Shashi Kanta Agrawal is a seasoned businessman. He began his family business in textiles, later expanding into manufacturing and the hospitality/service sector. He owns Reliance Spinning Mills and Everest Sugar Mills. Additionally, he serves as the Chairman of Marriott Hotels, Kathmandu. The HRM Nepal recently interviewed Agrawal to gain insights into his business strategies. Excerpts:
Q. The Nepali economy is grappling with a weak manufacturing base. What are your observations regarding premature deindustrialisation in Nepal?
A. Our family entered the manufacturing sector from trading. My grandfather used to import textiles from India and my father continued this business. He expanded the trading business by starting to import textiles and garments from countries other than India. I began helping my grandfather with the business at the age of 15. Later, we established Pashupati Textile, a well-known factory at the time that produced textiles and hosiery fabrics. Simultaneously, we operated plastic and pipe factories. I was passionate about business, and I thank God that my career went well.
Nepal has witnessed industrialisation; however, many industries couldn’t sustain due to a lack of a favourable environment. For example, if you plant a tree, it will survive if its roots go deep into the soil. Furthermore, if you nurture it by providing irrigation and fertiliser, it will bear good fruit. The growth of the manufacturing sector is weak, and total factor productivity is dismal. There are multiple reasons behind the weak growth of the manufacturing sector, with policy instability being a major one. Many countries around the world have policy stability despite political instability. For instance, I have heard that the United States of America (USA) has one of the largest oil fields in Alaska; however, they have not quarried it. Regardless of whether the President is from the Republican or Democrat party, their policy remains constant. It is said that this oil will only be extracted once the petroleum reserves in other parts of the world are depleted. Therefore, while political instability is beyond control, political leadership should ensure policy stability because the country cannot bear policy instability. Investors seek at least 20-plus years of policy stability or predictability of incentives or provisions related to investments.
Q. Along with policy instability, there are multiple factors affecting industrial production, such as labour relations, logistics costs for importing and supplying raw materials, electricity costs, tax policies and interest rates on credits, among others. What is your take on it?
A. Definitely, there are multiple reasons. I don’t see many issues with labour relations and labour productivity. External forces could entice labourers, though they are satisfied with the facilities provided by the industrial establishments. Such unrest has happened in the past but in recent years labour relations have improved significantly. Industrial establishments are disheartened by the Labour Court because almost 99% of the cases of dispute between labour and industrialists/businesspeople are settled against industrialists/businesspeople.
Regarding tax policies, I have talked about policy inconsistency. If the government is willing to promote the manufacturing sector, there must be congenial tax policies in place. Furthermore, court decisions should be impartial. Additionally, electricity tariffs, interest rates on credit, raw material import costs and logistics costs are very high. As we are a landlocked nation, the cost and predictability of importing are prime concerns for our industries. We import raw materials for yarn from China, India, Thailand and Indonesia. We then face equal difficulties and costs for exporting finished goods. Without exporting goods, our industry can’t sustain itself on domestic consumption alone. Logistics costs can be cross-subsidised from electricity. Based on a study by an independent party (impartial party) of the internal rate of return and export-based industries, the government should provide subsidies for electricity.
Growth in the manufacturing sector and exports will be instrumental in creating jobs, adding more value to the economy, and forming capital. Therefore, policymakers should consider creating more value in the economy by utilising/consuming electricity. Besides, reliable electricity supply is still a far-fetched dream. We are still facing 3-4 hours of unannounced load shedding each day in our factory in Biratnagar, and the quality of electricity is erratic, causing machines to crash due to voltage fluctuations. I don’t know whether there is an issue with the supply system or management issues.
Q. Reliance Spinning Mills has set a benchmark for operating industries in Nepal. How did you envision running such a perfect industry?
A. We’ve thought about running the factory scientifically, abiding by all standards set by the government. There are trade unions in our factory too. Previously, there were 10-12 trade unions; I think there are still 3-4. We operate the industry in a very democratic and transparent manner. We have an internal labour relations committee and hold regular meetings. We seek feedback from the labourers on the three best and worst aspects of working in the factory. This happens every month, and we publish the best feedback on the notice board and reward the person. Evaluations are conducted with representation from the labour union.
