Agriculture, Trade and Industrial Sectors: Performance and Issues

Agriculture, trade, and industry are fundamental components of Nepal’s economy, each playing a critical role in shaping the country’s economic landscape. Together, these sectors contribute significantly to employment, GDP, and the nation’s overall development. However, despite some progress, they face numerous challenges that hinder their growth and sustainability.

Agriculture Sector

Agriculture is a crucial sector in Nepal, employing a significant portion of the population. The Nepalese agriculture sector is characterized by subsistence farming, low productivity, lack of commercialization, dominance of food crops, inadequate agriculture credit, and unequal landholding distribution.

Features of Nepalese Agriculture Sector

• Only 21 percent of the land is used for farming.
• Agriculture contributes 23 percent to the country’s GDP.
• About 50 percent of exports come from agricultural products.
• Agriculture is the main source of livelihood for many people.
• Farming in Nepal relies heavily on the monsoon season for water.
• The farming system is mostly subsistence and mixed farming.
• Productivity in agriculture is low.
• There is not enough investment in the agricultural sector.
• Most farmers have small pieces of land.
• The farming system is not modernized.

Performance

Contribution to GDP and Growth Rate

The agriculture sector has been significantly contributing to the Nepalese economy. The structure of Nepal’s economy is changing. The agricultural sector’s contribution to the GDP is decreasing while the contribution of the non-agricultural sector is increasing. In the fiscal year 2022/23, the agricultural sector’s contribution to the GDP is estimated to be 24.1 percent, and the non-agricultural sector’s contribution to 75.9 percent. In the last fiscal year, such contributions were 24.7 percent and 75.3 percent. The average contribution of the agricultural sector in the last ten years is 26.5 percent.

Status of Imports and Exports of Agro-Products

 Exports of Agro-Products:

Approximately 50% of Nepal’s total exports are derived from agricultural products, highlighting the sector’s significance to the country’s economy.
Key agro-products exported include a variety of fruits such as apples, oranges, and mangoes, as well as vegetables like potatoes, ginger, and various spices. Additionally, cash crops such as tea, coffee, and cardamom play a crucial role, alongside processed foods that encompass snacks and beverages.

However, the export of agricultural products has experienced fluctuations, with a notable 29.1% decrease in total merchandise exports reported until mid-March of FY 2022/23 compared to the previous year. This decline underscores the challenges faced by the agricultural sector and its impact on Nepal’s overall export performance.

Imports of Agro-Products:

Nepal relies heavily on imports of agricultural products to satisfy domestic demand, particularly for food grains and processed foods.
Key agro-products imported include cereals such as rice, wheat, and maize, as well as dairy products like milk and cheese. Additionally, fruits and vegetables are often sourced from neighboring countries like India and China, while fertilizers and seeds are essential for supporting local agricultural production.

Despite this reliance, the total import of agricultural products has seen a decrease of 19.1% until mid-March of FY 2022/23, amounting to approximately Rs. 1,058.39 billion. This decline reflects changing market dynamics and may indicate shifts in domestic production capabilities or consumption patterns.

Issues of Nepalese Agriculture Sector/ Major Factors Affecting Agricultural Development

Hindrance of the Agricultural Sector in Nepal

Urbanization: As more people move to cities for jobs and better living conditions, fewer individuals are available to work in agriculture. This shift can lead to a decline in the workforce needed for farming, making it harder to produce enough food.

Political Instability: Frequent changes in government and political unrest can disrupt agricultural policies and programs. Farmers may face uncertainty about regulations, support, and resources, which can discourage them from investing in their farms.

Poor Planning: Inadequate planning for agricultural development can lead to inefficient use of resources. Without a clear strategy, projects may not address the actual needs of farmers, resulting in wasted time and money.

Low Investment: Limited financial investment in agriculture means that farmers often lack access to modern tools, technology, and infrastructure. This can hinder their ability to increase productivity and improve the quality of their crops.

Limited Human Resource Capacity: There is often a shortage of skilled workers and experts in agriculture. Without proper training and education, farmers may not be able to adopt new techniques or improve their farming practices, which can limit growth in the sector.

Lack of Marketing Management: Farmers may struggle to sell their products effectively due to poor marketing strategies. Without proper marketing, they may not reach potential buyers or get fair prices for their goods, which can affect their income and willingness to invest in their farms.

Issues of Agricultural Development in Nepal

Governance: This refers to how well the government manages and supports agriculture. In Nepal, there can be problems like poor planning, lack of clear policies, and corruption. When the government doesn’t effectively design and implement agricultural policies, it can lead to confusion and a lack of support for farmers, making it harder for them to succeed.

