Fixed Capital Formation Decline: What It Means for Investment in Nepal

Published on September 24, 2025

Nepal’s recent macroeconomic data highlights a worrying trend: the steady decline in Gross Fixed Capital Formation (GFCF), which measures investments in infrastructure, machinery, plants, and other long-term productive assets. In FY 2020/21, GFCF accounted for 29.3% of GDP, but by FY 2024/25, this ratio has fallen sharply to 24.1%. This downward trend indicates that the economy is not building sufficient productive assets, raising concerns about Nepal’s capacity to sustain long-term growth.

The decline reflects multiple structural challenges. First, delays in public infrastructure projects and weak capital expenditure have limited the government’s role in driving investment. Capital expenditure remains stuck at 3.6% of GDP, far below potential, meaning budget allocations for development are either underutilized or inefficiently deployed. Second, private sector investment has slowed due to high uncertainty, policy inconsistencies, and limited credit expansion. While lending rates have eased, with the base rate falling to 6.02% in FY 2024/25, businesses remain cautious, as demand is still recovering and external shocks persist.

The consequences of weak fixed capital formation are significant. Without adequate investment in productive assets, Nepal risks low productivity, limited job creation, and sluggish industrial growth. A heavy reliance on remittances to fuel consumption has kept Gross National Disposable Income rising, but this income is not being effectively transformed into domestic investment. The result is a consumption-driven economy with limited structural transformation. This also explains why, despite high savings—36.2% of GDP in FY 2024/25—Nepal struggles to channel resources into infrastructure, manufacturing, and export-oriented sectors.

For Nepal to sustain higher growth, reversing this decline is critical. Policies must focus on improving project execution capacity, creating a more stable investment climate, and incentivizing private capital formation. Public-private partnerships, reforms in land and energy sectors, and greater policy certainty could help attract both domestic and foreign investors. If Nepal fails to boost fixed capital formation, its growth will remain consumption-heavy, dependent on remittances, and vulnerable to external shocks.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.