Nepal economy shifts away from farming

The service sector has grown, but has widened the rich-poor gap and is not creating jobs


From high school, Nepali students memorise that Nepal is an ‘agricultural country’, and that 80% of the population is engaged in farming.

While it is true that most Nepalis are still dependent on agriculture, the country’s economy is shifting to services. Seven in every ten families also depend on remittances for household income. 

Agriculture now contributes less than 25% to Nepal’s economy, and this is down from 81% three decades ago. The number of Nepalis engaged in the service sector used to be only 16% at that time, and today it has gone up to 29%. 

Nepal’s economy has been transformed in recent decades during which new professions, businesses and enterprises have flourished. The finance, information technology (IT), hospitality, trade and other sectors have expanded. 

Meanwhile, the role of agriculture in Nepal’s economy has diminished. 

The strength of a country's economy is measured by the total value of goods and services produced annually, its GDP. Economies are divided into three sectors of activity: agriculture and forestry, manufacturing and construction and the service sector, which includes IT, finance, insurance, real estate and tourism.

Economies move through a cycle of expansion from the primary to the secondary to the tertiary sectors. Many developed countries are considered to have advanced because of the industrial sector. 

However, Nepal’s industrial sector has not grown in comparison to other nations. Indeed, while the industrial sector contributed 8% to the economy 50 years ago, it reached a peak of 21% some decades later, but at present has declined to 12.5%.

Industry is supposed to enhance production and in the process create jobs. But Nepal’s weak industrial development is one of the factors that drove 690,000 Nepalis to go abroad last year. 

The lack of industrial growth has meant that Nepal depends largely on the third service sector stage, which makes up almost two-thirds of the nation’s economy.

Nepal’s economic change has been brought about by a lack of meaningful growth in the agricultural and industrial sectors, as well as improvements in Nepal’s service sector.

“But this is only structural change, not a structural transformation needed for radical improvements to the economy,” says economist Dilli Raj Khanal. “For there to be such a transformation, we need to up our productivity in all sectors: agriculture, industry or service.”

The service sector also has inherent risks. While a small number of people involved in the service sector can increase production and add value to the economy, it may not create many jobs.

Moreover, because the service sector mostly involves educated, tech-savvy and business-minded people, its benefits are mostly limited to their circles, increasing socio-economic inequality. 

“The service sector yields more products despite fewer people being engaged in it, meanwhile agricultural production is declining  despite the involvement of a significant section of the population,” says Khanal. “We must thus find ways to increase both production and income in the agricultural sector.”

In the last three decades, the agricultural sector in Nepal has only grown at the rate of 2.9% annually, while the growth rate of the service sector during the same period has been 6.3%. So while the service sector is expanding, there has been no comparative increase in agricultural production, which in turn means that the income of Nepali farmers has not increased either. That further widens the gap between rich and poor.

A 1% growth in the agricultural sector plays an equal role in reducing poverty as a 6% growth in the service sector. Says economist Biswo Poudel, professor at Kathmandu University:  “Farmers directly benefit from agricultural reform, but an economy boosted by the service sector does not reach those communities.”

The average annual per capita income of Nepalis is $1,434 compared to $824 ten years ago. Despite this, the benefits have not been equally spread across communities. Those involved in the service industry, which has contributed to economic growth, have reaped the rewards. Farmers have just not enjoyed similar profits. 

“As it is, there is little possibility for expansion in the agricultural sector because we can neither increase the arable land nor productivity,” notes Hem Raj Regmi at the National Statistics Office.

It is not that newer ventures have not been launched in the last decade. For instance, while the banking and insurance sector contributed less than 3% to Nepal’s economy 20 years ago, it now makes up 7% of the economy.

Similarly, the share of the administrative sector has gone from 2% to 10% in the last 2 decades. But the share of the manufacturing and industry in the economy has fallen below 5% as compared to 9% two decades ago. 

Economist Poudel argues that increased agricultural production can lead to further economic growth in Nepal, provided there is an expansion of irrigation and transfer of agricultural technology.

There are almost 2.27 million hectares of irrigable land in Nepal, out of which 800,000 hectares do not have irrigation. Moreover, only one-third of the over 1.4 million hectares of land that have such facilities remain irrigated year-round. The rest are rain-fed fields.

“The greatest challenge Nepal faces is to create jobs in the agriculture sector as well as ensure a decent income,” says Regmi of the National Statistics Office.