Chapter 4

AGRICULTURE, TRADE AND INDUSTRIAL SECTORS: PERFORMANCE AND ISSUES

Lecturer: Binod Lingden Subba

Nepal’s agriculture sector

The science, art, and business of cultivating soil, producing crops, and raising livestock.

Agriculture sector, contributing to more than one third of Gross Domestic Product (GDP) and employing two-thirds
of the country's labour force is central to the livelihood of every Nepalese people. The agriculture sector is pivotal
to increase income, alleviate poverty and uplift the living standard of the Nepalese people. However, the
performance of this sector has been inadequate to meet the increasing food demand and livelihood needs of
growing population in the country.

Features
 Agriculture is the major sector of Nepalese economy.
 Only less than 20% of its land is cultivable.
 It contributes about 31.69 percent (one third) in the GDP. (Economic Survey: 2015/16).
 Agriculture contributes 13 % of the total foreign trade of the country.
 It provides employment opportunities to 66 percent of the total population.
 Agriculture is the main source of food, income, and employment for the great majority of the
population.
 Therefore, the development of agriculture sector is key for the development of national economy.
 Keeping in view of the contribution, the agriculture sector was given priority for its development from
the onset of the periodic plans till the Eighth Five Year Plan.
 Despite this, agriculture is monsoon dependent.
 Subsistence and mixed farming system with domination of small holder farmers.
 Low level of public and private investment.
 Suffer frequently from natural calamities as flood, landslides, cold weather, drought and earthquakes.

Performance of Nepalese agriculture sector

1. Number of industries: Total number of industries registered at the department of industries till the fiscal year
2015/16 is 6328. The shares of large, medium and small industries have averaged 13 percent, 23 percent and 64
percent respectively.

2. Capital investment: Total capital investment till the financial year 2015/16 is 1084210.46 millions.

3. Employment generation: Altogether 512159 people are engaged in industrial sector. These industries
appeared to have generated employment to 150, 96 and 62 individuals per industry respectively.

4. Foreign investment: A total of 3,520 industries from 86 different countries have been registered by mid-
February, 2016 securing approval for foreign investment of more than Rs. 1.89 trillion. 211,843 people are
estimated to have received employment.

5. Contribution to GDP: The contribution of industrial sector in the GDP is 13.42 percent in the fiscal year
2015/16 which previous fiscal year 2014/15 was 16.08 percent.

6. Industrial growth rate: The average rate of industrial sector averaged 2.01 percent from fiscal year 2006/07 to
fiscal year 2015/16.
 Nepal’s industrial sector

 Industrialization is an important factor for achieving the basic objective of a country„s economic and social
progress.
 The history of modern industrialization was started in 1936 with the establishment of Biratnagar Jute Mill.
 After this Morang Cotton Mill (1941), Morang Sugar Factory (1946), Raghupati Jute Mill (1946), Juddha
Match Factory (1946) were other industries established in Nepal.
 The outbreak of the Second World War gave added impetus (motion) to this trend. Due to extreme shortage of
essential consumer goods in the world market, the promoters of these industries could reap windfall profits
within a very short period of time.
 Within a period of 10 years, as many as 63 industrial units were opened in the country with a total capital
investment of Rs. 72 millions, of which only Rs 2 million was invested by Nepalese businessmen.
 With the return of business situation to normal after the War, most of these mills were liquidated. They could
not sustain the post-war recessionary effects and much of the foreign capital was withdrawn.
 Industrial development in Nepal, however, started getting regular attention of Government under the aegis of
development plans after the dawn of democracy in 1951.
 Several industries were established in the public sector mostly with the financial and technical assistance of
USSR and China.
 This process continued till the end of the Sixth Plan. As a result. Nepal witnessed the development of quite a
large number of manufacturing industries in the public sector.
 The industrial development strategy of the government, however, changed after mid-1980s. The govt. then
shifted its development strategy from state-led development to market-led economy. As a result, many of the
public sector industrial units were privatized in the early 1990s.

