BANKE, Nov 13: Nepal’s shift to federalism decentralized political power and administrative authority, bringing government services closer to citizens through seven provinces and larger local governments.
But a decade into the federal system, economic power, industrial investment and major infrastructure remain heavily concentrated in Kathmandu and Bagmati Province, leaving western Nepal struggling to catch up.
Preliminary government estimates for fiscal year 2025/26 show the extent of the regional economic divide. Of Nepal’s estimated Rs 6.6 trillion economy, Bagmati alone accounts for 36.7 percent, or Rs 2.423 trillion.
By comparison, Lumbini contributes Rs 937 billion (14.2 percent), Sudurpaschim Rs 464 billion (7 percent) and Karnali just Rs 277 billion (4.2 percent).
Combined, the three western provinces account for Rs 1.678 trillion, Rs 745 billion less than Bagmati alone. The figures underline how economic activity and capital remain concentrated in the federal capital and surrounding areas despite the political redistribution of power.
Book review: Analyzing political economy of federalism in Nepal
Lalit Kumar Rauniyar, a business leader in Nepalgunj, said federalism had improved administrative access but done little to change the region’s economic conditions.
"Ministers, secretaries and administrative offices have come closer to us. Provincial capitals and local governments have become active, but capital for industries, bank lending and real economic decision-making remain concentrated in Kathmandu," he said.
He said western Nepal had considerable potential in herbs, agriculture and cross-border trade, but the federal government had failed to provide policy incentives for large-scale processing industries. Banks and major business houses continued to favor Bagmati and other accessible areas, he added.
The lack of industrial investment has also accelerated youth migration. With few manufacturing industries or large employers, many young people leave for Kathmandu or seek work in Gulf countries, Malaysia and India soon after completing Grade 12.
Manraj Devkota, a businessman in Surkhet, said the creation of provincial ministries had failed to generate employment opportunities.
"Ministries have been established in Surkhet, and officials now travel to villages, but not a single large factory has opened to provide jobs to young people. Villages are losing their young population, reducing local purchasing power. Even small businesses are struggling, and some owners are considering leaving," he said.
He added that decentralizing political and administrative authority alone would not bring prosperity without distributing capital and industrial investment.
The Chaulkune Cement Industry in Surkhet, which received a license from the Department of Mines and Geology in 2009, has yet to begin operations, reflecting the difficulties in developing industries outside major economic centers.
Weak industrial activity has also left provincial governments with limited revenue. Lumbini, Karnali and Sudurpaschim remain heavily dependent on federal equalization grants and revenue sharing to finance both recurrent and development expenditure.
Industrialists say the government must go beyond transferring administrative structures and introduce targeted investment packages for western Nepal. These should include special economic zones and industrial corridors linking Nepalgunj and Bhairahawa in Lumbini, Surkhet in Karnali, and Dhangadhi in Sudurpaschim.
They have also called for tax holidays, low-interest financing and reliable round-the-clock electricity for industries established in the region. Joint investment by the government and private sector could support processing plants for medicinal herbs, minerals and agricultural products available in the hills and mountains of Karnali and Sudurpaschim.
Upgrading cross-border trade points and promoting local products are also necessary to expand economic opportunities. Without such measures, political power may remain dispersed across the country while economic activity stays concentrated in Kathmandu, deepening regional inequality and accelerating the depopulation of western Nepal.
