Nepal witnessed premature deindustrialisation in early 2000 and became a service-driven economy thereby skipping industrialisation requirements needed to enhance production and employment generation that are key for stable growth in the long run. Remittances have played a role to lubricate all sectors of the economy, most importantly for the growth of service sector as import-based consumption started surging over the years along with increased inflow of remittances. The service sector at present alone accounts for 60.2% of the GDP from 48% two decades back. Exponential growth of the service sector is largely backed by remittance sent by more than four million Nepalis working in Gulf countries and Malaysia.
Against this backdrop, both the government and private sector have realised the need for a strong production base to sustain the economy. The Confederation of Nepalese Industries (CNI), which has been advocating for industrialisation in Nepal has launched a campaign titled, ‘Make in Nepal-Swadeshi’. Business 360 caught up with Vishnu Kumar Agarwal, the newly elected President of CNI, to learn more about prospects for industrialisation in the country and the challenges.
Agarwal has previously served as Senior Vice President of CNI and as Chairman of its Infrastructure Development Committee. CNI is the apex body of the large and medium scale industrial community of Nepal and has a membership base consisting of nearly all of the big corporate houses of Nepal, blue-chip companies, JVCs, etc, spread across a wide and diversified spectrum of businesses.
Agarwal has previously led the Young Entrepreneurs’ Forum as well. He is a former football player and is currently promoting Kathmandu Razors Football Club, winners of the Nepal Super League 2021. He is better known as the Managing Director of MAW Group of Companies and the Honorary Consul General of the Czech Republic to Nepal. Excerpts of a recent interview with Business 360:
Being at the helm of CNI, how would you like to take forward the organisation. What roadmap would you like to implement as its leader in the next two years?
We have given priority to creating a sound environment for industrialisation. A strong production base is a must for stability and sustainability of growth and to generate employment. CNI is an umbrella organisation of Nepali industries and we try to address issues faced by our members by coordinating with concerned stakeholders and even the government. Industrialisation is necessary because with each new venture there is employment generation and forward and backward linkages are established which means ancillary industries also flourish. As soon as a good is produced it creates a supply chain — wholesalers, distributors and retailers – which means more businesses and jobs. If the product is competitive it can also be exported that helps bring in foreign currency. So, there is no substitute to industrialisation and we would like to appeal to all stakeholders to create a favourable climate for it. However, it is easier said than done as it requires a wide range of reforms from legal to physical infrastructure, land acquisition, taxation, cost of fund and others. We have defined our goals and everyone who takes on the mantle works towards attaining the goals with the help of the team.
Operating an industry is a multidisciplinary subject. How can Nepal become competitive despite being a high-cost economy as our cost related to output of labour is quite high and there are infrastructure impediments besides the procedural hassles while availing services from government offices?
It is challenging but not impossible. The government is also committed to developing an environment that encourages production-based industries. We can see the government’s perspective has been changing. Previously, they were more focused on generating revenue but now it has started emphasising industrial growth and has been trying to facilitate and promote industries. The status paper presented by Finance Minister Janardan Sharma in the Parliament a few days back also stresses on a production-based economy and the need to increase the share of industrial output in GDP. It is definitely the government’s choice on whether it wants to be more revenue-centric and promote imports to achieve higher targets in the short term or promote industrialisation and develop a sound, stable and sustainable growth of revenue in the long run. Promoting industrialisation could impact revenue collection to some extent in the short term but it will create the foundation for sound and stable revenue growth along with inclusive economic growth, jobs backed by a solid foundation of the economy or strong production base in the long term. That’s why all stakeholders must focus on industrialisation.
As the private sector is the major contributor for jobs and growth the government should ensure representation of private sector in investment facilitation/promotion mechanisms and while drafting financial and industrial laws and policies that are related to the private sector even before it starts consultations with us as there is always limited time for validation.
The country has faced premature deindustrialisation due to various constraints like the armed conflict, irregular electricity supply, labour unrest, preference erosion and most importantly cheaper imports. Do you believe an environment for industrialisation can be easily created?
Definitely it will take time to change the perspective. However, I believe that the mindset of the bureaucracy is changing for the better gradually. If you look at the recent policies and budget of the government, they’ve duly acknowledged the importance of production in the country. The budget for fiscal 2021-22 has also incorporated our initiative: ‘Make in Nepal-Swadeshi’. The major objective of this initiative is to develop a production-based economy from an import-based one. We’ve launched this campaign in consultation with the government and it has four objectives: creating employment for 1.5 lakh people annually; increasing contribution of industries in the economy (expanding the share of industrial output in GDP); boosting exports; and attracting investment to establish 1,000 industries including small and medium every year. Export earning has just crossed the threshold of Rs 100 billion and we have set a target to increase export income by four times within five years.
CNI has been urging the government to address infrastructure bottlenecks to make Nepali industries competitive which will consequently attract investment, substitute imports and boost exports. How well do you think is the issue of poor infrastructure being addressed?
The research cell of CNI was responsible for preparing the document, ‘Make in Nepal-Swadeshi’. We worked rigorously on it since last year and held a wide range of consultations with our members, academicians and government to validate the findings of the research and ideas pitched by our research team. We came up with a consolidated document with recommendations for the fundamentals that are required to translate the ‘Make in Nepal-Swadeshi’ campaign into action. We have a 34-point recommendation for interventions under seven pillars.
