View Point (Spotlight Weekly)

Achieving a Double-digit Growth: The Centrality of Farm-Industry Linkages - I

By Dr. Hari Krishna Upadhyaya

Background and Emerging Contex : Can Nepal ever achieve a double-digit growth – 10% or more a year? Past trends do not provide an optimistic answer. Even more, the growing social and political tensions in recent years have shaken the foundation even for an appreciable single-digit growth, the experience of which has not been long in Nepal.

During 1965-2001, Nepal’s real GDP grew annually at 3.8% - about 1.6% on per capita terms. There was some improvement in growth rate following the initial round of economic policy reforms introduced in the mid-eighties – from 2.6% during 1965-1985 to 4.8% during the remaining period. The highest and relatively stable growth rate of around 5% per annum was recorded during the first half of the 1990s. But at no time in the traceable history has Nepal achieved a growth rate near 10% a year.

Even the achievements made during the 1990s are now under threat due to worsening social and political landscape in recent years. The eight-year long internal conflict, which has already taken more than 10,000 lives, has seriously hampered development and inflicted large costs to the people and economy. Several important infrastructures have been destroyed; mobility of people and goods and services has been seriously disrupted; new private sector investment has been halted and operation of the existing industries and businesses has been threatened. Public spending on development has also been adversely affected – security expenditures have risen while development expenditures have fallen. Achieving a double-digit growth in such conditions may seem to be only a wishful dream for Nepal.

But past trends cannot block future possibilities. Nor can the present conflict continue forever. Moreover, accumulated micro-level experiences do point to the great, untapped potential that Nepal has for high growth - 10% or even more a year. What is more – such high growth rates can also be broad-based, more equitable and sustainable. Logically, given the nature and composition of Nepal’s economy, such a growth has to originate in and triggered by the agriculture sector.

Agriculture is the key to Nepal’s high growth and poverty reduction. Although the share of agriculture in GDP has fallen from 65% to 40% in the past three decades, the sector still employs more than two-thirds of Nepal’s labor force and offers a primary shelter to some 300,000 new entrants to this force every year. During 1965-2001, while the non-farm sector grew annually by 5.9%, the growth rate of farm sector was 2.5%, which was only marginally higher than the population growth rate. As a result, no great progress in poverty reduction was achieved during the period.

Poverty is widespread in Nepal. An estimated 38% population lived below the national poverty line in 1995-96. Preliminary results of the second Nepal Living Standards Survey indicate a very significant decline in poverty level – around 30% or even less by 2003/04. Informed views and judgments are that significant reduction in poverty is visible in many pockets. But still poverty remains a major problem and must be tackled seriously at all levels. Poverty is deeper and more severe in rural than in urban areas; and within rural areas, it is most severe in more remote hilly and mountainous parts of the mid- and far-western regions, where agriculture is often the only locally available livelihood option for the people.

While it is understood that high economic growth is essential for a sustainable poverty reduction, it is imperative that the growth be broad-based, equitable and contributing to large-scale poverty reduction to sustain the reduction in poverty. Of course, in Nepal, this means a sustained high agricultural growth.

Nepalese agriculture has remained largely traditional, rain-fed and subsistence-oriented. Crop farming dominates agriculture, with major cereal crops covering more than 90% of the cropped area. Crop yields are low and reportedly declining in some cases. Similarly, low productivities characterize animal husbandry, which is an integral part of Nepalese farming system. As a result, agricultural growth rate has hardly kept pace with population growth rate in the past three decades.

Opportunities for High-Growth Within Farm Sector

Are there opportunities for high growth within farm sector? Yes; there are, in plentiful. With great ecological diversities, which provide the country with unique opportunities for high-value, commercial agriculture, Nepal’s comparative or even absolute advantages to produce high-value farm products having niche markets at national, regional and international levels are evident. Some proven examples include off-season vegetables, vegetable seeds, spices, medicinal herbs, honey, organic tea and coffee. Similarly, as emphasized by the long-term Agricultural Perspective Plan (APP), commercial livestock farming offers great potential for income generation and poverty reduction even for the landless families in rural Nepal.

As shown in Table 1, the profitability of some of the off-season vegetables is truly very high – for example, more than Rs.10,000 per ropani (500 square meters) from cauliflower. This is nearly 25 times the net profit from rice (Rs.446/ropani). Even in the low profit scenarios (e.g., chilli), off-season vegetables can generate 8 times more profit than rice. Simplistically interpreted, if rice represents the current growth rate, off-season vegetables present the possibility of raising current growth rate by 8 times.

Some progress was achieved in commercial production of high-value agriculture in the 1990s; the share of agricultural exports in total production value increased from 20% in the first half to 35% in the second half. But the potential that has been tapped so far is far too little compared to the total potential of Nepal. Improved access to technologies, inputs, post-harvest facilities – packaging, processing, storage, transport, marketing, etc – which are provided by the private sector, is necessary to tap the remaining potential. A strong and dynamic linkage between the farm and industry sectors is therefore the key to modernizing Nepal’s agriculture to achieve high growth.

The forward linkage of farm sector (with agro-industry sector) will help to expand market for agricultural products – nationally through agro-processing, and regionally and internationally, through establishment of business linkages with external markets as well as through improved product quality resulting from better post-harvest handling (for example, packaging and grading). This will also help in smooth transition of the economy from a traditional, subsistence-based economy to a modern, industrialized economy.

(To be continued…)

(Dr. Upadhyay is an economist and a member of National Planning Commission)