Agricultural Transformation in Nepal:

Constraints, Migration, ADS and HIMALI

Chandan Sapkota and Arun Rana
Asian Development Bank
Nepal Resident Mission

Presented at South Asia Seminar Series, 26 June 2014
2014-06-26 1
The views expressed in this document are those of the authors and do not necessarily reflect
the views and policies of the Asian Development Bank, or its Board of Governors, or the
governments they represent.
Agriculture Sector at a Glance
Constraints to Agricultural Transformation
Impact of Migration and Remittances
Agriculture Development Strategy
Implementation Experience: HIMALI Project
2014-06-26 2
Presentation Outline
2014-06-26 3
1. Agriculture Sector at a Glance
2014-06-26 4
Declining share of GDP, but still a significant contributor to
GDP growth
65.2
71.6
33.1
0
10
20
30
40
50
60
70
80
Share of GDP
Agriculture Non-agriculture
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Contributions to GDP growth
Agriculture Non-agriculture
GDP growth (basic prices)
Agriculture share of GDP has
dropped to 33.1% from a high of
71.6% in FY1975
Agriculture sector is still an
important contributor to GDP growth.
Around 2/5
th
of GDP growth
Highly dependent on monsoon rains
for growth.
2014-06-26 5
Agricultural sector is the largest employer for 15+ years old


28.2
73
66.5
0
10
20
30
40
50
60
70
80
90
Male Female Total Male Female Total Male Female Total
Urban Rural Nepal
15+ years employed in agricutlure sector (% of total
employed)
Largest employer (among 15+ years old
employed population): 66.5%
More employed in agriculture sector in rural areas
Among all labor age groups, agriculture is the
most popular sector for employment
52.3% of workers in the 22-44 age group employed in
agriculture
Except for those in the highest consumption
quintile, all others are mostly employed in
agriculture sector.
66.7% of workers in the middle consumption quintile
are employed in agriculture
60.1
52.3
70.8
0
10
20
30
40
50
60
70
80
15-24 25-44 45+
Agricultural employment (% of labor age group)
64.6 64.9
68.7
63.7
38.3
0
10
20
30
40
50
60
70
80
Lowest
(First)
Second Middle Fourth Highest
(Fifth)
Agricultural employment (% of consumption
quintiles)
2014-06-26 6
Majority of households depend on agriculture for livelihood
Agricultural HHs: 76.3% of total
HHs

Average size of agricultural HH:
5.1 (>4.9 overall avg)

High share of agriculture
employment

Self-employment in agriculture
sector is pretty high: 61.3% of
total employment

Avg size of holding: 0.68
hectares
77.8% of holdings were less than
2 hectares in 2011/12
52.3% of holdings were less than
2 hectares in 1991/92



0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995/96 2003/04 2010/11
Share of employment
Extended econoimc
work
Self non-agriculture
Wage non-agriculture
Self agriculture
Wage agriculture
0.96
0.80
0.68
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1991/92 2001/02 2011/12
Average area of holding (hectare)
2014-06-26 7
Share of farm income in household total income is declining
Declining size of holdings +
declining share of farm income in
household income + declining
share of wage employment+ still
high share of employed in
agriculture = ?
Commercialization take-off?
Nascent/evolving stage of
transformation?
Low growth trap?
Low value added products
High land fragmentation+ high
wage growth + low productivity
growth = low competitiveness
Inadequate/unreliable supply of
inputs
Migration and remittances
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Cereals yield (Hg/Ha)
Bangladesh India Nepal
Pakistan Sri Lanka
2014-06-26 8
2. Constraints to Agricultural Transformation
2014-06-26 9
Why is agriculture sector not taking-off in Nepal?
General features:
Still stuck in subsistence agriculture
Negligible agro-business activities
Weak value chain development
(weak intra-sectoral linkages)
Lack of product specific, coherent
promotion strategies
Terai region the breadbasket of
Nepal
Irrigation facilities
Trade and transit corridors
Large agricultural land
Mid- and Far-West
Least connected region
Low agriculture potential (except may
be of region specific niche products)
Persistent food insecurity
Very weak inter-sectoral linkages
(agriculture industry)
-Agri sector has to be linked to non-agri
sector for meaningful transformation.



What is holding back
agricultural growth?

