Thus, the increase in pressure of population is badly affecting the agricultural
productivity.
9. Small Size of Landholdings: In the last five decades, the average farm size has
decreased from 1.1 hectare to 0.7 hectare per holding. The farm size is declining over
the years due to fragmentation and sub-fragmentation of landholdings due to the law
of inheritance. Because of small landholdings, farmers are handicapped in the use of
modern agricultural techniques and inputs.
10. Lack of Crop Diversification: Nepalese agriculture lacks diversification in terms of
crops. Farmers give more importance on cereal crops and most of them do not want to
change to the next suitable and alternative crops. As such, limited crops are grown by
Nepalese farmers.
IMPORTANCE OF AGRICULTURE IN NEPAL
Agriculture has a vital role in the economic development of Nepal. The importance of
Nepalese agriculture can be explained as follows:
i. Source of Livelihood: Agriculture is the source of livelihood to the Nepalese people. It provides
employment to about 62.2 percent of its population. About 73.9 percent of the population is
dependent on agriculture.
2. Source of Food: Agriculture supplies food for the growing population. It supplies food
products like paddy, vegetable, fruits etc. required for the livelihood of the people. The
self sufficiency in food saves valuable foreign exchange, which would otherwise be spent
on import of food.
3. Source of Animal Fodder: Animal husbandry is an inseparable dimension of agricultural
operations in Nepal. Agriculture provides most of the fodder for livestock. Food required
for domestic animals such as cows, buffalos, pigs, sheep, goats etc. is obtained from
agriculture. Thus agriculture is the main basis of livestock.
4. Source of National Income: With lack of development of other sectors of the economy,
agriculture is the main source of national income in Nepal. It contributes to about 27.59
percent to the GDP of Nepal.
5. Source of Raw Materials: In Nepal, various types of industries are based on agriculture
sector. Agro-based industries such as tea industry, jute mills, sugar mills, textile
industries, tobacco and cigarettes industries, edible oil industries, rice mills etc
required raw materials produced by agricultural sector.
6. Source of Public Revenue: Agriculture is the source of public revenue. Land registration
and land revenue constitute about 30 percent of the direct tax revenue of the government.
Likewise, the government also receives revenue from export of agricultural commodities.
7. Development of Industries: The capital required for industrial investment is obtained
from agriculture. The increase in agricultural income increases the purchasing power of
the farmers. This in turn, increases the demand for industrial goods. As a result investment
in industries increases and industrial development takes place.
8. Basis of Foreign Trade: The main basis of export trade of Nepal is agriculture. Agricultural
products like pulses, jute, oil seeds, tea, animal skins etc. are the major exportable items
of Nepal. The development of agriculture increases agricultural production. The surplus
production can be exported.
9. Basis of Market Extension: Agriculture has the main role in market extension in
151 Vedanta High School Economics - Book 9
Nepal. Agriculture market can be divided into two parts as food market and agriculture
production goods market. In the food market agricultural products are traded while in
agriculture productions goods markets equipments required for agriculture are traded.
10. Supports Development: Agricultural development stimulates and supports the
development of other sectors. The development of agriculture increases income of the
farmers. This increases saving and capital formation takes place. The increased savings can
be invested in health, education, people welfare etc. This helps in the overall development
of the economy.
PROBLEMS OF AGRICULTURE IN NEPAL
Despite Nepal being an agro-based economy it has to import agriculture products
from other countries. The main problems of agriculture development in Nepal can be
explained as follows.
1. Traditional System of Agriculture: Nepal’s agriculture system is based on primitive
system. Cultivation is carried out with the help of traditional equipments and human
labour. Scientific and developed techniques are rarely undertaken in agriculture. As a
result improvement in agriculture is not satisfactory.
2. Use of Primitive Techniques: Agricultural operations in Nepal are still subsistence
oriented. The primitive and outdated techniques of production are still in use. Majority
of the farmers are illiterate and are either ignorant or doubtful of new techniques and
improved agricultural inputs. Hence agricultural production is low.
3. Excessive Pressure of Population: There is lack of development of non agriculture sector
in Nepal. So there is excessive pressure of population on agriculture. The problem of
seasonal unemployment, underemployment and disguised unemployment is acute in
agriculture. Hence agricultural productivity and production is low.
4. Problem of Irrigation: Irrigation is most important factor of agricultural development.
Despite Nepal being rich in water resource its agriculture is dependent upon monsoon.
As per the Agriculture Census of 2011A.D, irrigation facility has been provided to 53
percent of the total cultivable land. Rest of the land is dependent upon monsoon rain.
Lack of irrigation restricts multiple cropping, crop diversification and productivity.
5. Lack of Credit Facility: The state of Nepalese farmers is very miserable. They need
capital to start up modern agriculture system institutions to provide appropriate capital
is not developed in Nepal. Despite the establishment of Agriculture Development Bank
the credit facility provided by this is not sufficient and not able to cover all over the
country.
6. Dual Ownership of Land: Dual ownership of land is Lack of credit facility makes
still prevailing in Nepal. Due to this there is always KEY farmer fall in trap of mon-
misunderstanding between landlords and tenants. IDEA eylender and are prone to
The tiller cultivates the land and the landlord reaps indebtedness
the benefits without any labour. The tenancy right of the farmers is still not secure.
Hence farmers do not have any enthusiasm to increase production.
7. Extreme Poverty: Nepalese farmers are extremely poor. They have to borrow funds from
traditional sources like village money lender and landlords at high rate of interest. They
are thus indebted and don’t have the enthusiasm to increase investment in agriculture.
8. Lack of Improved Seeds and Fertilizers: Improved seeds and chemical fertilizers are
needed for the development of agriculture. But in Nepal people use old seeds and low
quality fertilizers which hampers agricultural production.
Vedanta High School Economics - Book 9 152
9. Lack of Agricultural Research: No proper research has been carried out for agriculture
development. For agricultural development there should be proper research of soil and
use of appropriate seeds and fertilizers should be researched properly. These sorts of
research is lacking in Nepal which is the major problem of agriculture development in
Nepal.
10. Lack of Storage Facility: The farmers are compelled to sell their produce cheaply
immediately after the harvest due to lack of storage facility. They cannot store and wait for
the price to rise. A significant amount of agricultural production is destroyed by insects
and rodents in traditional storage.
Fodder Food for livestock (cattle)
Glossary
Cereal: Food crops
Capital formation: Net increase in productive capacity of the economy
Enthusiam: Interest, eagerness
REMEDIAL MEASURES TO PROBLEMS OF AGRICULTURE IN NEPAL
There are various problems of agriculture development in Nepal. Following measures
can be undertaken to solve such problems.
1. Development of Irrigation: Nepalese agriculture still depends upon monsoon which
is uncertain. Irrigation, which is the lifeblood of agriculture, is inadequate. Dependency
upon monsoon has resulted in irregular output in agriculture. Irrigation facilities have
to be extended throughout the country to increase agricultural production and productivity.
Adequate irrigation facilities also promote crop diversification.
2. Improved Seeds and Fertilizers: Provision of improved seeds and fertilizers can solve
the problem of agriculture in Nepal. Provision of sufficient seeds, fertilizers and other
requirements on time can solve the problem of agriculture in Nepal.
3. Improvement in Techniques of Production: The main cause of Due to lack of storage
low productivity in Nepalese agriculture is the use of primitive
techniques. The use of modern equipment and techniques help facility farmers cannot
to raise the agricultural productivity. Thus, the production wait for the right price to
technique should be improved to solve the agricultural problem. sell their produce
4. Provision of Storage Facility: Due to lack of proper storage facility farmers are compelled
to produce less or sell the product just after the harvest. Provision of sufficient storage
facility will encourage the farmers to produce more and store the products for future
sale. So facility of storage can solve the problem of agriculture.
5. Development of Transportation and Communication: Transportation will help in
transferring agricultural products in different parts of the country and communication
helps in providing information about the agricultural product. So transportation and
communication helps a lot to solve agriculture problem. Key Terms
6. Provision of Credit: Lack of credit is also a major problem Collective farming: coopera-
tive farming
of agricultural development in Nepal. The credit facilities Seasonal unemployment: un-
through different banks and financial institutions should employment during off season
be expanded so that farmers have easy access to credit
facilities.
7. Motivation in Collective Farming: Land fragmentation is also one of the problems of
Nepalese agriculture. Many farmers have small piece of land and there is less production
by individual farming. Instead, if they start farming in collective way productivity can
be increased and all individual farmer will be benefitted.
153 Vedanta High School Economics - Book 9
8. Promotion of Agro-based Industries: Agro-based industries should be promoted for
the development of agricultural sector. By establishing agro-based industries, the
uncertainty of market for agricultural products can be minimized and as a result,
agricultural production can be increased.
9. Reducing Excessive Population Pressure: Increased population pressure on land has
created various types of problems. Thus, the pressure of population on agricultural
should be reduced by controlling the rapid growth of population and diverting
agricultural labour to other sectors of the economy.
10 Adequate Agricultural Research: Agricultural development requires adequate agricultural
research. Research activities help to know the suitability of production according to land,
climate and soil. It also helps to identify the diseases and methods of diseases prevention.
This ultimately helps to increase agricultural production.
• Agriculture provides employment to 62.2 percent of population in NepalKeynote
7.1 • Only 33 percent of arable land has irrigation facility throughout the year
• The contribution of agriculture to GDP was 27.59 percent in 2017/18
AGRICULTURAL MARKETING IN NEPAL
The development of an agricultural marketing system is one of the most important factor
for increase in production and productivity. A well-developed agricultural marketing
system allows for the judicious investment of farmers’ resources. Farmers can harvest
maximum benefit from farming. There must be market to sell these products and prices
for them must be enough to cover the cost of production including farmer’s effort.
NATURE OF AGRICULTURAL MARKETTING IN NEPAL
The main features of agricultural marketing in Nepal are as follows:
1. Unorganized: The agricultural marketing in Nepal is largely unorganized. There is no
proper channel for markeing of agricultural produce.Farmers either sell agricultural
products directly to the consumer or to traders in small “Hat Bazars”
2. Seasonal: Agriculture production and marketing both Pause for Thought
are seasonal activities in rural Nepal. Since there is “A progressively agricultur-
lack of storage facilities, whatever the farmers grow and al country Nepal is backward
produce are brought to the market immediately after in agriculture itself” Com-
harvesting. This obviously causes over supply in the ment.
market compelling the farmers to sell their products at unfairly lower price.
3. Indequate Number of Market Centres: Market centers are inadequate in number
edspecially in the hills and mountain regions. People have to travel long distance for hours
to reach the nearest market centres. This natually limits trade of agricultural products.
Especially, perishable goods are badly affected.
4. Small Market Size: Due to subsistence farming, the volume of marketable surplus
generated by village farmers is very low. This situation discourages them from travelling
to a better market wherein they could obtain a better price. As a consequence, the extent
or size of the rural market is limited.
5. Poor Marketing Network: Given the topography and lack of transportantion and
communication system, agriculture market in Nepal are not well integrated. Normally,
there is food surplus in the Terai whereas most of the Hill districts remain food deficit
Vedanta High School Economics - Book 9 154
areas for a major part of the year.
6. Influence of Indian Market: Because of the long open border between India and Nepal
agriculture marketing is directly influenced by price and quality of the commodity across
the border. Generally, Indian agriculture production Disguised employment is a
system is more efficient and their products are situation of more people being
cheaper then the products of Nepal. This adversely KEY engaged than what is actually
IDEA required
affects the Nepalese agriculture market.
7. Predominance of Intermediaries: Intermediaries visit door-to-door and buy products at
very low price and sell the same to other consumers at higher prices. In this proces they
make substantial profits. The farmers are thus exploited by paying lower price for their
produce.
8. Individualized Marketing: Since rural farmers are not organised, they are compelled to sell
their products individually. Their bargaining capacity is thus weak. Whatever institutions
have come up recently for their protection have not been able to operate effectively due to
organisational and financial difficulties.
PROBLEMS OF AGRICULTURAL MARKETTING IN NEPAL
The main problems of agricultural marketing in Nepal are as follows:
1. Buyer’s Market: It is well understood that a systematic organization is necessary for
successful marketing of any product. The farm product traders are well organized in their
trading network than farmers. As a result, farmers are forced to sell their products at the
price fixed by buyers.
2. Non-Uniformity of Weights and Measures: The system of measurement varies from place
to place in rural areas. In Nepal there is a system of traditional weight and measures
to weigh goods in different parts of the country. The use of such defective weights and
measure cause exploitation of farmers.
3. No Grading and Standardization: In order to get good price of agricultural products,
farmers are required to grade their agricultural products according to product quality. But
most of the farmers have not adopted this practice. Therefore, the farmers are unable to
get desired price for their products.
4. Transportation Problem: Nepal still lacks cheap transportation facilities. Therefore, it
is very difficult to sell agricultural products at a deserving price. The problem is more
critical with small and women producers because it is not economical to transport small
quantity of their agricultural products to main markets.
5. Lack of Cold Storage and Warehouses: Agricultural products are perishable in nature
if they are not stored in proper temperature. Food grains are usually stored in mud-
built containers, which are easily spoiled by insects and pests. Perishable products
like vegetable and fruits cannot be preserved for long time without cold storage facility.
Unfortunately, most of the farmers do not have access to this facility.
6. Lack of Marketing Information: Due to illiteracy Fruit farming began
and ignorance, most of the farmers do not know the sometime between 6000
prevailing market price and types of goods, which and 3000 B.C. Figs were one
are in demand in the market. In both the cases, the of the first cultivated fruit
sufferers are farmers. crops.
155 Vedanta High School Economics - Book 9
7. Lack of Institutional Marketing: Most of the farmers have to bring their products to the
market individually because there is no organized marketing system. As a result, they
have to pay additional expenses which makes the products cost high and they get less
price for their product.
8. Lack of Credit: Nepalese farmers are forced to sell what they have produced in their own
villages. A great majority of farmers suffer from acute poverty, So they are compelled to
borrow from the private money lenders to whom they are bound to sell major portions of
their product at lower prices soon after the harvest.
MEASURES TO IMPROVE AGRICULTURAL MARKETING IN NEPAL
The following are some of the measures, which can be carried out systematically to make
the agricultural marketing system more efficient.
1. Easy and Cheaper Transportation Facility: One of the means to improve the agricultural
marketing is to provide easier and cheaper transportation facilities by improving the
existing rural road network. This will enable farmers to bring their products in the market
with low transportation cost and at suitable time to get good price.
2. Assurance of Fair Price: The government must assure fair and reasonable price for the
agricultural products. This is possible only by efficient management of agricultural
marketing system. Fair price encourages farmers to make hard effort to improve agricultural
production.
3. Effective Implementation of Metric System: The metric system of measurement and
weighing has been introduced in the country since a long time; but the substandard
weighing and measurement systems are still in use in many parts of the country. The
authority concerned must pay special attention to curb such practices through regular
observation and investigation.
