The Economic Journal of Nepal, Vol.41, No. 3 & 4, July-December 2018 (Issue No.

150) © Cedecon-TU

Industrial Development in Nepal:

Problems and Prospects
Mukti Bahadur Khatri1

Abstract
Industry has historically played an important role in contributing to
economic growth and employment of many countries around the world. It
is imperative to give high priority to Nepalese labor, skill and raw material
based domestic investments to promote national level industries for
achieving high employment and economic growth. So, this study examines

2018 based on secondary data. As an outcome of this sector is found to be

a more potential sector and contributing a significant role in sustain
wide economic growth in Nepal even in reality it has less contribution as
its potential capacity in the past.
Keywords: Industry, Industrial development, Economic growth,
Employment, Prospects.

Introduction
Nepal is trying to achieve a growth path in the last decade but results are an average
4.3 percent (MoF, 2018) and flourish the growth of rent seeking in spite of high, wide
and sustained economic growth. The economic development initiated in the last decade
of an autocratic Rana Regime of more than 100 years, were particularly chaotic through
establishment of industrial council. The initial years in the fifties, after freeing from a Rana
Regime, the pace of economic development took place. The economic progress after 1990
has been encouraging through liberal economic policy but the real achievements have been
overshadowed by the weakness of the politico-economic character of the ruling parties
from time to time. Furthermore, the emergence of the Maoists in 1996 created a politico-
economic crisis bringing to a close down the opportunities for socio-economic development.
A new understanding among political parties including the Maoists in 2006 provided hope
-
structure of the nation to a Federal Democratic republic with three levels of government
namely federal government at the top, provincial government at the middle and local
government at the bottom.
The contribution of the industrial sector to GDP was 5.5 percent in the last five fiscal years

1 Mr. Khatri is a Lecturer in Economics at Trichandra Multiple Campus, Ghantaghar, T.U.,

Nepal. Email: muktikc01@gmail.com.
26 | The Economic Journal of Nepal (Issue No. 150)

whereas two decades ago, it was around 10 percent (MoF, 2018). It is, of course, as a share
of the national economy manufacturing has reduced in size from about 10 percent in 1996-
1997 to just over 6 percent in 2011-2012 (CBS, 2014). However, Nepal has continually tried
to make a paradigm shift in the structure, thinking, way of economic behavior, responding
to the contemporary changes or advancements in the world economic order over the years.

Objectives of the Study

The objectives of the study are to overview the trend of industrial development, industrial
policies and acts along with explore the problems and prospects of industrial development
in Nepal.

Data and Methodology

The study is fully based on secondary data and information collected from various
books, booklets, journals, research reports, articles, working papers, conference proceedings,
smarika, newspapers, and websites published by the concerned organization and institutions
like Central Bureau of Statistics, Ministries of Finance, Industry, Commerce, and Supplies etc.
The study used the yearly time series data from 1990/91 to 2017/18 with initially five years
gap focusing on trends, policies and acts, problems and prospects of industrial development
in Nepal. These materials have provided an insight of the overall situation of the economic
and industrial position, problems and prospects of Nepal. The basic concept of industry and
industrial development in Nepal is drawn through review of literature. The study used both
qualitative and descriptive methods of data analysis.

History of Industrial Development in Nepal

In Nepal, industrial development started rather late due to the closed socio-political
and economic status of the country during the Rana Regime. So, the history of industrial

in 1936. Thereafter, in 1940, (i.e. information dissemination

about cottage level skill- based enterprises) was established. The early and gradually
developed industries were cigarette and match factories. Raghupati Jute Mills established in
1946 is regarded as the first modern industry of Nepal (Khatri, 2018).
The development of industrial sector is a crucial to attain prosperity, generate
employment, alleviate poverty, promote trade and stimulate growth of national income. But
the industrial development of Nepal over past decades remains not much satisfactory. The
manufacturing sector employed just 6.6 percent of the total workforce (NLFS, 2008). The
contribution of manufacturing to total GDP was a minimal 6 percent in 2010. Most industries
are located around various urban areas of the nation like Kathmandu Valley, Biratnagar,
Simara, Birgunj, Hetauda, Pokhara, Butwal, Nepalgunj and other places of the Terai region
(CBS, 2014).
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 27

