View Point (Spotlight Weekly)

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

By Dr. Hari Krishna Upadhyaya

Linkage Between Nepal’s Agriculture and Agro-industry SectorsZ : Theoretically, the agriculture and non-agriculture sectors can be linked directly through production linkages or indirectly through investment and expenditure linkages. The production linkages can be upstream or downstream – upstream, if industries supply technologies, inputs and credit for agriculture production, and downstream, if increased agricultural production leads to increased industrial investment in agro-processing or value added activities. Investment linkages occur when part of the savings in one sector is invested in the other sector. Expenditure linkages between the farm and non-farm sectors occur when increased farm incomes lead to increased demand for industrial or manufacturing products.

The APP’s strategy for agriculture-led high economic growth in Nepal was based on the assumption of strong expenditure linkages between the agriculture and non-agricultural sectors. Using cross-sectional evidences from other countries, a multiplier of 1.5 was assumed in the growth accounting framework. That means, a 1% increase in agricultural growth was assumed to spur non-agricultural sector growth by 1.5%. Did the assumption turn realistic in the past?

The agricultural and non-agricultural sector linkages in the past have been very weak Insofar as the trends in their growth rates during 1985-2003 are concerned; the two sectors appear to be operating independently – in isolation with one another.

Agricultural growth has had no influence in the growth of non-agriculture sector. For example, as shown in Table 2, the lowest agricultural GDP (AGDP) growth rate of 1.56% during 1990-94 was accompanied by the highest non-agricultural GDP (NAGDP) growth rate of 8.06% during the same period. Similarly, while the highest AGDP growth rate of 4.12% was accompanied by the NAGDP growth rate of 5.54% during 1985-89, the lowest ever NAGDP growth rate of 2.15% during the period is accompanied by the AGDP growth rate of 3.47%.

The graphical presentation in Figure 1 of the trends in annual growth rates during 1985-2003 clearly reveals the weak or insignificant linkages between the two sectors.

Except in isolated instances (e.g., sugarcane farming and sugar industries), the linkage between agricultural production and processing sectors is almost non-existent at the moment. While, on the one hand, most of the major agro-industries are forced to rely on imported raw materials, the same materials produced domestically are deprived of access to market. As a result, the agriculture sector has remained largely traditional and subsistence-oriented; and, given the massive dependence on this sector, the situation has contributed to persistent poverty in Nepal.

Factors Underpinning the Current Weak Linkages : What have caused the weak linkages between the farm and non-farm sectors of Nepal? An agro-industry sector policy study conducted in the mid-nineties indicated the following four main factors underpinning the weak linkages between the farm and industry sectors in Nepal.

Domestic Farm Products are not Competitive with Imported Products : Nepal's difficult terrain coupled with low levels of physical and economic infrastructures have adversely affected the competitiveness of domestic agricultural products in the markets. First, due to poor transport and marketing networks, supply of necessary production technologies and inputs (such as fertilizer, improved seeds and credit) is unreliable and costly. Farmers’ capacity to self-finance the investment in modern production inputs is limited and the level of input use is low. Irrigation and water control facilities are poorly developed and agricultural production is subjected to uncertainties of weather. Cumulatively, this has resulted in low agricultural productivity, high cost of production and high product price. Second, markets are inaccessible. Even where they are accessible, the cost of collection and marketing is very high. This further raises the product price in the market.

In contrast, Indian farmers across the border enjoy much better transport and marketing facilities, receive heavy subsidies in all major production inputs, (In Nepal, input subsidies in agriculture have been lifted, with the exception of some transport subsidies in remote areas) and obtain better crop yields. As a result, their unit cost of production is lower and products are cheaper, which make their products more competitive than Nepalese products even in the domestic markets of Nepal. For example, apples produced in Jumla sell costlier than imported apples in Kathmandu market. Similar examples can be cited for a number of fruits, vegetables and other farm products produced in Nepal.

Domestic Farm Products do not Match the Desired Quality (Variety) : Nepal's agricultural production has not responded to the needs of the agro-processing sector with respect to the quality or variety of farm products available to the processors. The flow of information between producers and processors is at best weak, and farmers' choice of crop varieties is either guided by their own subsistence needs or by locally available niche market rather than by the need of the processors. As a result, they have to rely on imported products for raw materials in their processing industries. There are examples of fruit processing industries depending on imported fruits for raw materials, noodle industries using imported flavors, and hotels serving imported asparagus, tomato, and fish and livestock products to their customers. A large number of breweries operate in Nepal. But all of them essentially use imported malt, while the same can be produced within the country; barley is extensively grown in the hills of Nepal.