4. Cold Storage and Warehouse Facilities: Farmers get very low price for their products
because most of the farmers are forced to sell their output immediately after harvesting
season when prices are generally very low. They are compelled to do so because of lack of
warehouse facilities. If warehouse and cold storage facilities are available, products could
be brought to the market as demanded and get a good price for their products.
5. Facilities for Processing Agricultural Products: The processing facilities of agricultural
products should be made available in various parts of the country so that farmers can
easily process their products and get reasonable price for their labour.
6. Market Information: Proper information is essential for efficient marketing of any product.
Therefore, the market information should be easily accessible to the farmers. This will help
to get the right commodities to the right places at the right time and with minimum waste.
Reliable and proper market information help to get fair price for agricultural products.
7. Elimination of Intermediaries: The elimination of middlemen is necessary from
agricultural marketing, because unless the farmer is allowed the facility of direct sales to
the customer, he cannot receive a fair price for it. Thus, with the elimination of mediators,
‘consumer grain centers’ should be established where the farmer sells his produce.
8. Publicity of Market Policies: Sufficient arrangements should be made for the transmission
of the authorized prices of agricultural produce and quantity of production etc. so that the
facts relating to agricultural marketing can be put before the concerned parties.
Vedanta High School Economics - Book 9 156
7.2 AGRICULTURAL FINANCE
In the general sense, the term agricultural credit means the short term, medium term and
long term loans, given to the farmers by any financial institution to enable them to carry
out agricultural production.
In order to increase production and productivity, varieties of seeds, fertilizers, insecticides
and pesticides must be used. These modern inputs must often be purchased on cash
payment and hence the need for credit. Agricultural credit becomes more important, as
agricultural practice is shifting to modern techniques.
IMPORTANCE OF AGRICULTURAL CREDIT
Agricultural credit is required for the following reasons:
1. Purchase of Agricultural Inputs: The agricultural productivity is very low because majority
of the farmers use traditional methods of cultivation. To modernize agricultural sector,
farmers need modern tools and inputs like fertilizer, seed, insecticides etc. Agricultural
credit is necessary for marginal farmers to buy these agricultural inputs.
2. Buying Land: The excessive pressure of population on land has made the nature of land
holding very small. There is a need to consolidate the land holding. Therefore, whenever
an opportunity comes for a farmer to consolidate his land holding, he needs money to buy
adjoining land. For this, farmers need long-term agricultural credit.
3. Agricultural Related Activities: Farmer needs money to buy livestock and to carry on
agricultural related activities. Besides, farmers also need both medium and long term
credit for buying heavy agricultural equipment such as water pump, tractors, thrasher etc.
4. Social and Domestic Expenditures: Farmers also need credit to meet consumption
expenditure during off-season and social expenditures like marriage, death ritual,
ceremonies etc.
5. Agricultural Enterprise: Agricultural credit is needed for secondary occupations such as
cottage industry, livestock farming, fish farming, bee keeping, mushroom farming etc. For
these activities, farmers need long term and medium term credit.
6. Better Management of Risk: Credit enables the farmers to better manage the risks of
uncertainties of price, weather etc. They can borrow money at the time of cultivation and
pay back the loans during peak years of crops.
7. Better Marketting of Crops: If timely credit is available to the farmers, they will not sell the
produce immediately after the harvest is over. At that time the prices of agricultural goods
are low in the market. Credit enables the farmers to withhold the agricultural surplus an
sell them when prices are high.
8. Sustain Agro based Industries: In order to sustain the development of agro-based
industries, there should be a substantial increase in the supply of raw materials needed
for such industries. Therefore, for the development of farm sector, a constant flow of credit
is essential and it would enhance over all growth of the economy.
Glossary Marginal Farmer: Poor farmer
Enhance: Increase
Livestock: Cattle
Substantial: A large amount
157 Vedanta High School Economics - Book 9
KeynoteSOURCES OF AGRICULTURAL CREDIT
There are two sources of agricultural credit. Institutional sources and Non institutional
sources.
A. Institutional Sources or Formal/Organized Sources:
The institutional sources which provide credit to the farmers are known as organized
sources of agricultural credit. The organized sources of agricultural credits are as follows:
1. Cooperative Societies: The cooperative movement was started in Nepal form 1953 A.D.
with the concept of self help through mutual help. The main objective of this bank is to
provide credit and other inputs at cheap rate to the farmers.
2. Agricultural Development Bank (ADB): The ADB was established in 1968 A.D. for the
development of agricultural sector in Nepal. ADB provides short term (less than one year),
medium term (1 to 5 years) and long term (more than 5 years) credits to the farmers.
3. Commercial Banks: They are second largest institution after Agricultural Development
Bank of Nepal to provide credit to the farmers. Nepal Rastriya Bank directed the commercial
bank to invest more than 12 % of their total credit under the priority sectors.
4. Rural Development Bank (RDB): The first RDB was established in Nepal in 2047 B.S. The
rural development banks are established with the objective to provide micro-credit to the
poor farmers. Such banks provide loans to rural farmers without collateral.
5. Finance Companies There are various finance companies established in different parts
of the country. Some of these companies are directly involved to provide loan to the poor
farmers.
B. Traditional or informal/non-institutional Sources:
The local individuals who provide the credit to the farmers are unorganized sources of
agricultural credit. The unorganized sources of agricultural credit are as follows:
1. Village Moneylenders: The traditional source of credit includes village moneylenders,
friends and relatives. The poor farmers get loans from these landlords and village
moneylenders whenever they need it. The village moneylenders not only charged an
exorbitant interest rate but also charged extra amount of money.
2. Friends and Relatives: The farmers also borrow money from their friends and relatives.
But as majority of the people in rural area lives below the poverty line, credit from friends
and relatives are also limited.
3. Land Owners: Land owners provide the credits to the farmers for short terms as well as
long term. Generally, short term credit is provided with the security of standing crops and
cattle and long term credit is provided with the security of land and house.
4. Merchant and Traders: They also provide credit during the pre-harvest season. The
farmers are forced to sell their products at a low price because the time to for repayment
of loan is very short.
• There is lack of organized agricultural credit in Nepal
• Village moneylenders are usually the landlords who own lands
• Rural credit by moneylenders and traders are tied to agricultural harvest
Vedanta High School Economics - Book 9 158
PROBLEMS OF AGRICULTURAL CREDIT
The problems of agricultural credit in Nepal are explained below:
1. No Loan without Collateral: The banks do not disburse any loan to the farmers without
surety and security. The farmers find it very difficult to arrange satisfactory security as
well as surety to the bank. Marginal and small farmers do not get the facility of agriculture
loan and remain bereft of the benefits of agricultural development.
2. Credit Inadequacy: The banks have not been making a fair assessment of the credit needs
of the farmers. It results in the shortage of finance and there arises inadequacy of credit. It
is pertinent to note that if sufficient funding is not available, it will not serve the desired
purpose. Moreover, the delay in disbursement also leads to many problems.
3. High Transaction Costs: The farmers have to incur many other costs in addition to the
interest they pay on the loan. Unidentified charges are being incurred at various stages to
expedite the sanction of loans etc. These high transaction costs hamper the spirit of the
farmers for getting loans.
4. Ambiguous Terms and Conditions: Illiterate farmers are ignorant about the various rules,
terms and conditions of the banking institutions regarding agricultural finance. They rely
upon the information given to them by bank officials and other agents involved in the
process. The lack of clarity of banking system and ambiguous terms and conditions stop
them from deriving the benefits of agricultural finance.
5. Complicated and Time-Consuming Procedure: The loan process is considered complicated
and time consuming. The farmers require crop loans during the particular seasons. If they
do not get the credit in time, it will not serve the desired purpose. The delay in processing
the loan is a common problem felt by the farmers.
6. More Beneficial to Large Farmers: The farmers normally get term loans to buy agricultural
equipments and farm machinery. However, the heavy terms loans for such facilities are
availed in most of the cases by large farmers because of their better access to the banks.
The marginal farmers do not take up the courage to opt for such loans. They also do not
have the required guarantee and resources to avail the facility of such loans.
7. Unapproachable for Tenants and Small Farmers: Due to formal procedure of availing
credit facilities from institutional sources, tenants and small farmers are unable to avail
the credit facilities from commercial banks. They are unable to meet the necessary basic
requirements of the commercial banks for availing credit facilities.
REMEDIAL MEASURES TO PROBLEMS OF AGRICULTURAL CREDIT IN NEPAL
The following measures if taken can solve the problem of the flow of agriculture credit to
the needy farmers:
1. Reducing Procedural Delay: The loan process is considered complicated and time
consuming. The procedure for getting loans should be made easy. Timely credit should be
made available to farmers on easy terms.
2. Directive to Commercial Banks; The central bank should provide directives to commercial
banks to set aside a certain percent of their credit lending to agricultural sector. Furthermore,
commercial banks operating in government sector should provide loans to the farmers on
low interest rate and without any mortgage.
159 Vedanta High School Economics - Book 9
3. Expansion of Agricultural Banks: Agriculture Development Bank and its various branches
should be expanded through out the country. This can helpto meet the redit requirements
of the farmers.
4. Agricultural Price Policy: There is greater need for agricultural price policy which
stabilizes the prices of agricultural products i.e. the income of the farmers. Hence the
banks will agree to provide them loans due to stable prices.
5. Loan without Collateral:The banks do not disburse any loan to the farmers without surety
and security. Efforts should be made to provide loans to farmers without collateral. This
can help marginal and small farmers tot get the facility of agriculture loan and carry out
agricultural operations.
6. Building Borrowing Capacity: There is an urgent need of the policies facilitating adequate,
timely and affordable supply of credit in the rural areas. To ensure this, existing regional
imbalances and coverage of the formal financial institutions need to be corrected.
7. Adequate Supply of Agriculture Credit: Poor farmers cannot afford the expensive
technology from their own resources in Nepal. So, supply of agriculture credit at easy
terms and conditions is very necessary.
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Why is Nepal called an agricultural economy?
2. What is the contribution of agriculture to the GDP of Nepal?
3. What is meant by subsistence farming?
4. What is meant by disguised unemployment?
5. What is meant by seasonal unemployment?
6. What is meant by dual ownership of land?
7. What is sharecropping in agriculture?
8. What is meant by crop diversification?
9. Mention any two problems of agricultural marketing in Nepal.
10. What are the traditional sources of agricultural finance in Nepal?
Short Answer Type Questions
1. Explain the problems of Nepalese agriculture.
2. Agriculture is the backbone of the Nepalese economy. Discuss.
3. Explain the role of agriculture in the economic development of Nepal.
4. Explain the main characteristics of the Nepalese agriculture.
5. Mention some major remedial measures to problems of agriculure in Nepal.
6. Explain the nature of agricultural marketing in Nepal.
7. Explain the problems of agricultural marketing in Nepal.
8. Explain the institutional sources of agricultural finance in Nepal.
Long Answer Type Questions
1. Explain the problems of agricultural development in Nepal. Suggest the remedial measures to solve
tthese problems.
2. Explain the major problems of agricultural marketing in Nepal. What measures would you suggest to
solve these problems?
V3.e danEtxapHlaiingthheSscohuorcoelsEocf oagnroicmulitcursa-l fBinoaoncke9in Nepal.
160
7.3 INTRODUCTION TO COOPERATIVES
The word cooperative means `working together’. Cooperative was founded from Latin
word “co-operari” where ‘co’ means together and ‘operari’ means working together.
Working together for member is the initial concept of cooperatives.
According to Prof. Henery Calvert, “Cooperative is a form of organization where in
persons voluntarily associates together as human beings on the basis of for the promotion
of economic interest of themselves.”
A co-operative is an autonomous association of persons who voluntarily cooperate for
their mutual, social, economic, and cultural benefit. It is an autonomous association of
persons united voluntarily to meet their common economic, social, and cultural needs
and aspirations through a jointly-owned and democratically-controlled enterprise. It is
a limited liability entity organized for limited profit and socially responsible business,
makes decisions on membership basis, and cares for the benefits of all of its members.
Cooperation dates back as far as human beings have been organizing for mutual benefit.
However, the history of modern cooperative in the world started in 1850 A.D. from Germany.
Mr. F.W. Raiffeisen established the first Savings and Credit Cooperatives with the objective of
upliftment of the deprived, poor, unemployed and starved people of the community.
Principles of Cooperatives
The cooperative is not based on the profit motive. Rather, it is based on the service
motive. The following principles were adopted by the 1995 Centenary Congress of the
International Co-operative Alliance (ICA).
1. Open Membership: Everyone participating in a co-operative business has the right to
membership. No one can be refused membership on the grounds of race, sex, disability,
politics or religion.
2. Democratic Control: All co-operatives are Cooperatives are democrat-
organized on the principle of one member, one vote. KEY ic and autonomous organiza-
IDEA
Everyone has an equal say, regardless of seniority tion established to fulfil com-
or their amount of investment in the business. mon interests
3. Common Ownership: The assets of a co-operative business are held in trust for the
benefit of present and future members of the business. Members decide how the profits
are distributed, re-invested in the business, or donated to social causes. Many co-
operatives put a high priority on reinvesting in the business.
4. Autonomy and Independence: Co-operatives are autonomous organizations controlled
by their members. If they enter into agreements with other organizations, or raise
capital from external sources, they do so on terms that ensure democratic control by
their members and maintain their co-operative autonomy.
5. Education, Training and Information: Co-operatives provide training for their members,
elected representatives and employees to contribute effectively to the development of
the co-operative. They also aim to promote the nature and benefits of co-operation.
6. Mutual assistance between the members: Co-operatives serve their members most
effectively and strengthen the co-operative movement by working together through
local, national, regional, and international networks.
7. Concern for the Community: Employee owned businesses consider the wider needs
of the community in which they work and live. They can do this by providing a
conscientious service to customers or supporting charitable community causes.
161 Vedanta High School Economics - Book 9
IMPO RTA NCE OF COOPER ATIVES
In an agricultural country like Nepal co-operatives can be the best economic means to
uplift the economic standards of the people of the lower income class living in rural and
urban areas. We can explain the role or importance of cooperatives as follows;
1. Safeguard from Intermediary Exploitation: Co-operative organizations eliminate:
monopoly, concentration of power and wealth and high interests loan. It neutralizes
the role of middlemen between buyers and sellers.
2. Develop Leadership Quality: In cooperatives, all members invest equally to purchase
shares. There is democratic system of one person, one vote. So they can put their
opinions openly. It helps to increase their leadership quality.
3. Development of Rural Areas: C ooperatives help to raise the level of awareness,
development of infrastructure and marketing opportunities in the rural areas. Co-
operative organizations provide financial and technical support to the poor farmers
and entrepreneurs. This aids in creation of employment opportunities and alleviate
poverty.
4. Mobilize Savings for Productive Activity: Co-operative organizations mobilize the
savings of people into productive activity. This encourages the people to save and
make investments in production of commodities. As a result quality products are made
available to the people at lower prices.
5. Employment Opportunities: Co-operative organizations directly and indirectly
contribute to the generation of employment opportunities in the country. They directly
create various kinds of job for the deserving people. Likewise, the technical and
financial help provided by them helps to make people self-employed.