Market failures?
Self-discovery/information
externalities
Coordination externalities
Government failures?
Land reforms
Taxes/subsidies
Governance/monitoring
Access to finance?
Availability of inputs?
Inadequate and unreliable
infrastructure?
Irrigation
Transport
Energy



Study focused on three specific impediments:

1. Land reforms and regulations
2. Availability of inputs
3. Access to markets

2014-06-26 10
Three constraints to agricultural transformation
2014-06-26 11
Land reforms and regulations [1]



0
10
20
30
40
50
60
Less than 0.5 ha 0.5 2 ha 2 ha and above
Agricultural holdings by size (percentage of
total)
1995/96 2003/04 2010/11
Smaller agricultural holdings are
increasing, while bigger holdings
are declining.
Economies of scale?
Productivity? (1/3
rd
of non-
agri sector)
Type of farming
family
Land
holding
Share of total
Landless 0-0.1 ha 10.1
Marginal cultivators 0.1-0.3 ha 23.6
Small farmers 0.3-0.5 ha 22.9
Medium farmers 0.5-3.0ha 39.9
Big farmers 3.0-10.0ha 3.3
Very Big farmers >10 ha 0.1
Lack of scientific land
reform
Important for proper
utilization and distribution of
land
Also seen as vital for
sustainable reduction in
poverty & inequality
Very contentious issue
Absentee landlords
2014-06-26 12
Land reforms and regulations [2]
Recommendations
Implementation of the
amendments to Acts
Implementation of the
updated policy
Proper coordination
among relevant agencies
Increase productivity of
land
Dis-incentivize land
fragmentation
Legal framework
At least 62 Acts and 27
regulations for land
governance
Land Act 1964 first
attempt
Five amendments based
on various land reform
commission reports
Ceiling on land ownership
Scientific redistribution
of land proposed
Land Use Policy 2012
7 categories of land
Weak implementation





2014-06-26 13
Availability of inputs [1]
Key inputs
Chemical fertilizers
Seeds
Irrigation
Finance
Labor
Machinery/technology diffusion
Infrastructure (energy, roads, ICT)
Unreliable/inadequate supply
Shortage of labor in agriculture sector
Growth of agri wage > Growth of non-agri
wage
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Paddy Maize Wheat Potato Sugarcane Vegetables
Number of agricultural households (million)
using seeds by type
Local Improved Hybrid Total reporting HHs
A majority of agricultural
households still use local seeds
Productivity is low
23
24
22
21
22
23
24
25
1991/92 2001/02 2011/12
Access to finance (% of agricultural HHs)
2014-06-26 14
Availability of inputs [2]
Key issues
Institutional weaknesses
Unreliable/inadequate supply by
public enterprises
Coordination failures: AICL, NFC,
NSC, NARC, MOI, MOAD
Misguided policies
Fertilizer subsidies crowding out
private suppliers
Low demand for or low
supply of finance?
BFIs: 9% of agri HHs
ADBL: 12% of agri HHs
Low use of modern varieties
of seeds
Out-migration creating
shortages of labor
Recommendations
Better institutional
coordination
Subsidy reform to correct
markets + genuine support
Expand microcredit and
microfinance services
Matching grants
Insurance services
Investment in sustainable
agri market infrastructure
Access roads
Micro-hydro electricity
Irrigation (river/lake/pond
account for 48% of total
irrigation by agri HHs)
R&D services


2014-06-26 15
Access to markets [1]
Key constraint for expansion
of agribusiness activities
Intermediaries escalating
prices
Middlemen
Transport syndicates
Tariff, para-tariff and non-
tariff barriers
Lack of warehousing and
storage facilities
Lack of actionable
information on market
opportunities
Capacities of farmers to exploit
available opportunities
Timely market and product
information
0
10
20
30
40
50
60
70
80
90
T
o
m
a
t
o
P
u
m
p
k
i
n

