Why industrial federalism is necessary

Nepal's aspirations for industrialization, entrepreneurship, and economic transformation are not being matched by its public policy and spending, leading to concerning long-term economic trends. The industrial sector's share of Gross Domestic Product (GDP) has steadily decreased over the past decade, falling from 14.1 percent in FY 2015-16 to 12.8 percent in FY 2024-25. The manufacturing sub-sector has seen an even sharper decline, shrinking from nearly 10 percent to below 6 percent of GDP in three decades, indicating structural economic weakness, reduced productive capacity, and lost employment opportunities.

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Nepal frequently speaks of industrialisation, entrepreneurship, self-reliance, import substitution and economic transformation, yet public policy and public spending do not reflect those ambitions.

This industrial contraction is particularly problematic given Nepal's demographic realities. Hundreds of thousands of young Nepalis enter the labor market annually, yet the domestic economy consistently fails to provide sufficient employment. For many, migration has become an economic necessity rather than an aspiration. The nation's trade profile further underscores this weakness, with an overwhelming dependence on imports. In FY 2024-25, imports constituted 86.7 percent of Nepal's total foreign trade, while exports accounted for only 13.3 percent, a stark indicator of limited industrial competitiveness and productive capacity. The persistent trade deficit is therefore fundamentally an industrial issue, not merely a customs or exchange-rate problem.

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The industrial sector’s contribution to Gross Domestic Product (GDP) has steadily declined over the past decade.

The Constitution outlines a division of responsibilities for industry and trade, with the federal government handling international trade, foreign investment, and national industrial policy, while provinces are expected to lead industrialization, regulate intra-provincial trade, and promote regional economic growth. However, the core problem lies in implementation, despite a generally coherent policy vision. The federal government's 16th plan emphasizes structural transformation through industrialization and export promotion, with provincial plans mirroring these goals while adapting to regional comparative advantages.

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The country’s chronic trade deficit is therefore not merely a customs or exchange-rate issue; it is fundamentally an industrial problem.

Effective industrial federalism necessitates active coordination between federal and provincial governments. This collaborative approach is crucial for realizing ambitions of import substitution and export promotion, which are impossible without stronger industrial foundations. The article argues that a shift towards strengthening these foundations through coordinated policy and investment is essential for Nepal's economic future.

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The actual problem lies in implementation. The policy vision itself is reasonably coherent.