6. Develop Moral Character: The main objective of a co-operative organization is to
render service rather than earn profit. They do not discriminate the people on the basis
of their sex, caste or religion. This develops feeling of mutual help, self-help, hard
work and aids in the development of moral character of the society.
7. Promotes Democracy: A co-operative organization is established on democratic rules
and principles. The members who run the co-operative organization are elected by
the majority of the members. Thus, such kinds of activities promote democracy and
responsibility among the members.
8. Improving Living Standard: Co-operative organizations provide employment and
create opportunities for the low-income group of the society. This increases their level
of income. Greater income provides greater access to basic human necessities. Thus,
it increases the living standard of the people.
DEVELOPMENT OF COOPERATIVES IN NEPAL
Nepal has a long cultural tradition of informal community based co-operatives
including savings and credit associations popularly known as Dhikuti, and grain
savings and labour savings systems known as Dharma Bhakari and Parma. Similarly,
Guthi provided a forum to work together for smoothly running different socio cultural
practices. Many of these traditional systems of cooperation are still functioning in the
rural areas of Nepal
Modern co-operatives began in Nepal in 1954 when a Department of Co-operatives
(DOC) was established within the Ministry of Agriculture to promote and assist
development of co-operatives.
Vedanta High School Economics - Book 9 162
After the Bakanpur Credit Co-operative was established in Chitwan district on April
2, 1956, the co-operative development is said to have finally introduced. The first co-
operative act, Cooperative Society Act, came into effect in 1959. Establishment of the
Cooperative Bank in 1963 that was converted into the Agricultural Development Bank
in 1968 and the formation of the Land Reform Savings Corporation in 1966 can be
taken as the major initiatives in the early era of cooperative movement in Nepal.
The development of co-operatives is described in phases corresponding to different plan
periods.
In the First Five-Year-Plan (1956-61). The first co-operative act, Cooperative Society Act,
came into effect in 1959. Government embarked on an ambitious programme to organize
4,500 agricultural multipurpose co-operatives. However, at the end of the plan period
only 378 cooperatives were established.
The Second Three-Year-Plan (1962-65) had given priority to establish cooperative societies.
It had set the target to establish 2200 co-operatives, but only 524 co-operatives were
established at the end of the plan period. In this plan period, a co-operative bank was
established in 2020 B.S under the co-operative bank act of 2019 B.S.
During the Third Five-Year Plan (1965-70), the co-operative bank which was established
in the second plan was converted to Agricultural Development Bank in 2024 B.S.. A
total of 366 co-operatives were established during the plan period.
During the Fourth Five-Year Plan (1970-75) a massive reorganization programme launched
already in 1969 was pursued, placing emphasis on the quality rather than on the quantity
of co-operatives. In this period, a total of 251 guided co-operatives were established.
Under the Fifth Five-Year Plan (1975-80) a massive Co-operative Expansion Programme
was launched, the “Sajha Programme”. Under this programme guided co-operatives and
village committees were converted into Sajha societies, co-operatives were organized
to cover almost all villagers. As a result, there were 742 Sajha institutions at the end of
the plan period.
During the Sixth Five-Year Plan (1980-85) an “Intensive Sajha Programme” was launched
in 1981 focusing more on and made more responsive to the needs and problems of
small farmers. This programme started in 20 districts of the Terai.
During the Seventh Five-Year Plan (1985-90) efforts were made to reshape the co-operative
movement. It was planned to extend co-operative services to the people through newly
established service centres. Existing co-operatives were placed at service centres and
where no co-operatives existed.
Under the Eighth Plan and with the restoration of democracy in 1990 (1992-1997) efforts are
made to revitalize existing co-operatives. A National Co-operative Federation Advisory
Committee was appointed and submitted its first report in 1991.In the same year a
National Co-operative Development Board was constituted. A new act, Co-operatives
Societies Act was promulgated in 1992. The Cooperative Act of 1992 provided freedom
for the farmers themselves to organize and establish cooperative societies.
The Ninth Plan (1997-2002) had a policy to improve the training methodology on co-
operative education with priority set on youth and women. Technical assistance on
services, loans, agricultural inputs were provided.
The Tenth Plan (2002-2007) had no significant change in policy towards co-operatives.
The usual development of co-operatives continued in the tenth plan too. At the end of
the plan period, the number of primary co-operative societies reached 9720.
163 Vedanta High School Economics - Book 9
The Eleventh Three Year Interim Plan (2007-2010), the first after the Interim Constitution
accorded high importance to co-operative sector. The Interim Constitution of Nepal has
considered the co-operative sector as one of the three pillars for national development.
It had a target of establishing 5280 new primary co-operative unit. At the end of the
plan period, 10280 primary co-operative units were established.
The Twelve Three Year Plan (2010-2013) like the previous Interim plan also recognized co-
operative sector as one of the bases of the economy to be mobilized for the development
of the economy. During the plan period, there was a net addition of 7000 primary co-
operatives. It achieved in creating 30000 direct employments in the co-operative sector.
The Thirteen Three Year Plan (2013-2016) adheres to the long term strategy to promote
co-operative movement for economic development. It underlines the following role of
the co-operative sector:
1. To establish the cooperative as a principal pillar of national economy by mobilizing
local labour, skill, and capital to the maximum extent possible.
2. To assist in the national goal of reducing poverty by generating employment and self-
employment opportunities in urban and rural areas.
3. To improve access to employment and self-employment opportunities in order to raise
the living standard of the poor, women, and other targeted groups.
4. To contribute to economic growth and national development by establishing industries,
businesses, and other productive endeavours.
5. To enhance the access of cooperative members in rural areas to savings and micro-
credit facilities.
The Fourteen Three Year Plan (2073-2076) feels the need for co-operatives involvement in
micro finance, marketing and production and to cover the areas which are not covered by
public sector and private secor. It underlines the following objectives:
1. To contribute to equitable socio-economic development of the economy by promoting co-
operative based producion, enterprise and service.
2. To ensure good governance through improvement in co-operative management and
practice in line with co-operative principles and values.
The Fifteen Periodic Plan (2076-2081) stressed on the supportive role in the overall
development process by following the principles and legal arrangements adopted by
the constitution of Nepal. It underlines the following role of the co-operative sector:
1. To maintain local governance, labor, skills, and capital in a cooperative manner.
2. To increase employment and income and poverty alleviation by mobilizing local
resources.
3. To assist in achieving socio-economic and cultural transformation and inclusive
economic growth of the members by producing, processing and marketing of goods
and services of human need.
PRESENT STATUS OF COOPERATIVES IN NEPAL
When the Cooperatives Act 1992 was promulgated, there were just 833 cooperatives.
After the Seventh Five Year Plan (1985-90), the number of cooperatives has increased
manifold. Till the mid-April of FY 2018/19, there were 34,737 Cooperatives, 65,12,340
share holders with the share capital equivalent to Rs. 76.34 billion.. The major types of
co-operative societies operating in Nepal are Saving and Credit, Multipurpose, Dairy,
Vedanta High School Economics - Book 9 164
Agriculture, Fruits and Vegetables, Bee Keeping, Tea, Coffee, Consumers, Science and
Technology, and Energy. Cooperatives are also found in the areas of transportation,
vegetable production, coffee and tea production, wood carving, furniture, the cottage
industry, carpet industry, and ginger production.
The cooperative sector has been offering direct and indirect employment to the people.
The situation of Co-operatives in the last decade is shown in the table below.
Fiscal Year Institution Nos. Member Nos. Share Capital (Rs. billions)
2008/09 19724 21383348 8.48
2009/10 22646 2963114 20.20
2010/11 23301 3141581 20.22
2011/12 26501 3842657 27.10
2012/13 27914 4104025 28.82
2013/14 31177 4555286 61.19
2014/15 32663 5100370 63.06
2015/16 33599 6030857 71.36
2016/17 34303 6102665 75.74
2017/18 34,512 6450000 76.90
2018/19* 34,737 6512340 76.34
Source: Economic Survey 2018/19 * Mid March 2019
PROBLEMS OF COOPERATIVES IN NEPAL
The problems of Cooperative sector in Nepal may be explained as under:
1 Non-accountability: The government provides too many benefits to cooperatives which
makes them more and more lethargic. There is lack of accountability on their part with
regard to proper utilization of assistance provided by the government.
2. Vested Interest: A lot of times people who are in position in control of cooperatives are
actually people who have joined cooperatives for personal gains. One of the major problems
this causes is conflicting of personal interests with the interest of the cooperatives now
this affects the performance of the cooperatives in a negative way.
3. Lack of Co-ordination: Coordination is the key to success of any organization. There
has been a lack of co-ordination among the institutional agencies, primary co-operatives,
unions as well as between co-operatives at the grass-root level. Defaulters of co-operatives
can become borrowers of other agencies.
4. Lack of Funds: The cooperatives have resource constraints as their owned funds hardly
make a sizeable portfolio of the working capital. This has stood in the way of adequately
meeting the credit requirements of the existing as well as new members.
5. Lack of Co-operation: Most of the people are in the grip of illiteracy, ignorance and
conservatism. They do not understand the significance of cooperation in their lives.
Absence of willing cooperation on their part hinders the growth of cooperative movement.
6. Defective Management: Cooperatives lack managerial skills and professionalism, sound
planning and implementation. The cooperatives suffer from nepotism, favouritism and
partiality. The growth of the cooperative movement, thus, is severely affected.
7. Limited Reach: Most profitable cooperatives are urban-based. The rural poor are not
benefitted much from cooperative movement. The rural sector has not felt the presence of
the cooperative movement in the country.
165 Vedanta High School Economics - Book 9
8. Non-inclusion of Marginalized Groups: There is lack of inclusion of every sector and
marginalized groups for the cooperative movement is a cause for its failure. Factors like
red-tapism; undue political interference and the strong hold of large farmers have arrested
the growth of co-operative movement.
REMEDIAL MEASURES TO THE PROBLEMS OF COOPERATIVES IN NEPAL
1. Catering to Local Needs: Co-operative societies should be set up taking the local
conditions into consideration. The co-operative farming and co-operative marketing
societies should make the maximum use of local resources.
2. Training and Orientation: Fresh efforts are warranted to create a cadre of trained
dedicated and honest workers. The government either through its own institutions or
through recognised agencies should play an important role in this regard.
3. Merger: The weak and inefficient cooperative societies should either be abolished or
merged with strong and efficient ones.
4. Provision of Institutional Credit: Institutional credit should be earmarked for
cooperatives. This can help to meet the credit needs for small farmers, tenants and
share croppers, landless workers and artisans.
5. Removal of Bottlenecks: Red-tapism, political interference, administrative bottlenecks
etc. have to be done away with. The officials should not succumb to local pressure,
political or otherwise.
6. Extension of Network: Those regions that have lagged behind should step up their
performance and expand their network to cover as much of credit requirements of the
farmers. efforts should be made to cover all the rural families so that no margin is left
for non-institutional credit and of exploitation of the rural poor.
7. Improve Management Practice: Cooperatives lack managerial skills and professionalism,
sound planning and implementation. Efforts should be made to introduce modern
management technciques and practices.
8. Increase in Multipurpose Cooperatives: The number of multipurpose societies should be
increased. All single purpose societies should be converted into multipurpose societies.
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Define co-operative society.
2. When was the first modern cooperative society in the world established?
3. What is meant by Parma?
4. When was the first Cooperative Act enacted in Nepal?
5. When the modern cooperative movement was finally introduced in Nepal?
Short Answer Type Questions
1. What are the salient features of cooperatives?
2. Explain the principles of cooperation.
3. Explain the major types of cooperatives.
4. Explain the present situation of cooperatives in Nepal.
5. Write about the importance of cooperatives in Nepal.
6. What are the main problems of cooperatives in Nepal?
Vedanta High School Economics - Book 9 166
7.2 INTRODUCTION TO INDUSTRY
Industry in the general sense refers to the application of labour, capital and natural
resources in the extraction and manufacturing of material goods. It is a classification
that refers to groups of companies that are related based on their primary business
activities.
According to the Industrial Policy of 2011, “ Any economic activity conducted by an individual,
firm or company to produce goods or provide service with a profit making objective shall be
regarded as an industrial enterprise”
An industry may thus be defined as a business activity, which is related to the raising,
producing, processing or manufacturing of products.
The development of the productive industries is indispensable for the country’s
overall development. Industrialization will generate employment; use available natural
resources and raw materials. Development of industrial sector helps to transfer people
from agriculture to industrial sector where people can earn more money. It ultimately
uplifts the living standard of the people. The contribution of manufacturing industries
to GDP was 5.48 percent in 2016/17 and 5.54 percent in 2017/18.
TYPES OF INDUSTRY
According to Industrial Policy 2011, the industries of Nepal are classified into the
following five groups based on the scale of production and the level of investment.
1. Micro Enterprises: Micro enterprises those industries which fulfill the following
conditions:
a. Fixed capital investment of not more than 2 lakhs rupees
b. Involvement of entrepreneur himself on management.
c. Employment of not more than 9 persons including the entrepreneur.
d. Annual transactions of not more than 20 lakhs rupees
e. Fuel consumption of less than 10 KW fuel engine capacities if engines are used.
2. Traditional Cottage Industries: The industries that are run at the household level
utilizing traditional skill and technology, local raw materials and related with national
customs, arts and culture are known as traditional cottage industries. Such industries
are labour intensive in nature and have the following features:
a. Use of traditional skills and technology Pause for Thought
b. Related with natural arts and cultures. “The annual average con-
c. Based on local raw materials and local technology tribution of industrial pro-
d. Electricity consuming capacity up to 10 KW duction to GDP has been 5.5
percent”
3. Small Scale Industries: The industries other than
micro industries and cottage industries with capital investment up to 5 crores rupees
are known as small scale industries.
4. Medium Scale Industries: The industries with a fixed capital investment between 5
crores rupees to 15 crores rupees are known as medium scale industries.
5. Large Scale Industries: The industries with a fixed capital investment of more than 15
crores rupees are known as large scale industries.
167 Vedanta High School Economics - Book 9
7.3 COTTAGE AND SMALL SCALE INDUSTRY
Cottage industries are those industries run at the household level using traditional
skill and expertise, and locally available resources. Cottage industries consists of
traditional handlooms, washing, printing and coloring, semi automatic loom, leg loom
which are identified labour based industries and related to tradition, art, culture of a
country mobilizing traditional skill, local raw materials and other materials.
The industries other than micro industries and cottage industries with fixed capital
investment up to 5 crores rupees are known as small scale industries.
IMPORTANCE OF COTTAGE AND SMALL SCALE INDUSTRIES
Cottage and small industries play an important role to generate employment in rural
areas. It also helps to earn foreign currency. The following are the major importance of
cottage and small scale industries.
i. Easy to Establish: Cottage and small-scale industries are easy to establish. The
establishment of cottage and small scale industries requires less capital, limited raw
materials, low technical expertise and can also be run by household. Such industries do
not require highly skilled manpower and expensive capital goods as well.