In terms of labour participation, around 50% are female, and more than 3,500 people are working in our factory. This factory has grown organically; this year we turned 31. The starting production of our factory was 22,000 spindles, which has expanded to 100,000 spindles. The scale we’ve achieved in three decades is far lower than it could have been. If this spinning mill were operated in other countries with a relatively better investment climate, the production would be no less than 500,000 spindles. We expand the factory every three years by bringing in the latest technology and machines and upgrading the existing ones. Inducting the latest technology has several benefits – electricity consumption will be less, human effort will be reduced, and there will be less wastage. Though human efforts will be lessened, we adjust them with new units, and some of them retire, but we don’t terminate staff working with us.
Q. Are you planning to diversify your export market?
A. Our major export destination is India, followed by Turkey. Previously, we tried to export to Bangladesh, but it was not convenient for us. However, we are in talks with different parties there and will definitely diversify to other destinations if they are favourable to us. Regarding market diversification and export facilitation, the government’s support is confined to announcements only. There is a Trade and Export Promotion Centre under the Ministry of Industry, Commerce and Supplies, however, there has been no contribution to promoting exports or facilitating the diversification of export destinations.
Other facilities the government should provide include an uninterrupted, reliable power supply, tax concessions and facilitation for the import of raw materials and export. Another fundamental aspect is the suspension of labour’s right to strike if industries and businesses have been providing facilities as defined by the laws. The entire manufacturing sector requires special treatment and export-based industries require even more special treatment due to their international commitments to supply products. The government hasn’t provided export incentives for the last two consecutive fiscal years. The government should top up the incentive in export earnings once it is collected in the bank account.
The problem rooted in the government for a long time is that it prepares guidelines only after the programme is announced. It would be better if the government announced the programme after preparing all the groundwork, such as guidelines. Such guidelines should be prepared based on stakeholder consultations. Another critical aspect I would like to underline is the discretionary rights of the authority. For instance, there is a provision for a 4%-8% export incentive, but it is not transparent which sector or which criteria of exporting firms avail 4%, 6% or 8%. Lack of transparency gives room for the authority and business people to play.
Q. You are also running a sugar factory. Do you think sugar production has lost its competitive edge?
A. The issue with the sugar factory is backward linkages. When cane growers are demotivated, it is difficult to bring them back to farming. Furthermore, the fragmentation of land does not encourage the private sector to enter into commercial farming with mechanisation. Due to the lack of mechanisation and the hardships of farming with human labour, profits are not lucrative. To make it lucrative, improved seeds, research, extension services and mechanisation should be provided.
There are Sugar Industry & Cane Development Departments in Uttar Pradesh and Bihar. We have a similar climate to them. If we hire experts from there and provide technical services to the sugarcane development board and extension services to farmers, we can improve yield. In this context, if the cost increases by Rs 100, the yield will improve by Rs 1,000, or ten times the cost.
Sugarcane farming has multiple benefits. Intercrops like beans, potatoes and other crops can be grown simultaneously. It has a strong forward linkage as we have sugar factories to consume sufficient sugarcane. From our Everest Sugar Mills, we produce around 9 megawatts of electricity from the factory. We operate the factory in the winter season and provide additional electricity to the national grid, roughly around 3 megawatts of electricity produced from the bagasse of sugarcane. If sugarcane is sufficiently supplied, we can operate for 150 days a year, up from around 90 days at present.
In addition, molasses is another byproduct, which is used in feed industries and breweries (to produce beer). Moreover, bagasse is also used by paper factories, industrial boilers and for manufacturing briquettes. Cane industries have no wastage, with various byproducts. This is why the government should give due priority to addressing the challenges faced by cane growers. Given the circumstances, we are competitive as the government has provided customs protection to sugar manufacturers. The consumption of sugar in the industrial sector is increasing, though consumption at the household level has plummeted. Around 70% of the sugar is consumed by the industrial sector.