England was the first country in the world to bring about industrial revolution in the
beginning of the 18th century. The notable point here is that at that time there were no policies
in Nepal related to industrial development. The process of planned industrialization started
with the launching of the First Five-year Plan in 1956. Gradually, a number of small, medium
and large-scale industries were established in the public along with private sectors.
The foundation for the industrial estates (IEs) was laid with the establishment of
Balaju Industrial Estate (BIE) in 1963 with the technical and financial assistance from
the United States of America (USA). The main reason behind establishing the industrial
estates was to facilitate the development of industries and manufacturing enterprises in the
country by providing basic infrastructures like land, roads, energy, water supply, sewerage,
communication etc. at a specifically designated place.
Industrial Development Management Limited (IDML) was constituted by the Government
of Nepal (GoN) in July 1988 in order to boost the balanced regional development by making
optimum utilization of local capital, natural resources (agriculture and forest based etc.) and
human resources for industrial promotion (IDML, 2018). There are 11 industrial estates
and 10 are in operation except Dhankuta, six are being developed and five are proposed for
consideration (MoF, 2018).

Table 1: Basic Information of Industrial Estates by 2018

No. of Industries
Estd. Financial Land Area
S. N. Industrial Estates Location Employment
Year Assistance (in ha.) Total Running Closed

1 Balaju 1960 USA Kathmandu 4200 34.09 141 125 5

2 Patan 1963 India Lalitpur 2000 14.91 118 113 2
3 Hetauda 1963 USA Makwanpur 4100 158.73 134 102 4
4 Dharan 1972 India Sunsari 797 10 35 29 3
5 Nepalgunj 1973 India Banke 991 11.65 35 33 2
6 Pokhara 1974 Nepal Kaski 3000 25.5 89 81 3
7 Butwal 1976 Nepal Rupandehi 1859 22.09 72 65 3
8 Bhaktapur 1979 Germany Bhaktapur 800 3.63 37 36 1
9 Dhankuta 1980 Nepal Dhankuta NA 3.26 NA NA NA
10 Birendranagar 1981 Netherlands Surkhet 300 4.58 28 22 2
11 Gajendranarayan 1986 India Saptari 40 14.96 11 5 4
Total 18087 303.40 700 611 29
Source: IDML, 2018.
The table 1 shows that 10 industrial estates have been providing different facilities as a basic
requirement of 700 industries. Among them 611 are operating their business and 29 are closed.
These industries are providing 18,087 employments. Out of 8 industrial estates are established
under the assistance of foreign countries whereas only two are established by the GoN.
28 | The Economic Journal of Nepal (Issue No. 150)

The Special Economic Zone (SEZ) Act - 2017 has formulated for the establishment of
export promotion of Nepal. So, the government of Nepal agreed to the concept of SEZ by
attracting foreign and national investors to establish industrial and business activities. After
this, the government has so far declared two SEZs which are one in Bhairahawa of Rupandehi
District and another in Simara of Bara District. Similarly, in total the government has planned
to create a minimum of seven SEZs throughout the country; making one SEZ in each of the
seven provinces. The Ministry of Industry, Commerce and Supplies has completed feasibility
study of establishing SEZ in Biratnagar of Province-1, Panchkhal of Bagmati Province,
Gorkha of Gandaki Province, Jumla of Karnali Province and Dhangadhi of Sudur Paschim
Province as well as eleven are proposed for consideration (MoF, 2018).