2. Increase in Employment Opportunities: Cottage and small Key Term
industries can generate more employment opportunities Disguised unemployment: a
because these types of industries are labour based situation where more people
industries. So cottage and small scale industries play are engaged than what is ac-
a very important role to reduce unemployment, under tually required
employment and disguised unemployment.
3. Utilization of Local Resources: Cottage and small industries are based on local raw
materials. The local raw materials like stone, woods, herbs bamboos, etc. can be used
by establishing cottage and small scale industries in rural areas. Furthermore, the local
skills and expertise are also preserved and fruitfully utilized by such industries.
4. Source of Foreign Exchange: Cottage and small industries are useful in earning foreign
currency by exporting their products. Woolen carpets, readymade carpet, Nepali paper,
handicrafts etc. are the products which are popular in foreign countries. So cottage and
small industries have great importance in foreign currency earning.
5. Preservation of Local art and Skill: Cottage and small industries use local art and skill
in the production of goods. Thanka painting, art painting, stone works, metal works,
wood crafts etc, constitutes our cultural heritage. Such industries help in utilizing and
preserving local art and skills.
6. Expansion of Employment Opportunities: Cottage and small scale industries provide
employment to farmers in off season and also absorb excess manpower from agriculture.
As cottage and small scale industries are labour
intensive, more people get employed. Cultural heritage refers to
7. Import Substitution: Cottage and small scale industries KEY the things of past that reflects
produce wide variety of goods. The development of IDEA our tradition and culture
cottage and small scale industries helps to reduce imports
and thus save valuable foreign exchange of the country.
8. Increase in National Income: Major exportable goods of Nepal are produced by cottage
and small industries. Various taxes and fees levied on this sector can increase national
income. Exports of cottage and small industries products also increase national income.
Vedanta High School Economics - Book 9 168
9. Subsidiary Source of Income: Cottage and small scale industries provide subsidiary
source of income to farmers during their off season. The rural people are extremely poor
and are hardly able to maintain themselves at subsistence level. The development of
small scale industries can provide seasonal employment to the farmers and thus serves
as a supplementary source of income to them. The goods produced by
10. Subsidiary to Medium and Large Scale Industries: small scale industries are used
Goods produced by cottage and small scale industries KEY as raw materials by medium
are used as intermediate goods by medium and large IDEA and large scale industries
scale industries. Thus the development of cottage
and small scale industries help to develop medium as well as large scale industries.
POTENTIAL OF COTTAGE AND SMALL SCALE INDUSTRIES IN NEPAL
Nepal has good prospects of cottage and small scale industries. The prospects of cottage
and small scale industries may be analyzed as:
1. Traditional Weaving: Handloom weaving or Dhaka weaving is a common industry in
Nepal. There are artisans and weavers gifted with the traditional skill of handloom
weaving. People of Kathmandu, Bhaktapur, Pokhara, Bandipur, Palpa, Gorkha,
Tehrathum, etc. are gifted with the skill of weaving.
2. Idol and Statue Making: Idol and statue making from metal, wood and stone is a
traditional craft of Nepal. Idol and statue making is a prospective occupation and have
international market too. Key Term
Seasonal unemployment: to
3. Metal and Wood Works: Metal works is popular in Patan, remain unemployed during
Bandipur and Chainpur. Artistic crafts are made of metal off season
and wood. People in different parts of the country are
engaged in such occupations.
4. Bamboo, Cane and Fibre Works: Bamboo and cane are available in the forests of Nepal.
Doko, dalo, nanglo, mats, furnitures from cane and bamboo are made in different parts
of the country.
5. Pottery: Pottery is a traditional occupation of the “Kumales” in Thimi, Bhaktapur and
some places in Kathmandu. However, this skill is gradually becoming extinct.
6. Nepali Kagaz: Paper making is in practice in Nepal since the ancient times. Nepali
Kagaz manufactured with the traditional technology is known for its durability. It
cannot be destroyed by pests and moths.
7. Carpet Industry: The mountain region of Nepal is “Cottage and small scale
known for sheep and chyangra rearing. The wool industries are suitable for a
from sheep and chyangra is used for carpet making. capital deficient country like
Nepalese carpet is known for its quality and has Nepal.” Do you agree?
international market.
Keynote
Viewpoint
8. Leather Works: With animal husbandry being an integral part of Nepalese living in
rural areas, there is good prospect of leather works in Nepal. As of now, Nepal exports
raw hides. Animal hides can be processed and leather items can be manufactured in
cottage and small scale industries.
• Cottage and small scale industries produce goods which helps to reduce
imports and thus helps in import substitution
• Nepalese carpet which is known for its quality is produced with wool from
Chyangra raised in the Himalayan region
169 Vedanta High School Economics - Book 9
PROBLEMS OF COTTAGE AND SMALL SCALE INDUSTRIES
Cottage and small scale industries in Nepal face various problems due to which they could
not develop. The major problems faced by cottage and small scale industries in Nepal are:
1. Lack of Capital: The artisans and entrepreneurs are gifted with skills but are handicapped
by lack of capital. The institutional source of credit is not adequate. Even the existing
financial institutions are reluctant to provide credit to poor artisans due to their poor
repaying capacity.
2. Shortage of Raw Materials: Local raw materials are exported. This has resulted in shortage
of raw materials for cottage and small scale industries. So raw materials for cottage and
small scale industries have to be imported and the cost of production rises. Consequently
cottage and small scale industries lose competitiveness due to high cost of production.
3. Intermediary Exploitation: Small artisans cannot make marketing arrangements on their
own. Handicrafts produced by them are collected by middlemen at low prices and sold at
high prices.
4. Competition from Large Industries: Cottage and small scale industries face competition
from large industries which produce the same goods at a lower cost. The cottage and small
scale industries have high cost of production and thus cannot withstand competition from
large industries.
5. Competition from Cheap Imports: Even in the domestic market cottage and small scale
industries have to compete with cheap imports. With cottage and small scale industries
products being expensive due to high cost of production, the demand for cottage and
small scale products is continuously decreasing.
6. Primitive Technology: Local skill is an asset. But if techniques of production are primitive,
quality of products will not be able to catch up with the changing taste and fashion. This
has been the case with Nepalese cottage industries.
7. Limited Market: Domestic market being limited, it is further eaten up by cheap imports.
The purchasing power of people is low. The cost of production of cottage and small scale
industries products being high, it cannot compete in the international market.
8. Poor Quality: Cottage and small scale industries have poor quality production. The
traditional and local skills have not been adapted to meet the changing taste and preferences
of consumers. So the market for cottage and small scale industries products in Nepal is
declining.
9. Problem of Transportation: The transport facilities are essential for the development of
cottage and small-scale industries. But, there is lack of transport and communication
facilities in hilly areas of Nepal.
10. Lack of Protection Policy: Lack of protection is also a problem of cottage and small
industries in Nepal as the government has not taken any step in that direction. Products
of cottage and small industries are not able to compete with goods imported from foreign
countries in both quality and price.
Glossary Labour intensive: Use of more labour
Thanka painting: A Tibetan Buddhist painting usually depicting a Buddhist deity
Reluctant: Unwilling
Intermediary: Middlemen
Vedanta High School Economics - Book 9 170
REMEDIAL MEASURES
The following steps must be adopted to develop the cottage and small industries. By
producing the skilled, productive and technical man power.
1. Provision of Capital: Institutional credit facilities should be Small scale production
provided to entrepreneurs at a concessional rate of interest. means higher cost per unit
This can help to remove financial difficulties faced by small and hence cannot com-
entrepreneurs. pete with large industries
2. Smooth Supply of Raw Materials: The shortage of raw materials faced by cottage and
small scale industries should be eliminated. The export of raw materials should be made
only after meeting the needs of cottage and small scale industries.
3. Elimination of Middlemen: Entrepreneurs of cottage and small scale industries should
be provided access to markets where they can sell their produce at good price. This can
encourage them and help in the development of cottage and small scale industries.
4. Demarcation of Areas of Production: The cottage and small scale industries cannot
compete with large industries as they face cost disadvantage. The goods produced by
cottage and small scale industries should not be allowed to be produced by large scale
industries.
5. Control of Imports: Cottage and small scale industries face competition from cheap
imports. To protect the cottage and small scale industries from cheap imports, high import
duties should be imposed.
6. Use of Modern Technology: The use of modern technology should be encouraged in order
to increase productivity and efficiency in production. The use of modern technology
lowers the cost of production and makes the cottage and small scale industries competitive
in the international market. Pause for Thought
7. Expansion of Market: The size of the market of cottage How can high import du-
and small scale industries should be expanded. New ties help to protect cottage
markets should be explored for the cottage and small and small scale industries?
scale industries products.
8. Improvement in Quality: The cottage and small scale industries products lack competitive
advantage due to their poor quality. Improvement in quality of production helps to increase
the competitiveness of cottage and small scale industries.
9. Proper Transport Facilities: The transport facilities should be expanded and the rural areas
should be linked to markets and urban areas through network of roads and transports.
This can help the cottage and small scale industries to develop.
10. Protection Policy: The cottage and small scale industries should be provided protection
by the government and should not be made to compete with large industries and cheap
imports. Special privileges should be conferred to entrepreneurs of cottage and small scale
industries.
CHECKPOINT 1. Explain the role of cottage and small scale industries in the economic development of Nepal
2. What are the prospects of cottage and small scale industries in Nepal?
3. What are the major problems of cottage and small scale industries in Nepal
4. Suggest some measures to solve the problems of cottage and small scale industries in Nepal
171 Vedanta High School Economics - Book 9
7.4 MEDIUM AND LARGE SCALE INDUSTRY
Medium and large scale industries are classified in Nepal on the basis of amount
of investment. Medium Scale Industries are the industries with a fixed capital
investment between 5 crores rupees to 15 crores rupees. Large Scale Industries are the
industries with a fixed capital investment of more than 15 crores rupees. Both the industries
are generally capital intensive in nature and are vital for economic development.
IMPORTANCE OF MEDIUM AND LARGE SCALE INDUSTRIES
The importance of medium and large scale industries can be explained as follows.
i. Rapid Economic Development: The productivity in medium and large scale industries
is higher than in other sectors of the economy and can thus contribute to increase in
national income of the country. This helps to accelerate economic growth.
2. Increase in Employment and Income: Medium and large Key Term
scale industries need large number of both skilled and Economic growth: quantita-
unskilled labour. The establishment of medium and lrge tive increase in national out-
scale industries can thus help to reduce the problem of put over a period of time
unemployment and disguised employment.
3. Increase in the National Output: Establishment and development of medium and large
scale industries in the country will increase the output of various goods in the country.
This will result in the increase of national output which will increase the pace of
development.
4. Improvement in Balance of Trade: The development of medium and large scale industries
increases industrial production. This will lead to decrease in imports and increase in
exports and thus help to improve the balance of trade. Increase in export and decrease in
import will correct the unfavourable balance of trade and balance of payment.
5. Resource Utilization: The development of medium Gross Domestic Product is
and large scale industries can lead to proper utilization the total value of goods and
of forest, minerals, human and water resources of the KEY services produced within the
country. This will lead to increase in Gross Domestic IDEA domestic territory of a country
Product of the country. in a year
6. Self Sufficiency and Import Substitution: Medium and large scale industries can
produce the basic and essential goods required by the country. Industrialization and
modernization can take place and the country can move towards self sufficiency with
the production of diverse variety of goods. As a result, import substitution become
possible and valuable foreign exchange is saved.
7. Modernization of Agriculture: The development of medium and large scale industries
makes available agricultural inputs like tools, machinery, fertilizer etc. cheaply and
adequately. This helps to develop agriculture.
8. Development of Basic Industries: Iron and steel industries, cement industries,
machinery and tools industries etc. are basic industries. These industries help in the
establishment and promotion of other industries. The basic industries industries can
be developed only on medium or large scale.
9. Skill Development: As trained manpower are required in medium and large scale
industries, the establishment of such industries will help to enhance the skill and
efficiency of labourers as well as entrepreneurs.
Vedanta High School Economics - Book 9 172
10. Capital Formation: Medium and large scale industries help to Capital formation is the
accelerate the process of capital formation within the country. net addition to the capital
Establishment of these industries expands capital market by assets of a country over-
providing investment opportunities to the people which is the time
basis of economic development.
PROSPECTS OF MEDIUM AND LARGE SCALE INDUSTRIES
Nepal as an agricultural country has great prospects of agro based industries in Nepal.
But there are other possibilities as well. We can outline some of them as follows:
1. Mineral based Industries: Nepal has rich mineral resources. With Nepal being rich in
limestone, iron ore, copper etc, Nepal has good prospect of cement industries, iron and
steel industries and other mineral based industries.
2. Medicine and Pharmaceutical Industries: There are over 800 medicinal herbs in
Nepal. The medicinal herbs can be used as raw material in medicinal industries. The
traditional medicines can be exported and valuable foreign exchange can be earned.
3. Forest based Industries: Nepal is rich in forest resources as well. Nepal has good prospect
of paper industry, ply wood industry, turpentine and other forest based industries.
Sustainable use of forest resources can help to earn valuable foreign exchange.
4. Food Processing Industries: Nepal is an agricultural economy. The agricultural products
can be used as raw materials in food processing industries. There is immense potential
for such industries in Nepal.
5. Tea and Beverage Industries: The hilly region of the country is well known for high
quality tea. The graded tea produced in hills has international market. For example, the
organic tea of Ilam has ready market in Europe.
6. Garment and Woolen Industry: The cotton and wool needed for garment and woolen
industry can be produced adequately in Terai and hills. Such industries can be
established as medium and large scale industries.
Glossary Balance of trade: Difference between the value of exports and imports
Efficiency of labour: The productive capacity of labour
Entrepreneur: A person who conceives a business plan and undertakes the risk and
uncertainty of establishing the enterprise
PROBLEMS OF MEDIUM AND LARGE SCALE INDUSTRIES
Medium and large scale industries are facing various problems. Some of the problems
are as follows.
1. Lack of Capital: Medium and large scale industries are capital intensive in nature. Nepal
doesn’t have the required capital to invest in large industries. People capacity to invest
is low and foreign investors are reluctant to invest due to fragile socio-political and
economic condition of the economy. Industrial finance is also lacking.
2. Lack of Skilled Manpower: Medium and large scale industries run without experts
in production process. Medium and large scale industries need skilled manpower for
handling the delicate task of production. Nepal doesn’t have adequate technical experts.
Foreign experts are extremely expensive and are not available as and when required.
3. Lack of Entrepreneurial and Managerial Talent: Medium and large scale industries
cannot develop without proper entrepreneurship. There is lack of dynamic entrepreneurs
who can conceive, innovate and make investment in Nepal.
173 Vedanta High School Economics - Book 9
4. Lack of Infrastructures: Nepal lacks basic infrastructures like roads, bridges and power.
This leads to concentration of industries in urban areas where these facilities are available.
This leads to wastage of resources in hilly areas and also increases the cost of production.
Massive power cut is also a major reason for fall in industrial output.
