Impediments to the Growth of Microenterprises in Major Manufacturing Subsectors

– This article was originally published by Ashesh Shrestha in the Himalayan Times on the March 24, 2019.

According to the National Accounts of Central Bureau of Statistics (CBS) for the fiscal year 2016/17, the contribution of manufacturing sector in the Nepalese GDP is 5.67 percent. It is regarded as one of the major sectors that could help boost the Nepalese economy. With the development of manufacturing sector, it will not only increase national output and create more employment opportunities but will also complement agricultural and service sector through backward and forward linkages respectively. Therefore, the support it provides to the other economic sectors further necessitates its growth.

There are a lot of microenterprises engaged in manufacturing sector in Nepal. Out of these micro manufacturers, many of them have not even been formalised and many of them have not been able to grow to become medium and large-scale enterprises due to various problems/challenges faced by them. This article focuses on five of the growing manufacturing sub- sectors, namely handicrafts, textile and readymade garments, iron and related, woollen carpet, and food and beverage and analyses the problems that micro- entrepreneurs in these manufacturing sub- categories are currently facing.

Many of the microenterprises in the handicraft sector are operating informally. The entrepreneurs perceive formalisation will only increase the cost of doing business as it comes with having to pay taxes, meeting various regulatory compliances, and yearly renewal of the registration, among others. Therefore, they are reluctant to get formalised. The “Public Procurement Act” of Nepal government has set Value Added Tax (VAT) registration as a mandatory provision for any firm that wishes to supply goods to the government. But the majority of the firms in the handicraft industry are cottage based and have acquired only Permanent Account Number (PAN). So, this clause has barred most of the handicraft industries especially micro, cottage and small from enjoying the benefits of selling their product to the government.

The major problem faced by the iron and related enterprises is getting ‘no objection commitment’ from the neighbours. These enterprises are mandatorily required by the law to obtain a ‘no objection commitment’ from the neighbours before establishment of the industry. But, because of the negative externality (sound pollution) produced by these enterprises, it is very difficult to get the commitment from the neighbours. Due to the cumbersome process to obtain a no objection commitment approval, iron and related industries are forced to operate in the hinterland, away from the human settlement. But due to rapid urbanisation and increasing migration, the vicinity where industries are operating gets crowded in a short period of time. So, the increasing human settlement in and around the industry is forcing them out of their place as the residents want to get rid of noises that iron industries produce. Therefore, the microenterprises in this sector are being forced to operate informally and they are not being able to upscale their operations.

The major problems faced by woolen carpet manufacturers are the lack of clear set of standards that comply with the international standards and lack of standard testing mechanism inside the country. Because of these factors, there have been instances when the exported carpets had to be withdrawn as they could not pass the standard test in international market. Nepalese manufacturers not only stained their reputation but also had to withdraw their products incurring huge loss.

In Food and Beverage industry, a standard mark is very important to reach out wider markets. Many retailers and traders do not accept the food and beverages without a standard mark. However, for getting license for using Nepal Standard (NS) marks provided by Nepal Bureau of Standards and Metrology (NBSM) in the product, there is a significant fee to be paid. A deposit of Rs. 20,000 and license fee of Rs. 2,000 has to be paid while applying for license to use NS mark. Additionally, after first three years of receiving the license, it has to be renewed every year by making a payment of Rs 1,000. Further, the NS mark can only be obtained at the regional and central level. Moreover, obtaining standard mark is very difficult because of bureaucratic hurdle due to which many micro entrepreneurs are not being able to expand their business.

Textiles and Readymade garment industries specifically face problem while exporting their products. The border as well as documentary compliance to export a consignment costs more than 50 percent of the GDP per capital of Nepal. Moreover, various monetary incentives provided to boost up exports do not seem to have benefitted micro and small manufacturers as they are not directly involved in international trade due to lack of information and technical knowledge about cross-border trade and economic infeasibility of exporting small volume of production directly.