Q. Recently, you mentioned the protection of duties for sugar manufacturers. However, the government has banned the import of dairy products and raised import duties, similar to the measures taken for sugar. As an industrialist and the operator of five-star hotels in Nepal, which mostly consume imported goods, what do you see as the midway solution for the protection of domestic industries?
A. The best approach is to provide duty protection to domestic industries. Additionally, other production incentives should be given to upgrade product quality, lower production costs and enhance competitiveness. There is no doubt that national and agro-based industries should be protected, but restricting imports of commodities goes against the principles of a liberal economy and multilateral trading arrangements. We must serve the quality products that tourists seek and are willing to pay for. Restricting imports is not a solution. The government’s restriction on dairy products has led to smuggling, forcing buyers to pay higher prices and resulting in lost revenue for the government.
Q. You have entered the hospitality business in a significant way. What are the prospects for the hotel industry in Nepal, given the influx of investment in this sector?
A. Prior to the COVID-19 pandemic, the hotel business was booming due to an encouraging inflow of tourists. Nepal was set to celebrate Tourism Year in 2020, but this was adversely affected by the pandemic, leading to a crisis that lasted until 2022. In recent years, there has been an encouraging flow of tourists to other destinations, but this has not been the case for Nepal. Our data maintenance system is faulty, as Non-Resident Nepalis (NRNs) holding passports from different countries are considered foreign tourists.
A crucial point to mention is the high cost of airfare to the Kathmandu sector. Due to high fares, tourists are discouraged from coming to Nepal. Airfare from India to Bangkok is much cheaper than from Kathmandu to Delhi and vice versa. Our national flag carrier is weak and cannot intervene in the monopoly of international airlines operating flights to and from Kathmandu. It has already been proven that the government cannot operate the airlines. The government does not need to conduct another experiment. Nepal Airlines should immediately bring in a strategic partner. Even the government of India has privatised its national flag carrier, Air India. Operating airlines is beyond the capacity of the government. If Nepal Airlines brought in a strategic partner with a majority share, the livery of the national flag carrier would not change. At the very least, Nepal Airlines should have 25-30 aircraft to fly to different international destinations.
Another important aspect is aviation safety and road safety, which are crucial for improving the inflow of tourists. Frequent air crashes and road accidents have exposed Nepal to negative publicity worldwide.
Q. The government has been promoting the narrative that the tourism sector has revived and returned to pre-COVID-19 levels. Is this true from the perspective of a businessperson operating in the hospitality industry?
A. If we look at the Aerocity area of New Delhi, outside Indira Gandhi International Airport, the average occupancy of hotels is over 90%, despite the high rates. In contrast, the average occupancy of four-star and five-star hotels in our region was 25% in the last week of August, at the beginning of the peak tourist season. To bounce back, we need an annual average occupancy of 75%. We are expecting improvement from September this year, but the infrastructure must be fit and proper. Aviation and road safety must be ensured to assure tourists and convince them to visit Nepal.
Q. Do you plan to expand your hotel business?
A. We are planning to construct another hotel in Kamaladi, Kathmandu, with over 100 rooms under the Moxy brand. The total cost of the hotel is expected to be around Rs 150 crores to Rs 160 crores. By bringing in international chain hotels, we promote the country as a destination. People perceive that if there are standard global chain hotels, then the destination is definitely good. Thus, international chain hotels are supplementing the country promotion initiatives of the Nepal Tourism Board.
Q. Do you have plans to expand your hotel network outside Kathmandu valley?
A. We have already invested in three hotels with a total of 430 rooms, which is a significant number. Currently, we do not have plans to develop additional hotels, as it would be risky for us as investors to concentrate our investments in the hotel sector. We will observe how the government addresses the aforementioned challenges. If the situation becomes favourable and there are prospects for improved tourist inflow, we are considering developing at least one hotel in Pokhara, the tourism capital of Nepal and a place of unparalleled majestic beauty.
Nepal has amazing natural endowments with vast tourism potential but the will of policymakers is crucial for developing this sector. If all stakeholders work honestly with a sincere objective to develop a prosperous Nepal, we will certainly achieve this goal. Otherwise, announcements made for the sake of making announcements do not deliver any results.