5. Lack of Transportation: Due to serious Viewpoint “Medium and large scale industries
transportation bottleneck, goods from can be instrumental in correcting the
production centres cannot be transported unfavourable balance of payment sit-
to the market in a smooth manner. Further, uation of the country” Do you agree?
raw materials also could not be transported to the production centre and are thus wasted.
6. Landlocked Position: The landlocked situation of Nepal increases the cost of production
due to higher transport and transit costs. Hence, Nepalese goods lose competitiveness in
international market. This has a negative effect on medium and large scale industries.
7. Lack of Industrial Finance: There is lack of institutional finance which can fulfil the
credit requirements of large industries. Further, the loaning process is long and tiring.
This dampens the spirit of entrepreneurs and affects the development of medium and
large scale industries.
8. Lack of Sufficient Research: Research and development helps to identify the feasible
industries in the country and to identify the demand for the products at the national and
international level. However, there is lack of sufficient research activities in the industrial
sector.
9. Lack of Competitiveness: Most of the Nepalese industrial products produced by medium
and large scale industries are of low quality. Due to substandard quality, the Nepalese
industrial products cannot compete in the international market.
10. Defective Government Policy: Nepal’s industrial policy is inconsistent, defective and
also undergoes frequent changes with the change in government. Due to such instability,
entrepreneurs are reluctant to invest in medium and large scale industries.
Keynote • A strong medium and large scale industrial base serves as the founda-
tion for economic development
• Nepal has huge potential in development of tea processing and other agro
based industries
REMEDIES TO PROBLEMS OF MEDIUM AND LARGE SCALE INDUSTRIES
The remedial measures to the problems of medium and large scale industries are as follows:
1. Provision of Capital: Institutional credit arrangements should be made to meet the
need of medium and large scale industries. Foreign investors should be encouraged to
invest in the industrial sector. This can help to remove the handicap of capital scarcity.
2. Development of Entrepreneurial Class: There is lack of dynamic and dashing
entrepreneurs in Nepal. Entrepreneurial and managerial skill should be promoted. The
existing entrepreneurs should be encouraged to invest.
3. Transit Arrangement: Landlocked nature of the country is a problem in the development
of medium and large scale industries in Nepal. To solve this problem, transit arrangement
has to be made with India and China. This helps to expand the market for Nepalese
industrial products and develop the industrial sector.
Vedanta High School Economics - Book 9 174
4. Development of Technical Experts: A pool of technical experts should be developed in
the country. Technical colleges should be established and training should be provided
to technical manpower to develop their technical skill. This can help to meet the need
of medium and large scale industries.
5. Adequate Supply of Power: Medium and large scale industries suffer from power
shortage. The immense hydropower potential of Nepal should be exploited by
establishing hydropower projects. This can help to provide cheap and adequate power
to industries and help in industrial development.
6. Expansion of Transportation Facilities: Transport facilities should be developed by
creating wide network of roads and transport fleets. Roads, railways, ropeways etc.
should be built to connect the production centres to places where raw materials are
found. The production centres should also be linked with markets. This can help to
develop the industrial sector.
7. Provision of Industrial Finance: The medium and large scale industries in Nepal lacks
finance for expansion of productive capacity and operation. To solve this problem,
financial institutions should be opened up to provide loans to industries. This can help
the medium and large scale industries tide over their financial difficulties.
8. Research and Development: There is lack of feasibility study, research and development
in connection to industrial sector in Nepal. Research and development should be carried
out in regard to development of production techniques and feasibility of projects. This
can help to promote medium and large scale industries in Nepal.
9. ImprovementinQualityofProduction:Nepalese industrial products lack competitiveness
due to low quality of industrial products. To make the Nepalese industrial products
competitive in the international market, the quality of production has to be improved.
10. Suitable Industrial Policy: A suitable industrial policy helps to motivate investors and
industrialists. The government agencies and industrialists should be brought together
to arrive at mutual agreement in policy formulation. This helps in the development of
the industrial sector.
CHECKPOINT 1. Explain the role of medium and large scale industries in the economic development of Nepal
2. What are the prospects of medium and large scale industries in Nepal?
3. What are the major problems of medium and large scale industries in Nepal
4. Suggest some measures to solve the problems of medium and large scale industries in Nepal
READING BETWEEN THE LINES
Until the 1980s, modern industry was almost nonexistent; only 0.66% of Nepal’s GDP was
derived from industry in 1964/65. Since then, industrial development has been given emphasis
in economic planning. The contribution of manufacturing industries to GDP was 5.48 percent in
2016/17 and 5.54 percent in 2017/18.
Major industries in Nepal include tourism, carpets, textiles, small rice jute, sugar, and oilseed
mills; cigarettes, cement and brick factories. Aside from small-scale food processing (rice, wheat
and oil mills), light industry, largely concentrated in southeastern Nepal, includes the production
of jute goods, refined sugar, cigarettes, matches, spun cotton and synthetic fabrics, wool, foot-
wear, tanned leather, and tea. The carpet, garment and spinning industries are the three largest
industrial employers, followed by structural clay products, sugar and jute processing.
175 Vedanta High School Economics - Book 9
7.5 TOURISM INDUSTRY
Atourist is a person who visits a location
other than his own home for recreation,
business,religious or other purposes.
Tourism is the activities of people traveling
to and staying in places outside their usual
environment for leisure, business or other
purposes. It includes the whole business
activities to provide facilities for tourists
such as hotel which provides accommodation
to tourists, travel agents, trekking agents and other related activities.
Since tourism industry is established to provide various services to tourists so it is
classified as service industry. Contribution of this sector to GDP was 2.2 percent in FY
2018/19.
IMPORTANCE OF TOURISM INDUSTRY IN NEPAL
The following are the major importance of tourism industry in Nepal.
1. Source of Foreign Exchange: Since exports of Nepal are limited, tourism has been a major
source of foreign exchange earnings. Amount spent by tourists in goods and services
bring substantial foreign exchange for the country. It is increasing over the years.Foreign
exchange earnings from the tourism sector was Rs.10.46 billion in fiscal year 2004/05
while the earnings in the FY 2017/18 increased to Rs. 67.09 billions. (Economic Survey
2018/19)
2. Exchange of Art and Culture: Tourism industries help to exchange art and culture
between Nepal and the rest of the world. When a tourist tours, he carries his concepts
and culture with himself. In the same way, the tourist is also influenced by the culture
of inhabitants of the country he visits. In this way, tourism industry makes mutual
exchange of concepts and culture among the people of different countries.
3. Publicity of the Nation: Nepal is a small country, difficult to be located in the world
map. Tourism helps to publicize the country in different parts in the world. It helps to
publicize. Nepalese art, skills tradition, cultural beauty and hospitality to the world.
4. Upliftment of Living Standard: The expenditure made by Key Term
tourists on food and lodging during treks, porter costs and Homestay: a form of tourism
so forth helps to boost up the living standard of people that allows a visitor to rent a
involved in tourism industry. Furthermore, as an integral room from a local family in a
part of a rural tourism, “homestay” has helped the locals homelike setting.
to earn the extra cash while promoting the local tourism.
5. Employment Generation: Tourism helps to create employment opportunities. It provides
direct as well as indirect employment. People get engaged in tourist trade such as hotel,
lodge, travel agency, guide, trekking guide etc. This helps to solve unemployment problem
in the economy.
6. Development of Cottage and Small Scale Industries: The art and culture of the country
is the base of products of cottage industries. These products are highly preferred by
the foreign tourists. Foreign tourists buy substantial quantities of handicraft items like art
objects, idols, thanka painting, apparel, ornaments etc. As such, handicrafts industries,
cottage industries, etc are benefitted from the development of tourism industries.
7. Development of Human Resource: Tourism sector requires skilled manpower because
Vedanta High School Economics - Book 9 176
tourists need specialized services and facilities. Manpower has to be trained to that effect.
This naturally results in the development of manpower skills.
8. Favourable Balance: Nepal has unfavourable balance of trade with its export earnings
being less than import payments. Foreign exchange earnings from tourism industry can
prove helpful in reducing this unfavourable balance.
9. Source of Government Revenue: Tourism is an important source of government revenue
in the context of Nepal. The government earns revenue from the tax, visa, fee, royalty
etc. This increases the government revenue. Substantial amount of taxes are paid by
hotels and travel agents as well.
10. Remote Area Development: Tourists are interested in sightseeing, trekking, climbing,
boating., rafting etc. These activities are related to remote areas. In order to take tourists
to the remote areas, infrastructure facilities are necessary. Thus tourism helps to develop
infrastructures.
PROSPECTS OF TOURISM INDUSTRY IN NEPAL
Nepal is called tourists’ paradise or Shangrila. Nepal has greater prospects in tourism
industry due to the following reasons.
1. White Mountains: Nepal has a large number of snow capped mountain peaks like Mt.
Everest, Annapurna, Dhaulagiri, Macchapuchre etc. Nepal has eight of the world fourteen
highest peaks in the world. Views of sunrise and sunset along these peaks have proved
exhilarating.
2. Sylvan Beauty: Nepal is gifted with natural beauty. It has white mountains in the north,
hills in the middle and plain in the south. It has many beautiful valleys and lakes.
Greenery and wildlife in Nepalese forests constitutes Nepal’s sylvan beauty and offers
abundant scope for the development of sylvan tourism. Nepal is rich in bio diversity. All
these resources are the assets that can attract tourists.
3. Temples, Unique Art and Architecture: Nepal is a country of temples. The important pilgrim
sites like Lumbini, Muktinath, Pashupatinath, Gosaikunda, Guheswori, Swayambhu are
in Nepal. There are temples displaying the unique art and architecture. Similarly, Durbar
squares of Kathmandu, Bhaktapur and Patan are extremely famous for art and architecture.
4. Climatic Variety: Due to geographical structure of Nepal various climates are found in
the country. Climate of Nepal is suitable for any type of tourists. Cold climate is found
in Himalayan region, moderate in hilly region and hot in Terai region. So climate of
Nepal is suitable for tourists from any part of the world.
5. Cultural Variety: Nepal is a multi-culture, multi-racial, multilinguistic and multi-
ethnic country. Nepal’s population represents more than a hundred ethnic groups. Each
ethnic group carries its own identity and cultural heritage. Their food dress ornaments,
beliefs customs, habits, and manners differ from one another. Their festivals, myths
and legends, music, and songs are interest of research to tourists.
6. Less Expensive: Cost of living in Nepal is very low as compared to other countries of
the world. For this reason even low class and medium class tourists can easily visit
Nepal. Holding of seminars and workshops in Nepal are also less expensive. This also
increase prospect of tourism industry in Nepal.
7. Adventure Sports: Nepal is an ideal destination for adventure sports like rafting ,
kayaking, paragliding, bungee jumping etc. The fast flowing white water river like
Bhotekosi are ideal for adventure rafting and kayaking. The mountain cliffs are ideal
for bungee jumping.
8. Trekkers Paradise: Nepal is known as trekker’s paradise because there are numerous
trekking routes highly enjoyable for tourists. There are short trekking rutes as well as
177 Vedanta High School Economics - Book 9
long trekking routes. The trekking route from Pokhara to Jomsom, Annapurna trekking
route is world famous.
9. Religious Places: More than 90 percent of the people in Nepal follow Hinduism and
Buddhism. Lumbini, the birthplace of Lord Buddha is in Nepal. Pashupatinath, Krishna
Mandir, Ram JanakiMandir, Muktinath, Gosaikunda, Swayambhu, Lumbini, etc. are the
important religious places of Nepal.
10. Rural Rusticity: People in developed countries enjoy rural rusticity and simplicity. They
may not know how a true village looks like. Nepal is a country with about 83 percent of
people living in villages.
Glossary Trekking: A long arduous journey, typically on foot
Thanka painting: Characteristic of or resembling country people
Sylvan: Natural and unspoilt
Rafting: The sport or pastime of traveling down a river on a raft.
PROBLEMS OF TOURISM INDUSTRY IN NEPAL
Though possibility of tourism industry is very high in Nepal, due to various reasons
tourism industry of Nepal is facing many problems which are explained below.
1. Poor Transportation and Communication Facilities: Transportation and communication
facilities are required for the development of the tourism sector. But there is a lack
of modern transportation and communication facility in Nepal. Due to lack of these
infrastructures many touristic destination of Nepal are overshadowed.
2. Lack of Development of Tourism Sites: Nepal is full of natural and pleasant places.
Gosainkund, Dudhpokhari, Rara, Dhorpatan, etc. are the examples. But these places are
not yet developed as tourism sites. So the expansion and development of tourism site
is an important challenge of the tourism sector in Nepal.
3. Lack of Tourism Centres: Tourism centers provide different tourism services like
information about tourist places, tourism maps, foreign currency exchane etc. Due to
limited tourist centers, there are possibilities for tourists to be cheated. Thus the lack
of tourism centers is a great deterrent to the development of tourism in Nepal.
4. Lack of Quality Hotels: Good quality hotel and lodges are the choices of foreign
tourists. But, such good quality hotel and lodges are lacking in Nepal. Most of these are
concentrated only in Kathmandu and Pokhara. The development of quality hotels and
lodges in tourist destination areas is an important challenge of tourism in Nepal.
5. Deterioration of Art and Culture: Tourists enjoy art and architecture. They relish in
cultural diversity. But Nepal’s culture, art and architecture are gradually deteriorating.
The festivals are disappearing. Temples are dilapidated and lack maintenance. The
idols of gods and goddesses are disappearing.
6. Lack of Qualified and Trained Manpower: Qualified and trained manpower is an
important base of tourism. In Nepal tourism manpower is neither well trained nor
adequate in number. Therefore, Nepal is unable to develop the tourism industry.
7. Lack of Recreational Facilities: Most of the tourists visit Nepal with the motive of
recreation. But recreational facilities are not developed well. Despite these, there are
some recreational facilities in Nepal such as rafting, bungy jumping, para-gliding and
night clubs. These should be developed and expanded even more.
8. Lack of Security: Security situation in Nepal is getting worse due to deterioration in law
and order in the country. Political disturbances, strikes, dacoit etc. are very common in
Nepal. This has adversely affected the tourism sector as the tourists are reluctant to visit
Nepal.
Vedanta High School Economics - Book 9 178
Keynote9. Pollution: Pollution has become rampant in Nepal. There is pollution in the air, in
water, in space, on roads and everywhere. Solid waste is not well managed and is
spreading everywhere in tourism spots. Therefore tourists are becoming hesitant to
visit Nepal.
10. Lack of Publicity and Advertisement: There is a lack of publicity and advertisement of
various tourism sites of Nepal in the international sphere. The efforts of the government
to activate the Nepalese embassies abroad for this purpose have not materialized.
REMEDIES TO PROBLEMS OF TOURISM INDUSTRY IN NEPAL
The following measures would be fruitful for the rapid and sustainable development of
tourism industry in Nepal.
1. Development of Transportation and Communication: Transportation and
communication facilities are the basic requirements for developing tourism industry.
The facilities of transport and communications should be made easily accessible in all
the tourist destinations of the country.
2. Development of Tourist Sites: The places of tourist attractions are mostly in remote
areas of Nepal. These sites should be developed into tourism centres by providing all
sorts of facilities to attract the tourists.
