Nepal's industrial capacity utilization has continued to decline in the post-pandemic era, raising concern among policymakers. Surprisingly, the average utilization rate has fallen more sharply in the last two fiscal years (2022/23 and 2023/24) than during the peak of COVID-19 (2020/21 and 2021/22). While lockdowns and restrictions during the pandemic severely disrupted industrial operations, the decline in capacity utilization has not reversed even after the situation became normal in the past two fiscal years. This persistent slump highlights the urgent need for policy reassessment to address the structural challenges plaguing the industrial sector.

The Economic Activities (Integrated) 2023/24 report published by the Nepal Rastra Bank (NRB) shows average capacity utilization dropped to an eight-year low of 48.3% in fiscal year 2023/24. The previous record low was 48.2% in 2015/16 when Nepal was rocked by twin earthquakes and the Indian blockade. The NRB report underscores that industries, already battered by COVID-19 lockdowns, have struggled to recover due to a liquidity crunch, volatile interest rates, rising input costs and weak demand.

Worrying Decline in Industrial Efficiency

A comparative analysis of three fiscal years (2021/22 to 2023/24) reveals alarming declines in capacity utilization across key industries, signaling broader economic instability. While some sectors, such as pashmina, tire and tubes, and processed milk, experienced growth, most manufacturing and construction-related industries faced severe contractions. The capacity utilization of Vanaspati ghee industries plummeted from 11.87% to 0.91%, while soybean industries dropped from 82.33% to 14.5%, reflecting a sharp decline in demand from India. Exports of these products, which have rebounded in 2024/25, took a severe hit in the past three fiscal years primarily due to tariff measures imposed by India.

Subodh Kumar Gupta, immediate past president of the Association of Nepali Rice, Oil and Pulse Industries, expressed optimism that capacity utilization of oil industries would see a significant improvement this fiscal year. While regular challenges stemming from porous borders persist, Gupta said capacity utilization of this sector depends on India’s policies.

Nepal’s refined vegetable oil exports have surged dramatically in the eighth month of the current fiscal year (from mid-February to mid-March), contributing to the overall rise in exports. Refined soybean oil and sunflower oil have remained Nepal's top two export commodities in terms of value over the first eight months of the current fiscal year, according to the latest data from the Department of Customs. During this period, Nepal exported refined soybean oil and fractions valued at Rs 47.94 billion, and refined sunflower oil and fractions worth Rs 754.14 million.

The sharp rise in exports is largely attributed to India’s decision in September 2024 to raise import duties on edible oil which created a lucrative opportunity for Nepali traders under the South Asian Free Trade Area (SAFTA) agreement which allows duty-free access for finished goods from Nepal to India. Nepali traders have taken advantage of this by importing crude or semi-processed edible oils from countries like Malaysia, Indonesia and Ukraine at minimal tariffs, refining them domestically, and then exporting the final product to India.

India revised import duties on crude palm, soybean and sunflower oil to 20%, while the duty on refined oils was raised from 12.5% to 32.5%. Additionally, the Agriculture Infrastructure and Development Tax further raised the effective tax rate to 27.5% on crude oil and 35.75% on refined oil, giving Nepal a competitive edge due to its duty-free access.

“Only three or four refineries among around 20 currently in operation can meet domestic demand. Our industrial capacity has been enhanced, eyeing the Indian market, “Gupta said. “Our capacity utilization improves when India allocates a quota. Otherwise, it drops to around one-fifth as 20% of our production can meet the domestic demand.”

The beer sector has also seen a noticeable decline, dropping from 79.50% to 53.89%, suggesting either reduced consumer consumption or shifting market dynamics. Iron rod and sheet production has fallen from 60.66% to 35.12%, and GI pipe utilization has decreased from 91.51% to 39.28%, largely due to a slowdown in construction activity and infrastructure development.

Pashupati Dev Pandey, President of the Garment Association Nepal, attributed the decline in garment industry capacity utilization to a drop in demand. Although capacity utilization in the sector rose from 27.16% in 2021/22 to 50.67% in 2022/23, it fell to 35.62% in 2023/24. Despite this, Nepal's export of ready-made garments grew by 9.12% in 2023/24, reaching Rs 8.96 billion, according to data from the Trade and Export Promotion Centre. "Lack of access to sea routes and reliance on imports for raw materials has increased our cost of doing business," Pandey added.

