Nepal frequently speaks of industrialisation, entrepreneurship, self-reliance, import substitution and economic transformation, yet public policy and public spending do not reflect those ambitions. The long-term economic evidence is deeply concerning. The industrial sector’s contribution to Gross Domestic Product (GDP) has steadily declined over the past decade. In FY 2015-16, the broader industrial sector accounted for 14.1 percent of GDP; by FY 2024-25, that figure had fallen to 12.8 percent. The manufacturing sub-sector presents an even more alarming picture, shrinking from nearly 10 percent to below 6 percent of GDP in three decades. They signal structural economic weakness, declining productive capacity, reduced industrial competitiveness and lost employment opportunities.

This decline matters profoundly because demographic and economic realities demand industrial expansion—not contraction. Every year, hundreds of thousands of young Nepalis enter the labour market, yet the domestic economy consistently fails to absorb them. For many, migration is no longer an aspiration but an economic necessity. The trade profile also reflects this structural weakness.

Nepal’s economy remains overwhelmingly dependent on imports. In FY 2024-25, Nepal’s total foreign trade reached Rs2,081 billion, with imports accounting for Rs1,804 billion (86.7 percent), while exports contributed only Rs277 billion (13.3 percent)—a stark reflection of weak productive capacity and limited industrial competitiveness. The country’s chronic trade deficit is therefore not merely a customs or exchange-rate issue; it is fundamentally an industrial problem. Policymakers have long spoken of import substitution and export promotion, but such ambitions cannot be realised without stronger industrial foundations.

The Constitution provides a clear division of responsibilities in the industry and trade sector. While the federal government retains authority over international trade, foreign investment, national industrial standards and macroeconomic industrial policy, provinces are constitutionally expected to lead industrialisation, regulate intra-provincial trade, register and regulate industries, develop industrial infrastructure, promote entrepreneurship and drive economic growth based on their comparative advantages. Industry and trade also fall within concurrent jurisdiction, requiring active coordination between federal and provincial governments.

The actual problem lies in implementation. The policy vision itself is reasonably coherent. The federal government’s 16th plan emphasises structural transformation through industrialisation, export diversification, import substitution, competitiveness enhancement, industrial corridors, foreign investment promotion and technological upgrading. Provincial plans broadly mirror these ambitions while adapting them to regional comparative advantages. Koshi prioritises agro-processing and hydropower-linked industries. Madhesh focuses on agro-based industrialisation and border trade facilitation. Bagmati emphasises knowledge-based and technology-driven industries. Gandaki leverages tourism-linked enterprise development. Lumbini prioritises industrial growth through public–private partnerships. Karnali focuses on small-scale and herbal industries to reduce regional disparities. Sudurpaschim aims to reduce outward migration through provincial industrial growth. Yet, policy ambition without fiscal commitment remains little more than rhetoric.

If public expenditure reveals actual priorities, Nepal’s industrial sector has clearly been relegated to the margins. In FY 2024-25, the Ministry of Industry’s allocation stood at just Rs9.3 billion—only 0.5 percent of the total government budget. Even in FY 2025-26, the figure rises only slightly to Rs10.1 billion, representing just 0.52 percent of the national budget. These are remarkably small figures for a country that repeatedly declares industrialisation as a national priority.

The problem is not merely the size of the budget; it is also its distribution. In FY 2024-25, nearly 89 percent of the Ministry of Industry budget remained under federal control, with only about 11 percent reaching subnational governments. In FY 2025-26, centralisation becomes even more pronounced, with more than 90 percent retained at the federal level. This is a fundamental contradiction at the heart of Nepal’s federal economic governance. Much of the budget retained at the federal level is not directed towards strategic industrial promotion but often diverted to general infrastructure spending and politically driven constituency projects.

While the Constitution assigns provinces major responsibilities in industrial promotion and intra-provincial trade regulation, the financial resources needed to fulfil these responsibilities remain concentrated in Kathmandu, creating a clear ‘function without finance’ problem. This fiscal centralisation is compounded by another structural reality: Despite federalism, Nepal’s economy remains heavily Kathmandu-centric, with Bagmati Province continuing to dominate national economic activity largely due to the concentration of private-sector investment and business activity.

Provincial expenditure data reveal the depth of this contradiction. In FY 2024-25, provinces allocated only about 1.3 percent of their total expenditure to industry. Even relatively proactive provinces remain modest in commitment; Gandaki allocated 2.4 percent, Koshi 2.3 percent, Madhesh 1.3 percent, while Bagmati, despite being the country’s most economically vibrant province, allocated just 0.3 percent. These are hardly the numbers of a country serious about industrial transformation.

Provinces have shown initiative despite severe constraints. Koshi has promoted startup incubation, investment summits and value-chain development around tea, coffee, dairy and local industries. Madhesh has linked industrial development to border trade facilitation and diaspora investment. Bagmati has pursued startup ecosystems and industrial villages, while Gandaki has integrated tourism-linked enterprise development. Karnali has experimented with ‘Make in Karnali’ branding and startup financing. These efforts demonstrate creativity and willingness, but ambition without resources cannot deliver structural transformation.

Federal plans emphasise industrial corridors, export promotion, competitiveness, foreign investment and industrial modernisation. Provincial plans broadly mirror these priorities. Yet implementation remains disconnected. Investment promotion efforts are conducted independently, entrepreneurship programs overlap and business facilitation systems remain fragmented. Rather than functioning as parts of a coordinated national industrial strategy, multiple layers of government often operate in parallel.

More concerning is the absence of meaningful inter-provincial economic cooperation. In mature federal systems, provincial governments coordinate economic policies, harmonise regulations, and jointly develop growth corridors. Nepal has yet to institutionalise such cooperation. Take the East-West Highway corridor, one of the most important economic assets. Instead of functioning as the backbone of coordinated industrial development, it remains fragmented across provincial boundaries. Industrial zones are planned separately, licensing systems vary, product standards lack mutual recognition and market integration remains weak.

At a broader level, Nepal’s development model itself deserves scrutiny. Public spending remains heavily focused on service delivery, while productive sectors receive marginal attention. Education, health and agriculture understandably command significant investment, but industry, the sector that drives productivity, export competitiveness, technological upgrading, and large-scale employment, remains persistently underfunded.

No country has achieved sustained prosperity through remittance dependence, import consumption and fragmented service-sector expansion alone. Economic transformation requires production: factories, industrial ecosystems, functioning logistics, competitive enterprises and long-term investment confidence.

Nepal cannot continue to lament trade deficits while neglecting its domestic productive capacity. It cannot celebrate entrepreneurship rhetorically while maintaining weak industrial infrastructure and uncertain regulation, nor speak of retaining youth while failing to create productive jobs at home.

Entrepreneurs are not asking for privilege, but for policy consistency, predictable regulation and serious institutional support. I have repeatedly urged leaders of both FNCCI and CNI to work more closely with provincial governments, but that seriousness has largely been missing. Provinces do not need symbolic constitutional authority; they need real economic devolution, while the private sector must move beyond Kathmandu and build stronger partnerships with provincial governments. Without a stronger industry, domestic production and empowered provinces, prosperity will remain elusive.