Kathmandu University School of Management

Balkumari, Lalitpur

Policy Review on Industrial Policy, 2011

Submitted to:

Mrs. Anupama Shrestha Pant,

Faculty of Nepalese Economics

Submitted by:

Sadikshya Pandeya

BBA Year II Semester II, Section B

March 27, 202

Table of Contents

Introduction..................................................................................3
Objectives ...................................................................................4
Analysis.......................................................................................5
Solutions & Managerial Implications........................................23
Solutions:.................................................................................23
Managerial Implication...........................................................25
References..................................................................................25
HONOR CODE:........................................................................26
Introduction

Industrial Policy, 2011 has been formulated with the objective of bringing positive changes in

overall economic and social sectors of the country by means of rapid industrial development

doing away with the weaknesses of the past. It is expected that through this Policy, activities of

industrial development will be increased; employment opportunities will be massively created

and the level of income of people will be increased so that contribution of industrial sector in

economy of the country will be at the forefront. In order to achieve the objectives set by the

Industrial Policy, 1993, it was first of all necessary to transform the economy, which was

substantially relied on agriculture, to industrial economy; therefore, efforts were made to

concentrate governmental activities concerning industrial development towards that direction.

The Industrial Enterprises Act, 1993 enacted as directed by the Industrial Policy, 1993, has

created legal basis for development of industries by making available additional facilities and

concessions such as income tax, sales tax and excise to the prescribed industries of various

classes and located in various regions having them classified and prioritized with a view to move

forward industrial development with high priority. In order to make more contribution in

industrial development, various efforts were made such as capacity development of labourers,

enhancing managerial skills, encouraging the use of new technology, increasing sectoral

investment, making provisions for restoration of sick industries, imparting trainings for

entrepreneurship promotion and making necessary institutional arrangement for providing

services and facilities from one window without hassles.

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In this policy, special provisions have been made for promotion of micro enterprises, cottage and

small industries. Similarly, special policy provisions have been made for woman entrepreneurs.

Moreover, it is necessary to make provisions for supremacy of industrial policy for promotion of

industrial promotion and development and to ensure that no other legal and policy provisions

will be made nor unnecessary intervention will be brought curtailing the facilities provided by

this policy. Therefore, we could say that this policy has been formulated in order to accelerate

the pace of industrialization in response to the diversity in the service industry and opportunities

arising out of them.

Objectives of the Policies

Some of the main objectives of the policies of the recently formulated industrial policy, 2011 are

as follows:

1. To increase export of industrial products along with growth in national income and

employment through enhancement of quality and competitive industrial products and

productivity

2. To establish industrial entrepreneurship as a sustainable and reliable sector by utilizing latest

technology and environment friendly production process

3. To protect industrial intellectual property rights

4. To increase contribution of industrial sector in the balanced national and regional

development by mobilizing local resources, raw materials, skills and means

5. To create strong basis of investment having developed productive human resources and

managerial capacity required for industrial development

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Analysis

As said, this Industrial policy, 2011 has been formulated in order to accelerate the pace of

industrialization in response to the diversity in the service industry and opportunities arising out

of them with objectives of utilizing the opportunities arising out from changes occurring in

economic sector, revolution in information technology sector, enhancing the competitive

capacity having regard to the facilities and concessions being provided for promotion of

industries in the neighboring countries bordering Nepal, accelerating industrial growth and many

more positive aspects. So, here are some points in forms of pros & cons, effectiveness &

ineffectiveness of this policies through which we can analyze both positive and negative aspects

of this policy.

Pros:

The industrial policy, 2011 has aimed to provide the facilities and concession of exemption of

tax for development and promotion of an industry. With this provision, except in the case of an

industry that produces all types of tobacco and liquors and kattha industries, all other industries

are provided benefits in one way or the other. There are further tax benefits for industries

established in least developed, undeveloped and underdeveloped areas. Such as the act where,

the industries established in the under developed areas referred to in schedule-11 shall be entitled

to a seventy percent exemption in the income tax to be charged for ten years from the date of

commencement of transaction. Also, the industries engaged in hydro power generation and

transmission, mining extraction, producing cement by making clinker with the use of local raw

materials (cement industries) and industries to explore and extract petroleum or natural gas, out

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of the prioritized industries referred to in schedule-7, shall be entitled to ninety percent

exemption in the income tax to be charged for seven years from the date of commencement of

transaction. With such commencement of act and policies it would act as the incentives to

establish more and more beneficial industries in an country in many different ways.

