a country, on the

contrary, international trade occurs two or more countries. The
field of International trade is higher than the domestic trade.
2. Differences in the dynamics of the material: The
raw material of production can move freely inside the country in
case of domestic trade. But in the case of international trade, the
raw material of production can’t move freely between the
countries.
3. Differences between natural resources: There is no
difference in characteristics of natural resources inside a country
but different countries have different types of natural resources
and there exist huge differences in their characteristics.

283
4. Differences between the money and banking
system: Same monetary policy and banking system exist inside a country. But
different countries have different rules and regulations in their banking and monetary
systems. The foreign exchange rate is essential for international trade. For that reason,
international trade is more complex than domestic trade.

5. Differences between business policy: Domestic trade follows

the same business policy in case of trade but international trade isn’t able to follow the
same rules and regulations. Because many countries follow different types of rules and
regulations.

6. Differences between market: There are no fundamental

differences between people in their taste, choice, and preferences in domestic trade.
besides, there exist differences in the many countries’ markets having different choices,
tastes ad preferences, different cultural programs .that’s why international trade
required more attention than domestic trade.

7. Differences between finance policy: There exist differences

between fiscal policy, tax policy, and tariff policy. The central bank of a country follows
favorable rules for their country. Domestic trade follows the same rules whereas
international trade doesn’t follow the same rules in their trading systems.
284
8. Difference between production systems: Different
countries have different production and economic systems. There exist different
rules and regulations in the production system, labor law, factory act in different
countries. That s why international trade is separate from domestic trade as a
result the production cost is different from one country to another country.

9. Differences between transportation cost : Due to

geographical location, domestic trade doesn’t bother about transportation costs.
But in international trade, transportation cost is a big matter and its impact is
higher in international trade.

10. Balanced of transactions: In international trade, money

inflation, money reduction, and export control systems are taken to keep favorably
balanced transactions in international business.

285
286
 Absolute and Comparative advantage

Absolute advantage: This theory was developed by Adam

Smith and talks about who can do it better, cheaper and quicker.
• Based on differences in cost.
• Absolute advantage says that one country would have an absolute advantage
over the other if it can produce same amount of goods or greater output of a
good or services than other countries using the same amount of resources or
even less.
• The product with absolute advantage is exported to the other country and
product with absolute disadvantage is imported.

• A country has an absolute advantage in producing

a good over another country if it uses fewer
resources to produce that good.
287
• Absolute advantage can be the result of a country’s natural
endowment.
 For example, extracting oil in Saudi Arabia is pretty much just a matter of
“drilling a hole.” Producing oil in other countries can require considerable
exploration and costly technologies for drilling and extraction—if indeed they
have any oil at all.

 The United States has some of the richest farmland in the world, making it
easier to grow corn and wheat than in many other countries.

 Guatemala and Colombia have climates especially suited for growing coffee.

 Chile and Zambia have some of the world’s richest copper mines.

 France can produce 10 liters of wine in 30 hours. Italy can produce 10 liters of
wine in 20 hours i.e. Italy has an absolute advantage over France.

 Philippines can produce clothing with less resources (Money) used than USA
i.e. Philippines has an absolute advantage over USA in clothing production.

288
Significance of absolute advantage theory

1. More quantity of both products.

2. Increases standard of living for both countries.

3. Increase in global efficiency and effectiveness.

4. Maximization of global productivity.

289
 Limitation of absolute advantage theory

1. No absolute advantage for many countries.

2. Countries size varies.

3. Country by country differences in specialization.

4. Deals with labor only and neglects other factors of

production.

5. Neglected transport cost.

290
 Comparative advantage
• Developed by David Ricardo: In 1817, David Ricardo, a
businessman, economist, and member of the British Parliament, wrote a
treatise called On the Principles of Political Economy and Taxation. In this
treatise, Ricardo argued that specialization and free trade benefit all trading
partners, even those that may be relatively inefficient.

• Condition that a country has ability to produce a certain product better than
another country with a lower opportunity cost. Country produce the product
with less opportunity cost and trade with other.

• The question each country or company should be asking when it trades is:
“What do we give up to produce this good?” It should be no surprise that
the concept of comparative advantage is based on this idea of opportunity
cost.

• Each party can gain by specializing in the good where it has comparative
advantage, and trading that good for the other.
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When one country can produce goods at a lower opportunity cost then
it sacrifices less resources in production.

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293
Specialization refers to the tendency of countries to specialize in
certain products which they trade for other goods, rather than
producing all consumption goods on their own.

