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Nov 26, 2010

Budget for 2010-2011 and entrepreneurship development

Any government aspiring for economic growth has to recognize the importance of the private sector and entrepreneurship, therefore, policies that allow for their growth. Hence, it’s notable that the budget recognizes the private sector and skilled manpower as the beacon of economic growth.

Generally, there are four elements of an entrepreneurship-friendly economy. First, it must be easy to form a business, without expensive and time-consuming bureaucratic red tape. As a corollary, abandoning a failed business should also be simple and straightforward. Added to this, a reasonably well-functioning system should exist that channelizes savings to investments, and a flexible labor market that allows entrepreneurs to attract new and skilled labor and fire the non-performing. Unskilled labor is also quite necessary for entrepreneurship to flourish.

The budget for fiscal year 2010-2011 fails to make any provisions for improving the abovementioned element. However, the decision to reduce the number of days to get tax payment by 12 days for a year is a step towards reducing bureaucratic hassles for the entrepreneurs.

The second element is secured property rights and proper enforcement of contract laws. It’s unfortunate that Nepal’s performance in property rights and enforcement of contract laws are quite poor and is deteriorating instead. The budget doesn’t address this at all which is unfortunate.

As third element, the government must discourage activities that divide up the wealth rather than increase. Activities such as criminal behaviors, “rent-seeking” behaviors, and excessive taxation should be discouraged. The government should also refrain from favoring certain industries or certain economic groups. It’s very unfortunate that the government has decided to hike taxes on progressive basis once again on personal income.

The government spending is in the most unproductive sector of the economy. The government activities are more inclined to dividing up the economic pie rather than expanding it. In this context, hiking taxes is going to be counterproductive as more and more proportion of an individual’s income is drawn to be invested in the unproductive sector rather than the entrepreneurial sector.

Finally, for a successful entrepreneurial economy, the government institutions should work towards ensuring that successful entrepreneurs and established companies continue to have incentives to innovate and grow. Eliminating cartels and too high marginal tax rates are some of the things the government can do in this regard. This year’s budget makes it unequivocally clear that those cartels or syndicates of any kind will be considered illegal and the registration of such organizations is automatically invalid. Though the provision itself sounds promising, the implementation seems very unlikely due to the powerful forces including politicians behind these organizations.

The government’s decision to provide blacktopped roads, electricity transmission lines and drinking water services to any venture providing direct employment to more than 100 Nepali nationals, and health posts with health worker to ventures employing more than 500 Nepali nationals sounds very promising, but it is very likely to be just another populist agenda.

The government has decided to take forward the Youth Self-Employment program which after much initial hue and cry has subsided into a quiet department in the Finance Ministry.

One thing that’s clear from this year’s and past budgets is that our government lacks a clear vision and understanding of entrepreneurship development. Entrepreneurship development requires a holistic approach because one positive step towards promoting entrepreneurship can easily be negated by another step that’s counterproductive to entrepreneurial environment of the country. For example, providing a tanker of diesel is of almost no use when power cuts are increasing to 14 hours a day. The government should also realize that if it’s serious about entrepreneurship development, it needs to focus on major policies rather than small group appeasing programs or populist agendas. If the government could work towards simplifying and reducing procedures for business registration and closures, making labor market flexible as per the market’s demands, ensuring property rights and enforcing contract laws, discouraging rent-seeking behaviors, eliminating cartels and syndicates and reducing the top marginal rates of taxes, entrepreneurship development could be ensured. It is also essential that the policies concerning entrepreneurship not change along with the change in governments.

It is, however, appreciable that despite all the obstacles and hurdles, the budget was unveiled to the relief of all entrepreneurs and general public alike. The budget can be considered fairly positive for entrepreneurship but has little, if any, effects on long-term development of entrepreneurship in Nepal.

-Surath Giri

(Published in The Himalayan Times of 25th November 2010)