Fig: Vicious cycle

So, with the implementation of this kind policies would increase the establishment oh no. of

industries be it small scale or large scale. Then with the increase in number of industries it would

also increase in demand for labors. With the rise in employment opportunities in the industrial

sectors it would also raise the income of the working labour which generally is their rise in the

purchasing power so ultimately they would demand for more goods for consumption and the

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cycle continues. Therefore, the formulations of industrial policy, 2011 which facilitates such

provisions, would result in benefitting the whole economy in long run.

Cons:

The tax revenue can be increased by the government by implementing the policies to register the

industries under company act so that their transaction does not go unreported. And, those tax

revenues can be utilized to re-distribute income and also to fund central public services in the

economy. But, collecting tax revenue is beneficial to the government only up to a certain point.

Higher tax rate will promote activities like tax evasion and tax avoidance as people tend to hide

their incomes or do not pay as much tax as they should which results in the decrement of the

revenue of the government. Here, on the one hand government has levied the huge corporate tax,

income tax rate on the industry that basically produces all types of tobacco and liquors and kattha

industries. These kind of industries actually has huge international market, So, initially when the

government impose high rates of tax amount for these kind of industries it would rise the

government revenue rapidly but gradually these industries will start to evade it and involve in

black marketing, reducing the possible income.

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 Fig: Laffer curve

As soon as the tax starts to increase beyond the point T max, which is the efficient tax rate, the

tax revenue collected by the government starts to decrease. Increment in the tax rate will lead to

more unreported activities which will ultimately make the economy unproductive.

On the other hand, with the implementation of Industrial Policy, 2011 it would generate the low

government revenue in an initial phase due to the minimized tax rate or no type of tax including

excise, income tax and value added tax at all where any capital expenditure made by the

company that would decrease pollution and the impact on environment, would be deducted for

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the purpose of income tax and further any money spent for diversification, expansion, insurance,

donation etc is excluded from the net profit which would thus reduce the tax payable income

and ultimately reducing the tax income in an economy.

Effectiveness:

This Industrial Policy, 2011 has been effective in generating employment opportunities for many

human resources in our country and generating disposable income through boosting up the

industrialization and flourishing industries in one way or other. Simply saying, government

spending can lead to positive results in employment. The increased spending in the development

sectors, like industries, or any other infrastructures could lead to increased level of jobs in

different forms which will create jobs and potentially lead to increased demand for labour, which

comes at the cost of increased wages. This will make the employment level higher in the

economy. However, it is essential to analyze the source of the government expenditure in

creation of jobs. Especially the expenditure in products and goods market through the revenues

generated from increased taxes then the demand shall decrease due to the decreased disposable

income leading to low jobs availability and no positive rise in income level.

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 Fig: Shift in labour demand curve
As shown in the figure above, the increased government expenditure and mobilization of

resources demands more labors to perform activities at different activities with the funds

available by public funding. This creates hike in labor wages as demand increases. The increase

in demand shifts the equilibrium level of employment to the right increasing the labor wages and

increasing the employment level in economy.

Ineffectiveness:

Although the policy gives ample information on how the development projects for the industrial

development should be in motion, we can still observe the ineffectiveness. The main reason for

the ineffectiveness would be that the government is not able to mobilize the internal resources of

the country in an efficient manner to meet the financing needs of large infrastructure projects.

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The government also has not been able to look beyond the national frontiers for the resources to

meet the infrastructure development needs. Foreign and local investors look at governments’

commitment to develop infrastructure sectors and to promote private sector participation in

specific infrastructure markets before making any investment decisions. However, the foreign

investors have been shying away from investing in the large infrastructure projects in Nepal

primarily due to the instable, complex and confusing legal framework. 

Implementing the infrastructure projects in Nepal is also exposed to various investment risks,

more particularly currency risk and revenue risk. Certain infrastructures projects such as road

does not ensure a definite revenue flow and even in case of projects with definite revenue stream,

such revenue is in Nepalese currency which results in foreign exchange fluctuation risk if the

project was developed through foreign currency financing. 

Delayed processes and obscure requirements for permits such as land acquisition above the land

ceiling, leasing of government land, undertaking of direct agreements, mortgage of land to

foreign persons etc. is another principal challenge for the foreign investors.