Productivity: Productivity is about how much food and crops farmers can produce from their land and resources. In Nepal, many farmers use traditional methods and tools, which can result in lower yields. Without access to modern technology, better seeds, and training, farmers may struggle to grow enough food to meet demand.

Commercialization: Commercialization means turning farming from just growing food for personal use into a business that sells products in the market. Many farmers in Nepal still grow food mainly for their families and don’t have the resources or knowledge to sell their products commercially. This limits their income and the growth of the agricultural sector.

Competitiveness: Competitiveness refers to how well farmers can compete with others in the market, including imported goods. Nepali farmers often face challenges like high production costs and lack of access to quality markets. This makes it difficult for them to sell their products at good prices and compete with cheaper imports.

Farmers’ Rights: Farmers’ rights are the protections and entitlements that farmers have regarding their land, seeds, and livelihoods. In Nepal, many farmers face issues like insecurity over land ownership and limited access to resources. When farmers’ rights are not respected, it can discourage them from investing in their farms and affect their ability to make a living.

Nepal’s Industrial Sector

The industrial sector in Nepal plays a vital role in the country’s economic development, contributing to job creation, income generation, and overall GDP growth. It encompasses various industries, including manufacturing, construction, mining, and services.

Structure of Nepalese Industrial Sector

1. Classification based on the Nature of output and service

 Manufacturing Industry

• Textiles and Garments: One of the largest sectors, producing clothing and fabrics for both domestic use and export.
• Food Processing: Includes the processing of agricultural products such as grains, fruits, and vegetables, as well as dairy products.
• Cement and Construction Materials: Significant production of cement, bricks, and other construction materials to support infrastructure development.
• Consumer Goods: Manufacturing of household items, electronics, and personal care products.

Construction Industry

• Infrastructure Development: Focuses on building roads, bridges, schools, hospitals, and other public facilities.
• Residential and Commercial Construction: Involves the construction of housing, office buildings, and commercial spaces.

Mining and Quarrying

• Mineral Extraction: Includes the extraction of minerals such as limestone, dolomite, and precious stones.
• Sand and Gravel: Sourced for construction purposes, contributing to the building industry.

Energy Sector

• Hydropower: A major source of energy in Nepal, with numerous hydropower projects contributing to electricity generation.
• Renewable Energy: Increasing focus on solar and wind energy to diversify energy sources.

Service Sector

• Tourism and Hospitality: A growing industry that supports hotels, restaurants, and travel services.
• Transportation and Logistics: Involves the movement of goods and services, crucial for industrial operations.

Small and Medium Enterprises (SMEs)

• Local Production: SMEs play a vital role in local economies, producing goods and services tailored to community needs.
• Handicrafts and Cottage Industries: Includes traditional crafts, pottery, and artisanal products that reflect Nepal’s cultural heritage.

Agro-based Industries

• Food and Beverage Production: Processing of agricultural products into consumables, including snacks, beverages, and packaged foods.
• Dairy and Meat Processing: Focuses on the production of dairy products and processed meats.

Information Technology and Software Development

• IT Services: Growing sector providing software development, IT consulting, and digital services.
• Startups: Increasing number of tech startups focusing on innovative solutions and services.

2. Classification based on investment

Micro Enterprise:

A micro-enterprise is a very small business, often run by one or a few people. These businesses typically have a limited number of employees and low capital investment. Examples include small shops, home-based businesses, and local service providers. They play a crucial role in local economies by providing jobs and services.

Traditional and Other Cottage Industries:

Traditional and cottage industries are small-scale businesses that often use simple, manual methods to produce goods. These industries are usually home-based and involve crafts, textiles, pottery, and food production. They rely on local resources and skills, preserving cultural heritage while providing income to families.

Small Scale Industries:

Small-scale industries are slightly larger than micro-enterprises but still operate on a small scale. They typically have more employees and a higher level of investment. These businesses can include small manufacturing units, workshops, and service providers. They contribute to local economies by creating jobs and producing goods for local markets.

Medium Scale Industries:

Medium-scale industries are larger than small-scale industries and usually have a more significant number of employees and higher capital investment. They often produce goods on a larger scale and may serve regional or national markets. Examples include food processing plants, textile mills, and machinery manufacturing.