Supply of Domestic Farm Products is Unreliable : Assured supply of raw materials with respect to quantity and timeliness is crucial for agro-processors and marketers. Nepalese farm products often fail in this front. Individual production units are small and scattered, and the quantity of production and supply is uncertain due to various reasons. In general, agricultural production in Nepal generates little marketable surplus. A survey conducted during 1995-96 revealed that less than half of the households in Nepal sold any crop in markets; and the quantity sold accounted for only 13% of the total quantity produced.

Supply of domestic farm products in markets is unstable. It is not surprising why a vegetable wholesaler in Kalimati market prefers to continue his/her existing link with Indian suppliers rather than to enter into new purchase agreement with farmer groups producing the same vegetables in adjoining areas. Efforts to export fresh vegetables and spices to international markets have met similar quantity constraints in the past.

Government Policies and Regulations are not Favorable : Investments in the farm sector are naturally risky, and returns are uncertain. So extra incentives will need to be introduced in order attract larger private sector investments in the farm sector. However, Government policies have had no such provisions in the past. In some cases, policies tended to be even biased against private sector investments in this sector. Rigid labor laws, unclear commodity and price policies, and competing public spending are among the policy and regulatory constraints cited by the agro-processors.

Enhancing the Farm-Industry Linkages : How to enhance the farm-industry linkages? It is clear that high and sustainable growth of the farm sector cannot be achieved without commercialization of agriculture, which, in turn, cannot be achieved without strong and dynamic linkages between the farm and industry sectors. The National Agriculture Policy recently introduced by the Government addresses the constraints mentioned above to such linkages, at least to the extent they directly impinge on the development of the agricultural sector to promote high growth and reduce poverty in a sustainable manner. But, while effective implementation of the Policy remains a challenge, considerable improvements in areas beyond the purview of the above Policy also need to be brought in place to enhance farm-industry linkages.

Most important of all is improvement in physical and agricultural infrastructure. Access to road and transportation networks is crucial to enhancing private sector investment, reducing the cost of inputs and extension service delivery thereby reducing the cost of production and increasing competitiveness of products, and widening access to markets. Equally crucial is improvement in marketing infrastructure – such as communication and information, collection centers – and irrigation and water control facilities. Small and micro-irrigation rather than large irrigation schemes have proved more effective in commercializing agriculture. It has been observed that with access to low-cost micro-irrigation facilities farmers have been able to shift to commercial high-value agriculture such as off-season vegetables.

There is a need to shift the focus of agricultural research and extension system from the current largely production-oriented cereal-based system to one that is market-oriented and based on comparative advantages. A key underlying principle of the research and extension system should be to generate and disseminate commercial, high-value agriculture production and processing technologies that satisfy the needs of producers as well as of processors. From the perspective of both growth promotion and poverty reduction, greater focus needs to be put on livestock and horticulture.

Organized production and marketing – for example, in the form of cooperatives – is an effective approach to commercializing agriculture. This also helps to achieve economies of scale in production and marketing and to make the supply of technology, inputs and other support services efficient. The National Agriculture Policy 2061 has recognized the benefit of organized production and marketing system and provides for extra incentives to encourage this. The Policy has also recognized the role that non-governmental and local community-based organizations can play in mobilizing and organizing farmers in this process. Re-orientation of the agricultural extension system towards partnership mode and along the spirit of the Policy is probably all that it takes to accelerate the pace of organized production and marketing of high-value agricultural products in the country.

Of course, putting in place favorable policy, legal and regulatory environment is crucial – especially for industries to respond to the needs and potentials of agriculture. Backward linkage of industry sector with agriculture is as important as the forward linkage of agriculture with the industry sector. And the former is particularly important for a smooth transition of subsistence economy, such as Nepal, to a modernized, industrial economy. Establishment and or relocation of processing industries in or near production pockets may be an effective strategy for promoting the backward linkage. It is probably rational to provide extra incentives for industries to follow this strategy. The concept of export processing zone goes well along this line, and needs to be effectively enforced.

Finally, the bottom-line is, of course, peace and political stability in the country. There is tremendous latent development potential that will be unleashed with the restoration of peace and political stability in Nepal.

(Concluded)

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