Table 2: Scale-wise Registration of Industries by 2017

Scales of No. of Total Capital No. of

Percent Percent Percent
Industries Industries (Rs. in millions) Employment
Large 856 0.24 9,81,326.79 65.93 1,26,974 4.44
Medium 1,482 0.42 1,23,922.52 8.32 1,40,873 4.93
Small 4,186 1.17 64,159.81 4.31 2,53,966 8.88
Cottage 3,48,870 98.17 3,19,330 21.44 23,37,373 81.75
Total 3,55,394 100 14,88,739.12 100 28,59,186 100
Source: Department of Industry, Ministry of Industry, Government of Nepal, 2017.
The table 2 shows that cottage industries cover almost 98.17 percent out of total
industries in low investment i.e. 21.44 percent and provide mass employment 81.75 percent
in comparison to others. Similarly, cottage, small and medium scale industries cover almost
99.76 percent out of total industries in low investment i.e. 34.07 percent and provide mass
employment i.e. 95.56 percent in comparison to large scale industries. Therefore, to generate
employment opportunities within a domestic economy, the government of Nepal should
promote and develop small and cottage industries.

Industrial Policies and Acts in Nepal

Public policy is commonly used in daily activities for the betterment of the people and
social welfare. Policy could be defined as a set of guidelines for action aimed at achieving
goals and objectives thereby satisfying the needs of society in general. A public policy
initially derives from the state institutions- both local, province and central level.
Industrial policy of Nepal can be divided into two time-periods like pre and post 1985. One
side, before 1985 policies were guided by inward looking protectionist strategies. Domestic

by high tariff and quota restrictions. The government was directly involved in the economy
and provided essential products and services. Another side, liberalization initiated in 1985
and accelerated after the 1990s, sought to modernize the economy and accelerate structural
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 29

changes by creating an environment appropriate for private sector participation. The

government began to withdraw from the economy and policies were implemented to promote

seeks to create an open and competitive economy by curtailing government interference in

price fixing of industrial goods (SAWTEE, 2007).
Nepal has followed an international trend of devising subject- specific policies in order to
drive the nation toward a sustainable development path. Hence, the government has devised,
revised and reformed its industrial policies from time to time and formulated necessary acts
to create an enabling industrial atmosphere. The major thrust behind devising various policies
has been on openness with emphasis on market driven strategies and encouraging the private
sector to play a dominant role in economic development.
In recent years, the government of Nepal has updated, refined and revised various
policies and acts on the basis of lessons learned and / or problems encountered while trying
for industrial growth, exports promotion, imports substitution, employment generation and
overall economic transformation and development. These policy frameworks and enactments
have helped build confidence of the private sectors for their greater participation in economic
activities through industrialization. The major characteristics of the various policies, acts and
strategies are shortened as follows:

Table 3: Features of various Industrial Policies of Nepal

S.N. Policies Main Features

1 Industrial Tax holiday and more facilities to the industries established in
Policy - 1960 remote areas.
Special consideration on customs duty.
2 Industrial Focused was on protectionist strategies and development of
Policy - 1974 small industries.
Supported by high tariff barrier and quota restrictions.
Developed the government enterprises.
Industrial Financial incentives for productivity oriented ventures.
3 Policy 1981 To attract foreign investments.
Special attention for export promotion zone (EPZ).
4 Industrial Encouraging private sectors.
Policy 1987 Promoting industrial development.
Classification of industries in Nepal.
5 Industrial Special attention for development of cottage & small scale industries.
Policy 1992 Privatization of the public enterprises.
Promoting competitiveness among the private industries for
reducing the production cost.
Developing industrial zones.
30 | The Economic Journal of Nepal (Issue No. 150)