3. Establishment of Tourism Centers: Lack of tourism centres hamper tourists as they are
unaware of tourist places. Tourism centres should be established in all possible tourist
destinations with required facilities.
4. Provision of Quality Hotels: Tourists need quality hotels nd facilities. Quality hotels
and resorts are concentrated only in a few urban areas of Nepal. The private sector
should be encouraged to establish quality hotels and resorts.
5. Proper Tourism Policy: The government should make efforts to attract tourists. Special
concessions have to be made to tourists in trekking, mountaineering and other adventure
sports. A liberal tourism policy can help to attract tourists from different countries of
the world.
6. Management of Trained Guides: The training centres should be expanded to provide
necessary training to the guides who help tourists by providing detailed information
about different places to visit.
7. Development of Recreational Centres: Most of the tourists come to visit Nepal for
recreational purpose. So, there should be proper arrangement of recreational centres
in all possible tourists’ spots.
8. Peace and Security: Deteriorating law and order situation is a matter of concern to
tourists. The law and order situation in the country has to be improved. Proper security
arrangement has to be made to to make tourists feel secured in any part of the country.
9. Control of Pollution: Pollution badly affects the tourism sector. A proper pollution
control policy should be formulated and implemented. A co-ordinated effort of the
government, private sector and civil society is necessary in controlling the growing
pollution in the country.
10. Publicity and Advertisement: Publicity and advertisement should be made through
posters, postcards, pamphlets, and Nepalese embassies. The information should be
provided to the tourists through different communication media.
• In the year 2018, the top five countries with largest number of tourist’s
arrival have been India, China, America, Sri Lanka and the UK
• The foreign currency equivalent to 67.09 billion was earned through the
tourism in FY 2017/18
179 Vedanta High School Economics - Book 9
READING BETWEEN THE LINES
VISIT NEPAL- Experience of a Lifetime
From the highest mountains in the world to amazing
trekking trails, mountaineers, trekkers and adventurers
seek out the Himalayas every year during climbing
season. Nepal also offers some of the best white water
adventures – rafting and kayaking on thrilling waters
and gentle rapids. Dirt biking, skydiving, Asia’s second
highest bungee jump, the world’s highest hotel and high
altitude races make the country one of the most sought
after destinations for an adrenaline rush.
CONCEPTS FOR REVIEW
Subsistence Farming Moonsoon Irrigation
Parma
Micro industry Cooperatives Dharma Bhakari
Medium scale industry
Labour intensive Cottage industry Small scale industry
Transit
Large scale industry Thanka painting
Capital intensive Capital formation
Landlocked Entrepreneur
GLANCING THE UNIT
Traditional Cottage Industries: The industries that 5. Proper use of local resources
are run at the household level utilizing traditional 6. Preservation of art and culture
skill and technology, local raw materials and related 7. Import substitution
with national customs, arts and culture 8. Source of national income `
Small Scale Industries: The industries other than Potential of cottage and small scale industries
micro industries and cottage industries with capital 1.Traditional weaving
investment up to 5 crores rupees are known as 2. Idol and statue making
small scale industries. 3. Metal and wood works
4. Bamboo, cane and fibre works
Medium Scale Industries: The industries with a 5. Pottery
fixed capital investment between 5 crores rupees 6. Nepali Kagaz
to 15 crores rupees are known as medium scale Problems of cottage and small scale industries
industries.
1. Lack of capital
Large Scale Industries: The industries with a fixed
capital investment of more than 15 crores rupees
are known as large scale industries. 2. Shortage of raw materials
Importance of cottage and small scale industries 3.Intermediary exploitation
1. Easy to establish 4. Competition from large industries:
2. Subsidiary source of income 5. Competition from cheap imports
3. Consumer supplies 6. Primitive technology
4. Expansion of employment 7. Limited market
8. Poor quality
Vedanta High School Economics - Book 9 180
GLANCING THE UNIT
Remedial measures 7. Improvement in quality of production
1. Provision of capital 8. Suitable industrial policy:
2. Adequate supply of raw materials Tourism Industry
3. Elimination of middlemen Tourism industry includes those business activities
4. Demarcation of areas of production
which provide facilities to the tourist such as hotel,
5. Control of imports lodge, travel agency, trekking agencies, etc.
6. Use of modern technology Importance of tourism industry
7. Expansion of market 1. Source of foreign exchange
8. Improvement in quality 2. Employment generation
9. Proper transport facilities 3. Development of handicraft industries
10. Protection policy 4. Source of government revenue
Importance of medium and large industries 5. Favourable balance
1. Rapid economic development 6. Manpower training
2. Development of basic industries 7. Widens market
3. Skill development 8. Publicity of the nation
4. Increase in employment
5. Resource utilizarion Prospects of tourism industry in Nepal
6. Self sufficiency 1. White mountains
7. Export promotion 2. Sylvan beauty
8. Development of agriculture 3. Unique art and architecture
Potential of medium and large industries 4. Cultural variety
1. Mineral based industrie 5. Climatic variety
2. Medicine and pharmaceutical industries 6. Rare animals and birds
3. Forest based industries 7. Adventure sports
4. Food processing industries 8. Trekkers paradise
5. Tea and beverage industries Problems of tourism industry in Nepal
6. Garment and woolen industry 1. Lack of adequate infrastructure
Problems of medium and large industries 2. Lack of tourism infrastructures
1. Lack of capital 3. Lack of recreational facilities
2. Lack of power and other infrastructure 4. Problem of pollution
3. Lack of transportation 5. Lack of trained manpower
4. Landlocked position 6. Lack of quality products
5. Lack of technical expertise 7. Deterioration of art and culture
6. Lack of entrepreneurial and managerial talent 8. Lack of publicity
7. Lack of competitiveness
8. Defective government policies and procedures Remedial measures
1. Development of transportation
Remedial measures
2. Peace and security
1. Provision of capital
3. Control of pollution
2. Adequate supply of power
4. Proper tourism policy
3. Expansion of transportation facilities
5. Establishment of tourism centres
4. Transit arrangement
6. Establishment of quality hotels
5. Development of technical experts
7. Development of tourism sites
6. Development of entrepreneurial class
181 Vedanta High School Economics - Book 9
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Define micro scale industry.
2. What do you mean by traditional cottage industry?
3. What are small scale industries?
4. What do you mean by large scale industry?
5. Mention two problems of cottage and small-scale industries.
6. Define tourism industry.
Short Answer Type Questions
1. Explain the potential of cottage and small scale industries in Nepal.
2. Explain the potential of medium and large scale industries in Nepal.
3. Explain the potential of tourism industry in Nepal.
4. What are the major problems of cottage and small-scale industries in Nepal?
5. What are the major problems of large-scale industry in Nepal?
Long Answer Type Questions
1. Explain the importance of cottage and small scale industries in Nepal.
2. Explain role of medium and large-scale industries in the economic development of Nepal.
3. Write the importance and of tourism industry in the economic development of Nepal.
4. What are the problems of tourism industry in Nepal? What are its remedial measures.
EYE ON THE PAST
The Hippie Trail - Advent of Western Tourists in Nepal
During the late 1960s onwards the largest
group, united by a common interest, were the
young people with long hair who gave the
hippie trail its name was that it led to the
major hashish-producing centres of the world.
The “hippie trail” describes a popular, though
varied, route through parts of Asia from the
edge of Europe to India and Nepal. For many,
Istanbul, Turkey was the starting point and
Goa, India, or Kathmandu, Nepal, was the
end, depending on the season. Afghanistan,
Chitral, Kashmir, Nepal were familiar names to the pot-smokers of the sixties and seventies, most of
whom knew very little else about the countries where their herb of choice was cultivated. In fact, the
Hippie Culture of the 1960/70 marked the entry of western tourists in Nepal.
Vedanta High School Economics - Book 9 182
8UNIT THEORY OF PRODUCTION
Learning Objectives Weight: 8 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the concept of production
• Explain the importance of production
• Understand and define Total Product,
Average Product and Marginal Product
• Explain the Law of Variable Proportions
• Explain the Law of Returns to Scale Before you begin
Theory of production explains the princi-
ples by which a business firm decides how
much of each commodity that it will pro-
duce, and how much of each kind of labour,
raw material, fixed capital good, etc., that
it will use.
Very Short Type Short Type Long Answer Type Total Marks
1 1 0 6
183 Vedanta High School Economics - Book 9
8.0 CONCEPT OF PRODUCTION
Production is the act of conversion of raw materials or inputs into finished goods or
output in a manufacturing process. In economics, ‘Inputs’ refers to all those factors of
production which are required by the firm to produce a particular product and ‘outputs’
refers to physical goods as well as services that are produced with inputs.
Fraser, “If consuming means extracting utility from matter, producing means creating
utility into matter”.
J. R. Hicks: “Production is any activity directed to the satisfaction of other peoples’ wants
through exchange”.
Production is a process of transforming (converting) inputs (raw-materials) into outputs
(finished goods). So, production means the act of creation of goods and services to satisfy
human wants. It includes any process that transforms inputs into output since production
refers to creation of utility with exchange value.
The act of production possesses the following three characteristics:
a. Creation of utility In production activity inputs
b. Promotion of utility
c. Exchange value KEY get transformed into output re-
IDEA sulting in creation of utility
Production is the process of adding utility to a good. It is an activity that creates utility or
value. Utility is added as form utility, place utility and time utility.
1. Form Utility: It is the utility which results by changing the form, shape and size of a good.
When the wheat dough is changed to slices of bread, the form of the good is changed. It is
called form utility.
2. Place Utility: It is the utility created by transferring a good from one place to another
where its use is worthwhile. Sand transferred from river side to construction site increases
its utility. Such utility is place utility.
3. Time Utility: It is the utility created by using the scarce goods and services in proper time
when they are most required. Government maintains a buffer stock and it releases food
grains in the market during crisis to meet the demand.
IMPORTANCE OF PRODUCTION
The concept production is of great importance in modern economic analysis. Its importance
may be analyzed under the following headings:
1. Importance to a Producer: The theory of production is of great significance to a producer.
A successful businesses must be able to estimate the optimum output to produce for sale.
The knowledge of optimum factor combination helps a producer to minimize cost and
maximize profits.
2. Economic Well being: Production concerns with all economic activities that directly or
indirectly satisfy human needs. The degree to which the needs are satisfied is taken as a
measure of economic well-being.
3. Satisfaction of Individual Needs: An individual makes efforts to produce goods and
services to fulfill his needs. However, he cannot produce all the goods he needs by himself.
He has to sell the goods he produce and purchase the deficit goods from others. The act
of production helps a person generate income which is then used to purchase goods and
Vedanta High School Economics - Book 9 184
services.
4. Satisfaction of National Needs: Different types of goods and services have be produced by
a country to fulfill the needs of its citizen. Adequate production of goods and services can
make the nation self reliant and helps to promote general welfare.
5. Utilization of Natural Resources: The act of production requires combination of various
factors of production. Increased production activity in an economy makes better and fuller
utilization of natural resources and thus helps to accelerate economic growth.
6. Employment Promotion: The act of production requires employment of workers. It
increases employment opportunity which helps to solve the unemployment problem.
Increase in employment generates income which helps in improving the economic
condition of the people.
7. Improvement in the Standard of Living: The act of production helps to increase national
income. Increase in national income leads the country to prosperity. As a result, income
output and employment increase in the economy. With the increase in income of the
people, the standard of living improves as well.
8. Enhances Economic Growth: The economic progress of a country depends upon its volume
of production. An increase in production of goods and services is a sign of economic
growth. It increases exports and helps to earn valuable foreign exchange. This makes a
country self reliant and secure sustainable development.
8.1 TOTAL PRODUCT, AVERAGE PRODUCT AND MARGINAL PRODUCT
1. TOTAL PRODUCT (TP)
Total product (TP) is the total quantity of a good produced in a given period with a given
amount of factor inputs and technology. For example, if two units of labour combined with
two units of capital produce 50 units of a commodity, then total product is 50 units.
In the short run, factors like labour and raw materials are variable while land, building
and capital equipments are fixed. The total product function in the short run may be
expressed as:
TP = f(L, K.)
In the short run run, labour (L) is variable while capital (K) is fixed. As such, output in
the short run can be increased only by increasing the variable factor labour.
Total Product is also the summation of Marginal Products at different input levels. It may
be expressed as:
Total Product = ∑ Marginal Product POINTS TO NOTE
2. AVERAGE PRODUCT (AP) In the short run factors are
Average Product (AP) is the output produced per unit of classified as fixed factors and
a variable factor (labour) employed. It is the ratio of total variable factors
Fixed factors are those fac-
product to labour employed. It is expressed as: tors like machinery and capital
equipment which cannot be in-
AP= If TP from the employment of 4 unit of creased or decreased in the short
labour is 52 then AP= TP/L which is
Where, 52/4=13 run. While variable factors are
TP is the total product and L is the total amount of those factors like labour whose
labour employed. quantity can be increased or de-
creased in the short run
185 Vedanta High School Economics - Book 9
3. MARGINAL PRODUCT (MP)
Marginal product (MP) is the change in total product that results from a one-unit increase
in the quantity of labour employed. It tells us the contribution to total product of adding
one additional worker. In other words, marginal product is the change in TP due to the
change in the amount of a variable input by one unit. Marginal product is the
It may be expressed as: KEY change in total output associ-
IDEA ated with using one more unit
MP = TPn– TPn-1,
where n = number of units of labor employed. of input
If labour is the variable input, then MP may be expressed as the ratio of change in total
product to change in labour.
MP= ∆ Marginal Product initially in-
∆ creases at an increasing rate,
then decreasese and even-
Where, tually turns negative. MP is
∆TP = change in the total product zero when TP is maximum
∆L = change in the employment of Labour (L)
by one unit.
If TP from the employment of 4 unit of labour is 52 and from 3 units of labour is 39, then
MP= TPn– TPn-1 which is 52-39=13
The concept of Total Product, Average Product and Marginal Product is illustrated in the
table below.
Product Schedule
Labour Total Product Average Product Marginal Product
1 10 10 10
2 24 12 14
3 39 13 15
4 52 13 13
5 60 12 8
6 66 11 6
7 70 10 4
8 72 9 2
9 72 8 0
10 70 7 -2
In the table, capital K is assumed constant. As the employment of labour increases, TP
initially increases at an increasing rate upto 3 units of labour employment, and then
increases at a decreasing rate and eventually decreases.
Inputs: Resources used for production
Glossary Output: Product resulting from production activity
Utility: Want satisfying power of a commodity
Variable: That which can be increased or decreased
Economic growth: Quantitative increase in national output overtime
Vedanta High School Economics - Book 9 186
8.3 LAWS OF PRODUCTION
Production analysis in economics can be done as short run analysis or long run analysis.
As such, economic theory considers two types of input-output relationships:
1. When quantities of certain input are fixed and one is variable.
2. When all inputs are variable.
The former relates to the short run and the later relates to the long run. These two types of
relationships are explained in the form of laws of production.