Large Scale Industries:

Large-scale industries are big businesses that operate on a national or international level. They have a large workforce, significant capital investment, and advanced technology. These industries often produce goods in bulk and can include sectors like automobile manufacturing, electronics, and pharmaceuticals. They play a vital role in the economy by generating substantial revenue and employment.

Special Economic Zones (SMZs)

Special Economic Zones (SEZs) are designated areas within a country that have different economic regulations than the rest of the country. These zones are created to attract foreign investment, boost exports, and promote industrialization.

SEZs aim to enhance economic growth by providing incentives for businesses, such as tax breaks, simplified customs procedures, and improved infrastructure.

Privileges Received by Industries in SEZs

Tax Benefits

• No Corporate Tax: Businesses in SEZs may not have to pay corporate income tax for several years, which saves them money.
• No VAT: Some goods and services can be bought without paying Value Added Tax (VAT), making them cheaper.

Customs Duty Exemptions

• Free Imports: Industries can bring in raw materials and equipment without paying customs duties, lowering their costs.
• Export Benefits: Products made in SEZs that are sold abroad may also have reduced or no export duties.

Easier Rules

• Quick Business Setup: Starting a business in an SEZ is usually faster and simpler.
• Less Red Tape: There are fewer rules and regulations to follow, making it easier for businesses to operate.

Good Infrastructure

• Quality Facilities: SEZs are built with good roads, utilities, and communication systems to support industries.
• Better Transportation: Improved transport services help move goods more efficiently.

Financial Help

• Easier Access to Loans: Businesses in SEZs can get loans and financial support more easily.
• Grants: Some SEZs may offer money or subsidies to encourage businesses to invest.

Export and Import-Oriented Industries

The industries in Nepal may also be classified as export and import-oriented industries.

Export Oriented Industries

There are some industries that are basically established for export. They are described below:

Carpet Industries

The carpet industry in Nepal is famous for making high-quality woolen carpets that are beautifully designed and handwoven by skilled workers. This industry is important for the country’s exports and provides many jobs, especially in rural areas. Nepalese carpets are popular in international markets, particularly in Europe and North America, where they are appreciated for their craftsmanship.

Garment Industry

The garment industry is one of the largest sectors in Nepal, offering many jobs and contributing significantly to exports. It produces a wide range of clothing, from casual wear to formal attire, for both local and international markets. The industry benefits from trade agreements that make it easier to sell products abroad, especially in the United States and Europe.

Pashmina Industry

The pashmina industry is known for creating luxurious shawls and garments made from fine cashmere wool from Himalayan goats. These products are highly sought after in global markets, especially in Europe and North America, for their softness and warmth. The industry supports many artisans and helps promote Nepal’s cultural heritage.

Leather and Leather Goods Industry

The leather industry in Nepal produces various products, including bags, shoes, and jackets. This sector is growing as it focuses on improving quality to meet local and international demands. Nepalese leather goods are becoming more popular for their durability and design, providing jobs and contributing to the economy.

Handicrafts

The handicrafts sector in Nepal includes a variety of products like woodwork, metal crafts, pottery, and traditional art such as thangka paintings and jewelry. This industry is important for showcasing Nepal’s culture and attracts tourists looking for unique souvenirs. By exporting these items, Nepal generates income and preserves its rich cultural heritage.

Others

The other export items are iron and steel, pulses, herbs, paper, ornaments, etc.

Import Substituting Industries

The major import substitution industries in Nepal are:

Pharmaceutical Industry

The pharmaceutical industry in Nepal is developing to produce medicines and healthcare products locally. This reduces the need for imported drugs, making healthcare more accessible and affordable for the population while also creating jobs in the sector.

Electrical and Electronic Industry

The electrical and electronic industry in Nepal aims to produce various electrical appliances and components locally. This effort reduces reliance on imported goods and helps create jobs. The sector includes the production of items like wiring, lighting fixtures, and small appliances, contributing to the economy and providing affordable products for consumers.

Problems/ Issues of the Industrial Sector in Nepal

Political Instability

Political instability in Nepal creates an unpredictable business environment, which can deter both domestic and foreign investment. Frequent changes in government and policy can disrupt industrial operations and planning, making it difficult for businesses to thrive.

Government Policy and Regulations

The industrial sector often faces complex and inconsistent government policies and regulations. Bureaucratic hurdles, lengthy approval processes, and frequent changes in regulations can create challenges for businesses, slowing down growth and innovation.

Lack of Energy

A significant issue for industries in Nepal is the lack of reliable energy supply. Frequent power outages and insufficient electricity generation hinder production processes, increase operational costs, and limit the ability of industries to operate efficiently.