Development of quality infrastructures and environment

6 Industrial friendly new technology.
Policy 2010 Focused on joint efforts of public, private and cooperative
sectors.
Prioritized export potential products by using local resources.
Enhancing enforcement capacity of the government.
Promotion of good governance.
Coherence between industrial, trade and transit policy.
Development of agriculture and forest sector.
Increase employment generation and boost per capita income.
Promote Special Economic Zones (SEZs).
'One- activities.
No work, no pay.
Source: Various policies issued by MoICS.
Industrial policy environment plays a significant role in accelerating economic growth
and achieving goals of development. In the globalized era, as a Least Developed Country
(LDC), Nepal faces numerous challenges in ensuring an enabling trade and industrial
environment. Ever since 1960, various policies have been implemented to promote
the industrial sector. But the country is far behind the desired progress. Despite the
implementation of economic reform measures, mainly in the 1990s, exports performance
has continued to remain weak.
The government has been concentrating its efforts on creating a conducive environment
for the private sector to increase investment in the country. Specifically, various governments
formed after 1990 have tried to create a conducive environment for economic development
by formulating new industrial policies and replacing older ones in pace with the changing
environment within the country as well as the entire world. Accordingly, the government
promulgated various policies to boost an enabling environment for the growth of the
manufacturing sector, attract foreign as well as domestic investments, generate income and
employment and thereby raise the quality of life of the Nepali society. The policy provisions
post - 1990 were the major foundations playing crucial roles in attracting investment for
industrial development.

No Work No Pay Principle

The Industrial Policy-2010 promises flexible labor policy regarding the work, no
principle. It shall be followed as provided by the labour law with the objective of creating
cordial relationship between employers and employees and to create additional employment
opportunities. Industrial sector of Nepal experienced a series of misunderstandings between
the industry and its workers, which not only affected industrial outputs but also slowed down
the entire industrial growth of the country. There were instances of many industries shutting
down their operation due to industry-worker conflict in the past. That is why industrial
productivity in Nepal is very low. Therefore, to build a friendly environment the -work-
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 31

no- policy should be implemented as a social security. Such social security will increase
factory-worker good relationships and foster the growth of the industrial sector as well as the
entire economy. It is only after assuring cordial industry-labour relationship in the country
attracts domestic and foreign investment at a tangible amount. Thus, one side, while factories
should understand that better output can be achieved only by encouraging its workers to
give their best. On the other hand workers should note that they will be able to enjoy better
facilities only if the factory performs well. Accordingly both factory owners and workers have
acknowledged this fact for the betterment of industrial progress. In this way, the industrial
output of the country can grow in the future.

Present Status of Industrial Development

The study presents and analyses the performance of the industrial sector of Nepal and its
social, environmental as well as regional impacts. It describes that the manufacturing sector
could not keep pace with the development of the rest of the economy. Factors that created
barriers to further development can be found in the sphere of governance, infrastructure,
labor, skills and social relations.

Table 4: Industrial Production, Growth and Contribution to RGDP (in millions NPR)

Fiscal Industrial Growth of Industrial Contribution of Industrial Total Real

Years Production Sector (in %) Sector to RGDP (in %) GDP
1990/91 12179 15.02 4.61 263955
1995/96 21322 8.29 6.33 336681
2000/01 38409 30.63 9.29 413428
2005/06 38898 2 8.09 480435
2010/11 41923 4.1 7.14 587534
2015/16 44223 -8 6.36 695688
2016/17 48510 9.7 6.47 749550
2017/18 52957 9.17 6.65 796784
Source: Author's construction from different Economic Surveys, MoF, Nepal.
The table 4 shows that industrial production is continuously increasing except FY
2015/16 where industrial growth rate became negative i.e. -8 percent. However, growth of
the industrial sector itself became more than 30 percent in 2000/01. But the GoN is unable
to continue this progress. Similarly, the contribution of the industrial sector in real GDP is
almost small i.e. less than 10 percent. Accordingly, real GDP is continuously increasing.
Therefore, the industrial sector should be expanded significantly in the years ahead and
turned out to be one of the major sectors for the massive driven sector of the economy of
Nepal through its growth and development.
32 | The Economic Journal of Nepal (Issue No. 150)

Table 5: Registration of Different Nature of Industries up to 2018

No. of Total Capital Fixed Working Employment

Categories
Industries (Rs. in millions) Capital Capital Generation
Agriculture and
forest based 442 23267.22 20117.54 3267.69 34898
Construction 55 48898.03 47473.36 1424.68 3648
Energy based 329 929637.6 910526.67 19110.92 31291
Information
Technology 38 1651.5 1377.45 274.05 1852
Manufacturing 2897 396695.2 307014.32 90151.38 312591
Mineral 68 6870.81 5756.39 1116.52 7119
Service 2085 144828.95 95992.45 48882.5 119992
Tourism 1615 129070.55 117056.96 12005.39 64105
Total 7529 1680919.86 1505315.14 176233.13 575496
Source: Based on Industrial Statistics, 2017/18.
The table 5 shows that the share of manufacturing industries had occupied at the top
and followed by service and tourism industries up to 2017/18. Similarly, as an investment
commitment, the total investment is on energy-based industries at the top and followed
by manufacturing, service and tourism industries. But more employment is generated by
manufacturing industries.

