Nepal | July 09, 2020

Firms seek protectionist measures as imports rise unabated

Rupak D Sharma
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Kathmandu, May 27

Deurali-Janta Pharmaceuticals, a leading drugs manufacturer in Nepal, recently started producing Rifaximin, an antibiotic used to treat liver-related infections. This is the first time the antibiotic was produced in the country, where ‘liver infection cases are rising mostly due to higher alcohol consumption’.

The drug is now available in the market for Rs 70 per 550mg tablet. This price, however, is not very competitive as retailers are selling the same antibiotic manufactured in India and Pakistan for about Rs 75 per tablet. In a country where everything foreign is considered better, chances of this pricing strategy turning off some of the buyers cannot be ruled out.

Production of pharmaceutical products, or any other good, entails a lot of research and development. This pushes up production cost in the initial stage of production. As this cost is recouped and goods are produced in mass, prices start falling. “We expect the same to happen with the antibiotic,” said Sumanta Batas, the company’s market planning head. This means Rifaximin antibiotics produced by Deurali-Janta will be able to compete with foreign products in the near future, thus controlling imports.

This is the type of manufacturing enterprise the government intends to promote: enterprises that are innovative, can create jobs, and have the ability to displace imports. This policy is a part of the government’s ambitious plan to transform Nepal into a production-based economy from import- and remittance-based economy, according to policies and programmes based on which budget for next fiscal year is being prepared.

Nepal’s production has succumbed to unrestricted imports over the years. This has widened trade deficit to over a quarter of the gross domestic product. Imports, to some extent, have benefited consumers, who can now choose from a wide variety of goods available in the market. But the loss of manufacturing capacity has hit job creation, forcing over 1,000 youths to leave the country per day to find employment opportunities in the Gulf and Malaysia.

Nepal cannot afford to continue exporting youths to generate foreign income, which, in turn, is being used to finance imports, as country is witnessing rapid erosion in its capacity to innovate.

“When manufacturing units begin operation, the management feels the pressure to enhance productivity and competitiveness. This generally leads to innovation and allows workers to hone skills,” said Shankar Sharma, former vice chairman of the National Planning Commission. “Since not many factories are operating these days, we do not have a reservoir of skilled workers or practical knowledge obtained from daily grinding.”

Perhaps because of this reason, the government, through policies and programmes, has identified manufacturing as a bellwether of higher and sustained economic growth. This is an indication that there is a growing recognition that a shrinking manufacturing sector has caused enough damage to the economy.

The policies and programmes have specifically named 10 manufacturing industries which will be promoted. They are sugar, pharmaceuticals, leather footwear, cement, iron mine, jute, carpet, readymade garments, yarn and handicraft products.

“If the government really wants to promote these industries, it must restrict imports,” said Hari Bhakta Sharma, president of the Confederation of Nepalese Industries, a private sector lobbying body.

Bangladesh’s pharmaceutical industry, for example, is protected from external competition, as its government has restricted
imports of drugs that are manufactured in the country.

“We should bring a similar policy in Nepal as well,” said Hari Bhakta, who is also executive director of Deurali-Janta Pharmaceuticals, adding, “Around 400 foreign firms are supplying drugs to Nepal by paying import duty of mere five per cent.”

The government is thinking along this line as well, as the policies and programmes have said ‘imports of goods and services that are unnecessarily increasing consumption, causing damage to domestic economy and creating health hazards will be restricted’.

“Nepal’s manufacturing sector will never grow unless strict measures are introduced to control imports of a number of finished goods because the country’s economic cost is 20 per cent higher than India’s,” said Hari Bhakta. “For example, a pickup truck costs three times more in Nepal than in India. And roads are not that great. All these are increasing our logistics cost. Then we have to pay tariff of up to 25 per cent to import GMP-certified building materials and up to 15 per cent duty to import other high-tech equipment. While these factors are adding to our production cost, various states in India are providing 30 per cent cash subsidy on fixed capital investment, which makes our goods even less competitive.”

Entrepreneurs like Hari Bhakta have started recommending protectionist measures to enhance domestic production as they deem the government has not created a ‘level playing field for businesses to operate’. This, according to them, is making closure of a manufacturing unit or termination of production of a particular good a frequent event. This has benefited traders who import various goods, many a times by submitting fake bills at customs offices to evade taxes.

Nepal, for example, imported 6.5 million pairs of shoes worth Rs 800.3 million in 2017, as per the report of Trade and Export Promotion Centre. This means average cost of each pair of imported shoe was Rs 123.

“Shoes can’t be produced at such a low cost,” said Footwear Manufacturers’ Association President Rabin Kumar Shrestha. “This is the result of rampant under-invoicing. If the government fails to control this, domestic industries can never compete with foreign goods, because under-invoicing implies tax evasion, which enables importers to sell goods at lower prices.”

A version of this article appears in print on May 28, 2018 of The Himalayan Times.

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