Gain from trade refers to extra production and consumption

effects that countries can achieve through specification and
international trade.
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 Differences between absolute and comparative advantage

Particular Absolute advantage Comparative advantage

Definition A country will have an absolute
advantage over another country when
it produces the highest number of
goods after the same resources are
supplied to both of them.
Comparative advantage can be
described as the ability of a
particular country to produce a
certain product better than another
country.

Basis Trade is not mutually beneficial Trade is mutually beneficial.

Factor cost is a factor involved in absolute opportunity cost is the factor that is
advantage involved in comparative advantage.

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Context of absolute and comparative advantage in Nepal

• NTIS (2010) has identified 19 goods and services

 Agro-foods: Cardamom, ginger, honey, lentils, tea, noodles and
medicinal herbs/essential oils

 Craft: handmade paper, silver jewels, iron and steel, Chyangra,

pashmina and wool products

 Services: tourism, labor, IT, health, education, engineering and

hydroelectricity.

• The diverse climate, topography and abundance of water resources

are conductive for tourism and hydroelectricity.

• Nepal has hardship in competing with India and China in producing

traditional commodities like manufactured goods and even
agricultural commodities.

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 Balance of payment and Balance of Trade
Balance of payments (BOP): Accounting record of all monetary
transactions between a country and the rest of the world. These
transactions include payments for the country's exports and imports of
goods & services, financial capital, and financial transfers.

A country has to deal with other countries in respect of 3 items:-

 Visible items which include all types of physical goods exported and
imported.

 Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.

 Capital transfers which are concerned with capital receipts and capital
payment.

According to Kindle Berger, "The balance of payments of a country is a systematic record

of all economic transactions between the residents of the reporting country and
residents of foreign countries during a given period of time". 297
 Features of Balance of Payment (BoP)
 It is a systematic record of all economic transactions
between one country and the rest of the world.

 It includes all transactions, visible as well as invisible.

 It relates to a period of time. Generally, it is an

annual statement.

 It adopts a double-entry book-keeping system. It has

two sides: credit side and debit side. Receipts are
recorded on the credit side and payments on the
debit side.
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 Components of BoP
1. Current Account Balance:
 BOP on current account is a statement of actual receipts and payments in short
period.
 It includes the value of export and imports of both visible and invisible goods.
There can be either surplus or deficit in current account.
 The current account includes:- export & import of services, interests, profits,
dividends and unilateral receipts/payments from/to abroad.

2. Capital Account Balance

 It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
 The capital account involves inflows and outflows relating to investments,
short term borrowings/lending, and medium term to long term
borrowing/lending.
 There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement in banking capital,
official capital transactions, reserves, gold movement etc.
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3. Financial Account Balance:
 Direct investments
 Portfolio investments
 Other investments

4. Overall Balance of payment

Total of a country’s current, capital and financial account is
reflected in overall Balance of payments. It includes errors,
omissions, official reserve and related items transactions.
..\Downloads\Balance of Payment 2021.xlsx

300
Balance of Trade: The difference between a country's imports and its
exports. Balance of trade is the largest component of a country's balance of payments.
 The balance of trade, commercial balance, or net exports (sometimes symbolized
as NX), is the difference between the monetary value of a
nation's exports and imports over a certain period.

• The balance of trade measures a flow of exports and imports over a

given period of time.
• The balance of trade does not mean that exports and imports are
"in balance" with each other.

 Debit items include imports, foreign aid, domestic spending abroad and
domestic investments abroad.

 Credit items include exports, foreign spending in the domestic economy

and foreign investments in the domestic economy.

 When exports are greater than imports than the BOT is favourable and if
imports are greater than exports then it is unfavourable.
301
302
Difference between BoP and BoT

303
 Major theories related with international trade

1. Theory of Mercantilism
The theory that a country should accumulate
financial wealth by amassing as many inflows of
“currency” as possible.
Mercantilism: 16th – late 18th century
• A nation’s wealth depends on accumulated treasure
• Gold and silver are the currency of trade

• Two means of increasing a country’s wealth are colonialism and

international trade.
• A system of government institutions and policies designed to restrict
international trade
– Maximize exports through subsidies.
– Minimize imports through tariffs and quotas 304
2. Theory of Absolute advantage
3. Theory of Comparative advantage

4. Heckscher (1919)-Olin (1933) Theory:

• Export goods that intensively use factor endowments which
are locally abundant.
– Corollary: import goods made from locally scarce factors.
• Patterns of trade are determined by differences in factor
endowments - not productivity.
• Remember, focus on relative advantage, not absolute
advantage.