Table 6: Registered of Scale-wise Industries up to 2018

Scales of No. of Percent Total Capital Percent No. of Percent
Industries Industries (Rs. in millions) Employment
Large 1030 13.68 1452564.3 86.42 149263 25.94
Medium 1,640 21.78 149426.37 8.89 152504 26.50
Small 4,859 64.54 78,929.22 4.69 273729 47.56
Total 7,529 100 1680919.9 100 575496 100
Source: Department of Industry, Ministry of Industry, GoN, 2018.
The table 6 shows that small scale industries covers almost 65 percent out of total
industries in low investment i.e. around 5 percent and provides more employment about
48 percent in comparison to others. Similarly, small and medium scale industries cover
almost 87 percent out of total industries in low investment i.e. 14 percent and provide mass
employment of 75 percent in comparison to large scale industries. Therefore, to generate
employment opportunities within a domestic economy, the government of Nepal should
promote and develop SMEs.
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 33

Table 7: Foreign Investment on Nepalese Industries for the Last Five Years (Rs. in 10 millions)

Fiscal No. of Foreign Fixed Total Employment

Years Industries Investment Capital Capital Generation
2013/14 307 2013.2 3504.9 4073.7 11790
2014/15 370 6745.5 7743.7 8137.1 13167
2015/16 348 1525.4 1416.5 2054.4 11663
2016/17 398 1511.3 1233.3 1700.3 11734
*
2017/18 194 3491.1 3548.7 3804.1 7541
Total 1617 15286.5 17447.1 19769.6 55895
Note: An asterisk * denotes the first eight months of the FY 2017/18.
Source: Economic Survey, 2018.
The table 7 shows that the number of industries and foreign investment has been
continuously increasing. Accordingly, even in the first eight months of the FY 2017/18, the
commitment of foreign investment has been made two fold than the previous FY 2016/17.
This means formation of stable government attracts foreign investment significantly.

Table 8: Country-wise Investment on Nepalese Industries (Rs. in 10 millions)

Share
No. of Total Foreign Employment
Countries * in Total
Industries Investment Investment Generation
Investment
India 713 13652.8 8680.3 35 68655
China 1226 9191.3 6346.7 25.6 56505
China Hong Kong 36 3707.2 2728.2 11 4782
South Korea 324 1624.5 1149 4.6 11070
USA 375 2083.7 838 3.4 17654
British Virgin Island 16 1630.3 806.4 3.3 2180
UK 169 897.2 538.6 2.2 10702
Mauritius 10 391.8 335.5 1.4 974
Singapore 44 820.7 296.2 1.2 3207
UAE 17 540.6 290.4 1.1 1827
Other 82 Countries 1343 6853.7 2776.5 11.2 59578
Total 92 Countries 4273 41393.8 24785.8 100 237134
Note: An asterisk * denotes first eight months of the FY 2017/18.
Source: Economic Survey, 2018.
34 | The Economic Journal of Nepal (Issue No. 150)

The table 8 shows that on the basis of project cost of the approved industries for
foreign investors, the shares of Indian investors have occupied 35 percent of total foreign
investment. Similarly, China occupied the second position in the investment which is 25.6
percent and China Hong Kong is in the third place with 11 percent investment in share.
Similarly, the share that has been invested by investors of India, China and China Hong
Kong to total foreign investment is 39 percent, 16 percent and 13 percent correspondingly.
In the latter period, the share of Chinese investors has been increasing to total foreign
investment. So, foreign investment by the first eight months of the current FY 2017/18, the
shares of investors of China, India and the USA has been 28.7 percent, 16.7 and 8.8 percent
respectively (MoF, 2018).