In addition, these industries are the major causes of pollution as they emit harmful gases,

chemicals and wastes in the environment. With increasing air, water and land pollution, no

situation is favoring agricultural production in the economy. On the other hand, Nepal depends

on monsoon rain for its agricultural production. Due to global warming, the weather and climate

patterns are changing which is also hampering the agricultural sector. Hence, the agricultural

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sector could be incapable providing raw materials for industries if this continues and the growth

of the country will be hampered extensively.

Pros:

The Industrial Policy 2011 has put a serious target on developing the export sector. There has

been provision of no excise and value added tax levied if the products are produced within the

country and are exported to abroad. The policies also promise to produce the power of bonded

warehouse to export promotion industries. Providing tax benefits and other facilities is

okay but the main reason behind our low export is that the lack of quality and standard in our

products. This industrial policy has also tried to handle this problem by promising to upgrade and

strengthen the prevailing Nepal Bureau of Standards and Metrology. Further, so as to conduct

functions referring to research, consultancy, trainings for the capacity development so as to

extend productivity, a separate National Productivity Council is mentioned to be established.

So during this way, the Industrial Policy 2011 has made some serious policies to extend exports

of the state.

Fig: Shift in AD curve 12

They came up with policies like the export promotion industries shall be made available the

facility of bonded ware house in more simplified manner, only one percent custom duty shall be

levied on machinery and equipment to be imported for research and development (R&D)

including the machinery, scientific instrument, and machinery and equipment for expansion of

the industry and no value added tax and excise shall be levied to boost the export of the

countries. So, with this export is supposed to rise raising the aggregate demand with the export

multiplier effect in an economy. So, with the rightward shift in AD curve the real GDP/ National

Income of our country is also supposed to increase.

Fig: Shift in IS curve

So, when the aggregate demand rises from the export and the consumption multiplier effect as

consequences of the industrial policies that have been formulated to boost the Nepali industries

with provisions of financial access made to micro enterprises, cottage and small industries

through the various Funds, promoting sale of the products of micro enterprises, cottage and small

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industries, governmental and nongovernmental agencies, and also with provisions made for

making available loans in simple and easy manner from banks and financial institutions to

women entrepreneurs engaged in micro, cottage and small-scaled industries the IS curve will

also shift from IS1 –IS 2 with the positive effect in an national income by shifting it from Y1-Y2.

Cons:
The policies stated in the Industrial Policy 2011 would with no doubt increase the level of

investment and exports of the economy but also increase inflation in an economy if we detaily

looked into it. The policies such as financial as well as technical assistance to the entrepreneurs

who want to set up an industry. Here we are not only talking about large scale investment from

wealthy industrialists but rather we are also talking about small scale investment from numerous

micro enterprise entrepreneurs. The policies are also bound to increase the foreign direct

investment in the nation. Also, the government has levied excise as well as value added tax for

goods produced for export. This would reduce the cost for exporters encouraging them to export

more.

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 Fig: Demand Pull Inflation

And as we know Investment and exports are major components of the aggregate demand curve.

An increase in both these factors would lead in the shift of aggregate demand curve to the right

as a result increasing the national income. Although, it seems to be the positive impact in an

economy but the increase in Aggregate demand (AD) would also lead to an increase in price

level (PL). As firms reach full capacity, they respond by putting up prices leading to inflation.

Also, near full employment with labour shortages, workers can get higher wages which increase

their spending power and we tend to experience demand-pull inflation in an economy.

Effectiveness:

With Industrial Policies enlisted, it would also help your economy to move on to new

equilibrium level and balance on deficit and payment. Policies such as, any small-scale industry

that provides a direct employment to more than 100 native workers regularly for a period of

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more than six months in the minimum, a medium scale industry that provides more than 200

workers and large scale industry that provides more than 500 workers, such an industry shall be

entitled to a further exemption of 25 percent in the income tax to be charged in that year.

