CHAPTER 2: ECONOMIC ENVIRONMENT
Case Study
A Businessman’s Dilemma in Nepal’s Changing Economy
Ram Prasad Gurung grew up in Lamjung, watching his parents farm terraced hillsides that barely produced enough for the family. Like many, he dreamed of something more. After working in Malaysia for six years as a construction worker, he returned home in 2018 with savings and a clear goal: start a small agro-processing business.
He chose to process millet into packaged health flour — targeting health-conscious urban consumers. His timing seemed perfect: Nepal’s urban middle class was growing, disposable incomes were increasing, and there was a rising demand for traditional, organic food.
But the economic environment around him was more complex than he imagined.
The Economic Landscape
1. Structure and IndicatorsAt the Crossroads
By 2024, Ram’s business was breaking even, but competition from cheaper imported flour was intensifying. He now faced a choice: invest in automation to reduce costs, expand into export markets, or diversify into other organic products such as buckwheat noodles and herbal tea. Each option carried risks, and the direction he chose would depend on how he read Nepal’s economic environment.
Questions:
- From the case, identify at least four components of Nepal’s economic environment that directly affect Ram’s business operations. Explain briefly.
- Considering Nepal’s current economic policies and sectoral issues, which of the three options (automation, export expansion, diversification) would be most feasible for Ram, and why?
- How could government reforms in industrial policy, trade policy, and infrastructure improve the prospects of small rural-based industries like Ram’s? Provide specific suggestions.
Answers:
Qno 1: Components of Nepal’s Economic Environment Affecting Ram's Business
Lamjung resident Ram Prasad Gurung started a small agro-processing business to process millet into packaged health flour, targeting health-conscious urban consumers through his savings from foreign employment in Malaysia for 6 years. However, many components of Nepal's economic environment directly affect Ram's business operations, which are explained as follows:
1. Economic Condition:
This refers to the current state of the economy, including factors like income levels, distribution of wealth, and poverty. The case states that while national and per capita income had improved, income distribution remained uneven, with rural areas lagging behind cities. This condition directly affects Ram's business by limiting the size of his potential domestic market. Although he targets the growing urban middle class, the persistent rural poverty means a significant portion of the local population likely cannot afford his value-added, packaged health flour, constraining local demand.
2. Economic Policies:
This encompasses the fiscal, monetary, and industrial policies set by the government. The government's three-year plan, which emphasises agro-based industrialisation, and its industrial policy promoting SMEs with concessional loans are direct policy components. However, these policies negatively affect Ram's operations due to their poor implementation. The "tangled bureaucracy" makes it difficult for him to access the promised support, increasing the time, cost, and difficulty of securing financing to grow or sustain his business.
3. Economic Integration:
This refers to the extent of the economy's linkages with the global economy through trade, investment, and capital flows. Nepal's deep economic integration is evidenced by its heavy reliance on imports from India and China and the significant role of foreign employment remittances. This integration is a double-edged sword for Ram:
- It makes his production costs unpredictable as he must import packaging and machinery, exposing him to fluctuating exchange rates.
- It creates intense competition from "cheaper imported flour," which challenges his market position.
- It leads to a shortage of skilled labour because young people are integrated into the global labour market, preferring jobs abroad over working in his plant.
4. Economic System:
This defines the structure of the economy, including the balance between agriculture, industry, and services, and the mix of public and private ownership. Nepal's economic system is described as "still largely agrarian," with a high contribution from services but a low contribution from industry (14% to GDP). This system creates a challenging operational environment for Ram, an industrial processor. The lack of a strong industrial base means poor supporting infrastructure(frequent power cuts, poor roads, lack of cold storage) is prevalent, which increases his operating costs and reduces efficiency. The economy's structure is not yet fully oriented to support manufacturing and value-added industry.
In summary, Ram's business is directly impacted by four key aspects of Nepal's economy: the uneven economic condition that limits local demand, ineffective economic policies that fail to support SMEs in practice, deep economic integration that increases costs and competition while creating labour shortages, and an agrarian economic system that lacks the infrastructure for efficient industry. His challenges are a direct result of this complex economic environment.