t
h
r
e
a
d
s
P
e
a
r
B
i
t
t
e
r

m
e
l
o
n
C
a
u
l
i
f
l
o
w
e
r
C
u
c
u
m
b
e
r
Price difference bewteen Dharke (Dhading)
and Kalamati (Kathmandu)
Large difference between farm gate
price and wholesale price
Middlemen, market distortions
Recommendations
Effectively implement the ban syndicates
Market supervision and monitoring against anti-
competitive practices
Link farmers directly with markets to limit
middlemen activities
Favorable trade policy
Tariffs on agricultural inputs should be lower than tariffs
on final products
Concerted promotion high potential export products
NTIS 2010 identified 7 agro-food products: Cardamom, ginger,
honey, lentil, tea, instant noodles, medicinal herbs and
essential oils
Storage and warehousing facilities
Market research and information availability
2014-06-26 16
Access to markets [2]
2014-06-26 17
3. Impact of Migration and Remittances
2014-06-26 18
Migration, remittances and NELM
Study focused on the
impact of migration and
remittances on agriculture
productivity
New Economics of Labor
Migration (NELM):
Migration leads to a decline
in agri productivity beyond
surplus labor
Remittances augment
financial resources available
to acquire agri inputs and
capital assets, i.e. eases HH
liquidity constraints
0
5
10
15
20
25
30
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
F
Y
1
9
9
5
F
Y
1
9
9
6
F
Y
1
9
9
7
F
Y
1
9
9
8
F
Y
1
9
9
9
F
Y
2
0
0
0
F
Y
2
0
0
1
F
Y
2
0
0
2
F
Y
2
0
0
3
F
Y
2
0
0
4
F
Y
2
0
0
5
F
Y
2
0
0
6
F
Y
2
0
0
7
F
Y
2
0
0
8
F
Y
2
0
0
9
F
Y
2
0
1
0
F
Y
2
0
1
1
F
Y
2
0
1
2
R
F
Y
2
0
1
3
P
R
e
m
i
t
t
a
n
c
e
s

(
%

o
f

G
D
P
)

N
u
m
b
e
r

o
f

m
i
g
r
a
n
t

w
o
r
k
e
r
s

Migration and remittances
Number of migrants Remittances (% of GDP)
Remittances inflows amounted to
25.7% of GDP in FY2013
Large out-migration is putting
pressures on agriculture sector wages
2014-06-26 19
Data sources and model
Data and general stats
Use the recent cross-sectional
national level household survey
data
2,918 migrant households growing
paddy and receiving remittances
Distilled from 5,988 sample
households
Agriculture productivity
measured by paddy production
per hectare
Average paddy yield is just
2,842 kg per hectare
Use of chemical fertilizers is
relatively higher among migrant
households than non-migrant
households; same with
ownership of farming assets


Basic model
Migration and remittances are
endogenous to household income
and yield.

1.

= +
1
+
2
+

2. =
0
+
1
+
2

3. =
0+

3 SLS estimate
Instruments:
Avg remittance received in PSU
Proportion of migrant population
in PSU
Highest education completed by
family member
2014-06-26 20
Migration, remittances and agriculture yield

Remittances and paddy yield
Migration and paddy yield
Migration
Negative impact of migration on paddy yield
(statistically significant)
One additional migrant labor in the
agriculture household is associated with a
loss of about 163 kg per hectare of paddy
NLSS III: Agricultural wages increased by
127% between 2004 and 2011.
Remittances
Negative impact (but statistically not
significant)
Remittances received by households may
not have been used to acquire capital goods
(or agriculture technology) to boost yield
NLSS III: Almost 80% of remittance income
is used for consumption purpose & just
2.4% for capital formation
2014-06-26 21
Model output and interesting findings
A person increase in migration is
associated with NRs11,644 increase in
remittance inflows to agricultural
households.

Proportion of year-round irrigated land
and the use of chemical fertilizers
positively and significantly affect paddy
yield.

More number of children below 15 years
of age is associated with low paddy yield
(More working age household members
associated with high paddy yield).

Central region has significantly higher
paddy yield compared to the Far-western
region.
2014-06-26 22
Recommendations
Enact policy measures aimed at channeling remittances to investments
in productivity-enhancing agricultural capital assets and inputs.
An enabling investment climate helps farmers & entrepreneurs take manageable risk
Legal, policy, institutional, regulatory, political stability, infrastructure
Enhance skills of both outgoing and returning migrants
Migrants earn more abroad and remit more income to households,
Enables agri HHs to acquire more productivity-enhancing capital assets even after discounting for the high
share of consumption expenditure.
Skills enhancement of returning migrants would help them engage more productively
in the agriculture sector, potentially helping to increase agriculture yield.
Help migrants convert remittance savings into productive investments
by
Bridging skills gap
Diversifying economic activities (hence income generating sources)
Creating a financial system that is able to mop up small amounts of savings from
multiple sources and channel them into productive business purposes
Reducing the cost of remitting money, financial literary, lowering
barriers to entrepreneurship, and maintaining overall macroeconomic
stability.
2014-06-26 23
4. Agricultural Development Strategy (ADS)
2014-06-26 24
ADS and agricultural transformation
ADS is designed to guide agricultural sector over the next 20 years and
structurally transform agriculture sector by achieving the following
outcomes and outputs.

