The International Monetary Fund (IMF) has recently revised the global growth upward from the earlier projection made in October. According to the January projection, the world economy will grow by 3.3 percent in 2026 compared to the earlier projection of 3.1 percent. China’s growth for 2026 has been revised upward by 0.3 percentage points to 4.5 percent. And, for India, growth has been revised upward by 0.2 percentage points to 6.4 percent. According to the WTO, the global merchandise trade volume is also projected to grow by 2.4 percent in 2025 compared to the earlier projection of 0.9 percent.

Nepal, lying between two emerging economic powerhouses, China and India, remains in a low-growth trap. Over the past 50 years, Nepal’s annual average growth remained only 4.3 percent. Although growth momentum was higher after the reconstruction efforts made in the aftermath of the disastrous earthquake of 2015, it receded after the Covid-19 pandemic. While the economy contracted by 2.37 percent in 2019–20 due to Covid, the average growth in the subsequent five years is 4.1 percent. The World Bank, in its November report, cautions about the implications of heightened uncertainty on Nepal’s economy, projecting the growth of 2.1 percent in the current fiscal year.

What is holding back Nepal’s growth momentum? To answer this, it is necessary to review the growth attained during 2016–17 to 2018–19. In these three years, Nepal’s economic growth was 7.8 percent. Three major factors drove the high growth. Post-earthquake reconstruction was one factor. As a part of post-earthquake reconstruction efforts, around 600,000 houses were constructed. Major infrastructure projects such as Upper Tamakoshi, Pokhara Airport and Bhairahawa Airport also spurred growth. Further, the implementation of federalism, which channelled resources to the local level and supported the construction of local infrastructures, including roads and administrative buildings, also supported higher growth. But the questions on the allocative and productive efficiency of such investment remain.

With the outbreak of Covid-19, growth momentum faltered and has not rejuvenated yet. Following the pandemic years, there were concerns regarding the availability of loanable funds, interest rate and foreign exchange reserves. Contrary to that, things are different now. Interest rates have come down historically, and the central bank has relaxed a number of regulations. However, the growth prospect remains weak. This is primarily due to the reduced investment.

The overall investment in the country as a share of GDP has come down to 24 percent in the last three fiscal years. Such a ratio was around 30 percent in the previous eight years. Further, the growth of the private sector credit by banks and financial institutions remained 6.3 percent in the last three years, which is below the nominal GDP growth. Private credit growth was 19.3 percent in the decade just before the credit slowdown. Despite the private sector being overleveraged, private credit needs to be channelled around the growth of nominal GDP.

The slowdown in overall investment signals subdued growth in the years to come. If bold measures are not taken to revamp the growth momentum, Nepal will miss breathtaking opportunities that stem from three factors. One of the major factors that could help push Nepal’s growth frontier outward is the trickle-down effect of burgeoning growth in China and India. Both these economies have been playing a catalytic role in ushering in global growth. While countries in the Global South and North are aligning with China on trade and investment, India has weathered the unprecedented tariff shock. The resilience shown by these economies in this unnerved time should encourage Nepal to bring in additional foreign direct investment, promote tourism and lobby for infrastructure financing. This will have a reinforcing effect in attracting investment from other countries, too.

Nepal needs both production and productivity growth. One area that could boost productivity is the investment in and adaptation of technology. An analysis by the IMF staff shows that AI-driven productivity gains could raise total factor productivity in emerging Asia by roughly 0.3 to 3 percentage points. In fact, countries like Nepal need to raise total factor productivity by catching up to the advances made in the area of artificial intelligence and technology. Digital and green infrastructure projects could be a prudent choice in this regard.

The conventionally discussed growth drivers, such as tourism, energy, agriculture and Micro, Small, and Medium Enterprises (MSMEs), are to be harnessed earnestly. In addition, IT, education, health, herbal processing, and forestry could be ideal avenues to pour more investment and boost growth. Premature deindustrialisation has a lingering effect on Nepal’s long-term growth. As the industrial policy has returned to the centre stage around the world, Nepal should not delay in encouraging the private sector to funnel investment in manufacturing and processing. Industrial policy should not be viewed only from the traditional man and machine perspective. Rather, it should complement investment and reinvestment in productive capacity.

Modern industrial policy should contribute to innovations and save large sums that Nepal has been paying to the outside world in the form of annual maintenance costs for various computing software and programmes. The current demography also offers more advantages to Nepal in utilising an abundant labour force in the production function. The 3 million people who have left the country in the last four fiscal years in search of work are a clear example of the demographic dividend that Nepal has failed to reap.

Low investment and inefficiency in service delivery have hindered higher growth. Thus, an efficient and production-oriented private sector, along with smart service delivery from the government are necessary to boost growth. Developing infrastructure, investing in expanding industrial capacity and accumulating human capital are hallmarks of higher growth. Increasing capital formation, widening digitisation and addressing information asymmetry in finance are just as vital.

Developing infrastructure and enhancing productive capacity on one hand, and distributing resources from the national exchequer on the other are two different things. Production requires huge efforts, whereas distribution is easier. A case in point is India, which in the last two decades accelerated the pace of productivity growth by investing in high-value services and efficiency-enhancing reforms. However, policy and polity instability have shackled the growth prospects of Nepal and resulted in unjust socio-economic development. As Martin Luther King said, injustice anywhere is a threat to justice everywhere. Hence, Nepal should work towards attaining higher growth that is inclusive and balanced. As the parliamentary election nears, political parties should stand above the bigotry of distribution and clearly outline plans for production that create employment and promote entrepreneurship.