Lack of Security

Concerns about security, including theft, vandalism, and political unrest, can impact industrial operations. A lack of security can deter investment and make it difficult for businesses to operate safely and effectively.

Quality of Product

Many industries in Nepal struggle with maintaining consistent product quality. This can be due to a lack of skilled labor, inadequate training, and outdated production methods, which can affect competitiveness in both domestic and international markets.

Weak Technology

The adoption of modern technology in Nepal’s industrial sector is limited. Many businesses rely on outdated equipment and processes, which reduces productivity and efficiency, making it challenging to compete with more technologically advanced industries.

Low Capacity Utilization

Many industries in Nepal operate below their full capacity due to various factors, including lack of demand, inefficiencies, and inadequate infrastructure. Low capacity utilization leads to higher per-unit costs and reduced profitability.

Lack of Physical Infrastructure

Inadequate physical infrastructure, such as poor transportation networks, limited access to markets, and insufficient facilities, hampers industrial growth. This lack of infrastructure increases costs and affects the ability to deliver products efficiently.

Labor Regulations and Labor Unions

While labor regulations are essential for protecting workers’ rights, overly strict regulations can create challenges for businesses. Additionally, strong labor unions may lead to strikes and disruptions, affecting productivity and operational stability.

The Role of Industry in the Changing Scenario

Economic Growth

The industrial sector is important for Nepal’s economic growth. As the country tries to move away from relying only on agriculture, developing industries can create jobs, increase productivity, and help the economy grow. A strong industrial base can make the economy more stable and less vulnerable to outside problems.

Job Creation

Industries provide many job opportunities, especially for young people and women. As industries grow, they create various jobs, from skilled positions to unskilled labor. This helps reduce poverty and improve living standards in communities.

Boosting Exports

The industrial sector is key to increasing Nepal’s exports. By making products like textiles, carpets, and handicrafts, industries can sell goods in international markets, bringing in foreign money and helping to balance trade. This is especially important for Nepal, which often imports more than it exports.

Adopting New Technology

As industries grow, they often use new technologies and methods. This can lead to better efficiency, higher quality products, and more competitiveness. The use of modern technology can also benefit other sectors of the economy.

Improving Infrastructure

The growth of industries can lead to better infrastructure, such as roads, electricity, and communication systems. As industries demand better services, both the government and private companies are encouraged to invest in infrastructure, which helps the entire economy.

Regional Development

Industrial growth can help develop less populated areas by creating jobs and economic opportunities. Setting up industries in rural regions can reduce the movement of people to cities and help distribute wealth more evenly.

Sustainability

With growing awareness of environmental issues, industries are starting to adopt more sustainable practices. This includes using renewable energy, reducing waste, and being more eco-friendly. Such practices not only help the environment but can also make Nepali products more appealing in global markets.

Service Sector

The service sector is a vital part of Nepal’s economy, contributing significantly to GDP and employment. It includes a wide range of activities such as tourism, hospitality, banking, education, healthcare, and retail. As the economy evolves, the service sector is becoming increasingly important for overall growth and development.

Tourism

Tourism is one of the most significant components of the service sector in Nepal. The country is known for its stunning natural beauty, rich cultural heritage, and adventure activities like trekking and mountaineering. Tourism generates income, creates jobs, and promotes local businesses. It also helps preserve cultural traditions and supports conservation efforts.

Banking and Finance

The banking and finance sector plays a crucial role in facilitating economic activities by providing financial services such as loans, savings accounts, and investment opportunities. This sector helps businesses grow by providing the necessary capital and supporting individuals in managing their finances. The growth of digital banking has also improved access to financial services for many people.

Healthcare Services

The healthcare sector is essential for improving the quality of life in Nepal. It includes hospitals, clinics, and health programs that provide medical care and services to the population. The government and private sector are working to enhance healthcare facilities and access, which is vital for the overall well-being of citizens.

Education

The education sector is critical for developing human capital in Nepal. It includes schools, colleges, and vocational training centers that provide knowledge and skills to the workforce. Improving education quality and access is essential for fostering innovation and economic growth in the country.

Retail and Trade

The retail sector encompasses various businesses that sell goods and services directly to consumers. This includes local markets, supermarkets, and online shopping platforms. The growth of the retail sector contributes to job creation and provides consumers with access to a wide range of products.