Classification of industries
The Industrial policy, 2010 has classified industries into the following categories:

1. Classification of industrial sector based on nature of production and service:

a) Industries based on agriculture and forestry: The businesses of production or processing from
raw materials based on agriculture and forests product as such as integrated sericulture and silk
production, horticulture and fruit processing, animal husbandry, and forestry related business
such as leasehold forests, agro-forestry etc.

b) Production-oriented industries (manufacturing): The industries producing goods having used raw
materials or semi-processed raw materials or unused materials having added value as prescribed.

c) Export-oriented industries: The industries exporting 51% or more of their products to abroad.

d) Energy-oriented industries: The industries producing energy from water resources, wind, solar
power, coal, natural oil and gas, bio-gas and other sources

e) Mining industries: The industries extracting and processing metallic and non-metallic minerals.

f) Tourism industries: The enterprise that provides services to tourists such as Tourist lodging,
motel, hotel, restaurant, resort, travel agency, gliding, water refining, cable car complex, pony-
trekking, trekking, hot air ballooning, paragliding, horse-riding etc.
 g) Construction industries: The enterprise that constructs and operated physical infrastructure such
as road, bridge, ropeway, trolley bus, tunnel, flying bridge, commercial and residential complex
construction and operation.

h) Information and communication technology industries: Industrial enterprise relating to

information, knowledge and communication having used technology for information collection,
processing and transmission.

i) Services industries: Workshop, printing press, consultancy service, cinematography,

construction business, public transportation business, photography, hospital, nursing home,
educational and training institution, laboratory, air services, cold storage, etc.

2. Classification of industries based on investment nature shall be as follows:

a) Micro Enterprises: Micro enterprise means the enterprise having met the following conditions:-
 Where investment is up to two hundred thousand rupees as fixed capital except the house or land
 Where the entrepreneur himself/herself engaged in management
 Where there are up to nine workers including the entrepreneur
 Where the annual financial transaction is less than two million rupees, and
 If an instrument with engine is used, the electric motor or other oil engine capacity has to be less
than ten kilowatt

b) Traditional and other Cottage Industries: industrial enterprises that uses traditional skills and
technology, the instruments and machinery based on local raw materials and associated with art
and culture of the country and that uses electric power up to 10 kilowatts are traditional and other
cottage industries.

c) Small Scale industries: Industrial enterprises other than those of micro enterprises and traditional
and other cottage industries having the fixed assets of up to 50 million rupees are small scale
industries.

d) Medium Scale Industries. Industrial enterprises having the fixed assets more than fifty million to
one hundred fifty million rupees are medium scale industries.

e) Large scale Industries: Industrial enterprises having the fixed assets of more than one hundred
fifty million rupees are large scale industries.

Export oriented industries

Industries, which produce goods to be sold in the international market, are export oriented industries. These
industries play an important role in maintaining balance of trade. They are the major source of foreign currency.
Since, at present, Nepal has limited amount of export as compared to its imports, it is suffering from trade deficit.

a) Carpet industry: Carpet weaving is the traditional occupations of the people of the hilly regions. In ancient
times, people were involved in this industry to fulfill their needs only, but at present it has become one of the
important industries of the country. From the early 60s, carpet products were exported to European countries.
The industry developed and specialized in support of the Swiss government. Many new models and designs
were developed along with the development in quality. At present, it has contributed significantly to the
development of the export sector, employment foreign exchange earning. It provides employment opportunities
 directly and indirectly to about two lakh people.

Nepal exports carpets to 35 countries. However, Germany is the major market which takes in 60 percent of the
total exports.

b) Garment industry: This industry was introduced in Nepal in the early 70s. This is a major export oriented
industry of Nepal. At present, it has become an important source of employment and foreign exchange earning.
It provides employment opportunities directly and indirectly to about for one lakh people. The USA (United
States of America) is the main market for Nepali garment products as its takes in around 80 percent of the total
export. Other markets of garment products are France, UK (United Kingdom), Germany, Italy, Australia,
Canada and Japan. The provision of quota system granted by the USA government to Nepal has contributed to
the development of the garment industry. However, from 2005, the USA government terminated the quota
system, as Nepal became a member to the WTO.