Improved governance
Credible policy commitment
Improved institutional
coordination
Effective implementation
support; M&E
Higher productivity
Decentralized extension system
Strengthened agri edu system
Adequately sized farms to use
land efficiently and sustainably
Improved irrigation efficiency
Timely and quality agri inputs
Mechanization through pvt sector
Profitable commercialization
Improved investment climate
Contractual farming
Supportive tax policy
Financial & agri insurance
products
Competitive agri value chains
Rural roads networks
Increased competitiveness
Agri market information
ITC products for market
intelligence
Develop market infrastructure
Rural electrification
Increased agri exports
2014-06-26 25
5. Implementation Experience: HIMALI Project
HIGH MOUNTAIN AGRIBUSINESS & LIVELIHOOD
IMPROVEMENT PROJECT (HIMALI)
2014-06-26 26
$20 million ADF grant
Approved in 2011 (effective Sep. 2011) Closing: Oct 2017
Grants for agribusiness development ($10.6 million)
- 80% grant share (<$50,000 value)
- 50% grant share (>$50,000 value)
- Max. grant amount $250,000
Registered cooperatives, companies, individuals
Livestock, horticulture, vegetables & cash crops, fisheries,
medicinal & aromatic plants
Finance business establishment/development cost (operational
cost on limited basis)

2014-06-26 27
WHATS HAPPENING?
2014-06-26 28
To date, around 400 proposals received, 100
contracted
- Livestock, horticulture, aquaculture, vegetables, medicinal
and aromatic plants
Total grants committed: $1.6 million
Average size of agribusiness: $23,000
Two new projects recently approved
High-density apple farming ($0.5 million)
Medicinal herb processing ($0.6 million)
2014-06-26 29
IMPROVED CATTLE FARMING: RASUWA
Total investment: $28,000
Grant share: $$22,500
Expected revenue: $54,000 per year

RAINBOW TROUT FARM: RASUWA
2014-06-26 30
Total investment cost: $35,000
Grant share: $28,000
Revenue: $26,000 per year

COMMUNITY-BASED NAK FARMING
2014-06-26 31
Women-led cooperative
60 Naks purchased with project grant supplying
milk to the DDC cheese factory
Revenue: $14,000 per year

MOBILE CHEESE FACTORY:
GATLANG, RASUWA
2014-06-26 32
Production: > 9 MT per year; capacity to
Processing capacity: 1,000 liters of milk per day
CHALLENGE # 1: ACCESSIBILITY
2014-06-26 33
CHALLENGE #2: LACK OF INPUTS
2014-06-26 34
Lack of improved breeds of cattle, sheep, goats for livestock
development (stringent quarantine to import)
Degraded/declining pastureland in alpine areas
Fertilizers and organic manure
Weak extension services (pest control & other improved
practices)
Lack of irrigation
Feed for trout imported from Kathmandu (high cost due to
protein content from shrimp imported from India or Bangladesh)

CHALLENGE #3: LACK OF HUMAN RESOURCES
& IDEAS
2014-06-26 35
High cost of labor makes labor-intensive agribusinesses not viable
- Affecting livestock businesses
Lack of mechanization/skills
Innovative businesses lacking despite potential
- Processed meats
- Cheese
- Medicinal and aromatic plants
Cultural factors
- Entrepreneurs with money have no idea whats out there
- Weak linkages with local people who have no money but know
whats available, but they dont know the global market and
demand

CHALLENGE # 4: LAND ISSUES
2014-06-26 36
Traditional land use rights not accepted formally
Local control land in many areas
Protected areas: Unclear government policies
CHALLENGE # 5: ACCESS TO FINANCE
2014-06-26 37
Banking sector confined to Kathmandu and urban
areas
Lack of knowledge of mountain resources
Willingness to take risk low
CHALLENGE # 6: CERTIFICATION & QUALITY
CONTROL
2014-06-26 38
No certification agency
Weak quality control mechanisms
Hampering exports


2014-06-26 39
THANK YOU!