Nepal’s trade deficit is ballooning each year due to sluggish exports and galloping imports. A decade and a half earlier, the exports were equivalent roughly to 18 percent of GDP. Now, this ratio has come down to about nine percent. Clearly, the Cash Incentive Scheme introduced in 2010-11 to promote export has failed miserably.
The government announced cash subsidies at the rate of two percent of the export value for all types of goods with domestic value addition of 30 percent or more. So far, the government has doled out Rs 1.4 billion in such export subsidies. That just seems to be wastage. Experts believe that the criteria set for the cash incentive should be revisited to make it more effective. Exporters are complaining that there is no clarity on how the cash incentive should treat different volumes of exports. They say that the scheme is benefitting those who are exporting lower volumes of goods due to their access to government and bureaucracy while exporters of much bigger volumes are not entitled to it at all.
Another reason why the scheme has failed is because the scheme applies to only third country exports and excludes exports to India. This obviously requires rethinking as India is the largest trading partner of Nepal with whom the trade deficit too is very high. In fact, Nepal’s trade deficit is mainly with India. The Cash Incentive Scheme is a policy instrument to motivate exporters for a period of time by helping them to reduce their costs which enables them to be price competitive. It envisions encouraging them to multiply their production in the subsequent years. Increased volume in export quantity and export value implies creation of additional job opportunities and capacity enhancement of exporters. It is futile to prolong the scheme if it fails to achieve the intended outcome.
To make the scheme more effective, the government should explore ways to increase the production of goods with export potential and focus on lessening operational hassles that affect production processes. Also needed is a focus on exporting high value products where transport is not a problem and can be exported through air cargos. Cash incentives can be increased for exports of such selective products and reduced for other products with less comparative and competitive advantages. It is also difficult to understand why exporters are not excited with the cash incentive scheme when its ultimate purpose is to reduce business costs for them. It really must come as an interesting ‘food for thought’ for the policymakers.
According to the data of the Trade and Export Promotion Centre (TEPC), exports of products listed in the Nepal Trade Integration Strategy (Revised 2016), a strategic paper that identified nine products and three service areas as Nepal’s potential products for export, have been declining. Decline in the production volume of NTIS products has affected their exports volume. Trade deficit is bound to swell when exports grow only slightly as compared to the growth in imports. There is no doubt that the lack of exclusive promotion programmes for production of exportable goods has created difficulties in the growth of exports.