The fundamental path to economic upliftment

Looking from a circle, there is only depression everywhere and no signs of a positive side. From the other corner, it is discussed that the economic activities are slowly returning to the rhythm and the economy is improving.

It seems relevant to discuss how the budget to be presented in the Federal Parliament for the next financial year can act as a milestone to take the economy on the path of uplift by addressing the problems the country is currently facing. The dimensions of the economic stagnation that the country is currently experiencing are basically low job creation, low productivity, increasing trade deficit, increasing national debt and sluggish capital market. The principles and priorities of the upcoming budget, which is currently being discussed in the parliament, should be seen from the background of these problems.

Low productivity in agriculture

The lack of job creation in the non-agricultural sector and the migration of labor force due to low productivity in agriculture has slowed down the overall economic growth. In Nepal, there are more than 50 subsidies given by various levels of government to the agricultural sector, but not all of them are related to production. For the current financial year, it seems that the government has allocated more than 58 billion rupees as agricultural subsidy, but in most of them, the paper process is complicated and there is a high tendency to take advantage of it. The question has arisen as to how to simplify it in the reach of actual agricultural workers. In addition, due to open borders, Nepali agricultural products have to compete with Indian agricultural products in the consumer market and Indian agricultural products receive more subsidies than Nepal. In India, government subsidies on chemical fertilizers and other agricultural raw materials are around 1.5 percent of GDP, while subsidies related to loans and other agricultural products are 2 to 2.25 percent of GDP. The total agricultural subsidy in Nepal is about one percent of the GDP. This has made it difficult for Nepali products to compete with Indian agricultural products. On the one hand, limited modernization and commercialization in agriculture, on the other hand, low productivity and difficulty in raising the price of labor, the youth dependent on agriculture are migrating out of the country in hundreds of numbers every day. This means that potential employment in agriculture is not expanding, it is shrinking.

Various studies show that about thirty percent of the grain crops in Nepal are lost due to lack of proper protection. The first requirement is to increase the productivity of agriculture by encouraging the research agricultural projects from the side of the state, while the subsidy for crop protection and transportation is another requirement. There is a need to increase the effectiveness of subsidies and to control micro-organisms, insects, rats, birds and wild animals that damage agricultural production. In the absence of crop protection, the poor farmers either hastily sell their produce at cheap rates and middlemen do not take advantage, or they have to bear the loss due to the lack of crop protection. This type of subsidy connects the farmer with the production and also gives good returns for the agricultural work.

As a large number of male agricultural workers migrated from rural areas to foreign employment, the development and expansion of women-friendly agricultural technology has become necessary. In the neighboring countries of India, Madhya Pradesh and Jharkhand, the production and expansion of women-friendly agricultural equipment has been given a lot of importance and there are clear signs of improvement in family income and the standard of living of farming families. In this, Nepal has to learn from the experience of its neighbors.

Due to climate change, the temperature of the earth is projected to increase by 1.5 degrees Celsius within the next decade, which has a direct impact on the agricultural system. Traditional crops are gradually becoming more adapted to the highlands, while new varieties of agricultural crops that are produced at higher temperatures in the lowlands are also becoming possible. While mitigating the effects of climate change and adapting to it has created a situation, there is also a need for a strategy to transform it into a new opportunity.

Rising National Debt

The government's capital expenditure capacity is continuously decreasing, while on the other hand, the burden of public debt is increasing. With the increasing public debt, the government's capital expenditure capacity improved. If the increased debt was used for developmental expenses, it would not cause much problem, but if the increased debt is used for non-productive expenses, it will definitely ruin the government's financial system. Looking at the trends of the first eight months of the current financial year, the scope of improvement in the government finance system is not yet visible. According to the office of the Comptroller General, by the end of February, 51 percent of the target for the financial year has been spent on regular and 26 percent on capital. Overall, after 75 percent of the financial year, the expenditure is around 45 percent. Even if we do a more structural analysis of

expenses, the situation is disappointing. Now the portion of loan interest payment is more than the development expenditure. While the capital expenditure reached around 81 billion rupees, the financial arrangement reached 138 billion rupees. This shows that the burden of public debt is increasing (currently more than 44 percent of GDP, which has doubled within a decade) but the capacity to carry capital expenditure is decreasing. For example, the government has not yet been able to disburse Rs 40 billion to the builders, which should have been paid by the end of the last financial year. Due to the slowness of the government showing the provisions of the Public Expenditure Regulations, the morale of businessmen has fallen. Their low morale is a matter of great concern and the government needs to be very sensitive to it.