We can better the industrialisation process through reforms in multiple areas like relaxation on land ceiling or land holding limit for industries, industrial relation related issues and taxation, among others. Similarly, we have to identify projects that can help substitute imports. We can kickstart even through low-value addition, but we have got to start. Once an industry comes into operation it will create backward and forward integration. Most importantly, infrastructure projects must be completed in a timely manner. Such infrastructure should provide necessary impetus for the industrial environment by lowering cost of production; helping tourism industry flourish and smoothening agriculture supply chain. Lastly, we have stressed on digitalisation and modernising industries. We have to modernise our service industry so that they can compete globally.
On the consumption side, three pillars have been identified. We have to develop trust towards Nepali products. Government agencies, private/public companies and general public must be encouraged to consume Nepali products and we also have to boost exports. CNI is very serious about the industrialisation drive and all stakeholders need to be involved to address the barriers to industrialisation. What is encouraging is that the government is also seeking specific feedback which is a positive sign. We can see things are happening and we are committed to it.
Industries have become highly smart through adaptation of technology. Artificial intelligence, 3D printing, and blockchain technology, among others have changed the whole perspective of industrial production. What sort of industrialisation are you envisioning for the country?
Nepal lies between two emerging economic superpowers – India and China – and that is an opportunity for us. On the flip side, both are highly industrialised and their scale of production is high and the technologies they use may easily beat us in terms of the competitiveness and quality of our production. However, the reason why I am saying it is an opportunity is we can integrate our industries with those of India and China. Industries worldwide (including India and China) are adopting fragmented mode of production. We can supply ancillary products. I often cite the example of the cement industry in Nepal. When the government relaxed policies regarding operation of mines, the cement industry boomed in Nepal. If we rightly pinpoint the issue and sort it out, it can pave the way for new avenues to develop ancillary industries, local consumption and exports. We must gradually lower our production cost, address infrastructure bottlenecks, and lessen various procedures that will gradually lower the cost involved in our supply chain and improve the labour output to become competitive.
If we look at the special economic zones (SEZ) why has there been lukewarm response from investors to set up industries in these zones?
SEZs are considered the best option for industrialisation but there are some other issues like lack of proper electricity supply, high lease rate and lack of effective single-window facility, among others. The government must be clear on whether it wants to generate revenue through land leases or the profit of industries that are set up in SEZs. I think tax on profit is justified. I often say the government must play the role of a driver and the rest are passengers. It depends on the government’s desire.
Some member industries have been saying that CNI has not been looking into their issues properly. How often do you interact with members?
Our members directly approach us to resolve their problems in coordination with the concerned stakeholder which could be government agencies, Nepal Rastra Bank, banks or others. We represent 5,000 members and have a strong mechanism for feedback. We do respond to our members promptly. We have experts, lawyers and a vibrant secretariat to take forward such issues. We don’t have any conflict among the members. Internal conflict and excessive politics can dampen the spirit of any organisation and they can easily deviate from their core issues. We are duly acknowledged by the government agencies, Nepal Rastra Bank and other stakeholders for our well-researched feedback.
We can see the government’s perspective has been changing. Previously, they were more focused on generating revenue but now it has started emphasising industrial growth and has been trying to facilitate and promote industries. The status paper presented by Finance Minister Janardan Sharma in the Parliament a few days back also stresses on a production-based economy and the need to increase the share of industrial output in GDP.
What do you have to say about the need for unity of private sector umbrella organisations?
We have a common objective to support and lobby for the private sector and economic development. We might have differences in opinions in the way we work but we have a common ground and the same voice on issues of the private sector. We have collaborated to issue common statements on economic and legal issues related to the private sector.
The Federation of Nepalese Chambers of Commerce and Industry has been lobbying to become the sole agency to issue the certificate of origin included in the Nepal-India Trade Treaty. Your thoughts.
I don’t think it will happen. The government has assigned the umbrella bodies of various chambers and Trade and Export Promotion Centre to issue certificate of origin after a long ground work. The exporters can obtain the certificate from any designated organisation they wish.
The private sector could play an effective role in attracting FDI and Track II diplomacy along with expanding trade and investment relations. How do you view this?
We can definitely do it and we have in fact prioritised this. In order to ensure we have good networking and there is good flow of information on policies/rules and experiences in between South Asian and ASEAN countries, we are going to establish Union of Chambers of Commerce of South Asia which will have 19 members. We will be signing an MoU on this very soon.
What should the role of chambers be to expedite investments and create jobs in the post-pandemic era?
The private sector needs to play a proactive role. We must contribute in policy finalisation and economic development. Also, we need to gain the trust of the entire private sector and acknowledgement from the public, and we will be working with all stakeholders. Government policies and laws must be compatible for the growth of the economy and address the Covid 19 related issues. For example, we have requested Nepal Rastra Bank to provide up to 20% of the loan or Rs 200 million, whichever is higher, as working capital for Covid 19 affected businesses. If that materialises then mid-sized industries will immensely benefit. Meanwhile, the Monetary Policy 2021-22 has addressed the issues of MSMEs. Likewise, the government should provide Covid 19 vaccines at the earliest to reopen economic activities so that the economy which has been battered by the pandemic can recover fast. Most importantly, as the private sector is the major contributor for jobs and growth the government should ensure representation of private sector in investment facilitation/promotion mechanisms and while drafting financial and industrial laws and policies that are related to the private sector even before it starts consultations with us as there is always limited time for validation.