A. Law of variable proportions The short run is a period
B. Law of returns to scale KEY of time when only some of a
IDEA firm’s inputs can be varied.
Before we proceed to the laws of production, a brief
explanation of the concept of short run and long run is done below:
Short Run Analysis: The short run is the time frame in which the quantities of some
resources are fixed. The fixed resources are the firm’s technology and capital, its equipment
and buildings. The management organization is also fixed in the short run. The fixed
resources that a firm uses are its fixed factors of production and the resources that it can
vary are its variable factors of production. The collection of fixed resources is the firm’s
plant. So in the short run, a firm’s plant is fixed.
Long Run Analysis: The long run is the time frame in which the quantities of all resources
can be varied. The long run is a period in which the firm can change its plant. To increase
output in the long run, a firm can increase the size of its plant. In the long run, there is no
classification of factors as fixed factors and variable factors all factors are variable.
A THE LAW OF VARIABLE PROPORTIONS
The Law of Variable Proportions relates to the short run law of production. The law
explains the production function with a single variable factor. It examines the nature of
change in output in the short run when an increasing quantity of variable factor is
combined with a given amount of fixed factor.
When the employment of one factor is increased or decreased while other factors of
production are held constant, the proportion between the factors varies. Therefore, the
tendency is called the law of variable proportions.
Statement of the Law
The law states that as more and more units of a variable factor are combined with a
given amount of fixed factor, total product first increases at an increasing rate then at
diminishing rate and eventually decreases. It implies that marginal product first rises and
then diminishes eventually.
According to Samuelson: “An increase in some inputs relative to other fixed inputs will,
in a given state of technology cause output to increase, but after a point, the extra output
resulting from the same addition of extra inputs will become less”.
Assumptions of the Law
The law of variable proportions is based on the following assumptions:
1. Constant Technology: The state of technology is assumed to be unchanged. If there is
an improvement in technology the production function will move upward.
2. Factor Proportions are Variable: The law assumes that factor proportions can be
187 Vedanta High School Economics - Book 9
varied, if factors are to be combined in a fixed proportion, the law has no validity.
3. Homogeneous Factor Units: All units of the variable factor are identical and
homogeneous.
4. Short-run: The law of variable proportions operates only in the short-run.
5. Existence of Fixed Factors: There must be at least one factor which is kept fixed.
6. Rational Producer: The producer is rational. He seeks to maximize returns.
Three Stages of the Law
There are three stages of the law of variable Increasing returns states
proportions which are given below: that successive increases in
KEY
Stage I: Stage of increasing returns; IDEA inputs eventually lead to more
additional output.
Stage II: Stage of decreasing returns; and
Stage III: Stage of negative returns.
Illustration of the Law
The law of variable proportion with its three stages is illustrated and explained with the
help of the following table and figure. POINTS TO NOTE
Labour TP AP MP Stage of returns Decreasing returns
1 10 10 10 Increasing returns states that successive
increases in inputs
2 24 12 14 eventually lead to less
3 39 13 15 additional output.
4 52 13 13 Negative returns states
5 60 12 8 Decreasing returns that successive increas-
6 66 11 6 es in inputs eventually
cause Marginal Prod-
7 70 10 4
uct to turn negative
8 72 9 2
9 72 8 0
10 70 7 -2 Negative returns
Suppose there is a given amount of land (fixed factor) which is combined with a variable
factor (labour).
The table shows that up to the employment of 3 units of labour, total product increases
at an increasing rate and beyond the 3rd unit of employment, total product increases at a
diminishing rate. It is because the marginal product of labour initially rises and beyond the
employment of 3 units of labour, it starts diminishing. Key Terms
At the employment of 4 units of labour, AP is maximum Homogenous: same in all aspects
and equals the MP. This marks the end of stage 1. Rational: sensible
The employment of labour between 5 units to 9 units Variable: which can be increased
cause MP to diminish and TP to increase at a decreasing or decreased
rate. This stage marks stage 2. The stage ends when MP
is zero and TP reaches the maximum. Beyond the employment of 9 units of labour, MP
turns negative and TP starts decreasing.
The three stages of the law of variable proportions are illustrated in the following figure
where labour is measured on the X-axis and output on Y-axis.
Vedanta High School Economics - Book 9 188
R POINTS TO NOTE
Y Features of Increasing returns
TP 1. TP increases initially at an increasing
Max TP rate
2. MP initially increases and reaches its
Inflection point H•
maximum point
S* • Stage 3. AP increases and reaches its maxi-
2
Stage TP mum point
3 4. MP equals AP at the maximum point
Stage •F
1 of AP
Features of Decreasing returns
o X 1. TP increases at a decreasing rate
Y Fig: 4.26 2. MP decreases and reaches zero
Diminishing returns 3. AP decreases continuously
MP 4. TP reaches its maximum point at
AP Increasing Negative
returns which MP is zero
return Features of Decreasing returns
Max AP Zero MP 1. TP decreases as MP turns negative
Max MP 2. MP turns negative
F* •S
o L L1 M AP X
L' MP
Fig: 5.27 Labour
Stage 1: Stage of Increasing Returns
In this stage, Total Product increases at an increasing rate initially up to a point. This
is because the efficiency of the fixed factor increases initially as additional units of the
variable factors are combined with it. In the figure, from the origin to point F, slope of the
Total Product curve (TP) is increasing, which means that the Marginal Product (MP) of
labour rises. Point F is the point of inflection where the total product stops increasing at
an increasing rate and starts increasing at a diminishing rate. Corresponding vertically to
the point of inflection Marginal Product of labour is maximum, thereafter it diminishes.
This stage is called the stage of increasing returns because the Average Product (AP) of the
variable factor increases throughout this stage. The stage ends at the point where the AP
curve reaches its highest point and intersects the MP curve.
Causes of Increasing Returns
1. Indivisibility of Fixed Factors: The fixed factors employed in the production process
are indivisible, i.e. they cannot be divided into smaller parts. As such, when more
units of variable factor are combined with fixed factor, output keeps increasing.
2. Fuller Utilization of Fixed Factors: In the initial stages of the production the fixed
factors are underutilized in relation to the variable factor employed. Fuller utilization
of fixed factors requires greater application of the variable factor labour which in turn
leads to increase in Total Product and Marginal Product.
3. Division of Labour and Specialization: Division of labour and specialization is
possible due to increase in scale of production. Division of labour & specialization
cause increase in skill, efficiency of labourers, saving of time and innovation.
4. Perfect Combination of Factors: With the increase in variable inputs in the production
process the firm achieves perfect combination of fixed and variable factors. This
189 Vedanta High School Economics - Book 9
increases productivity and production.
5. Increase in Efficiency: As more units of the variable factor are employed, the efficiency
of variable factors increrases because it creates more opportunity for the introduction
of division of labour and specialization. This results in higher output.
Stage 2: Stage of Diminishing Returns
In this stage, total product continues to increase at a diminishing rate until it reaches the
maximum point H where the second stage ends. In this stage both the Marginal Product
and Average Product of labour diminish but are positive. This is because the fixed factor
becomes inadequate relative to the quantity of the variable factor labour. At the end of
the second stage, i.e., at point M Marginal Product of labour is zero corresponding to the
maximum point H of the Total Product curve TP. This stage is important to a firm because
the firm will seek to produce in this range.
Causes of Decreasing Returns
1. Fixity and Inadequacy of Fixed Factors: Increase in employment of variable factor
after the optimum point of employment will cause Marginal Product and Average
Product to decline because the fixed factor then becomes inadequate in relation to the
quantity of variable factors.
2. Imperfect Substitutability: According to Mrs. Joan Robinson factors of production
are imperfect substitutes of each other. There is a limit to the extent to which one
factor can be substituted for the other. Beyond this limit, perfect ratio between various
factors gets disturbed and productivity tends to increase at a diminishing rate.
3. Wrong Proportion: The proportion of variable factors is greater than the quantity of
fixed factors. Hence, both AP & MP decline.
4. Problem in Management: Diminishing returns in production arise at a larger level of
employment due to problem in management and coordination.
5. Overworked Fixed Factor: Another reason for diminishing returns is that the fixed
indivisible factor is being worked too hard. It is being used in non-optimal proportion
with the variable factor.
Stage 3: Stage of Negative Returns
In stage 3,Total Product diminishes and the TP curve slopes downward. As a result,
Marginal Product of labour is negative and the MP curve falls below the X-axis. In this
stage the variable factor (labour) is too much in relation to the fixed factor. Generally, stage
3 is a theoretical possibility because no producer would like to operate at this stage.
Causes of Negative Returns
1. Over crowding in Production: The negative returns are the result of excessive quantity
of variable factors combined with a constant quantity of fixed factors. Hence, output
declines. The proverb “Too many cooks spoil the broth” aptly applies to this stage.
2. Decline in Productivity and Efficiency: Productivity and efficiency declines after a
point when more and more quantities of a variable factor is employed.
3. Mismanagement in Production: When the Scale line: a ray or line
employment of a variable factor becomes KEY which shows the proportions
excessive, management and supervision of IDEA of factors being combined
production becomes burdensome. As a result,
negative returns arise.
Vedanta High School Economics - Book 9 190
Stage of Operation
A rational producer will not select either the stage I (because there is opportunity for him to
increase output at increasing rate by employing more units of variable factor) or the stage
III (because the MP is negative). The stage I & III are described as Non economic Region.
Hence, the producer will select the stage II (which is described as the most economic
region) where he can maximize the output. The stage II represents the range of rational
production decision.
All the three stages together constitute the law of variable proportions. Since the second
stage is the most important, in practice we normally to refer to this law as the law of
diminishing returns.
IMPORTANCE OF THE LAW OF VARIABLE PROPORTIONS
The importance of the law of variable proportion may be explained in the following points:
1. It explains the input output relations. We can find out by how much the total product
will increase as a result of a continous increase in the units of the variable factor.
2. It tells us that the tendency of diminishing returns is found in all sectors of the economy
whether it is agriculture or industry.
3. The law tells us that any increase in the units of variable factor will lead to increase in
the total product at a diminishing rate.
4. The law points out that through improvement in science and technology, the producer
can postpone the occurrence of diminishing returns.
5. It explains the operation of the law of diminishing returns in LDCs in its intensive form.
In these countries, excess pressure of population on land causes even the marginal
productivity to turn negative.
6. The Malthusian theory of population stems from the fact that food supply does not
increase faster than the growth in population because of the operation of the law of
diminishing returns in agriculture.
7. Ricardo also based his theory of rent on this principle. According to him rent arises
because the operation of the law of diminishing return forces the application of
additional doses of labour and capital on a piece of land.
8. The law of diminishing marginal utility and the marginal physical productivity theory
of distribution are also based on this law.
APPLICATIONS OF THE LAW OF VARIABLE PROPORTIONS IN AGRICULTURE
The law of variable proportions applies in manufacturing as well as in agriculture. It
applies wherever production is done by varying factor proportions. However, it has special
relevance in agriculture due to the following reasons:
1. Agricultural operations are spread over a wide area. So effective supervision is not
possible.
2. Limited size of land can impose a constraint on production and cause diminishing returns.
3. Limited scope for the use of specialized techniques. Economies of Scale: Bene-
fits which a firm achieves due
4. It is affected by natural factors like climate, rainfall, to large scale operations
5. soil fertility etc.
KEY
Limited scope for the division of labour. IDEA
191 Vedanta High School Economics - Book 9
B LAW OF RETURNS TO SCALE- (Long run law of production)
The term ‘returns to scale’ refers to the degree by which output changes as a result of a
given change in the quantity of all inputs used in production. It refer to the long-run
analysis of production. In the long run, output can be increased by varying all factors.
Thus depending upon whether proportionate change in output is greater than, equal to or
less than the proportionate change in inputs we have increasing, constant or decreasing
returns to scale.
According to A. Koutsoyiannis: “ The term returns to scale refers to the changes in output
as all factors change by the same proportion”
The law of returns to scale analyzes the change in output when all the factors are varied
in the same proportion. It refers to the effect of scale relationship.
Three Components of the Law of Returns to Scale
There are three components of the law of returns to scale. They are:
a Increasing returns to scale The law of returns to scale is
b Constant returns to scale
c Decreasing returns to scale KEY a long run law of production
IDEA where all factors are variable
Returns to scale can be expressed as a movement along the scale line or expansion path
which we have seen in the previous section. The three types of returns to scale are
explained with the help of isoquants and scale line.
1. Increasing Returns to Scale
Increasing returns to scale (also called economies of scale ) arise when an increase in all
inputs leads to a more-than-proportional increase in the level of output. Increasing returns
to scale is said to operate when output increases more than proportionately to the increase
in factor inputs. This implies that simultaneous increase in all the inputs in the same
proportion results in a great proportion increase in output.
Y 60 • Increasing returns to scale im-
plies that doubling inputs cause
40 E output to increase by more than
double
20
• The distance between successive
Capital C Keynote isoquants decreases along the
B scale line
IQ3
A IQ2 • Isoquant means equal quantity
curve
IQ1
O Fig: 5.28 Labour X
In the figure, the distance between successive isoquants Key Term
decrease along the scale line OE. i,e OA>AB>BC. It Isoquant: a curve which shows
means that equal increases in output are obtained by different combinations of inputs
smaller and smaller increments in inputs. In other words, capable of producing the same
by doubling inputs the output is more than doubled. level of output
Vedanta High School Economics - Book 9 192
Causes of Increasing Returns to Scale
1. Indivisibility of Certain Factors: Certain inputs like machinery and managerial skill are
available in a certain size and cannot be halved. Due to indivisibility of such factors, they
have to be employed even if the scale is much less than their optimum capacity. In such a
situation, increase in scale of production makes fuller utilization of the indivisible factors
and yield increasing returns.
2. Managerial Economies: With the increase in scale of production, managerial functions
are divided as production manager, sales manager, marketting manager etc. and each
functions are alloted to a specialized manager. This increases managerial efficiency and
yield increasing returns.
3. Economies of Large Scale Production: Large scale production leads to full and complete
utilization of indivisible factor inputs. As the size of the plant increases, more output can
be obtained.
4. Division of Labour and Specialization: As output increases, it is possible to introduce
division of labor and specialization. Effective supervision and scientific management of
the firm etc would bring in increasing returns.
5. Economies of Scale: As output increases, it becomes possible to enjoy several other kinds
of economies of scale like overhead, financial, marketing and risk bearing economies etc.
It is also responsible for increasing returns to scale.
2. Constant Returns to Scale
Constant returns to scale denote a case where a change in all inputs leads to a proportional
change in output. For example, if labour, land, capital, and other inputs are doubled,
then under constant returns to scale output would also double. Constant returns to scale
operate when all factor inputs are increased in a given proportion and output also increases
in the same proportion. Economists also describe constant returns to scale as the linear
homogeneous production function.