305
5. Product Life-Cycle Theory (Raymond Vernon, 1966)
• Article in the Quarterly Journal of Economics.
• As products mature, both location of sales and optimal production
changes.
• Affects the direction and flow of imports and exports.
• Globalization and integration of the economy makes this theory less
valid.

6. The New trade theory

• Began to be recognized in the 1970s.

• Deals with the returns on specialization where
substantial economies of scale are present.
– Specialization increases output, ability to enhance
economies of scale increase.
306
7. Porter’s Diamond (Harvard Business School, 1990):
 Concept of Competitive advantage of nation
 Question: “Why does a nation achieve international success in a particular
industry?”

Determinants of National Competitive Advantage

• Factor endowments: nation’s position in factors of production such as skilled
labor or infrastructure necessary to compete in a given industry.
• Firm strategy, structure and rivalry: the conditions in the nation governing
how companies are created, organized, and managed and the nature of domestic
rivalry.
• Demand conditions: the nature of home demand for the industry’s product or
service.
• Related and supporting industries: the presence or absence in a nation of
supplier industries or related industries that are nationally competitive.

307
 Determinants of
National Competitive Advantage

Chance
Company Strategy,
Structure,
and Rivalry

Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government
Source: Michael Porter, The Competitive Advantage of Nations
THANK YOU !!

309
World Trade Organization and
Implication in Nepal

310
 An Only global international organization that facilitates
international trade.

 Organization for liberalizing trade and a forum for governments

to negotiate trade agreements and to settle trade arguments.

 Since 1948, the General Agreement on Tariffs and Trade

(GATT) provides the trade rules later in January 1995 it changes
into the WTO.

 The WTO agreements negotiated and signed by 164 world‘s

trading nations and ratified in their parliaments.

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 Objectives of WTO
• To make transparent international trade related rules

• To help producers and traders of goods and services

• To strengthen world‘s economic situation and increase investment,

employment and income

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 Activities of WTO
• Negotiating the reduction or elimination of obstacles to
trade(import tarrifs,other barrier to trade) and agreeing on rules
governing the conduct of international trade( antidumping,
subsidies, product, standards etc.)

• Administrating and monitoring the application of WTO agreed

rules for trade in good, trade in services and trade related
intellectual property rights.

• Monitoring and reviewing the trade policies of members, as

well as ensuring transparency of regional and bilateral trade
agreements.
313
 Activities cont.…
• Settling disputes among members regarding the interpretation and
application of the agreements.

• Building capacity of developing country government officials in

international trade matters.

• Assisting the process of accession of some 30 countries who are not yet
members of the organization

• Conducting economic research and collecting and disseminating trade

data in support of WTO;s other main activities.

• Explaining to and educating the public about the WTO, its mission and
its activities.

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 Trade Principle of WTO
• Non- discrimination( most favor nation and national
tratment)

• Freer trade: gradually through negotiation

• Predictability: binding commitments

• Promoting fair competition

•
• Transparency

• Safety values
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 Nepal’s Accession to the WTO
• On April 23, 2004 the protocol entered into force and Nepal
became the 147th member of the WTO.

• Nepal undertook 25 systematic commitments under the terms

of its accession to WTO.

• Nepal is the first officially classified least developed countries

(LDCs) to join since the WTO was established.

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 WTO agreements
1. Agreement on Agriculture (AOA)- 3 pillarrs

• Domestic support – reducing the subsidies in

Agriculture
– reduce commitment by 20% in industrial countries and 13% by
developing countries.
– But Nepal has given only 1.3% of subsidy for agriculture
production which can be increased to 10%.
• Market Access: Increasing access to market
– Reducing the tarrifs by developed countries on an average by 36%
and developing countries 24%.

• Export subsidies – reducing export subsidies

317
2. Agreement on Sanitory and PhytoSanitory Measures (SPS)
Those import which has serious issues on health of plants, animal
human can banned

3. Agreement on Technical Barriers on Trade (TBT)

Quality, weight,colour, labeling,expiry date etc

4. Agreement on Trade related Intellectual Property

Right(TRIPS)
(trade marks, patient, copy right, plant variety protection)