c) Leather Industry: It is a traditional industry. Due to availability of sufficient raw materials, the leather
industry has a great scope of development in Nepal. The share of leather product export is 2 percent of the total
export.

d) Handicraft Industry: Traditionally, Nepal is a rich in handicraft products and its craftsmanship is well known
the world over. The industry has been playing an important role in the Nepalese economy. It is an important
means of employment and foreign exchange earning. Nepal's handicraft products include wood carving,
potteries, paintings and thankas, hand made paper and paper products, gold plated items, filigree articles, silver
jewelries, masks etc.

e) Agro and forest based industries: Nepal is an agricultural country. More than 80 percent of the people are
engaged in farming. Many agro based industries are exporting their products to foreign countries. These include
tea, pulses, ginger, cardamom, coffee, honey and other agro based industries. Nepal is rich in forest resources.
In the mountainous regions of Nepal, many rare plants and herbs are found. Nepal exports many forest based
industrial products consisting of wood, herbs, paper products etc. These industries also contribute to foreign
currency earning.

Import substituting industries

Nepal has limited industries. So, it imports many industrial commodities from foreign countries. All industries that
help to minimize imports are called import substituting industries. Covering the national market by domestic
industrial products helps to make the country self dependent. Nepal has adopted an import substitute policy since
1961.

It has given priority to developing import substitute industries in Nepal. However, more needs to be done on this
front. Import in more as compared to export, which has resulted in the negative balance of payment. The major
import substituting industries of Nepal are pharmaceuticals, food, beverage, chemical, iron and steel, electrical,
electronic, paper, cement, sugar industries etc.

a) Food and beverage industries: At present food and beverage companies are operating in Nepal. To some
extent, Nepal is self sufficient in food and beverage products. Food products include vegetable ghee, noodles,
biscuit, flour, animal feed. etc. Beverage products include cold drinks, soft drinks and hard drinks.

b) Chemical Industries: Chemicals industries of Nepal also help to minimize the import volume. The companies
include soap, detergent power, paints, fertilizer, match industry etc.

c) Iron steel industries: Nepal is self dependent in iron and steel products. It imports only raw materials
necessary for the industries. Iron and steel industrial products include iron rods, tin, steel pipe, wire net, belting
wire, steel plate, grill etc. All iron and steel manufacturing factories are situated in the Terai region.
d) Electrical industries: Electrical industries include companies producing electric ware, bulb, battery,
plug/switch, cables etc. Urbanization and expansion of electricity to villages has increased the demand of these
products in recent years. These industries also support in minimizing import of electrical goods.

e) Electronic industries: Nepalese electronic manufacturing companies import parts of electronic products from
foreign countries and assemble them in the country. These companies include TV,computer, refrigerator,
transistor, tape recorder and watch assembling companies. This industry is thriving in Nepal due to low labor
cost and the ever growing demand.

f) Cement industries: The development of economic activities increases the demand for cement products. In
Nepal, the Hetuada Cement Industy and Udaupur Cement Industry are two government owned cement
companies. Besides, many private cement companies are operating in Nepal. However, the domestic cement
industry meets only 20 percent of the total demand.

g) Paper industries: Paper production is a traditional industry of Nepal. At present, there are many paper
industries in the country. Among them, the Bhrikuti Pulp and paper Nepal ltd and Everest paper mill are two
big industries. These industries have helped in minimizing the import of paper products.

h) Sugar industries: Production of sugarcane is the traditional agricultural occupation of the people of Nepal. The
huge production of sugarcane in the Terai region helps in promoting the sugar industries in Nepal. Lumbini
Sugar Mill, Maha laxmi sugar Mill, Birgunj sugar mill, Eastern sugar mill etc. are major sugar producing
companies of Nepal. The establishment of these companies has helped minimize the import of sugar products
in Nepal.
Service sector

a) Tourism Industry: Tourism is one of the major service sector industries of Nepal. There are more prospects
for the development of tourism in Nepal. The country is full of natural beauty and offers many natural spots for
tourists, like the high snow capped mountains, valleys, lakes, national parks, ancient temples, culture, peace
loving and hospitable people and so on and so forth. The tourism industry includes hotels, resorts, restaurants,
cable car, travel agencies, rafting, trekking agencies etc.

