There are four possible scenarios of deindustrialization in Nepal. First, a straightforward long-term decline in the output of manufactured goods or employment in the manufacturing sector. Second, a shift from manufacturing to the service sector, where manufacturing accounts for a smaller share of total employment. Third, manufactured goods may comprise a declining share of external trade, leading to a persistent inability to generate sufficient export surpluses to maintain external balance. Fourth, a sustained trade deficit that accumulates to the extent that the country becomes unable to revive sick and closed industries, triggering a downward spiral of economic decline.
Deindustrialization is a process of social and economic change caused by the reduction of industrial capacity, especially in heavy or manufacturing industries. It has been both a cause and an effect of weak economic performance. At present, the share of manufacturing in GDP has fallen to 4.5%, down from 12% in the previous decade. A significant portion of investment has shifted toward non-productive sectors such as real estate rather than industrial manufacturing. The decline in the industrial sector has led to high youth unemployment, reaching 22.7% in 2023. This has also fueled large-scale outward migration, with roughly 55% of Grade 12 graduates going abroad for studies.
During the 1990s, when liberalization was adopted as a major economic strategy in Nepal, the industrial sector was performing relatively well. The country made progress toward economic growth and opened up to market reforms aimed at improving living standards. The private sector and multinational companies invested significantly in education, health, banking and financial institutions, aviation, and manufacturing. Multinational corporations brought in foreign direct investment, mainly from India and China, and established several industries in Nepal. These investments contributed to infrastructure development, technology transfer, skill development, export promotion, employment generation, and government revenue, while also helping reduce market prices.
However, at present, due to the weakening manufacturing sector and high operating costs, foreign investors appear less interested in Nepal. Neighboring countries also prefer exporting goods to Nepal rather than establishing production plants within the country. Another major challenge is the open border with India, through which large volumes of goods enter illegally without paying taxes. Despite government efforts, controlling such imports has remained extremely difficult. As a result, domestic producers struggle to compete with cheaper, untaxed imported goods.
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Investors also express concern over lengthy bureaucratic procedures and red tape. For example, companies such as Dangote from Africa and Reliance from India, which showed interest in investing in large cement industries, reportedly withdrew after facing significant procedural difficulties. Despite prolonged efforts, they were unable to operate in a supportive investment environment and eventually abandoned their plans.
Other factors contributing to the decline in the manufacturing sector include the non-operation of privatized state-owned industries, weakening investment policies, declining exports of woolen carpets and garments, the withdrawal of US duty-free tariff benefits for Nepali products, and quota restrictions imposed by India on several export items.
Every government in Nepal has repeatedly announced plans to revive sick and closed industries and reform investment-related laws. However, investors continue to face challenges ranging from complex company registration processes and renewals to land acquisition difficulties and inefficient taxation systems. Dispute resolution mechanisms are also slow, affecting investor confidence and delaying repatriation of investments and dividends due to lengthy and inconsistent procedures.
Even after federalism, policy control over industrial development remains largely centralized at the federal level, while provinces have limited authority to promote industries. Inadequate infrastructure also remains a major bottleneck for attracting investment.
To reverse deindustrialization, experts suggest prioritizing agro-processing, handicrafts, and light engineering industries, upgrading Special Economic Zones (SEZs) with improved infrastructure, and encouraging foreign direct investment. Structural transformation is needed to expand employment, strengthen the production base, and support industrial growth. The government must design effective policies to promote industrial development and address systemic constraints. Policies should also attract investment in hydropower, technology, and export-oriented manufacturing.
More recently, the government’s 100-point work plan under the Investment, Industry, Private Sector Promotion and Tourism framework has introduced time-bound reforms aimed at improving governance within 15 to 90 days. It emphasizes a one-door approval system, an integrated business platform, and a startup fast-track mechanism. The plan also includes determining investment modalities for national priority projects under the Investment Board.
In addition, the plan aims to reduce the loan risk weightage for SMEs, convert government training centers into employment, skills, and entrepreneurship development hubs, and strengthen private sector protection and promotion strategies. It also proposes action against those responsible for damaging industries during recent protests and introduces relief packages for affected enterprises. A Prime Minister’s Delivery Unit will be established under the Office of the Prime Minister. Industrial registration up to Rs 250 million will be handled at the district level through cottage and small-scale industry offices. These measures are expected to reduce bureaucratic delays and improve investor facilitation.
Investment is crucial not only for rebuilding infrastructure but also for strengthening the country’s productive capacity. At the federal level, the government should act as a facilitator for large and medium industries, while provincial and local governments should support small-scale industries. Advocates of reindustrialization argue that manufacturing jobs are more sustainable and economically beneficial than those in the service or financial sectors. There is strong expectation that the new government will implement time-bound and effective reindustrialization policies. If properly executed, the current governance reforms and commitment to reducing private sector interference could help revive industrial activity in Nepal.
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