Unlocking Growth of SMEs in Nepal

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Unlocking Growth of SMEs in Nepal

BY Shant Sharma

In developing nations, there is a predominant presence of small and medium-sized enterprises (SMEs). By incorporating micro enterprises into the mix, we recognize the collective category as micro, small, and medium-sized enterprises (MSMEs). These enterprises play a crucial role in both economic and social contexts, contributing significantly to job creation, employment rates, and GDP growth. SMEs typically surpass large corporations in sheer numbers and are major employers, catering to a substantial workforce.

SMEs serve as the catalyst for economic growth, their classification determined by factors such as industry, assets, workforce size, and sales. Within the countries affiliated with the Organisation for Economic Co-operation and Development (OECD), including the United States and EU nations, the definition of SMEs varies. In the US, SMEs are identified as firms with fewer than 500 employees, whereas EU countries set a limit of 250 employees.

In India, the taxation structure for enterprises follows a tiered approach. Micro enterprises, with an investment of 1 crore and an annual turnover of 5 crore, are subject to an 8% tax rate. Small enterprises, with a 10 crore investment and an annual turnover of 50 crore, face a 10% tax rate. Meanwhile, medium enterprises, with a 20 crore investment and an annual turnover of 100 crore, are obligated to pay a 12% tax. 

The impact of these MSMEs on employment is noteworthy, with a creation of 120 million jobs across various industries in India. Furthermore, micro and small enterprises significantly contribute to the economy, constituting 33% of India's GDP.

Similarly, in China, where SMEs constitute approximately 97% of all enterprises, classifications within the retail sector are more nuanced. A small company in this sector is designated as one with fewer than a hundred employees and revenue of less than RMB 10 million. Once a retail company surpasses a hundred employees and achieves an annual revenue exceeding RMB 10 million, it attains the status of a medium-sized enterprise.

In Bangladesh, a notable trend in recent decades is the remarkable expansion of SMEs. The growth of SMEs in Bangladesh, particularly in the last decade, has been nothing short of astonishing. Since the mid-1980s, their numbers have surged four to five times, reaching a staggering 7.9 million, contributing up to 25% to the country's GDP.

The impact of SMEs on employment in Bangladesh is substantial, with an estimated 24 million people engaged in SMEs, constituting approximately 30% of the total employed workforce. Additionally, SMEs are emerging as a significant source of employment for women in Bangladesh, signifying their increasing role in fostering economic opportunities and gender inclusivity.

Regarding Nepal, a report from the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) highlights that the country's MSMEs are pivotal employers, supporting over 2.7 million individuals. Nepal boasts more than 923,000 registered businesses, with a substantial 90% falling under the MSME category, contributing to 45% of total employment.

However, the financial landscape for MSMEs in Nepal presents challenges, with a projected financing gap of $3.6 billion, juxtaposed against the currently available $731 million. The Department of Industry oversees the registration of eight types of industries, encompassing services, agriculture and forestry, manufacturing, tourism, construction, energy, minerals, and information technology. Notably, the service sector hosts a majority of unregistered informal micro and small enterprises, underscoring the need for comprehensive inclusion in industry registration processes.

SMEs in Nepal encounter numerous challenges hindering their expansion and growth. A prominent hurdle for micro and small enterprises is the restricted access to markets, exacerbated by the influx of illegally imported goods posing significant challenges. The existing policy bias in favor of a select few large businesses, coupled with a bias against SMEs, creates a void that poses obstacles for burgeoning enterprises.

Monopolies in large enterprises and dealership businesses, whether in the realm of vehicles or other consumable items, where the lion's share of profits is garnered, constrict the space for SMEs to expand. It is imperative to dismantle such monopolies, fostering an environment where both the general public and SMEs can engage in businesses and dealerships openly, fostering a more inclusive and competitive marketplace.

Additional challenges abound, particularly in the seamless scaling up of enterprises from small to medium and ultimately to large. A significant number of SMEs cease operations due to the absence of comprehensive government policy support. Commercial banks exhibit a bias towards financing prominent business conglomerates, displaying minimal interest in supporting SMEs.

Compounding the issue, the escalating irregularities in the microfinance and cooperative sectors present a hurdle for SMEs in securing financing. Addressing these systemic challenges is crucial to fostering an environment where enterprises of all sizes can thrive and contribute substantially to economic growth.

Drawing from global practices and experiences, SMEs emerge as the backbone of the economy, catalyzing production and offering a diverse array of employment opportunities. The rapid growth of SMEs holds the potential to mitigate the outflow of Nepali nationals seeking foreign employment. Recognizing this pivotal role, the government should underscore the significance of SMEs by formulating a dedicated law aligned with international standards.

To facilitate efficient administration, the establishment of an independent regulator or a separate department, acting as a single point of contact, is imperative for SMEs. Furthermore, prioritized amendments to existing laws—covering foreign direct investment, tax and labor regulations, as well as bank and financial institutions—will foster a conducive environment. It's essential to safeguard domestic industries through these legislative changes. Additionally, provinces and local governments should be actively engaged, assuming appropriate roles to provide substantial support to SMEs in their respective regions.

The current contribution of SMEs to Nepal's GDP falls short of a satisfactory level, accentuated by substantial funding gaps hindering their growth. To address this, the government should prioritize budgetary support for SMEs, setting a long-term target of elevating their GDP contribution to 50%.

Particularly for SMEs leveraging modern technologies, considering exemptions from enterprise income tax for a reasonable duration is prudent. Additionally, SMEs playing a pivotal role in alleviating unemployment could qualify for tax exemptions during specified periods. Recognizing their distinct challenges, it is crucial to lower the income tax rate for SMEs in comparison to their larger counterparts, fostering a more equitable and supportive fiscal environment.

Granting SMEs a reduction in electricity bills is a pragmatic step towards easing their operational costs. Encouraging both state-owned and private banks to establish specialized departments dedicated to serving SMEs is pivotal, especially through the provision of collateral-free loans at lower interest rates. This initiative not only facilitates financial accessibility but also recognizes the unique needs of small and medium enterprises.

Furthermore, the establishment of a separate bond market presents a strategic solution to address the credit crunch plaguing SMEs. This dedicated platform can provide them with additional avenues for financial support, fostering a more robust and diverse landscape for SME funding.

SMEs face the need for internal funding in their initial stages and subsequently rely on external funding to fuel advanced growth. Their unique ability to integrate proven practices and technologies expeditiously, compared to the experimental nature of new ones, positions SMEs as catalysts for a country's growth. The adoption of tested technologies by markets further accelerates growth.

A synergistic partnership between the government and the private sector is paramount for the holistic development of SMEs. Collaborative policies are essential, as they are the linchpin for maintaining economic stability and fostering the rapid development of SMEs. This concerted effort ensures conducive environment that propels SMEs towards sustained progress. 

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