b) Transportation industry: The transport industry in Nepal is still in a developing stage. This industry includes
road transport, air transport and water transport. The development of transportation is the basis for the
development of industry, trade and other auxiliaries of commerce in the nation. Since Nepal is a landlocked
country, it has no direct water transportation system. Therefore, the transportation industry includes only road
and air transportation.

c) Information and communication Industry: The rapid development of science and technology contributes to
the growth of information and communication service. The development of internet, email and mobile phone
service has brought about a revolution in the field of information technology. The main components of
information service are postal service, telecommunication service, television broadcasting service, radio
broadcasting service, print media service, motion pictures etc.

d) Construction industry: The construction industry has an important role to play in the economic activities of
Nepal. This industry is involves in infrastructure development works consisting of construction of roads,
bridges, commercial buildings, electricity projects, expansion of telecommunication etc. In the construction
industry, many private contractors, projects, and many foreign consultants are involved. Private contractors are
involved in construction of commercial complexes, private residences, and in taking tender for government
projects. Nepalese construction companies are classifies into four categories: Class A, Class B, Class C and
Class D on the basis of their manpower, investment, equipment and experience. Foreign construction
companies are involved in the construction of huge projects supported by foreign donors, like the Word Bank,
and Asian Bank, and the Nepal government.
e) Financial institutions: Financial institutions include commercial banks, development banks, finance
companies, cooperatives and non cooperatives. After the adoption of the financial sector liberalization policy,
financial institutions have increased in a considerable scale. Many such institutions are concentrated in the
urban areas.

Nepal’s foreign trade structure

Foreign trade is considered as an essential factor for accelerating the path of economic development. Most countries
are involved into foreign trade to create employment, raise propensity to save, increase foreign exchange earnings,
and raise the productivity of investment moving from less productive use to high productive use.

In the context of Nepal, historically, barter trade prevailed at domestic and border trade. The international trade
was limited to Tibet and East India Company. Nepal provided transit passes between India and Tibet during the
medieval times in history (treaty of peace and commerce was signed with Tibet during the time of Pratap Malla).
Subsequently, India occupied 95 percent of Nepalese trade during the Rana period. To improve foreign trade, GON
and GOI signed historic treaty of trade and commerce in July 31, 1950 both for transit and bilateral trade. Nepal
also signed bilateral trade agreements with 15 other countries between 1947 and 1992 (the first one USA and the
last with Mangolia and Poland in 1992): all in MFN basis. Nepal is a beneficiary to GSP scheme since 1971, a
member of SAFTA, BIMSTEC FTA and WTO since 2004.

Today, Nepal exports the following major products in international markets:

 Hand knotted woolen  Pulses

carpet  Spices
 Readymade garments  Medicinal herbs and
 Pashmina products essential oils
 Handicraft products  Nepalese paper and paper
 Leathers products
 Precious and semi-  Honey
precious stones  Tea and Coffee

Nepal’s import partners

Year 2011 2012 2013 2014 2015
No. of Countries 162 153 153 153 159
Nepal’s export partners
Year 2011 2012 2013 2014 2015
No. of Countries 133 132 135 128 127
Number of products imported
Year 2011 2012 2013 2014 2015
No. of products 4070 4062 4004 4134 4066
Number of products exported
Year 2011 2012 2013 2014 2015
No. of products 1019 1051 1175 1151 897
Source: World Integrated Trade Solution
Table: Country wise import in the year 2016
S.N. Country Value (NRS) % Value
1 India 320,596,575,740 65.4
2 China P. R. 68,039,435,416 13.9
 3 U.A.E. 9,455,305,117 1.9
4 Indonesia 6,805,949,658 1.4
5 Thailand 6,234,966,944 1.3
6 U.S.A. 5,600,845,065 1.1
7 France 5,534,851,713 1.1
8 Japan 5,007,500,310 1.0
9 Malaysia 4,315,401,027 0.9
10 Argentina 4,254,093,534 0.9
11 Others 5,447,501,667 11.1
Total import 490,320,226,191 100