Information Technology (IT)

The IT sector is rapidly growing in Nepal, with an increasing number of companies providing software development, web design, and IT services. This sector has the potential to create high-skilled jobs and contribute to the economy by attracting foreign investment and promoting digital innovation.

Nepal’s Foreign Trade – Structure and Issues

Foreign trade is defined as the exchange of goods and services by persons and organizations between different countries. When goods and services are sold to other countries, it is called export trade. Import trade is the act of buying goods from other countries. If goods and services are imported to export them to other countries, it is called entrepot trade.

Nepal’s foreign trade is characterized by a significant trade deficit, a reliance on imports, and a few key trading partners. 

Export Composition

Major Export Products:

• Textiles and Garments: This category includes readymade garments, which are a significant part of Nepal’s exports, especially to markets like the United States and Europe.
• Woolen Carpets: Known for their quality, woolen carpets are a traditional export product that contributes significantly to foreign exchange earnings.
• Pashmina Products: Luxurious shawls and garments made from fine cashmere wool are highly sought after in international markets.
• Agricultural Products: Includes items like tea, coffee, spices, and fresh vegetables, which are increasingly being exported to various countries.

Key Export Partners

• India: The largest destination for Nepali exports, accounting for about 60% of total exports.
• United States: A major market for textiles and garments.
• China: An emerging market for various Nepali goods.

Import Composition

Major Import Products:

• Petroleum Products: The largest import category, including crude oil and refined fuels, which are essential for energy needs.
• Machinery and Equipment: Critical for industrial and agricultural sectors, including construction machinery and manufacturing equipment.
• Consumer Goods: This includes electronics, food items, clothing, and household products that are not produced locally.
• Raw Materials: Used in local manufacturing processes, including metals, chemicals, and agricultural inputs.

Key Import Partners:

• India: The primary source of imports, accounting for about 65% of total imports.
• China: The second-largest supplier, providing machinery, electronics, and various consumer goods.
• Other Countries: Includes the United States and several Southeast Asian nations.

Trade Balance

Trade Deficit: Nepal consistently faces a trade deficit, with imports significantly exceeding exports. For instance, in recent years, the trade deficit has been around $11 billion, indicating a heavy reliance on foreign goods.

Trade Agreements

• Regional Trade Agreements: Nepal is part of several trade agreements, including the South Asian Free Trade Area (SAFTA) and the Trade and Transit Agreement with India, aimed at facilitating trade and reducing tariffs.
• Bilateral Agreements: Nepal has also entered into various bilateral trade agreements to enhance market access for its products.

Issues of Nepalese Foreign Trade

Trade Deficit

Nepal often spends much more on imports than it earns from exports. This trade deficit can strain the country’s finances and make it hard to grow the economy.

Dependence on a Few Products

Nepal mainly exports a small number of products, like textiles and carpets. This makes the economy vulnerable to changes in demand for these items.

Quality Standards

Many Nepali products do not meet international quality standards, which limits their ability to compete in global markets. Improving product quality is important for increasing exports.

Infrastructure Challenges

Poor infrastructure, such as bad roads and limited access to ports, makes it difficult to transport goods. This can lead to higher costs and delays in getting products to market.

Regulatory Barriers

Complicated rules and slow approval processes can create problems for businesses trying to trade internationally. These barriers can discourage investment and slow down operations.

Political Instability

Uncertainty in politics can disrupt trade and make foreign investors hesitant. A stable political environment is necessary for encouraging trade and investment.

Limited Market Access

Even with trade agreements, there are still challenges in accessing some markets. Nepal needs to negotiate better terms to boost exports.

Global Economic Conditions

Changes in the global economy, like recessions or trade disputes, can affect Nepal’s trade. The country needs to be ready to adapt to these changes.

Remittance Dependency

Many families in Nepal rely on money sent home by relatives working abroad. While this helps financially, it can also reduce the focus on local production and trade.

Lack of Awareness and Support

Many local businesses do not know enough about international markets and opportunities. Better support and training are needed to help them succeed in foreign trade.

Conclusion

In conclusion, agriculture, trade, and industry are important parts of Nepal’s economy, providing jobs and contributing to the country’s overall wealth. However, each sector faces significant challenges that make it hard for them to grow. The agricultural sector deals with low productivity and not enough investment, while the industrial sector struggles with political instability and poor infrastructure. To promote steady economic growth, Nepal needs to tackle these issues by making smart investments, improving government support, and helping local businesses, which will create a stronger economy that benefits everyone.

Frequently Asked Questions (FAQ)

Related Notes

• Socio-Cultural Environment
• Economic Environment