Distribution of Industries by Provinces

The distribution of industries, capital and employment generation in 7 provinces under
the federal democratic republic of Nepal can be shown as follows.

Table 9: Province-wise Registration of Industries by 2018

Names of No. of Total Capital Employment

Percent Percent
Provinces Industries (Rs. in 10 millions) Generation
Province-1 673 9.18 34263.7 73610 12.98
Province-2 491 6.69 8374.9 50246 8.86
Bagmati 4961 67.64 58602.4 345947 61.01
Gandaki 556 7.58 25930.2 32441 5.72
Province-5 508 6.93 15521.3 52965 9.34
Karnali 38 0.52 10981.7 2562 0.46
Sudur
Paschim 107 1.46 2643.3 9263 1.63
Total 7334 100 156317.5 567034 100
Source: Economic Survey, 2018.
The table 9 shows that among registered industries from the beginning to 2017/18, about
4961 industries have been registered in -+Bagmati Province that covered one third of the
total industries of Nepal, whereas the lowest figure of 38 industries in Karnali Province.
Similarly, on the basis of investment, Bagmati Province is at the top i.e. Rs 58602.4 Crore
and Sudurpaschim at the bottom i.e. Rs. 2643.3 Crore.
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 35

Figure 1: Province wise Distribution of Industries by 2018

Source: Derivation based on Economic Survey, 2018.

Figure 1 shows that about 68 percent industries are centralized in Bagmati Province
while Sudur Pashim and Karnali Provinces secured only 1 and less than 1 percent of existing
industries of Nepal.

Figure 2: Province-wise Employment Generation on Industries by 2018

Source: Derivation based on Economic Survey, 2018.

Figure 2 shows that about 61 percent of people were employed in Bagmati Province
while only 2 and less than 1 percent was employed in Sudur Paschim and Karnali Provinces
of Nepal respectively.
36 | The Economic Journal of Nepal (Issue No. 150)

Distribution of Cottage and Small Industries By Provinces

The governments of all provinces have been trying hard to raise the development of cottage
and small scale industries. For the purpose it has been devising various policies and making
or revising acts and changes in rules from the beginning in order to attract investments in the
manufacturing sector as well as stressing on the expansion of the availability of resources.

Table 10: Distribution of Cottage and Small Industries by Provinces

Provinces / FY 2013/14 2014/15 2015/16 2016/17 2017/18* Total

Province - 1 2455 4095 3387 4333 1904 16174
Province - 2 2583 2819 2318 4820 3187 15727
Bagmati 7530 8419 8275 10057 5532 39813
Gandaki 2234 3039 2598 3180 2371 13422
Province - 5 5330 4809 4494 5637 3774 24044
Karnali 742 1225 1202 1579 506 5254
Sudur Paschim 1280 1864 2043 2433 1288 8908
Total 22154 26270 24317 32039 18562 123342
Note: An asterisk * denotes the first eight months of the FY 2017/18.
Source: Economic Survey, 2018.
The table 10 shows that in the FY 2016/17, 32,039 cottage and small industries have been
registered in the office under the Department of Cottage and Small Industries and Cottage
and Small Industries Development Committee. Similarly, in the last 5 years, the highest
number of domestic and small enterprises was registered in Bagmati Province, whereas the
lowest number of enterprises was registered in Karnali Province.

