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Nepal: Priorities for Agriculture and Rural Development


The central challenge for rural development in Nepal is to shift from a subsistence to a commercial economy in an environment characterized by widespread and day-to-day insecurity and violence.

Agriculture is the principal source of food, income, and employment for the majority, particularly the poorest. Growth in agriculture is, therefore, crucial for reducing poverty, and preliminary findings from the National Living Standards Survey indicate that despite the insurgency, the sector has made a significant contribution to poverty reduction.


However, agriculture is largely based on low-value cereals and subsistence production, with a mere 13 percent of output traded in markets. The sector’s current 40 percent share in national GDP is declining, although there is considerable scope for increasing productivity and value-added.

Despite an increasing reliance on remittances from laborers abroad, the absence of economic opportunities outside subsistence agriculture keeps most Nepalese poor, and is widely cited as a factor in the current Maoist insurgency in rural areas, which further limits prospects for development, causing a vicious cycle of poverty in rural areas.


Conflict:  Widespread violent conflict and the inability of the Government to enforce law in most of its territory have severely limited both development efforts and the delivery of public services. Only projects that rely on decentralized approaches, using civil society and NGOs, seem to be able to function. Political uncertainty creates doubts about the prospects for national development.


Obstacles to commercialization of agriculture:  A mountainous terrain and poorly developed road network restrict access to markets, constraining agricultural growth and diversification into higher value added and non-farm activities. Weak and poorly integrated institutions and inadequate technical support for supply chain development have further limited marketing opportunities. The 1995 Agriculture Perspective Plan (APP) to increase agricultural productivity through irrigation, fertilizer use, infrastructure and technology was not fully implemented. However, The recent National Agricultural Policy, which updates the APP, places commercialization, private sector-led development, and trade at the forefront of the development agenda.


The trade challenge:   Nepal ’s recent entry into the WTO presents opportunities, alongside formidable challenges to meet food safety rules, animal health regulations, and quality standards, together with re-evaluating domestic support programs, price controls, and competitive advantage. Nepal ’s location between the two largest countries in the world presents both a blessing and a curse. Subsidies in India ’s agricultural sector mean that Nepal ’s Terai region faces competition with Indian cereal production. However, the diversity of Nepal ’s agro-ecological zones is promising for exports of off-season horticulture, niche products, and non-timber forest products like medicinal plants. Organic production is practiced by default in Nepal , but such produce cannot currently be certified to meet international standards and price premiums.


Inefficient exploitation of water resources:   Despite significant expansion in the 1990s, Nepal has not reached its irrigation potential. Less than 40 percent of cultivable land is irrigated (only 17 percent year-round), while there is potential to reach two-thirds. Institutional problems and inefficient pricing and fee collection mechanisms result in only 3 percent of operations and maintenance costs being recovered, severely threatening the sustainability of large schemesin the Terai.

Lack of equitable and secure access to land:  Tenancy restrictions, high land fragmentation, absentee landlordism, and unequal distribution pose key challenges to tenure security and, in turn, private investment. Land disputes are common, yet most cannot afford to file court cases, and judicial process can be lengthy. Moreover, policy restrictions, such as on large-scale contract farming on various commodities (excluding tea), still remain. The idea of creating a "Land Bank" for assisting the poor in accessing land assets by the Government are worth exploring although it is not yet clear how this would function.


1. Increasing productivity and value addition through commercialization and irrigation investments

  • Commercialization:  This will require action along several fronts, including policy support, meeting quality standards, capacity building and market information for producers, applied research, and investment in the supply chain for high value commodities. Trade can be promoted by strengthening institutions and systems for quality control and certification, and investing in laboratories, testing stations, and human resources.
  • Irrigation and emphasis on farmer management:  Irrigation infrastructure can be improved by: (a) promoting both surface and groundwater irrigation for commercial and industrial crops in the Terai, while encouraging high-value horticulture and cereal production in the Mountains and Hills; (b) developing year-round irrigation in perennial flow areas and small storage facilities in other areas; (c) building low pressure sprinklers and drips for high value crops, and shallow and deep tube wells only where profitable; and (d) investing in mini- and micro-hydro facilities, to facilitate power generation and lift irrigation in the hills . The Government should encourage farmer management of irrigation infrastructure, and support matching-grants for demand-driven farm interventions.


2. Improving the functioning of factor markets

  • Factor markets should be reviewed based on analytical work and cross-country experience. Those can promote land redistributive policies, achieve a more accessible legal system to address land disputes, and identify market and non-market mechanisms to improve access to land. Measures should be defined to improve land administration systems, particularly cadastral and land title records, to provide greater security of ownership and reduce transactions costs. Work on rural finance should develop strategies to provide services to people in isolated areas, where the traditional Grameen model is unsuitable.

3. Reaching out to the poor and investing in basic infrastructure

  • Due to the protracted conflict and instability of the Government, decentralized approach to empower communities and devolve decision-making power to the local level has become the hallmark for better service delivery. The use of non governmental agencies has become an important vehicle to facilitate access to livelihood opportunities and income generating activities, particularly for the most disadvantaged groups. A mix of local, public and private investments in roads, communication and power remain critical to improve access to assets, integration with markets, generate off-season employment, especially for the most backward areas. As political, administrative and fiscal decentralization is brought back on track, role for local government will need to be defined to meet local demands, involve communities and improve accountability.


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