Qno . 2: Analysis of Ram's Options: Automation, Export, or Diversification?
Considering Nepal’s present economic policies and sectoral challenges, diversification into organic products such as buckwheat noodles and herbal tea seems to be the most practical and low-risk strategy for Ram. While automation can reduce labour dependence, it demands heavy investment and reliance on imported machinery. Similarly, export expansion promises larger markets but is constrained by SPS standards and logistical barriers. In this context, diversification stands out as the most suitable option for the following reasons.
1. Policy Alignment:
The government's tourism policy and the growing urban and tourist demand for traditional, organic foods create a ready and expanding domestic market. Diversifying his product line allows him to leverage his existing brand, distribution network (e.g., supplying to hotels and restaurants), and expertise in processing traditional grains. This reduces reliance on a single product (millet flour) and insulates him from competition from cheaper imports.
2. Market demand for organic products:
With the rise of health-conscious consumers, the growth of the urban middle class, and increasing disposable incomes, the demand for organic products is expanding. Consumers now have both the capacity and willingness to pay a premium for healthier alternatives. In this context, Ram can diversify his investment into the production of value-added agricultural products such as buckwheat noodles and herbal tea. It can reduce dependency on millet production.
3. Risk mitigation:
Diversification spreads risk. If millet flour faces stiff competition, sales of buckwheat noodles or herbal tea can sustain the business. It also allows him to better utilise his machinery and potentially cope with climate-induced yield variations in one crop.
4. Lower Risk and Capital Requirement Compared to Other Options:
- Export Expansion: While trade policy encourages exports, the case highlights that Sanitary and Phytosanitary (SPS) requirements are a "big hurdle." Meeting these international standards requires significant investment in certification, upgraded facilities, and compliance—a high risk for a small business just breaking even.
- Automation: Automation requires a large upfront capital investment. Given the bureaucratic hurdles to securing concessional loans and his current break-even status, this is a risky financial move. Furthermore, automation addresses the labour shortage but does not solve its core market problem of competition; it might even be an over-investment if demand doesn't grow sufficiently.
In summary, diversification allows Ram to grow by capitalising on proven domestic trends and supportive policies, without taking on the excessive financial and regulatory risks associated with exporting or automation at this juncture.
Qno. 3: Recommended Government Reforms to Support Small Rural Industries
To truly empower entrepreneurs like Ram, the government needs targeted reforms in three key areas:
a) Industrial Policy Reforms:
- Simplify Bureaucracy: Create a single-window system specifically for SMEs to apply for concessional loans, grants, and registrations. This would drastically reduce the time and complexity Ram faces in accessing support.
- Skill Development Programs: Partner with local colleges or NGOs to launch vocational training programs in machine operation, food safety (like HACCP), and quality control in rural areas. This would create a pool of skilled labour for businesses like Ram's, making local jobs more attractive.
b) Trade Policy Reforms:
- Export Facilitation Centres: Establish government-supported centres that provide subsidised testing and certification services to help small businesses meet international SPS requirements. This would lower the biggest barrier to export for businesses like Ram's.
- Import Substitution Incentives: Offer tax breaks or subsidies on locally manufactured packaging materials and simple machinery. This would reduce the import dependence of businesses like Ram's and protect them from foreign exchange volatility.
c) Infrastructure Reforms:
- Reliable Energy Access: Prioritise industrial estates in rural areas with guaranteed electricity supply through dedicated feeders or promote subsidised solar power installations for SMEs to overcome power cuts.
- Improve Rural Connectivity: Accelerate road improvement projects linking production hubs (like Lamjung) to major urban markets (like Pokhara and Kathmandu). This directly reduces transportation time and cost.
- Invest in Shared Infrastructure: Build community cold storage facilities in agro-processing zones. Farmers and small processors like Ram could rent space at affordable rates, reducing post-harvest losses and enabling them to diversify into perishable goods.
By implementing these specific reforms, the government could create a far more enabling environment where small rural businesses can thrive, create local employment, and contribute meaningfully to the national economy.