5. General Agreement on Trade in Service

– opens the door for foreign investment in different sectors Nepal, had
agreed on 74 different sectors and sub-sectors
– Animal medical services ,Technical Experiment and investigation
services
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 Implication of WTO in Nepal
 Open market - promoting competition
 Transit right- Granted access to sea as aright
 Attract foreign direct investment,
 The Anti-dumping rules
 Countervailing rules
 Import - existing tariffs on imported agriculture goods in
Nepal is one of the lowest as they range from 0 – 10%
 Export - India having absorbed almost 57% of the country's
total farm exports ( MOF, 2016)
 Trade strengthen program- NTIS 2016
 Intellectual property right –
 Easy in getting fund 319
Opportunities of WTO membership
 Protection of Dumping
 End of Preferential Trading Arrangement
 Export Subsidies
 Dismantling of Non Tariff Barriers
 Tariff Binding
 Access of Market
 Rise in the Government Revenue
 High value Agriculture Commodities Export
 International business competition will entrance the capacity and
productivity of Nepalese Industries.
 Benefit from the provision of positive discrimination of LDCs
preferences.

320
 Import consistency for industrial inputs.

 Possible assistance from WTO secretarial and trading partners for

domestic capacity enhancement.

 Well define trade will be institutionalized and there will be no frequent

transit related tussles with India as used to be experienced in the past.

 Safeguard from unilateral decision to trading partners.

 Benefit linkage with transitional will be improved and it will improve

production and employment.

 Helps to increase Foreign Direct Investment (FDI).

 Helps to eradicate the problem arising from the bilateral business with
the neighboring countries.
321
 Challenges of WTO Membership
 Employment- sophisticated machineries and better technology

 Negotiation for More Benefits- gaining more and loosing less

 Strengthening Institutions

 Specialization in Some Products and Services- lack industrialization

 Making Industries Cost Effective- need modernization in industry

 Export quality and standard

 Monopoly of Multinational cooperation(MNCs) in Patent - Basmati rice

of south Asia ,was patent by US with name Taxomati

 Threats to domestic products by imports

322
 Disadvantages of WTO to Nepal
1. Domestic industries may be adversely affected
2. Tariff reduction causes decrease in revenue
collection
3. Domestic investment may suffer because of FDI
4. Difficult to meet international standard of
quality
5. National indigenous expertise may decline
6. Elimination of duty free and quota free system

323
 Conclusion
• The international agriculture trade under the WTO
regime has been liberalized, but at the same time has
also become more competitive.

• Although the rich countries have promised to open up

their market by cutting tariffs and nontariff barrier,
mainly the trade 'distorting supports', it will be difficult
for less developing countries to be truly benefited.

• In case of Nepal the opportunities from the WTO

provision would be futile unless it adds more farm
products to its export basket.
324
 Multilateral and Bilateral trade agreements

SAARC:

325
 SAFTA (South Asian free Trade Area)

Objectives of SAFTA:
 Promoting and enhancing mutual trade and economic
corporation by eliminating barriers in the trade
 Promoting condition of fair trade competition in the free trade
area.
 Establishing a framework for further regional corporation to
expand the mutual benefits of the agreement
 Creating effective mechanism for the implementation and
application of this agreement, for its joint administration
326and for
the resolution of disputes.
 Under SAFTA, the eight SAARC nations (Nepal, Bhutan, India, Bangladesh, Pakistan, Sri
Lanka, Maldives, and Afghanistan) have pledged to cut tariff rates on a product-by-product
basis, and more than 5,000 items are entitled to preferential duty treatment in the
participating countries. However, the long “negative list” of goods that are excluded from
preferential duty treatment under SAFTA has limited the agreement’s impact on regional
trade.

 Nepal became the 147th member of the World Trade Organization (WTO) in April
2004. Nepal was given until December 2006 to comply with its WTO obligations, but to
date it has only partially fulfilled these obligations.

 In February 2004, Nepal became a member of the Bay of Bengal Initiative for Multi-
Sectoral Technical and Economic Cooperation (BIMSTEC). Other members include
Bangladesh, Bhutan, India, Myanmar, Sri Lanka, and Thailand. BIMSTEC seeks to establish
a more comprehensive free-trade area through deeper and more substantial sector
coverage of services and an open and competitive investment regime.

 Nepal has signed bilateral trade agreements and treaties with seventeen countries,
including the United States, United Kingdom, Yugoslavia, India, Russia, South Korea, North Korea, Egypt, Bangladesh,
Sri Lanka, Bulgaria, China, Czech Republic, Pakistan, Romania, Mongolia, and Poland.

 The treaty Nepal signed with India in 1996 and amended in 2009 is its most important in terms of
trade volume. Except for some items under quantitative restrictions, the trade treaty puts Nepal in a
unilateral duty-free trade regime with India, which accounted for more than 60 percent of Nepal’s
total trade in FY 2016/17.
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THANK YOU !!

328