Trade deficit and trend

If we analyze the trends of the last fiscal year and the eight months of the current fiscal year, there are still no signs of improvement in the country's foreign trade. Based on the latest data published by the National Bank, in the first eight months of the current financial year, primary goods accounted for 56 percent of the country's total exports, while finished goods accounted for 44 percent. Export of capital goods is only 0.2 percent. In the same period last financial year, these figures were around 54, 46, and 0.5 percent. On the other hand, the situation regarding imports is not improving. In the first eight months of the last financial year, imports of goods used as raw materials, finished goods, and capital goods were 53, 38, and 9 percent of the total imports, while the export trend became weaker and reached 49, 42, and 9 percent. These figures show that the trend of our foreign trade is weakening and the share of raw materials in exports and finished goods in imports is increasing. It shows that the productive capacity of industrial goods in the domestic economy has decreased and it is declining.

It seems that the government should be sensitive to international trade and make policy reforms. Regarding agricultural products that came to Nepal cheaply due to Indian subsidies and are being displaced, it is necessary to keep such products in the sensitive list and impose a countervailing tax on similar imported goods. Similarly, some Chinese ready-made clothes are available on the street for cheaper than the real price. Producers of such goods keep the Nepali market under their control for a long time and supply them at unexpectedly cheap prices without incurring any cost. There are two main purposes of supplying such goods. First, to displace their competing suppliers from the market and second, to gradually increase the price of those goods after consumers have become accustomed to their goods and competitors have been displaced. Such business trends are present in different countries of the world. But there is no cure for it. Various countries may impose anti-dumping duties to curb this trend. This type of tax is not so popular in our country, but it is necessary to protect Nepali industrial production by imposing this type of tax on the goods brought from customs with low invoice.

It is good to increase the reserves of foreign currency, but there are some disadvantages if there are more reserves than required. This reduces the interest income on the one hand and on the other hand reduces the consumption level in the long term and pushes down the economic growth rate itself. In recent months, when foreign exchange reserves have almost doubled from the target, it is appropriate to adopt some strategy aimed at reducing the import of petroleum products in the long term. For now, it is appropriate to reduce the customs duty on electric vehicles and electric stoves and try to increase domestic consumption of electricity as much as possible. Although the monetary policy aims at a foreign exchange reserve that can cover seven months of imports, it is currently at a level that can cover more than 13 months of imports. Savings above the target will not benefit the country in the long run. On the other hand, the Electricity Authority is exporting electricity cheaper than the domestic tariff. Therefore, to increase the domestic demand for electricity, it is necessary to reduce the customs duty of electrical goods. Because on the other hand, Nepal has to reduce its own greenhouse gas emissions to zero by 2045.

Falling capital market

The fall in the capital market has not raised the morale of investors. As the NEPSE index, which was around 3200 a few years ago, is currently around 1200, investors seem to be unenthusiastic about the returns of industrial, service and commercial establishments. At present, there are about 6.2 million small capital market investors in the country and it is the situation that they have submitted an annual revenue of 16 billion to the government. In the present situation, the capital market itself does not have the ability to raise its position, the government should create a positive environment. Sometimes the finance ministers who come after the change of government consider it as an unproductive sector, so the scenario of closing the capital market during their tenure is not new in Nepal. Compared to the capital market, the productive real sector is the one that the government should emphasize, but the ups and downs that appear in it also dictate the state and direction of the economy. The government should have a positive psychological influence on the capital market to improve economic activity and investment climate. This gives more speed to the possibility of capital mobilization in the country.

Summary

Low economic growth, high unemployment with inflation, and declining investment are the hallmarks of stagflation according to classical economic concepts, which are not so easy to resolve. On the one hand, finding solutions creates a new problem on the other hand, so the situation becomes like a frog's nest. Globally, this type of problem was caused by the oil crisis of 1970, and various countries have been facing such problems sporadically in different periods of history. In 2022, when problems of this nature were looming in the US economy, they were carefully tackled, with unemployment solutions being prioritized and inflation control second. We do not have the problem of high inflation but low economic growth, high unemployment and declining investment. Job creation and improved investment along with productivity growth are the long-term solutions, for which appropriate business strategies, timely reforms in the taxation system, efficiency of public spending and boosting the morale of the private sector are the immediate needs.