On the other hand, some industries have demonstrated impressive growth. The processed milk industry's capacity utilization surged from 30.32% in 2021/22 to 57.99% in 2023/24. The rice and wheat flour sectors have also experienced steady growth. The capacity utilization of the yarn industry, a key component of textiles, improved from 70.19% to 75.25%. Pashmina, too, has made a remarkable recovery, with capacity utilization reaching 97.85% in 2023/24. One of the standout performers is the tire and tubes industry, which saw a substantial increase from 40.87% to 91.34%, indicating a strong recovery in industrial production.

Dhana Prasad Lamichhane, President of the Nepal Pashmina Industries Association, attributed the growth to global promotional campaigns and international recognition, which have boosted demand. Although the latest data from the Trade and Export Promotion Centre shows that Nepal’s pashmina and woolen shawl exports declined by 5.32% to Rs 3.02 billion in 2023/24 compared to Rs 3.19 billion in 2022/23, Lamichhane suggested that the true value of the sector’s exports might be underreported. Nepal lacks a Harmonized System (HS) code for pashmina, meaning exports are categorized as wool or ready-made garments.

Furthermore, many tourists purchase pashmina products in cities like Kathmandu, Patan, Bhaktapur and Sauraha, and these transactions are not included in official export figures. “Nepal’s annual pashmina exports exceed Rs 7 billion,” Lamichhane claimed, noting that trade has improved, though this has not yet been reflected in the data. “It is the responsibility of the Ministry of Industry, Commerce, and Supplies to track and manage this.”

To enhance self-reliance, the Nepal Pashmina Industries Association aims to utilize the 3.3 million hectares of land reportedly available for rearing Chyangra, the primary source of raw pashmina wool. There are approximately 800 pashmina manufacturing units, both large and small, and over 1,500 outlets selling pashmina products. “However, the latest data is not available,” Lamichhane added.

Additionally, some industries have shown more volatility, with fluctuating performance across the years. Capacity utilization of the soft drinks sector, for instance, improved significantly from 50.46% to 70.97%, signaling strong consumer demand. However, the plastic products sector showed an increase in 2022/23, only to decline again in 2023/24, indicating an unstable market environment. The electric wire and cable sector, after an initial decline, rebounded strongly in 2023/24.

Unreliable Power Supply: A Major Challenge

Industrialists have identified unreliable power supply as a significant challenge to the country’s industrial growth. Frequent power outages in industrial corridors are forcing industries to rely on costly generators to maintain operations.

According to the recent Industry Status Report by the Confederation of Nepalese Industry (CNI), 55.17% of industries continue to use generators due to inconsistent power supply. Industrialists argue that the electricity provided by the Nepal Electricity Authority (NEA) comes from common feeders shared by entire areas, which significantly reduces its reliability. They are calling for the establishment of separate commercial feeders to ensure a more stable power supply.

Manufacturing industries are particularly affected, with 70% of them depending on generators. The report also reveals that using generators as an alternative energy source adds 9.25% to their operational costs.

Industrialists have accused the NEA of crippling industries with unannounced power cuts. In a joint press conference on March 23, representatives from the Nepal Cement Manufacturers Association of Nepal, the Steel Manufacturers Association, and the Nepal Yarn Manufacturers Association condemned the NEA for imposing load shedding without prior notice. "If the NEA cannot provide uninterrupted electricity, it should at least make the load shedding schedule public," they demanded.

The associations also accused the NEA of misleading the public regarding the end of load shedding. Despite the NEA’s announcement in April 2018 that industrial load shedding had been eliminated, industries continue to face frequent outages, with some experiencing up to 12 hours of power cuts daily.

“For nearly six months each year, from mid-December to mid-May, industries experience continuous load shedding. Yet, the NEA denies it and refuses to publish a schedule, engaging in false and misleading propaganda,” the statement said. Industrialists warned that prolonged power cuts are causing businesses to grind to a halt. “How can an industry operate under such conditions?” they questioned.

Shobhakar Neupane, President of the Steel Producers Association, stated that power outages sometimes exceed 14 hours a day. “Even when power is available, the quality is poor,” he said during the press conference.

