Before World War II, Nepal had basic industries like curio, bricks, tiles, biscuits, confectionery, and so on. The early years of Nepal’s industrial history were not very smooth. Policy contradictions, capital inadequacy and infrastructural difficulties posed major constraints. This difficulty still continues. Technically, Nepal’s industrialization process began 75 years ago when Udyog Parishad (Industrial Council) was constituted in 1935 and Company Act was enacted in 1937 with an aim to promote agriculture, industry and commerce.
The promulgation of Company Act as a foundation to industrialization in Nepal came into effect roughly 175 years later after Britain introduced mechanization. Although the institutionalization process of economic cooperation began roughly 55 years ago, Nepal’s industrialization process got momentum from 1936, the year when Indian capital began to flow into Nepal to take advantages of the available cheap raw materials and labor. Indians considered they were relatively safe here from India’s complicated custom and tax law under the British rule. The Company Act provided for the incorporation of industrial enterprises, a joint stock principle with limited liability. As a result, the first prominent Indian businessman Radha Krishna Chamaria, from a well-known family of Marwari financiers from Kolkata, assisted establishing Biratnagar Jute Mill as a collaborative venture of India and Nepali entrepreneurs with initial capital of 160,000 Indian rupees. When this initial venture became a success, other financiers were also attracted.
An Indian businessman A N Singhania established the first rice mill in 1937; cotton mill in 1942; and sugar mill in 1946. Similarly, Nepali businessman Gauri Narayan Giri also established a rice mill in Janakpur in 1938. Scarcity in the neighboring countries due to war became one of the reasons for increased demand of Nepali products. However, this situation did not last very long. Available literature based on research findings reveal that key positive factors that created an environment for industrialization in other countries ranged from favorable political-legal environments to plentiful natural resources; abundant supplies of relatively low-cost, skilled and adaptable labor. Except natural resources, Nepal always has difficulty in maintaining such resources to stimulate industrial cost-efficiency and technology transfer. Too much of politicization by making the trade unions legal sister organizations of different political parties further restricted the stimulus for industrial investment and economic growth.
Since TYP 2010-2013 is being passed under political stalemate when Nepal’s macroeconomic indicators have crashed, and rising political pressure has necessitated an increase in the size of budgetary allocation, we will not exceed 3.5 percent growth as against estimated 5.5 percent.
In 1942, two paper mills emerged as joint ventures of Nepali and Indian entrepreneurs. As Company Act 1936 did not have any provision for private limited companies, a new act was formulated in 1951 to solve this problem. As a result, 92 new private joint stock companies were established between 1952 and 1964. The narrowness of Company Act 1936 and the 1951 Act was removed after the execution of the Industrial Enterprises Act of 1974, which focused on the government’s role as a facilitator. Unfortunately, discrepancies between policy and practice were evident and the role of public sector continued to be favored.
Prior to 1951, Nepal had few all-weather roads making transportation of goods extremely difficult to expand markets and sustain growth momentum. Basket-weaving, cotton fabric and edible oil production constituted almost 60 percent of the industrial output. Garment and carpet industries grew rapidly and flourished as export-oriented industries since mid-1980s but jute production declined. The garment business after the expiry of multi-fiber agreement in 2005 has nosedived. Although efforts were made to build necessary infrastructure from external assistance, especially since 1951, inadequate infrastructure was still evident until the 1990s. Most of the industries during the 1950s and the 1960s were developed with government protection. The state-led industrialization policy lasted from 1960 to 1990 before embarking upon economic liberalization program.
After Nepal joined the Colombo Plan in 1950, foreign assistance began to flow. Initially, foreign aid was introduced in the form of grants. India and the United States contributed more than one-third of all grants. The assistance was directed toward the development of agriculture, transportation infrastructure, and power generation. The other areas under consideration were communications, industry, education, and health. By 1960, the number of registered industries reached 63. After 1960s, when there was an influx of foreign aid, the number of modern and cottage industries increased to 3,557 by the year 1997.
Beginning 1960s, some bilateral assistance remained in the form of loan. The loan component in overall national expenditure was very nominal until Fiscal Year 1969/70. The share of loan in foreign aid increased from under 4 percent between 1965 and 1970 to more than 25 percent by 1985/88 period. Since 1970, multilateral assistance was significant that contributed to more than 70 percent of funding in development planning. As of 1991, external assistance was in the form of project aid, commodity aid, technical assistance, and program aid.
The early 1990s was historically important from both the economic and political perspectives. The system of constitutional monarchy and initiation of economic liberalization program began during the same period. Industrial Policy, 1992; Industrial Enterprise Act, 1992; Foreign Investment Policy, 1992; Foreign Investment and Technology Transfer Act, 1992; Company Act, 1996; One window Policy, Privatization Policy, Trade Policy and Privatization Act were some of the outward looking policies.
The Tenth Plan’s goal was also to increase the contribution of industry to GDP. To increase industrial competitiveness, attempts were made to attract FDI and appropriate technology in areas of comparative advantages. As Nepal suffered prolonged political instability and law and order situation deteriorated badly during the Tenth Plan period the process of industrialization had negative impact. The result was declining growth rate of only 1.9 percent against the set target of 7.8 percent. The key constraints that can be identified include lack of basic and physical infrastructure; low capacity utilization; lack of business environment; low competitiveness and problem in technology transfer; and underutilization of dry port.
The Three-Year Plan (TYP) 2007-2010 ignored challenges facing Nepal’s industrial development such as industrial insecurity, incompatibility of industry-related laws with other laws, especially Income Tax Act 2002, unskilled manpower, procedural delays, ambiguous and rigid labor laws, politicized trade unionism, capital inadequacy for investment, anti-business custom valuation procedure, and non-operative environmental protection provisions.
Since the forthcoming TYP 2010-2013 is being passed under political stalemate when Nepal’s macroeconomic indicators have crashed, and rising political pressure has necessitated an increase in the size of budgetary allocation beyond Nepal’s absorptive capacity, we will not exceed 3.5 percent growth as against the plan’s estimate of 5.5 percent. Therefore, the country rather needs an alternative uncertainty-oriented economic policy to guarantee minimum level of growth to feed Nepal’s hungry millions.
bishwambher@yahoo.com
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