Moreover, in case such an industry provides 50 percent of such direct employment to native

women, persons belonging to Dalit or persons with disability, there shall be an exemption of

forty percent in the income tax to be levied in that year. Furthermore, it has also been state that

“Except in the case of an industry that produces all types of tobacco and liquors and kattha

industries, the industries engaged in hydro power generation and transmission, mining extraction,

producing cement by making clinker with the use of local raw materials (cement industries) and

industries to explore and extract petroleum or natural gas, out of the prioritized industries

referred to in schedule-7, shall be entitled to ninety percent exemption in the income tax to be

charged for seven years from the date of commencement of transaction.” . Ultimately, all these

policies aimed to boost the Nepalese industrials sector.

Let’s only talk about one sector that is engaged in hydropower generation and transmission

where government tries to enhance the outcomes or the production of energy through above

mentioned policies. We could see that how the policy reforms in one sector under industrial

sector could affect the whole economy.

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 Fig: Shift in Equilibrium Level

Initially, the economy is at E2 equilibrium in figure 1, where the current demand D2 is higher

than the supply S1. Thus, the citizens are charged higher prices of P2, for the electricity. But had

there been enough production and supply in the economy, both demand and supply would have

increased prom D1 to D2 and S1 to S2 respectively. Thus, the citizens need not bear higher

prices for electricity as the economy would run in the efficient equilibrium of E3 and the initial

prices for increased volume would be attainable.

However, if the supply of electricity could be increased, the decrease in its price is not the only

benefit that the economy would be experiencing. The dependency of the economy on traditional

and petroleum energy will be reduced maximally and as a sustainable and environment friendly

fuel, other cost of productions and cleaner environment will be possible to be achieved. 

Moreover, as an economy rich in water resources, the production of electricity that is possible in

Nepal can go beyond the volume that is enough for our sole economy. Productions and supply

can be increased up to Q3 level as shown in figure 2. Hence, this excess electricity can be

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exported in neighboring countries which could be a great source of revenue. Also, as a hydro-

electrically sufficed economy, our economy would also require less of the petroleum and other

sources of energy that it is currently importing from other nations.

In the same way, this industrial policy is also effective in flourishing the industries in Nepal and

reaps the benefits of balance of payment surplus, export multipliers etc. which in turn is

beneficial to the whole economy.

Ineffectiveness:

The policies mentioned in the Industrial Policy 2011, would increase the budget deficit of the

nation to a larger extent. First of all, the government has levied all major taxes which would lead

to a fall in the government revenue. Second, as the policies mentioned here promises

development of special economic zones, establishment of different industrial and promotional

boards as well as promises different trainings, assistance and guidance, the expenditure that

would occur to fulfill these promises would be huge. To carry out the policies the government

might also require additional loans from foreign countries and other organizations. This would,

at last, increase the level of budget deficit of the economy.

Government Expenditure& Spending

Government Revenue

Surplus

Government Expenditure

Deficit

18 Real GDP
Y Deficit Line
In the above figure, we can see that at point ‘Y’ the income meets expenditure whereas the part

at left of Y indicates deficit and the part right of Y indicates surplus. The actions to fulfill of

these policies would increase the deficit as the expenditure would be higher. However, we are

not against these higher expenditures as in the long run it would be beneficial for the economy.

Pros:

Successful implementation of this policy will reduce national income inequality in three

ways. First, because of favorable policies, as the number of industries increases, more job

opportunities will be created, which will guarantee a stable salary for a large group of people,

thereby reducing income inequality. Second, such a policy will reduce income inequality by

supporting microenterprises, cottages and small businesses. Entrepreneurs in these industries

can increase their income level and also increase the income of a small group of people they hire.

Finally, these policies will help reduce income inequality by ensuring balanced

development across the country. 

This would reduce the geographic income inequality that exists in Nepal. According to this

policy, there are special tax incentives for industries created in the least developed, least

developed and underdeveloped areas. In addition, there are additional tax advantages if local

residents work in these sectors. This will encourage industrialists to create industries in remote

areas. This will not only increase the income of local residents who work there, but the presence

of industry in the region also opens up new opportunities for local residents.

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 Fig: Lorenz curve

The given figure is a Lorenz curve which is used to show the level of wealth disparity. The

diagonal line represents perfect equality which is an imaginary and hypothetical situation. In the

given figure the red line represents high income inequality which represents the current situation

of Nepal where there is less job opportunities and an unfavorable business environment. The

blue line represents a rather low level of income inequality that the industrial policy would bring.