Cement industrialist Dhruba Thapa said that power shortages have forced cement plants to operate at less than 50% capacity. Manufacturers explained that they are unable to meet production needs during peak demand periods due to power shortages. On the other hand, when the power supply is stable—particularly in July and August—low demand causes production to drop to just 20% of capacity, they added.

A new report by the World Bank states that manufacturing output fell to around 6% of GDP in 2022, significantly lower than in regional and structural peer countries. "The lack of dynamism in the sector restricted domestic demand for electricity," reads the report.

In 2022, Nepal’s industrial sector consumed roughly 12,800 TJ (terajoules) of electricity, with a peak demand of only around 2,170 MW. While electricity consumption more than doubled compared to a decade ago, it only accounted for 9% of total industry energy consumption in 2022, substantially lower than in regional peers. For example, Bangladesh’s industrial sector consumed around 147,000 TJ of electricity in 2022, which constituted 35% of the sector’s energy mix, according to the World Bank.

Mixed Trends in New Registrations

In the fiscal year 2023/24, while a total of 434 industries were registered with the Department of Industry, there were no new industries registered in 36 districts.

Of the registered 434 new industries, 137 were in tourism, 118 in services, 107 in manufacturing, 22 in energy, 21 in information technology and 16 in agriculture and forestry. Among these, 49 were large-scale, 52 medium-scale, and 333 small-scale industries with proposed investments of Rs 201.80 billion.

Bagmati Province recorded the highest number of new industry registrations, with a total of 290 industries. In contrast, Karnali Province did not register any new industries at all in the review period. Additionally, several districts across various provinces saw no new industry registrations during 2023/24. In Koshi Province, Udayapur, Tehrathum, Bhojpur, Dhankuta, Khotang, Solukhumbu and Okhaldhunga had no new registrations. Similarly, in Madhes Province, Siraha, Saptari, Sarlahi and Rautahat did not see any new industries registered. In Bagmati Province, Sindhuli district had no new industry registrations, while in Gandaki Province, Baglung, Mustang, Nawalpur and Syangja districts saw no new industries. Lumbini Province also had no new industry registrations in Rukum East, Gulmi, Pyuthan and Rolpa. In Sudurpaschim, Achham, Baitadi, Bajhang, Bajura, Dadeldhura and Doti districts saw no new industries during the fiscal year.

Overcoming Structural Deficiencies

The study has stressed the need for an investment-friendly environment, improved infrastructure (including roads, energy, and communication), and increased foreign investment to support technology transfer and enhance managerial capacity. These structural deficiencies continue to impede industrial growth and overall economic expansion. A key issue emphasized in the World Bank report is the ongoing outmigration of semi-skilled and skilled workers. Due to a lack of dignified employment opportunities in Nepal, more workers are seeking jobs abroad. The report underscores the importance of investing in export-oriented industries and improving labor relations to foster a more harmonious industrial environment.

Sur Krishna Vaidya, Vice-President of Industry and Commerce at the Federation of Nepalese Chamber of Commerce and Industry (FNCCI), told New Business Age that declining consumer purchasing power and rapid labor migration have reduced industrial activity to mere sustenance levels. Vaidya pointed out a downturn in the construction sector, which traditionally relied on Indian workers to fill labor shortages. “Many Indian laborers used to reside in Nepal, renting rooms and contributing to the local economy by spending on food and other services. Their decline has had a cascading effect on various sectors,” he explained.

While capacity utilization in cement industries has remained relatively stable over the past three fiscal years, data shows a gradual decline in industries producing concrete, iron rods, sheets and steel products.

Once a booming sector, the cement and steel industries have faced setbacks due to regulatory hurdles, delays in the issuance of export certifications by India, and the government’s failure to stimulate domestic demand through infrastructure projects.

Despite some positive financial indicators, such as foreign exchange reserves, remittance inflows, and liquidity surplus, Vaidya warned that tax revenue has declined. “Most industries are now merely breaking even rather than generating profits,” he said, urging the government to introduce an economic relief package, similar to the one implemented during the COVID-19 pandemic, to revitalize the industrial sector.

(This news report was originally published in  April 2025  issue of New Business Age Magazine.)