Manufacturing Industry

Current Status

The contribution of manufacturing to GDP in fiscal year 2064/65 was 7.34 which have decreased
to 5.67 in current fiscal year 2073/2074. In fiscal year 2072/73 the contribution of manufacturing
industry to GDP decreased to 5.72 percent. The growth of this sector for the last ten year is
averaged at 2.05 percentages.

Growth of the manufacturing sector is estimated to increase by 9.7 percentages for the fiscal year
2073/74 comparing to its rate during the fiscal year 2072/73.

During the last fiscal year, the devastating earthquake and the unofficial border blockade was the
reason behind 8 percentage decline in this sector whereas, during this fiscal year, due to the
sufficient inflow of the petroleum, less obstruction from bands and the strikes created normalcy
in the industrial sector thereby resulting a increasing effects in the manufacturing sector.

In the first eight months of fiscal year 2073/74 altogether 6834 industries have been registered at
ministry of industrial department. In analyzing all industries manufacturing industries have the
highest number of industries with 2713 industries (39.7%), service industries number is 1907
(27.9%), tourism industry with total of 1406 (20.6%), agriculture industry with 413 numbers
(6.1%) and energy with 283 industries (4.1%).

In the first eight months of fiscal year 2073/74 industries that has been registered the highest
capital investment is in energy industries with 52.9%, manufacturing industry with 23.1%,
service industries with 10.7%, tourism industries with 8%, agriculture industries with 1.6% and
minerals with only 0.3%.

Because of the unfavorable working climate prevailed in the country, many of the workforce are
forced to leave the country for abroad employment. In these scenarios, establishment of industry
plays a huge role in creating positive working climate and ultimately positive economic growth.

Budget 2073/74 Provisions

For industry, commerce and supply sector programs Rs. 10.96 billion has been allocated. The
major highlights are:

Establishment of employment generating and export oriented industries will be promoted.

Investment promotion programs will be organized abroad.
Grant will be provided to selected industries promoted by young entrepreneur for the
necessary technological and market promotion. Youth entrepreneurship program will be
continued. Activities such as awareness, skill development, appropriate technology, easy
access to loan with subsidized interest rate and market development will be conducted
under the small and cottage industry promotion program.
 Special Economic Zone will be brought into operation. Studies will be conducted to
establish additional industrial zones. Access road, electricity transmission lines and other
infrastructures will be developed for cement, iron and copper industries and mines.
Concessional loan will be provided for the citizen who are under poverty line to develop
entrepreneurship upon the recommendation of local level body.
Bhagat Sarbajit Dalit Development will be continued with enhanced effectiveness.
Environment friendly industries will be further promoted.

Foreign Direct Investment on Manufacturing Industries

Foreign Direct Investment (FDI) is one of the factors for growing trade, investment and
economic growth for the countries. The integration of global economies is enhanced by flow of
FDI across the globe. Multinational companies (MNCs) are the vehicle of FDI through which
they transfer capital and technologies from one geography to geography. Primarily, MNCs go
cross boarder operations with the view of market seeking, raw materials explorations and low
operations costs. MNCs are important for developing economies because they invest in the green
fields which help to improve the infrastructure of the economy. The main importance of FDI on
economic growth is that FDI are embedded with the new technologies which become the pivotal
driver for economic transformation of developing and under developed economies. The local
firms learn new technologies from the MNCs in one hand; they try to improve the managerial
and technological aspects of the operations on the other hand. In the recent years, every country
has the policy to attract more FDI in their economic policies. Nepals neighboring countries both
China and India have achieved higher economic growth rate along with the massive inflow of
FDI (table below). Not only India and China, other neighboring countries recorded higher level
of economic grow in the recent years.

Looking at the data of past 10 years, in fiscal year 2063/64 there were 188 firms operated with
FDI with NRS 3 arba 18 crores and 60 lakhs. In fiscal year 2071/72 there were 370 firms
operated with FDI which declined to 347 firms in fiscal year 2072/73. In the first 8 months of
fiscal year 2073/74 there are currently 213 firms operated with FDI with NRS 10 arba 15 crores
and 10 lakhs.

In the first 8 months of fiscal year 2073/74, there are around 3907 firms registered from 90
countries with FDI. These firms employ 224,286 employees. India has the highest share of FDI
with 39.12%, China is the second with 16.26% and China-Hongkong is the third with 13.06%.
The share of USA in FDI is 3.64% and UK is 2.56%.

In terms of number of industries operating in Nepal with FDI, China has the highest number of
industries with 1093 industries, India is second with 662 industries and third is USA with 344
industries.
Various laws have been enacted to develop the industries such FDI act 2071. Focus has been also
towards transfer of technologies and FDI.

Challenges or Reasons for decline in contribution of GDP as compared to 2005

According to the study done by World Bank in 2009 there are two main reasons:

1. The first reason is Political instability of Nepal. The frequent changes in government
have had severe impact on the development and formulation of industrial sector in the
country. In 26 years after declaration of democracy in the country, the present Sher
Bahadur Deuba led government is the 24th government of the country. This shows the
high level of political instability. The average life of government of Nepal since
declaration of democracy is hardly a year. So changing government and changing
priorities and policies along with political ideology is affecting industrial sector.
In addition to political instability, the trade union problem is another aspect that has
hindered the pace of industrial development. The trade unions are causing problems time
and again with unjustified demand related to wage and compensation. The Everest Hotel
is the recent example of such problems. Even though in surface massive earthquake
seems to be reason behind shutting of Everest Hotel but in reality labor union issues were
the major factor. Surya Nepal Pvt. Ltds Biratnagar based garment manufacturing unit
which ceased production due to problem of trade unions. The highly politicized unions
have caused organization huge cost in terms of strikes, inefficiency and disputes between
management and employees. Forced employment of party candidates by trade unions are
unlikely to improve productivity of manufacturing industries. Forced donations are other
problems caused by trade unions which add further to cost of doing business.

2. The second reason is electricity shortage in Nepal.

Other reasons for decline in contribution of GDP are:

During the last fiscal year, the devastating earthquake and the unofficial border blockade
was the reason behind decline in this sector whereas, during this fiscal year, due to the
sufficient inflow of the petroleum, less obstruction from bands and the strikes created
normalcy in the industrial sector thereby resulting a increasing effects in the
manufacturing sector.
Unfavorable environment for foreign investment
Lack of proper infrastructure. For eg: State of Mugling- Naraygadh sadak
Huge competition from India and China
Lack of security and Manpower.

Opportunities

Find out product with comparative advantage such as cement, noodles.

 Duty free access to 2nd largest market of the world i.e. India.
Duty charges applied to manufacturing products imported from India.
Nepal is 45th largest country in terms of population.
EU, USA, Australia and Canada has also provided duty free access. According to
Everything But Arms (EBA) provision of Europe, while exporting from Nepal to Europe
no duty charges are applied.
Similarly according to India-Nepal trade treaty 1996, no duty charges applied for
agricultural products for both counties while duty charges are applied to manufacturing
products imported from India.
According to Generalized System of Preferences of USA, 95% of Nepalese exportable
goods are getting duty free except for garment.