60 • Constant returns to scale implies
that doubling inputs cause out-
Y put to increase exactly by double
40 E • The distance between succes-
sive isoquants remains constant
20 C along the scale line
Capital B IQ3 • Scale line shows the expansion
A IQ2 path of output. It shows scale re-
Keynote lationship
IQ1 When both economies of
KEY scale and diseconomies of
O X IDEA scale balances, constant re-
Fig: 5.29 Labour
The scale line OE indicates the increase in scale. turns to scale occurs
It can be observed from the figure that the distance
between successive isoquants is equal, i.e. OA = AB = BC. It means that if both labour and
capital are increased in a given proportion the output expands in the same proportion.
193 Vedanta High School Economics - Book 9
Causes of Constant Returns to Scale
1. Optimum Combination of Factor Inputs: When the factor inputs are combined optimally,
constant returns to scale occur over a certain range of employment of factor inputs.
2. Indivisibility of Fixed Factor: If the lumpy indivisible capital input is perfectly divisible,
constant returns to scale accrue to a firm.
3. Balanced Economies and Diseconomies of Scale: If the economies of scale get exactly
neutralized by diseconomies of scale, then constant returns to scale accrue to a firm.
3. Decreasing Returns to Scale
Decreasing returns to scale occur when a balanced increase of all inputs leads to a less-
than proportional increase in total output. Decreasing returns to scale is said to operate
when output increases less than proportionately to the increase in factor inputs. It is said
to occur when a simultaneous increase in all inputs in the same given proportion result
in a smaller proportion increase in the output. This implies that doubling up factor inputs
less than double up the output. • Decreasing returns to scale im-
Y 60 plies that doubling inputs cause
output to increase by less than
40 E double
• The distance between successive
C isoquants increases along the
20 scale line
Keynote B IQ3Capital • Decreasing returns to scale is
caused by diseconomies of large
scale production
A IQ2 X When diseconomies of scale
O Fig: 5.30 IQ1 KEY outweigh economies of scale, de-
IDEA creasing returns to scale occurs
Labour
It can be seen from the figure that the distance between successive isoquants increases,
i,e OA < AB < BC. It signifies that equal increments in output are obtained by larger
and larger increases in inputs. In other words, if the inputs are doubled, output will
increase by less than twice its original level. The decreasing returns to scale is caused by
diseconomies of large scale production.
Causes of Decreasing Returns to Scale
1. Managerial Diseconomies: As the scale of production increases to a large extent, co
ordination and control become increasingly difficult. Managerial efficiency declines and
cause decrease in productivity.
2. Delay in Decision Making: A large firm has a heirarchal chain of control. This cause
unnecessary delay in decision making and cause decreasing returns.
3. Labour Diseconomies: With large employment of labourers, production activities are
affected due to trade union activities.
4. Exhaustible Natural Resources: There is a constraint on production due to limitation of
natural resources. For example, doubling up the gold mining plant may not double up the
output of gold.
5. Decline in Productivity and Efficiency: Productivity and efficiency declines unavoidably
after a point when more and more factors are employed.
Vedanta High School Economics - Book 9 194
READINGS BETWEEN THE LINES
LAW OF VARIABLE PROPORTIONS AND AGRICULTURE
In agriculture, this law applies soon because the land is a constant
factor and it can not be increased as the variable factors like labour
and capital. The fixed factor may be land in agriculture or machinery
in industry. Whenever the successive doses of labour are combined
with the fixed factor,after some time, the variable factor becomes
more than sufficient as compared to the fixed factor. The proportion
between the fixed factor and variable factor is not correct and marginal returns begins to fall.
The modern economists call it the law of variable proportions.
Summary of The Three Stages of The Law of Variable Proportions
Stages Total Product Marginal Average Product
(TP) Product (MP) (AP)
Stage I Increases at an Increases and Increases and
increasing rate, reaches at reaches its
then increases at maximum point maximum point.
diminishing rate and begins to
decrease.
Stage II Increases at Decreases and Begins to
diminishing rate becomes zero decrease
and reaches its After reaching its
maximum point maximum point
Stage III Begins to fall B e c o m e s Continues to
Negative diminish
CONCEPTS FOR REVIEW
Production Inputs Total Product
Average Product Marginal Product Specialization
Productivity Efficiency Indivisibility
Fixed Factor Variable Factor Returns to Scale
GLANCING THE UNIT
Meaning of Production: It is defined as any in economics can be done as short run analysis or
economic activity that leads to the creation of goods long run analysis. As such, the economics theory
and services having utility. It includes any process considers two types of input-output relationships.
that transforms inputs into output. The former relates to the short run and the
later relates to the long run. These two types of
Total Product (TP): It is the total output which is relationships have been explained in the form of
produced with a given amount of factor inputs and laws.
technology over a given time period. i) Law of variable proportions
ii) Law of returns to scale
Average Product (AP): Average Product (AP) is the
output produced per unit of a variable input employed.
Marginal Product (MP): It is the additional output Law of Variable Proportions : The Law of Variable
produced by employing one additional unit of a Proportions examines the nature of change in
variable input, holding the amounts of all other inputs output in the short run when an increasing quantity
constant of variable factor is combined with a given amount
Laws of Production: The analysis of production, of fixed factor. This law explains the production
195 Vedanta High School Economics - Book 9
function with single variable factor techniques.
Three stages of the law: There are three stages of c It is affected by natural factors like climate,
the law of variable proportions. The three stages rainfall, soil fertility etc.
are:
d Limited scope for the division of labour.
Stage: I – Law of increasing returns; Law of Returns to Scale: Laws of returns to
Stage: II – Law of decreasing returns; and scale refer to the long-run analysis of the laws of
Stage: III – Law of negative returns. production. In the long run, output can be increased
Special Application of the Law in by varying all factors. The term ‘returns to scale’
Agriculture:×Agricultural operations are spread refers to the degree by which output changes as a
over a wide area. So effective supervision is not result of a given change in the quantity of all inputs
possible. used in production.
a Limited size of land can impose a constraint There are three components of the law of returns to
on production and cause diminishing returns. scale. They are:
b Limited scope for the use of specialized a Increasing returns to scale
b Constant returns to scale
c Decreasing returns to scale
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Define production
2. What do you mean by factors of production?
3. Define total product.
4. Define average product
5. Define marginal product.
6. What is the change in total product called?
7. What is meant by law of variable proportions?
8. What is meant by returns to scale
9. Mention two causes of increasing returns.
Short Answer Type Questions
1. Explain the importance of production..
2. Explain the causes of increasing returns.
3. Explain the causes of decreasing returns.
4. Explain the causes of negative returns.
5. Explain the importance of the law of variable proportions
6. Explain the causes of increasing returns to scale.
7. Explain the causes of constant returns to scale.
8. Explain the causes of decreasing returns to scale.
Long Answer Type Questions
1. State and explain the law of variable proportions. How far is it applicable in agriculture?
2. Explain and illustrate the law of variable proportions. Which stage will a producer choose to operate?
3. Explain and illustrate the law of returns to scale.
Vedanta High School Economics - Book 9 196
9UNIT HOUSEHOLD ECONOMICS
Learning Objectives Weight:13 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the concept of Household
Economics
• Understand household management
• Explain the qualities of a household manager
• Understand the duties and respomsibilities you begin
Beforeof a household manager
• Explain the management of household Gary Becker’s influence on the econom-
ics of the family has been pervasive. His
• resources ideas have dominated research in the
• Learn the preparation of household budget economics of the family.The foundational
Explain the activities conducted at home assumptions of Becker’s economic approach
• Explain the various household technologies to the family are now widely accepted by
• Explain family wellbeing, sttandard of living economists.
and life satisfaction
Very Short Type Short Type Long Answer Type Total Marks
1 1 0 6
197 Vedanta High School Economics - Book 9
9.0 CONCEPT OF HOUSEHOLD ECONOMICS
Ahousehold consists of one or more people under the same housing arrangement
and who combine to provide themselves with food and possibly other essentials of
living. The term 'Household Economics' refers to the economic analysis of decisions made
by households and the family units within them. It is also called "Home Economics".
Household economics includes the study of household financial arrangements. Household
economics analyzes all decisions made by households at both the microeconomic and
macroeconomic level.
Household economics deals with the economics and management of the home and
community. It covers a wide range of topics consumer education, sewing, cooking,
nutrition, food preservation and hygiene. This teaches how to properly run a family
environment and make the world a better place for generations to come.
Household economics covers the economic analysis of all decisions made by households.
It also deals with the relationship between individuals, families, communities, and the
environment in which they live. Household economics helps to develop an understanding
of the factors that influence the well-being of individuals and families within the home
and community and of the actions people take to enhance and sustain those environments.
It applies economic concepts such as production, division of labor, distribution, and
decision making to the study of the family.
9.1 HOUSEHOLD MANAGEMENT
Household management refers to the various tasks and chores associated with the
organization, financial management , and day-to-day operations of a home. It is a vital
factor in every family contributing to the overall health, happiness and well being of the
family.
According to Nickel and Dorsey, “Home management is planning, controlling and
evaluating the use of resources of the family for the purpose of attaining family goals.”
Household management deals with the practical application of the principles of
management to the home. It is the administrative aspect of family living which covers the
forming of plan of action, the sharing of responsibilities the organized and controlled use
of available resources. It involves proper planning, organizing, controlling and assessing
the family resources for their best use and thereby fulfilling the expectations of the family.
The study of household management is intimately linked with values, standards and goals
which give meaning to the lives, thoughts, feelings and experiences of the members of the
family. These values, standards and goals which are closely related to each other, motivate
the family to make decisions, to achieve their desired goals.
QUALITIES OF A HOUSEHOLD MANAGER
In order to manage the home efficiently, a good household manager should have the
following qualities:
1. Responsible and Organized: A household manager should be responsible and organized.
He handles a lot of responsibilities. like welcoming guests, keeping inventory, managing
household budgets managing staff membersetc. He must always keep paperwork in order
and complete tasks when they’re supposed to.
2. Leadership Skills: A good house manager must have strong leadership skill. It will help
Vedanta High School Economics - Book 9 198
him to maximize efficiency in the household and to achieve both short and long-term
goals. As a leader, he must also maintain a positive and encouraging working environment
among staff members to inspire hard work and diligence.
3. Communication Skills: Communication skill is an important facet of a strong leader. It can
help to clearly communicate organizational goals and specific tasks so that staff members
can work efficiently and effectively. At the same time, a house manager has to listen to
ideas and be open to feedback and suggestions.
4. Intelligence: It is a necessary characteristic of the successful household manager. It is
required in proper selection and purchase of materials for the house, money management,
care and up-bringing of children, solving the problems related to health and hygiene.
5. Enthusiasm: Enthusiasm is one of the mental qualities of a household manager. This quality
is a result of good mental and physical health. It helps a person to become interested in an
activity and stimulates to higher levels of proficiency.
6. Sympathetic and Humane: The household manager should have the power of
understanding. He should be sympathetic towards all the members of the family as well
as servants and others who come in contact with him/her.
6. Imagination: Imagination is the ability to recall and rearrange facts and ideas in new
situations. Imagination is an essential quality of a household manager. It promotes one to
visualize situations make plans, can see the result a certain plan of action before they are
actually carried out.
7. Judgement: The household manager must have the power of judgement. It is the quality
that helps one to be fair in various situations in relation to the problems involved. Before
taking an appropriate decision the household manager can visualize, evaluate and analyze
the problems and its solutions by the power of judgement.
8. Perseverance: This is an important and valuable quality of the household manager. The
persevering person does not sit idle or give up effort until the results are achieved. A
person who possesses this quality will be able to recognize problems and find ways to
overcome them courageously in all situations.
9. Self-Management: It refers to the management or control on one’s own feelings. This
quality is required for the household manager as well as all the family members. Self-
control will help to face difficult situations in life.
10. Resourcefulness: The household manager must have the capacity to handle and use
resources in their best possible ways. A resourceful manager is able to overcome problems
in various spheres and is competent enough to find alternate and imaginative solutions to
any problem.
Inventory: A collection of unsold products waiting to be sold
Glossary
Budget: Estimate of income and expenditure for the coming period
Facet: A particular aspect or feature of something
Perseverance: Continued effort to do or achieve something despite difficulties
DUTIES AND RESPONSIBILITIES OF A HOUSEHOLD MANAGER
A household manager looks after the general operation of the home. He has the
responsibilities of planning, organizing and coordinating events, managing household
schedules, paying household bills and completing any other administrative tasks.The
following are the typical duties and responsbilities of a household manager:
1. Ensure Peace and Security of the Family: The household manager should ensure a proper
security system in place. Besides, the security system should be made in such a way that
every member could be able to find all medicines and safety equipments in due time and
in proper place.
199 Vedanta High School Economics - Book 9
2. Balance between Income and Expenditure: The household manager should also beKeynote
concerned about the family income and budget. He should make purchases in accordance
with the limited resources for fulfilling the basic requirements of food, clothing etc. of the
family members.
3. Proper distribution of Work: A household manager has to distribute all the tasks of the
family among the family members properly. A good household manager should choose the
right person to do the right job according to their ability and eagerness.
4. Equal Sharing among the Family Members: A household mnager has to take the right
decision in resource utilization to meet the basic demands of the family. He should take
concrete decision to make a balance between the demands and resources of the family.
Moreover, he has to make a proper planning for using the limited resources for the
betterment of the family.
5. Care of the Family Members: A household manager has to look after the family members.
He has to shoulder various responsibilities to run the family in proper order. He is also
responsible to ensure good health and mental peace of the family members.
6. Overseeing of Household Staffs: A household manager has to manage and look after
household staffs. Overseeing household staff includes hiring, firing, payroll management
and performance reviews of the household staffs.
7. Decision-making to fulfil Family Needs: A household manager is responsible for executing,
controlling, implementing and evaluating all the household activities. A proper planning
has to be done and then it is implemented. The impact should be judged after that and
then decision is needed to be undertaken. The decision making is an important area and
need to be well clarified to the family members and then the final decision can be made.
8. Social Responsibilities: The social responsibilities and duties of a household manager
involve associating himself and the other members of the family with several social
organizations and thereby making the family an integral part of social development.
Socialization helps a person to nurture his/her customs, idealism and social values.
• Management deals with achieving desired goals through planned activity
• Household economics covers the economic analysis of all decisions made
by households.
• Household management deals with the practical application of the prin-
ciples of management to the home
9.2 HOUSEHOLD RESOURCES
Household resources are the assets that people have at their disposal. In short, both the
tangible resources, such as money, materials, equipments etc. and the intangible resources
like time, knowledge, ability and aptitude, etc. which are possessed by the family and
used for achieving the household goals are termed as household resources.
Household resources are very much needed for proper home management. The goals of
a family can not be attained without adequate family resources. In home management,
the proper utilization of family resources is highly needed. Without household resources,
the goals of family cannot be achieved. But these household resources are needed to be
used in an appropriate way having proper planning and controlling and assessing the
requirements of the family.
The household resources are
The resources with a household are scarce. They the assets that people have at
are needed to be utilized and managed properly to their disposal
achieve family goals. As such, the knowledge and KEY
IDEA
ability of using the scarce family resources according
to the requirement, objectives and goals of the family is called Resource Management.
Vedanta High School Economics - Book 9 200
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