Problems to Industrial Development in Nepal

Despite various plan and policy provisions, positive laws and rules, the investors have
been facing many barriers to enabling the environment in the industrial sector. Road closures,
strikes by laborers and Nepal Bandh (total closure of the economic activities) are frequently
declared by either political parties or any groups. It is quite amazing in Nepal that even the

government. Even hospitals, telecommunication, sanitation and electricity workers have a

tendency to go on strikes and force the country to fulfill their unnecessary as well as unethical
demands. The major problems are:
Inadequate Physical and Social Infrastructures:- Physical infrastructures such as road,
energy, communication, irrigation and social infrastructures such as education, health and
sanitation are insufficient. That is why private sectors are also centralized in urban areas only.
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 37

Therefore, the industrial sector of Nepal does not flourish even though its process started 60
years ago and is suffering from basic requirements.
Lack of Corporate Culture and Institutions:- Lack of corporate culture and intuitional
development energetic people of Nepal are unable to develop managerial and entrepreneurial
skills for maximum utilization of available resources. Business community is not taking risk
by establishing new industries. However, they are actively participating in trading.
Lack of Political Stability and Will-Power:- Nepal has been unable to mobilize
resources even if it has sufficient water resources, human resources, natural beauties, cultural
heritages and bio-diversities because of long standing instability and lack of strong will-
power of political leaders.
Vicious Circle of Poverty:- About 21 percent people are living below absolute poverty
line (MoF, 2018). So, energetic youths are facing problems of capital deficiency. On the basis
of the principle of vicious circle in level of income remains low, this leads to low level
of saving and investment. Consequently, low investment leads to low productivity which
again leads to low income. In economics, the cycle of poverty is the of factors or events
by which poverty, once started, is likely to continue unless there is outside The
countries.
Socio Cultural Constraints:- Socio-cultural values are one of many interacting factors
that can impact economic as well as industrial development and influence on how we approach
the process of economic development due to a set of values, beliefs, traditions and habits.
Market Imperfection:- Imperfect market becomes a barrier to achieve economic
efficiency and fair business activities. On the contrary, under perfect competition, a firm or
industry can operate at the point where there is no surplus of capacity that means resources
are fully utilized.
Low Competitive Power and Human Resource Development:- In this age of global
competition, it is not just enough for the Nepalese firms to be competitive at the domestic level.
For that industrial sector should have to improve economies of scale through technological
advancement, marketing strengths, efficient production and distribution systems as well as
affordable labor. Building up skill and competitive human resources is the key for catching
opportunities for market opening and widening. East Asian countries have good examples of
success stories. So, industrial sectors have low competitive power due to less development of
human resource than required.
Difficult Geographical Location:- Nepal is surrounded by India on three sides and China
on one side. So, it is a land-locked country whose transit facilities are determined by the
willingness of India. Nepal has a bitter past experience in case of export and import. Now, the
government of Nepal can eliminate this difficulty through diplomatic relationships with these
countries as most favored nations. On the other hand, difficult topography is a challenge to
achieve balanced and inclusive development by addressing geographically between villages
and towns, mountains, hills and terai as well as on the basis of castes, groups, genders and
provinces.
38 | The Economic Journal of Nepal (Issue No. 150)

i) Good Governance:- It refers to providing a legal and regulatory framework and

enlightened fiscal and strategic direction for promotion of economic growth and
development. The attitudes and perceptions of management have been frequently cited
as important determinants of economic performance. Many problems are caused by
lack of clarity in laws and regulations and unpredictability and inconsistency in their
implementation. Sometimes, policies and regulations are made without the suggestions
and knowledge of the private sector. Firms also complained about excessive government
red tape, public services delays and corruption. Implementation of the import regime
(problems with customs and duty drawbacks), the tax regime (inappropriate revenue
targets and poor tax administration), and the labor law (inflexible economizing
provisions) affect exporters mostly.
j) Lack of Research and Development:- Research is required for the exploration and
extension of the economy in domestic as well as third countries. But in case of Nepal,
there is no adequate institutional infrastructure for this purpose. In spite of these
constraints, the economy of Nepal has shown potential to be competitive in several
areas. This is supported by analysis of abundant resource, domestic resource costs,
price differentials and revealed comparative advantage. However, given the increasing
volatility and competition of global markets, Nepal must make considerable efforts to
improve the industrial sector as its potential.
Problems facing Nepal is her inability to attract foreign private capital, imports and exports
with third countries transit through only the port of Kolkata, investment opportunities in large
scale industries are limited by extremely low purchasing power of the population and
remoteness and poor endowment of mineral resources, knowledge of finance of marketing
(whether for the country-wide distribution of goods or for exports) and even of simple
management procedures and accounting practices is woefully inadequate, entrepreneurship
and management capacity has been very inadequate, failure to exploit known investment
opportunities, social preferences for maintaining status quo than increasing production,
investment in land and eye-catching consumption rather than investment in industries, lack of
efficiency, initiative and organization in industrial operations are some of the more important
impediments. It is necessary to introduce appropriate educational programs with emphasis on
training to entrepreneurs for industrial progress. The size and behavior of markets are also
major limiting factors in the industrialization of the economy (Nepal, 2004).
Therefore, the role of government required foremost changes in above mentioned
problems through suitable plan and policy interventions for improving long-term economic
performance to provide more than enough scope to the domestic economy to integrate with
the global economy through industrial development.