Table: Country wise export in the year 2016

S.N. Country Value (NRS) % Value
1 India 21,852,281,101 58.1
2 U.S.A. 4,642,439,205 12.3
3 Germany 1,520,609,400 4.0
4 Turkey 1,368,343,240 3.6
5 U.K. 1,256,018,669 3.3
6 China P. R. 1,008,491,879 2.7
7 Bangladesh 855,738,147 2.3
8 Japan 633,891,147 1.7
9 France 625,648,675 1.7
10 Italy 573,153,635 1.5
11 Others 3,302,773,209 8.8
Total export 37,639,388,307 100
Source: Trade and Export Promotion Centre
5. Inadequate market information: It has
Foreign trade issues in Nepal been difficult to achieve sufficient
information on potential market, potential
Nepalese foreign trade performance has so far been poor. importers and their specialties, type of
Several factors seem to be responsible, and these include: demand, the quantity and quality of
products demanded, product packaging,
1. Landlocked: Landlocked is one the major issue of foreign delivery time, cost of delivery, insurance,
trade in Nepal that creates high transit cost which is a big SPS and TBT requirements and the link
challenge to promote trade. The remote distance from sea port agencies. These are very important factors
is another major hurdle in the trade and transit of Nepal, the which contribute significantly to expand
nearest sea port being 660 miles away from the Nepalese trade. In the absence of these facilities,
border. This consequences to higher price of the imported Nepal has been unable to properly utilize
products in the Nepalese markets and exported products in the internationally available trading
foreign markets in comparison to other foreign products due to opportunities.
high transportation cost, demurrage charge, insurance charge
and undue delays. 6. WTO constraints: Nepal became the
first LDC member to accede to WTO in
2. Limited export basket: Nepal‟s trade basket is very limited 2004. Nepal is an active participant in
covering around 40 percent of total export by major ten items. WTO negotiations. However, Nepal‟s
In addition, the trend of export is also very unpredictable. participation in the WTO negotiations is
Exports have largely been unattainable due to unpredictable severely handicapped by its limited
behavior of importers, decline in the quality of products, human resources, institutional capacity,
absence of effective branding and other issues, relating to the understanding of complex dynamics of
protection of intellectual property rights, inability of exporters multilateral trade regime. Because of
to generate competitive advantage, increased cost of these factors, all of the WTO
 production, and high competition from other exporters as well. commitments cannot be implemented by
the Government alone and immediately. It
3. Inadequate economic infrastructure: The present has created constraints to Nepal from
performance of Nepalese economy and trade is affected by sharing better performance in the WTO
weak infrastructure, in particular lack of energy and road system.
infrastructure. At present, Nepal is facing severe energy crisis.
The big gap between supply and demand of electricity, 7. Lack of proper trade policy: The first
especially in the dry season, has created frequent and long trade policy was introduced in 1983 with
time power cuts which has reduced production, increased cost the slogan of “Export for development”.
and created uncertainty over smooth supply of products to the Following the wave of economic
market. All these factors are making Nepalese products less liberalization and Structural Adjustment
competitive. Program, Nepal introduced its first
Liberal Trade Policy in 1992. Trade
4. Insufficient skilled human resources: One of the important Policy 1992 removed most of the trade
problems of Nepalese economy is the absence of high quality, barriers such as eliminating licensing for
professional human resources in all sectors including trade. import and export, establishing industry
Most of the producers and traders lack vision and long term etc. Given the changed context GON
planning. They are not highly skilled and technically sound to introduced Trade Policy, 2009.
use modern technology in their businesses including ICTs. Considering the dynamism in the trade
The high level government officials and technocrats dealing sector and addressing alarming trade
with the trade and investment issues also lack sufficient deficit, the Government introduced new
experience and expertise in the related sector due to absence Trade Policy, 2015. However, this policy
of mechanism to develop specialized human resources. All allows uncontrolled flow of foreign goods
these factors contribute to low productivity, delay and poor into Nepal, whereas Nepal doesn‟t have
handling, ultimately leading to additional costs. the capacity to counter this which
ultimately causes large trade deficit.