India has surpassed Japan to become the world’s fourth-largest economy. It is also the fastest-growing major economy globally and the only South Asian nation projected to maintain over six percent annual growth.
Earlier this month, the IMF’s World Economic Outlook confirmed that India remains the world’s fastest-growing economy, with its GDP now standing at $4.3trn. In 2015, India’s GDP was $2.1trn—meaning the economy has more than doubled in less than a decade. The IMF projects India's GDP will reach $5.5trn by 2028, overtaking Germany to become the third-largest economy.
India has developed one of the most dominant and diversified tech, pharmaceutical, and manufacturing sectors in the world. In stark contrast, Nepal—with a GDP of just $46.08bn, roughly 0.01 percent of India’s—remains heavily dependent on remittances and has failed to develop into a manufacturing hub.
Nepal’s trade deficit paints an even grimmer picture. India exports $432 bn annually, while Nepal manages only $1.13bn in exports—just 2.8 percent of its GDP. Given that Nepal is landlocked and 88.6 percent of its trade depends on India, diversification should be a strategic priority. Yet, the government has not developed a clear policy to build alternative trade partnerships.
Nepal lacks functional railway routes and robust trade agreements with China, the world’s second-largest economy. Projects under China’s Belt and Road Initiative (BRI) have stalled due to concerns over debt sustainability and geopolitical sensitivities with India.
Political instability continues to drag Nepal’s economic progress. Around 68 percent of Nepalis blame political instability for delays in BRI projects. While anti-India sentiment occasionally flares—such as during the 2020 Lipulekh protests—people-to-people ties remain strong: about 65,000 Nepali students study in India compared to just 6,500 in China. Furthermore, Indian tourists to Nepal far outnumber Chinese visitors—317,000 versus 101,000 in 2024—even though more Chinese cities (seven) than Indian ones (four) are connected by direct flights to Nepal.
Despite strategic posturing, Nepal's reliance on India is grounded more in geography and economics than ideology. While China offers an alternative, structural limitations and risk aversion have hindered deeper engagement. Nepal’s cautious hedging—seeking infrastructure grants from China while relying on India for trade and security—is a pragmatic survival strategy in a competitive neighborhood.
Nepal’s missed economic moment
Nepali economists have overlooked several critical factors that stunted economic growth. The government's incremental budgeting approach has proven inadequate. For example, the FY 2025–26 budget targets only 4.61 percent growth—far short of the 7–8 percent needed to reach middle-income status.
Nepal has also failed to implement fiscal innovations like tax-base expansion, digital compliance, or performance-based budgeting—tools successfully adopted by countries like South Korea and Singapore.
While the 2006 civil war is often blamed for Nepal’s stagnation, it did catalyze brain drain and rapid, unplanned urbanization. Over one million youth still leave the country each year. The 2015 earthquake further derailed development, redirecting tech and infrastructure budgets toward reconstruction and heritage preservation.
Eight years after the federal transition, provinces remain under-resourced and lack competitiveness. Local capacity gaps meant that only 12 percent of capital budgets were executed mid-year. Despite immense potential in hydropower, Nepal has harnessed only 2,500 MW of an estimated 83,000 MW—its share of GDP from the energy sector fell from nine percent in 2000 to just 4.87 percent in 2024.
Systemic governance failures persist: 44 percent of earthquake-damaged health facilities remain unrepaired, worsening outcomes during the Covid-19 pandemic. About 27 percent of pandemic relief funds were misused, contributing to rising poverty. Remittance inflows—29 percent of GDP—have largely fueled consumption and imports rather than domestic industry.
Meanwhile, only nine out of 35 proposed BRI projects have materialized, stalled by debt fears and lack of transparency. Nepal ranks 94th globally in ease of doing business, deterring foreign investment. Strategic paralysis has also hindered progress on Russian energy and IT cooperation, and stalled rail connectivity with China. The country continues to suffer from an 8.86 percent brain drain rate, ranks 117th out of 180 on the Corruption Perceptions Index, and faces the risk of FATF sanctions.
Recovery will require depoliticizing institutions, streamlining federal governance, and leveraging Nepal’s diaspora, clean energy resources, and strategic location for long-term economic transformation.
Rojen Budha Shrestha
BA LLB 4th Year
Kathmandu School of Law
