The latest data from the Asian Development Bank projected an estimation of 25.2% Nepalese still in poverty in 2020. Despite abundance in natural resources, majority of the human capital is drained into other industrialised nations, most notable to the gulf and neighbouring India as semi-skilled labourers; the primary reason being the unproductive agricultural sector, stagnant economic growth, low wages, and social and economic disparities created by lackluster policies adopted by the state.
While there are many reasons responsible for the current situation, limited growth prospects for the small business are one of the foremost reasons. Small businesses, also called Micro and Small Enterprises (MSE), play an essential role in generating employment and alleviating poverty. According to the Industrial Enterprise Act 2020, enterprises having fixed assets up to Rs. 2 million and yearly transactions of up to Rs. 10 million fall under micro-enterprises while enterprises that have capital of up to Rs. 150 million are classified as small enterprises. MSEs employs approximately 1.75 million people and accounts for 22% of the nation’s GDP.
Despite being a very significant contributor to economic growth, MSEs are unable to operate at an optimum level. Historically, they have received less importance compared to larger firms, be it in registration or marketing and financial access. On top of that, instead of formulating smooth and uncomplicated policies to foster their growth, the government has left this sector largely unnoticed, further demotivating the entrepreneurs.
The Challenges
The inescapable administrative problems of the Nepali bureaucracy hinders the progress of small firms. The current federal model envisioned to cut down on these hindrances and provide smooth services to the citizens. However, with the introduction of the three-tier government agencies after adopting federalisation, the Entrepreneurs are required to visit multiple offices for registration and renewals, which is very frustrating, exhausting and time-consuming. At present, micro and small enterprises belonging to the trade sector are required to be registered under three different government agencies to be formalised. Firstly, under the ward office at the local level, secondly at the Department of cottage and small industries under the provincial level and thirdly at the Inland Revenue Office at the central level. Furthermore,lack of coordination between the various government agencies is evident, which is another challenging issue.
Such vague registration procedures have discouraged smaller firms from registering and formalising their enterprise.
Informality brings vulnerability and the problems of dubious property rights, legal obstacles, lack of safe and proper credit channels and disconnection from proper marketing channels. This leads to the entrepreneurs having access to limited markets and having to oversee trading complications, thus creating a great hurdle in flourishing the products of MSEs. Most of the MSEs don’t have access to international markets and tend to operate in the local markets only. The products manufactured in MSEs have to compete with both larger firms and imported products. Poor quality of such products have further reduced their competitiveness. For instance, in the eastern hilly region of Nepal, carpet manufacturing microenterprises of well-known products like Radi, Pakhi, Bakkhu, Darhi are on the verge of extinction. According to the local entrepreneurs of Bhojpur district, they cannot afford advanced technology and facilities like colouring, washing and grinding.
Carpets are the major export of Nepal. The export of the Nepalese carpet industry has extended to 40 countries out of which Germany, USA, Belgium, Britain, Switzerland, Japan, Spain are the leading exports markets. Lamentably, a large number of carpets do not pass the standard test and have to be withdrawn.Lack of manpower increases the cost of production, and they are unable to get a profitable income out of it. Insufficient raw material production is an additional issue of carpet industries. They are obliged to import raw material from other countries like Tibet and New Zealand. Importing raw material increases the production cost as it adds to transportation cost and customs duty. Also, taxes on the import of raw materials are higher than the taxes of import of finished goods.
Besides, MSEs have to go through many hurdles in raising capitals for their establishment. Most of the banks and finance corporations hesitate to provide loans to small enterprises and prefer to allocate their resources to larger firms. Fresh entrepreneurs looking to get established through MSEs cannot execute their ideas and projects unless they have certain capital of their own or show some collaterals. As a result, most small firms in Nepal borrow from friends and relatives. This type of finance cannot cater to all the needs of small and micro enterprises, and consequently, it forces the use of cheap and old production technology.
How to overcome these obstacles?
Henceforth, rather than mentioning that MSEs are the topmost priority of Nepal’s economy, the government should reflect their words into actions. To tackle these various issues related to MSEs, the implementation of definite strategies is a must.
Firstly, access to finance should be easy for MSEs. Similar to the larger firms, an environment needs to be built where entrepreneurs can find collateral-free loans. In addition to this, it is necessary to mitigate the issues entrepreneurs face in the administrations during registration and renewal. One window policy needs to be implemented which is time saving, efficient, and effective. Likewise, marketing should be given topmost priority and the products should get opportunity to gain access to broader markets. This can be done by simplifying or doing away with the administrative hassles and red tape at border checkpoints and bringing reforms to the export-import codes. To boost competitiveness at both the local and international markets, a proper mechanism for quality control of domestic products to see whether these products meet the standards or not is necessary. Though taxation is an essential source of revenue to the government, it also adds an unfair pressure on to small business owners. Tax policy should be set up in a justifiable way. Tax rates should be appropriate, and the tax burden needs to be shaved off the micro and cottage industry, as most of these are owned by impoverished people. This will also incentivize the small businesses to formalize.
People with less technical skills, education, limited capital can uplift their living standard through MSEs. So, it is obligatory to provide special attention to MSEs and enhance the required investment climate so that they could adequately play the role expected of them in economic transformation. Else, Micro and Small enterprises, the critical engine of economic prosperity will collapse, which will, in turn, push Nepal’s economy towards darkness.