Prospects of Industrial Development in Nepal

Economic growth is the steady process by which the productive capacity of the economy
is increased over time as the potential capacity of existing resources whereas development
 Khatri: Industrial Development in Nepal: Problems and Prospects ......| 39

is the process of improving the quality of life of the people. Economic growth is measurable
and economic development can be used to describe the underlying determinants of economic
growth. However, to achieve rapid economic growth through industrial development, there
should be development of export oriented manufacturing industries. Promotion of export
based industries and diversification of export market are the major factors which significantly
contribute to expanding economic activities and uplift the living standard of the people.
Therefore, there is opportunity in the following areas for promotion and development of
the industrial sector as well as to improve prosperity of the country. The major prospects of
industrial development in Nepal are:
Hydro-electricity:- There is a significant prospect of hydroelectricity due to high water
current and 6000 rivers whose length are about 45000 km as well as estimated that about
44000 MW of economically feasible electricity can be generated from the available water
resources. So, it has potential to promote industrial as well as agriculture production.
Tourism:- Nepal is full of natural beauty, great Himalayas, adventure places, unique
cultural heritages, wide range of biodiversity and historical religious places. So, there are
ample opportunities in the tourism industry.
Forest / Herbs:- The total area covered by forests in Nepal remains about 40.4 percent
and thousands community forest user groups. In the context of sustainable conservation of
biodiversity, about 23.4 percent of the total land is covered by conservation areas (MoF,
2018). In Himalayan and Hilly regions, there are different species of herbs such as Peepla,
Timmur, Yarchagumba, Neem, Harro, Barro, Panchaaule, large cardamom, ginger, turmeric
etc. are available.
Agro-processing:- Majority of the people are dependent for their income and employment
in agriculture and contribute 27.59 percent in GDP (MoF, 2018). So, possibility of agro-
based industries such as sugar, tea, mango juice, apple juice, bel juice, tobacco, honey, milk,
fish, meat and floriculture etc.
Information Technology:- Information technology has emerged as a strong means for
developing business sectors such as tele-medicine, tele-education, e-commerce, e-trade, e-
governance and so forth.
Human Resource Development:- Nepal has also potentiality to improve and capitalize
her human resources through applied education and different vocational training which
would be appropriate to mobilize her available resources as its potential capacity like in
East Asia. Above mentioned prospects are positive indications of bringing the pace of the
industrial development of country and catch the track of prosperity.

Conclusion
Industrialization and industrial development are recognized as the principal of sustainable
economic growth to provide stability and development, but its development trend is slow and
challenging up to now as well as its contribution in GDP is less than 10 percent. In Nepal,
40 | The Economic Journal of Nepal (Issue No. 150)

plans and policies reform efforts of over 60 years for the development of the industrial sector,
but unable to improve economic performance through this sector. Similarly, the industrial
infrastructure, entrepreneurial skills, technological capability, political will power and good
governance constitute the key problems of industrial development. As a result, the country
is facing an ever rising negative balance of trade as well as balance of payments situation.
However, Nepal has a potentiality of hydro-power, tourism, herbal products, agro-processing,
and human resource development. Accordingly, with the hope of more stable governments
at federal, provincial and local level, a positive and enabling environment is required for the
development of the industrial sector.

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