Nepal was a late starter in the mechanization of industries. When Western countries were entering the realms of the first and second industrial revolutions, Nepal was reeling under an autocratic regime and remained isolated from the outside world. A lack of physical infrastructure and technology —combined with the government's apathy toward public suffering—were defining features of the Rana regime. A major turn of events occurred with the overthrow of the autocratic rule by the people's revolution in 1950.
Homegrown Industries
The first Industrial Revolution began in the mid-eighteenth century in Britain with the invention of the steam engine and the mechanization of production. This was followed by the second revolution during the 1870s, which fueled global trade and the rise of large corporations. The third industrial revolution, beginning in the mid-twentieth century, was driven by digitization and the use of computer technology in production. The ongoing fourth revolution, since the early 21st century, is powered by a fusion of modern technologies such as artificial intelligence (AI), the Internet of Things (IoT), robotics, and quantum computing.
Nepal, isolated for much of its history, remained largely indifferent to mechanization for mass production, consumption, and export. Instead, its industries were limited to cottage and small-scale enterprises passed down from ancient and medieval times. These included the production of cotton yarn and coarse fabrics, wool carding, blanket and rug making, wood carving, bronze casting, leather processing, and the manufacture of utensils and agricultural tools, among others. These industries primarily catered to local needs, with products also sold in neighboring districts and villages. A limited range of items—such as rugs, blankets, bronze statues, and semi-processed agricultural products—were exported to bordering towns in India and Tibet (China).
The growth of industries in British India encouraged Nepalese rulers to create employment opportunities within the country. As a result, nearly three dozen industries were established during the 1930s, including sugar and jute mills, a mining company, and factories for matches, soap, plywood, and furniture. Alongside industrial development, Nepal Bank Limited was established in 1934 as a lending agency for industries, and the Council for Industrial Facilitation was set up in 1935. This was followed by the creation of cottage industry training centers and promotional display centers in Kathmandu and major towns like Baglung, Palpa, Bandipur, Banepa, and Bhojpur. Credit is due to Rana Prime Minister Juddha Shumsher for establishing the Agriculture Council, the Departments of Mines and Plant Resources, and the Cottage Industry Department, as well as for enacting the Company Act and related regulations. Thus, Nepal’s early industries were largely homegrown, relying on local raw materials, traditional skills, and limited markets.
Cooperatives growth on a declining trend
Tryst with Modern Industries
Major steps toward industrialization were taken after the launch of Nepal’s first five-year plan (1956–61) and during subsequent plan periods. The Nepal Industrial Development Corporation (NIDC) was established in 1960 to provide soft loans to industries. During the first decade of the Panchayat regime, numerous public sector industries were set up, mostly with the support of bilateral development partners. Industrial estates were developed across various regions.
The 1990s marked a turning point, with economic liberalization gaining momentum. Reforms included the liberalization of foreign currency regulations, abolition of the quota and licensing systems in trade, and the introduction of various regulatory acts and policies. The privatization of public enterprises began in 1994 to prevent revenue losses from inefficient state-run industries and to create a level playing field for private investors. The revision of the bilateral trade agreement with India in 1996 facilitated Nepalese exports and boosted industrial production. These developments attracted several multinational companies to Nepal, including Unilever (Dabur Nepal), Arati Strips, and ITC Limited India (Surya Nepal). Key exports to India include high-value agricultural products like tea, coffee, large cardamom, and vegetable fats, along with goods manufactured by these multinationals. Manufacturing contributed 13 percent to Nepal’s GDP by the end of the 20th century.
The Declining Trend
Many public sector industries handed over to the private sector eventually shut down or became non-operational due to various challenges. While significant private investment was expected to upgrade old mills and factories, many investors opted for more profitable ventures offering quicker returns instead of revamping outdated manufacturing units.
Nepal also experienced a decade-long Maoist insurgency (1996–2006), followed by a prolonged political transition that culminated in the promulgation of a federal republican constitution in 2015. Although two general elections have since been held, they have failed to ensure stable governments at the central and provincial levels. Political instability has led to policy inconsistency, poor governance, and a loss of investor confidence.
In this unstable environment, the domestic and foreign direct investments envisioned in national plans have not materialized. According to the Department of Industry, a total of 9,519 industries were registered by the fiscal year 2022–23, of which 60 percent fell under the small-scale category. Although the projected foreign direct investment (FDI) in registered projects is around USD 4.3 billion, only one-third of this has been realized. This paints a gloomy picture for industrial investment in Nepal. The World Investment Report (WIR) 2025, published by the United Nations Conference on Trade and Development (UNCTAD), places Nepal at the bottom of the FDI rankings among South Asian countries. FDI inflows to Nepal stood at just USD 57 million in 2024, down from USD 185 million in 2019—a clear sign of continuous decline. Moreover, the bulk of this investment is directed toward services, tourism, and hydropower, with manufacturing largely neglected. This meager investment in manufacturing is insufficient to generate significant employment opportunities within the country.
What Next?
The neglect of traditional industries and the lack of sufficient government support are major obstacles to addressing Nepal’s widening trade deficit. Adopting modern technologies, fostering innovation, and enhancing productivity in existing industries are essential for Nepal’s journey toward industrialization.
Setting up agro-processing industries—focusing on fruits and vegetables, jute, cotton, wool, and leather—as well as value-added processing of large cardamom, ginger, and tannery products, can generate local employment and connect producers to international markets. Special programs should be introduced to tap into the growing global demand for textiles, apparel, and fashion products. Incentive structures must be developed to attract investors back into the manufacturing sector.
For Nepal to remain competitive in export markets, it must prioritize quality production and brand development. Equally important are policy stability, anti-corruption measures, and the promotion of transparency and accountability. These reforms are crucial for restoring investor confidence. While the road ahead may be challenging, it is by no means impossible.
The author is Former Secretary of the Government of Nepal. Views expressed are personal.