Cons:

The Industrial Policy-2011was promulgated in order to make remarkable contribution in national

economy through sustainable and broad-based industrial development in an effective,

coordinated and collaborative partnership of public, private and cooperative sectors thereby to

support poverty alleviation. With the implementation of these policies it would obviously benefit

the growth of the industries, investors will be willing to invest in these sectors and within few

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years we may have more number of establishment of industries than we expected but we also

shouldn’t ignore the fact that with the increasing numbers of industrial sites / areas it would also

increase the level of pollution in the community / area where general people resides.

Fig: Negative Externalities

The harmful chemicals, gases, carbon are usually produced by industries during its operation

affecting and risking hundreds and thousands of people’s health. Not only that, there would be

lot of wastage material being thrown out by the industries but in the absence of proper waste

management techniques the boosting industrial growth would result in negative externalities.

Effectiveness:

As we are aware that agriculture and industry are two such sectors that complement one another

and are required for each other’s development. So, this Industrial policy is also effective in

uplifting the agriculture sectors, In a sense that, when the industries flourished then it would

demand more numbers of labors and the people who are disguised unemployed would get the

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 job. So, in a way it benefits both the sector at the same time by increasing the productivity of the

both sectors.

PPC curve

National Income

For instance, if somebody brought up an initiative to come up with a chemical fertilizer industry,

the interest rates were not low for establishing of chemical fertilizer industry because of which

the farmers still had to depend on imported chemical fertilizers which were extremely expensive

and were not easily available especially during conditions like economic blockade then in such

condition domestic industries would sound more beneficial.

All in all, with the rise in domestic industries it would also give rise to agricultural sector with

provision of basic tools and technologies needed for ease and fast production in agriculture such

as seed, fertilizers, and chemicals etc which usually are produced by industries. So, it would

increase in an productivity of both sectors and utilisation of the resources which would

ultimately shift the PPF curve rightward signifying the economic growth in a nation.

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Solutions & Managerial Implications

Solutions:

1. Provision of loans and credits:

The government should bring new insurance schemes for the banking sectors for the assurance of

repayment of loan amount as most banks and institutions require collateral – mostly land and

buildings – before a customer can qualify for a loan, thus preventing some entrepreneurs from

accessing this facility. Bright entrepreneurs are often at the mercy of informal lenders, who can

be predatory. This has discouraged the development of industry (especially the small and

medium scale), investments in tourism sectors and trade. The banking sectors are continuously

encountering the difficulty in lending due to the insecurity roused by the possibility of bad debt.

2. Rural Penetration:

The government should provide good incentives for banking sectors for the establishment in

rural sectors. Because with the absence of banks and financial institutions in many parts of the

country has hampered entrepreneurs’ ability to secure loans for their businesses. The banks and

financial institutions have been facing problems in getting their branch setup in the rural regions

of the country due to lack of infrastructure, security, manpower and soon.

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The incentives could range in the form of tax cut for profits in rural sectors, extra facilities for

the workers in rural sectors through assistance of government and development of infrastructures

in different parts of the country. Also, with the provision of lending in low interest rate could

boost up the confidence to start the small scale business in rural areas too.

3. Formulate suitable & effective Monetary policy:

The central bank in coordination with the Finance Ministry should plan long lasting policies

which could encourage the investment due to increased security and predictability of interest

rates. The strict monetary policy and the rapid change of policies by the central bank have caused

the increased volatility in the capital market. In addition the continuous change in the paid up

capital of the banking sectors, though had made the banks and financial institutions more stable

but had highly affected the bank’s performance. This has led to merger and other activities

increasing the cost of administration and decreasing profits, discouraging the investors.

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Managerial Implication

This analysis on policy reforms formulations and implementation on Nepalese industrial sector

imparts on important managerial implication that we as a manager should boost those plans and

policies which seek the upliftment of every sector of the organization and should be formulated

in a way where different sectors could help the growth of each other. And also as a manager, we

should ensure that the ideas and skills of all the members in the organization should be

capitalized to reap the best results for the organization.

References

 Article: Industrial Policy, 2011

 http://www.economicsguide.me/?cat=8&paged=11

 https://www.intelligenteconomist.com/lorenz-curve/

 https://www.tutor2u.net/economics/reference/laffer-curve

 http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=self+correction,

+aggregate+market

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HONOR CODE:

“On my honor as a student, I pledge that I have neither given nor

received aid on this assignment.”

-Sadikshya Pandeya

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